UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2021

 

OR

 

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

 

For the transition period from ___________to ____________

 

Commission File Number 000-55431

 

 

MASSROOTS, INC.

(Exact name of business as specified in its charter)

 

Delaware   46-2612944
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
277 Suburban Drive, Suffolk, VA   23434
(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

 

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

 

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

 

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

 

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

 

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

 

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

 

As of November 22, 2021, there were 994,871,337 shares of the registrant’s common stock issued and outstanding.

 

 

 

 

 

 

TABLE OF CONTENTS 

 

PART I. FINANCIAL INFORMATION  
  ITEM 1. Financial Statements  
    Condensed Consolidated Balance Sheets as of September 30, 2021 (unaudited) and December 31, 2020 1
    Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited) 2
    Condensed Consolidated Statements of Stockholders’ Deficit for the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited) 3
    Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020 (unaudited) 5
    Notes to Condensed Consolidated Financial Statements (unaudited) 6
  ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 27
  ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 30
  ITEM 4. Controls and Procedures 31
       
PART II. OTHER INFORMATION 32
  ITEM 1. Legal Proceedings 32
  ITEM 1A. Risk Factors 32
  ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 32
  ITEM 3. Defaults Upon Senior Securities 32
  ITEM 4. Mine Safety Disclosures 32
  ITEM 5. Other Information 32
  ITEM 6. Exhibits 33
  SIGNATURES 34

 

-i -

 

 

FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

-ii -

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

MASSROOTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    September 30,     December 31,  
    2021     2020  
    (unaudited)        
ASSETS            
Current assets:            
Cash   $ 1,082     $ 1,485  
Prepaid expenses    
-
      97,132  
Total current assets     1,082       98,617  
                 
Total assets   $ 1,082     $ 98,617  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT                
                 
Current liabilities:                
Accounts payable and accrued expenses   $ 4,218,421     $ 4,948,890  
Accrued payroll and related expenses     4,037,298       3,864,055  
Deferred revenue     25,000      
-
 
Advances     122,000       88,187  
Non-convertible notes payable, current portion, net of debt discount of $15,862 and $0, respectively     1,759,589       159,520  
Derivative liabilities     4,289,634       25,475,514  
Convertible notes payable     3,063,970       3,186,303  
Total current liabilities     17,515,912       37,722,469  
                 
Non-convertible notes payable, net of debt discount of $1,636 and $0, respectively     128,857       60,000  
PPP note payable    
-
      50,000  
Total liabilities     17,644,769       37,832,469  
                 
Commitments and contingencies (See Note 8)    
 
     
 
 
                 
Stockholders' deficit:                
Preferred stock - 10,000,000 shares authorized:    
 
     
 
 
Preferred stock - Series X, $0.0001 par value, $20,000 stated value, 100 shares authorized; 26.05 and 16.05 shares issued and outstanding, respectively    
-
     
-
 
Preferred stock - Series Y, $0.001 par value, $20,000 stated value, 1,000 shares authorized; 720.515674 and 654.781794 shares issued; 720.515674 and 626.995464 shares outstanding, and 0 and 27.78633 to be issued, respectively     1       1  
Preferred stock - Series Z, $0.001 par value, $20,000 stated value, 500 shares authorized; 500 and 0 shares issued; 0 and 0 shares outstanding, and 500 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, $0.001par value, 1,200,000,000 shares authorized; 499,871,337 and 493,726,405 shares issued and outstanding, respectively
    499,871       493,727  
Common stock to be issued, 906,373,564 and 907,379,814 shares, respectively     906,374       907,380  
Additional paid in capital     299,667,352       283,024,527  
Discount on preferred stock    
-
      (20,973,776 )
Accumulated deficit     (318,717,287 )     (301,185,712 )
Total stockholders' deficit     (17,643,687 )     (37,733,852 )
                 
Total liabilities and stockholders' deficit   $ 1,082     $ 98,617  

 

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

 

1

 

 

MASSROOTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2021     2020     2021     2020  
                         
                         
Revenues   $ 54     $ 2,316     $ 1,660     $ 2,316  
                                 
Operating Expenses:                                
Cost of revenues    
-
      150       297       150  
Advertising     (4,578 )     43,020       18,125       43,020  
Payroll and related expense     66,693       63,879       225,603       239,770  
Other general and administrative expenses     333,197       101,189       953,927       413,417  
Total Operating Expenses     395,312       208,238       1,197,952       696,357  
                                 
Loss From Operations     (395,258 )     (205,922 )     (1,196,292 )     (694,041 )
                                 
Other Income (Expense):                                
Interest expense     (699,254 )     (1,602,204 )     (1,667,413 )     (3,607,210 )
Change in derivative liability for authorized shares shortfall     2,641,481       66,572,635       (159,633,797 )     (43,406,183 )
Change in fair value of derivative liabilities    
-
      (85,287 )     300,885       303,593  
Gain on settlement of convertible notes payable and accrued interest, warrants and accounts payable and cancelation of common shares in exchange for Series Y and Series Z preferred shares and cash     4,332,489      
-
      179,272,324      
-
 
Gain on forgiveness of debt    
-
     
-
      192,521      
-
 
Gain (loss) on conversion of convertible notes    
-
     
-
      (880 )     882  
Total Other Income (Expense)     6,274,716       64,885,144       18,463,640       (46,708,918 )
                                 
Net Income (Loss) Before Income Taxes     5,879,458       64,679,222       17,267,348       (47,402,959 )
                                 
Provision for Income Taxes (Benefit)    
-
     
-
     
-
     
-
 
                                 
Net Income (Loss)     5,879,458       64,679,222       17,267,348       (47,402,959 )
                                 
Deemed dividend resulting from amortization of preferred stock discount    
-
     
-
      (34,798,923 )    
-
 
Deemed dividend from warrant price protection    
-
     
-
     
-
      (95,002,933 )
                                 
Net Income (Loss) Available to Common Stockholders   $ 5,879,458     $ 64,679,222     $ (17,531,575 )   $ (142,405,892 )
                                 
Net Income (Loss) Per Common Share:                                
Basic   $
-
    $ 0.05     $ (0.01 )   $ (0.10 )
Diluted   $
-
    $
-
    $ (0.01 )   $ (0.10 )
                                 
Weighted Average Common Shares Outstanding:                                
Basic     1,406,244,901       1,401,226,219       1,405,511,082       1,387,478,585  
Diluted     9,450,619,151       40,198,748,273       1,405,511,082       1,387,478,585  

 

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

 

2

 

 

MASSROOTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021

(unaudited)

 

    Preferred Stock                 Common Stock     Additional     Discount on              
    Series X     Series Y     Series Z     Series C     Common Stock     to be Issued     Paid     Preferred     Accumulated        
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     In Capital     Stock     Deficit     Total  
                                                                                                 
Balance at June 30, 2021 (unaudited)     26.05     $
       -
      720.515674       1      
-
     
-
      1,000     $            1       499,871,337     $ 499,871       906,373,564       906,374     $ 298,648,071     $        
-
    $ (324,596,745 )   $ (24,542,427 )
Series Z preferred shares issued as equity kicker for note payable     -      
-
      -      
-
      250      
-
      -      
-
      -      
-
      -      
-
      387,262      
-
     
-
      387,262  
Series Z preferred shares issued as part of settlement agmt     -      
-
      -      
-
      250       1       -      
-
      -      
-
      -      
-
      632,019      
-
     
-
      632,020  
Net loss     -      
-
      -      
-
      -      
-
      -      
-
      -      
-
      -      
-
     
-
     
-
      5,879,458       5,879,458  
Balance at September 30, 2021 (unaudited)     26.05     $
-
      720.515674       1       500       1       1,000     $ 1       499,871,337     $ 499,871       906,373,564       906,374     $ 299,667,352     $
-
    $ (318,717,287 )   $ (17,643,687 )

 

    Preferred Stock                 Common Stock     Additional     Discount on              
    Series X     Series Y     Series Z     Series C     Common Stock     to be Issued     Paid     Preferred     Accumulated        
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     In Capital     Stock     Deficit     Total  
                                                                                                 
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 )
Issuance of common shares previously to be issued     -      
-
      -      
-
      -      
-
      -      
-
      1,006,250       1,006       (1,006,250 )     (1,006 )    
-
     
-
     
-
     
-
 
Issuance of common shares for services rendered     -      
-
      -      
-
      -      
-
      -      
-
      2,175,431       2,175      
-
     
-
      164,680      
-
     
-
      166,855  
Common shares issued upon conversion of convertible notes     -      
-
      -      
-
      -      
-
      -      
-
      4,448,251       4,448      
-
     
-
      128,554      
-
     
-
      133,002  
Cancelation of common shares and warrants in exchange for cash paid per cancelation agreement     -      
-
      -      
-
      -      
-
      -      
-
      (1,485,000 )     (1,485 )    
-
     
-
      (9,515 )    
-
     
-
      (11,000 )
Sale of Series X preferred shares     10.00      
-
      -      
-
      -      
-
      -      
-
      -      
-
      -      
-
      200,000      
-
     
-
      200,000  
BCF recognized upon issuance of Series X preferred shares     -      
-
      -      
-
      -      
-
      -      
-
      -      
-
      -      
-
      2,852,500       (2,852,500 )    
-
     
-
 
Series Y preferred shares issued in exchange for convertible notes, accrued interest and warrants     -      
-
      65.733880      
-
      -      
-
      -      
-
      -      
-
      -      
-
      1,314,678      
-
     
-
      1,314,678  
BCF recognized upon issuance of Series Y preferred shares     -      
-
      -      
-
      -      
-
      -      
-
      -      
-
      -      
-
      10,972,647       (10,972,647 )    
-
     
-
 
Deemed dividend resulting from amortization of preferred stock discount     -      
-
      -      
-
      -      
-
      -      
-
      -      
-
      -      
-
      -       34,798,923       (34,798,923 )    
-
 
Series Z preferred shares issued as equity kicker for note payable     -      
-
      -      
-
      250      
-
      -      
-
      -      
-
      -      
-
      387,262       -      
-
      387,262  
Series Z preferred shares issued as part of settlement agmt     -      
-
      -      
-
      250       1       -      
-
      -      
-
      -      
-
      632,019      
-
     
-
      632,020  
Net income     -      
-
      -      
-
      -      
-
      -      
-
      -      
-
      -      
-
     
-
     
-
      17,267,348       17,267,348  
Balance at September 30, 2021 (unaudited)     26.05     $
-
      720.515674       1       500       1       1,000     $ 1       499,871,337     $ 499,871       906,373,564       906,374     $ 299,667,352     $
-
    $ (318,717,287 )   $ (17,643,687 )

 

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

 

3

 

 

MASSROOTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020

(unaudited)

 

    Preferred Stock                 Common Stock     Additional              
    Series B     Series C     Common Stock     to be Issued     Paid     Accumulated        
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     In Capital     Deficit     Total  
                                                                   
Balance at June 30, 2020 (unaudited)    
-
    $
-
      1,000     $ 1       493,726,405     $ 493,727       907,499,814     $ 907,500       246,665,759       (396,647,339 )   $ (148,580,352 )
Net income     -      
-
      -      
-
      -      
-
      -      
-
     
-
      64,679,222       64,679,222  
Balance at September 30, 2020 (unaudited)     -     $
-
      1,000     $ 1       493,726,405     $ 493,727       907,499,814     $ 907,500       246,665,759       (331,968,117 )   $ (83,901,130 )

 

    Preferred Stock                 Common Stock     Additional              
    Series B     Series C     Common Stock     to be Issued     Paid     Accumulated        
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     In Capital     Deficit     Total  
                                                                   
Balance at December 31, 2019     -     $
-
      1,000     $ 1       384,266,948     $ 384,267       944,659,814     $ 944,660       151,364,371       (189,562,225 )   $ (36,868,926 )
Issuance of common shares previously to be issued     -      
-
      -      
-
      37,160,000       37,160       (37,160,000 )     (37,160 )    
-
     
-
     
-
 
Common shares issued upon conversion of convertible notes and accrued interest     -      
-
      -      
-
      72,368,457       72,369      
-
     
-
      298,386      
-
      370,755  
Common shares contributed back to the Company and promptly retired     -      
-
      -      
-
      (69,000 )     (69 )    
-
     
-
      69      
-
     
-
 
Deemed dividend related to warrant price protection     -      
-
      -      
-
      -      
-
      -      
-
      95,002,933       (95,002,933 )    
-
 
Net loss     -      
-
      -      
-
      -      
-
      -      
-
     
-
      (47,402,959 )     (47,402,959 )
Balance at September 30, 2020 (unaudited)     -     $
-
      1,000     $ 1       493,726,405     $ 493,727       907,499,814     $ 907,500       246,665,759       (331,968,117 )   $ (83,901,130 )

 

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

 

4

 

 

MASSROOTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS

(unaudited)

 

    Nine Months Ended
September 30,
 
    2021     2020  
Cash flows from operating activities:     3          
Net income (loss)   $ 17,267,348     $ (47,402,959 )
Adjustments to reconcile net income (loss) to net cash used in operating activities:                
Change in fair value of derivative liabilities     (300,885 )     (303,593 )
Change in derivative liability for authorized shares shortfall     159,633,797       43,406,183  
Interest and amortization of debt discount     1,665,813       3,607,210  
(Gain) loss on conversion of convertible notes payable     880       (882 )
Gain on settlement of convertible notes payable and accrued interest, warrants and accounts payable and cancelation of common shares in exchange for Series Y and Series Z preferred shares and cash     (179,272,324 )    
-
 
Gain on forgiveness of debt     (192,521 )    
-
 
Share-based compensation     166,855      
-
 
Changes in operating assets and liabilities:                
Prepaid expenses     97,132       1,975  
Accounts payable and accrued expenses     187,022       (119,176 )
Accrued payroll and related expenses     173,243       94,180  
Deferred revenue     25,000      
-
 
Net cash used in operating activities     (548,640 )     (717,062 )
                 
Cash flows from financing activities:                
Bank overdrafts    
-
      (13,678 )
Proceeds from sale of Series X preferred shares     200,000      
-
 
Proceeds from issuance of convertible notes payable    
-
      637,000  
Proceeds from issuance of non-convertible notes payable     1,515,424       132,911  
Repayment of non-convertible notes payable     (25,000 )     (39,641 )
Proceeds from advances     53,991      
-
 
Repayments of advances     (20,178 )    
-
 
Cash paid in settlement of debt and warrants     (1,176,000 )    
-
 
Net cash provided by financing activities     548,237       716,592  
                 
Net decrease in cash     (403 )     (470 )
                 
Cash, beginning of period     1,485       1,120  
                 
Cash, end of period   $ 1,082     $ 650  
                 
Supplemental disclosures of cash flow information:                
Cash paid during period for interest   $ 1,600     $
-
 
Cash paid during period for taxes   $
-
    $
-
 
                 
Supplemental disclosure of non-cash investing and financing activities:                
Amortization of discount on preferred stock   $ 34,798,923     $
-
 
Common shares issued upon conversion of convertible notes and accrued interest   $ 133,002     $ 370,755  
Series Y preferred shares issued as settlement for convertible notes payable, accrued interest and warrants   $ 1,314,678     $
-
 
Issuance of common shares previously to be issued   $ 1,006     $ 37,160  
Common shares contributed back to the Company and promptly retired   $
-
    $ 69  
Deemed dividend related to warrant price protection   $
-
    $ 95,002,933  
Derivative liability recognized as debt discount on newly issued convertible notes   $
-
    $ 528,076  
Reclassify accrued interest to convertible notes payable   $ 93,685     $
-
 
Reduction of derivative liabilities stemming from settlement of convertible notes payable, accrued interest and warrants in exchange for Series Y preferred shares   $ 4,834,911     $
-
 
Reduction of derivative liabilities stemming from settlement of convertible notes payable and accrued interest and cancelation of common shares and warrants for cash   $ 169,815,037     $
-
 
Series Z preferred shares issued as equity kicker for note payable   $ 387,262     $
-
 
Series Z preferred shares issued as part of settlement agreement   $ 632,020     $
-
 

 

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

 

5

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2021 (Unaudited)

 

NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION

 

Overview

 

MassRoots, Inc. (“MassRoots” or the “Company”) is a technology company focused on developing cloud-based solutions to deliver informative content and improve operating efficiencies. The Company was incorporated in the State of Delaware on April 26, 2013.

 

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

 

Basis of Presentation

 

The interim unaudited condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments and reclassifications and non-recurring adjustments) necessary to present fairly the Company’s results of operations for the three and nine months ended September 30, 2021 and 2020, its cash flows for the nine months ended September 30, 2021 and 2020, and its financial position as of September 30, 2021 have been made. The results of operations for such interim periods are not necessarily indicative of the operating results to be expected for the full year.

 

Certain information and disclosures normally included in the notes to the annual consolidated financial statements have been condensed or omitted from these interim unaudited condensed consolidated financial statements. Accordingly, these interim unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 as filed with the SEC on April 16, 2021 (the “Annual Report”). The December 31, 2020 balance sheet is derived from those statements.

 

NOTE 2 – GOING CONCERN AND MANAGEMENT’S LIQUIDITY PLANS

 

As of September 30, 2021, the Company had cash of $1,082 and a working capital deficit (current liabilities in excess of current assets) of $17,514,830. During the nine months ended September 30, 2021, the net loss available to common stockholders was $17,531,575 and net cash used in operating activities was $548,640. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for one year from the issuance of the unaudited condensed consolidated financial statements.

 

During the nine months ended September 30, 2021, the Company received proceeds of $200,000 and $1,515,424 from the issuance of preferred shares and non-convertible notes, respectively. The Company does not have sufficient cash to fund operations for the next fiscal year.

 

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

 

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

 

6

 

 

Accordingly, the accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business for one year from the date the unaudited condensed consolidated financial statements are issued. The carrying amounts of assets and liabilities presented in the unaudited condensed consolidated financial statements do not necessarily purport to represent realizable or settlement values. The unaudited condensed consolidated financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.

 

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

 

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

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The unaudited condensed consolidated financial statements include the accounts of MassRoots, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include stock-based compensation, fair values relating to derivative liabilities, fair value of payroll tax liabilities, deemed dividends and the valuation allowance related to deferred tax assets. Actual results may differ from these estimates.

 

Fair Value of Financial Instruments

 

The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 825-10, “Financial Instruments” (“ASC 825-10”) requires disclosure of the fair value of certain financial instruments. The estimated fair value of certain financial instruments, including cash, accounts payable and accrued liabilities are carried at historical cost basis, which approximates their fair value because of the short-term maturity of these instruments. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the condensed consolidated financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk.

 

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

 

7

 

 

Cash

 

For purposes of the unaudited condensed consolidated statements of cash flows, the Company considers highly liquid investments with an original maturity of three months or less to be cash equivalents. As of September 30, 2021 and December 31, 2020, the Company had no cash equivalents. The Company maintains its cash in banks insured by the Federal Deposit Insurance Corporation in accounts that at times may be in excess of the federally insured limit of $250,000 per bank. The Company minimizes this risk by placing its cash deposits with major financial institutions. At September 30, 2021 and December 31, 2020, the uninsured balances amounted to $0.

 

Property and Equipment

 

Property and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives of three to five years. Repair and maintenance costs are expensed as incurred. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition is reflected in earnings.

 

Accounts Receivable and Allowance for Doubtful Accounts 

 

The Company monitors outstanding receivables based on factors surrounding the credit risk of specific customers, historical trends, and other information. The allowance for doubtful accounts is estimated based on an assessment of the Company’s ability to collect on customer accounts receivable. There is judgment involved with estimating the allowance for doubtful accounts, and if the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make the required payments, the Company may be required to record additional allowances or charges against revenues. The Company writes-off accounts receivable against the allowance when it determines a balance is uncollectible and no longer actively pursues its collection.

 

Revenue Recognition and Deferred Revenue

 

Revenues are accounted for under ASC Topic 606, “Revenue From Contracts With Customers” (“ASC 606”). ASC 606 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASC also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer purchase orders, including significant judgments.

 

In accordance with ASC 606, the Company recognizes revenue in accordance with that core principle by applying the following:

 

  (i) Identify the contract(s) with a customer;
     
  (ii) Identify the performance obligation in the contract;
     
  (iii) Determine the transaction price;
     
  (iv) Allocate the transaction price to the performance obligations in the contract; and
     
  (v) Recognize revenue when (or as) the Company satisfies a performance obligation.

 

The Company primarily generates revenue by charging businesses to advertise on the Company’s website and social media channels. In cases where clients enter advertising contracts for an extended period of time, the Company recognizes revenue pro rata over the contract term and any unearned revenue is deferred to future periods. 

 

Based on the nature of the Company’s revenue streams, revenues generally do not require significant estimates or judgments. The sales prices are generally fixed at the point of sale and all consideration from contracts is included in the transaction price. The Company’s contracts do not include multiple performance obligations or material variable consideration.

 

8

 

 

Deferred revenue represents the amount of prepaid advertising fees the Company has received from customers and it is included in current liabilities in the accompanying condensed consolidated balance sheets.  Deferred revenue shall be recognized in the future as the advertising services are provided.

 

Advertising

 

The Company charges the costs of advertising to expense as incurred. Advertising costs were $18,125 and $43,020 for the nine months ended September 30, 2021 and 2020, respectively.

 

Stock-Based Compensation

 

Stock-based compensation expense is measured at the grant date fair value of the award and is expensed over the requisite service period. For stock-based awards to employees, non-employees and directors, the Company calculates the fair value of the award on the date of grant using the Black-Scholes option pricing model. Determining the fair value of stock-based awards at the grant date under this model requires judgment, including estimating volatility, employee stock option exercise behaviors and forfeiture rates. The assumptions used in calculating the fair value of stock-based awards represent the Company’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment.

 

Income Taxes

 

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

 

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

  

Convertible Instruments

 

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

 

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

 

9

 

 

Beneficial Conversion Features and Deemed Dividends

 

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

 

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

 

Derivative Financial Instruments

 

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

 

The Company’s freestanding derivatives consisted of warrants to purchase common stock that were issued in connection with the issuance of debt and the sale of shares of common stock, and of embedded conversion options within convertible notes. The Company evaluated these derivatives to assess their proper classification in the balance sheet as of September 30, 2021 and December 31, 2020 using the applicable classification criteria enumerated under ASC 815, “Derivatives and Hedging.” The Company determined that certain embedded conversion and/or exercise features did not contain fixed settlement provisions. The convertible notes contained a conversion feature such that the Company could not ensure it would have adequate authorized shares to meet all possible conversion demands. As such, the Company is required to record the derivatives which do not have fixed settlement provisions as liabilities and mark to market all such derivatives to fair value at the end of each reporting period. The Company also records derivative liabilities for instruments, including convertible notes, preferred stock, and warrants, in which the Company does not have sufficient authorized shares to cover the conversion of these instruments into shares of common stock.

 

Long-Lived Assets

 

The Company reviews its property and equipment and any identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The test for impairment is required to be performed by management at least annually. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. Intangible assets are stated at cost and reviewed annually to examine any impairments, usually assuming an estimated useful life of three to five years. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings.

  

10

 

 

Indefinite Lived Intangibles and Goodwill

 

The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, “Business Combinations,” where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill.

 

The Company tests indefinite lived intangibles and goodwill for impairment in the fourth quarter of each year and whenever events or circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable.

  

Segment Reporting

 

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

 

Net Loss Per Common Share

 

Net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share includes the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if converted” methods, as applicable. The computation of diluted earnings (loss) per share excludes potentially dilutive securities when their inclusion would be anti-dilutive, or if their exercise prices were greater than the average market price of the common stock during the period.

 

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

 

    September 30,     September 30,  
    2021     2020  
Shares of common stock issuable upon conversion of convertible notes     226,347,786       5,722,267,406  
Options to purchase shares of common stock     27,621,765       27,621,765  
Warrants to purchase shares of common stock     11,575,000       17,161,702,276  
Shares of common stock issuable upon conversion of preferred stock     7,817,778,624       18,017,191,930  
Total potentially dilutive shares     8,083,323,175       40,928,783,377  

 

Recent Accounting Pronouncements

 

In August 2020, the FASB issued ASU 2020-06, which simplifies the guidance on accounting for convertible debt instruments by removing the separation models for: (1) convertible debt with a cash conversion feature; and (2) convertible instruments with a beneficial conversion feature. As a result, the Company will not separately present in equity an embedded conversion feature in such debt. Instead, we will account for a convertible debt instrument wholly as debt, unless certain other conditions are met. We expect the elimination of these models will reduce reported interest expense and increase reported net income for the Company’s convertible instruments falling under the scope of those models before the adoption of ASU 2020-06. Also, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock method will be no longer available. The provisions of ASU 2020-06 are applicable for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of ASU 2020-06 on its unaudited condensed consolidated financial statements.

  

11

 

 

In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 removes certain disclosure requirements, including the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. ASU 2018-13 also adds disclosure requirements, including changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements, and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments on changes in unrealized gains and losses, and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. ASU 2018-13 became effective for us on January 1, 2020. The adoption of this update did not have a material impact on the Company’s unaudited condensed consolidated financial statements and related disclosures.

 

There are other various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

NOTE 4 – PROPERTY AND EQUIPMENT

 

Property and equipment as of September 30, 2021 and December 31, 2020 is summarized as follows:

 

    September 30,
2021
    December 31,
2020
 
Computers   $ 6,366     $ 6,366  
Office equipment     17,621       17,621  
Subtotal     23,987       23,987  
Less accumulated depreciation     (23,987 )     (23,987 )
Property and equipment, net   $
-
    $
-
 

 

Depreciation expense for the nine months ended September 30, 2021 and 2020 was $0.

 

NOTE 5 – ADVANCES, NON-CONVERTIBLE NOTES PAYABLE AND PPP NOTE PAYABLE

 

Advances

 

During the nine months ended September 30, 2021 and 2020, the Company received aggregate proceeds from non-interest bearing advances of $53,991 and $0 and repaid an aggregate of $20,178 and $0, respectively, of advances. Included in the nine months ended September 30, 2021 were $2,091 of advances from and $5,278 of repayments to the Company’s Chief Information Officer and $25,000 of advances from Empire Services, Inc. (See Note 14). The remaining advances are primarily for Simple Agreements for Future Tokens, entered into with accredited investors issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(a)(2) thereof and/or Regulation D thereunder in 2018. As of September 30, 2021 and December 31, 2020, the Company owed $122,000 and $88,187 in principal and $4,000 and $0 in accrued interest, respectively, on advances.

 

Non-Convertible Notes Payable

 

During the nine months ended September 30, 2021 and 2020, the Company received proceeds from the issuance of non-convertible notes of $1,515,424 and $132,911 and repaid an aggregate of $25,000 and $39,641, respectively, of non-convertible notes. Included in the nine months ended September 30, 2021 and 2020 were $1,515,424 and $20,520, respectively, of advances from and $0 of repayments to the Company’s Chief Executive Officer and Empires Services, Inc., (See Note 14). The non-convertible notes have maturity dates ranging from March 31, 2019 to June 24, 2023 and accrue interest at rates ranging from 0% to 35% (default interest rate) per annum.

 

On June 2, 2021, one of the holders of non-convertible notes entered into an agreement to cancel the entire amount owed to him (including principal of $79,000 and accrued interest of $63,055), resulting in gain on forgiveness of debt of $142,055 (See Note 8 – Trawick’s Complaint).

 

On June 4, 2021, one of the holders of a non-convertible note payable for $60,000 extended the due date of the note from June 26, 2022 to June 24, 2023.

 

12

 

 

On June 25, 2021, a law firm the Company formerly used received an arbitration award of $459,251 for unpaid legal bills. On September 23, 2021, the Company entered into a Resolution Agreement to settle the arbitration award for an aggregate of $275,000 to be paid as follows: (i) $25,000 by September 30, 2021; (ii) $15,000 per month by the last day of each month from October 2021 through January 2023; and (iii) $10,000 by February 28, 2023. The Company imputed an interest rate of 10% and discounted the note accordingly. The imputed debt discount of $17,991 is being amortized to interest expense over the term of the note. The Company recognized a $202,242 gain on settlement. As of September 30, 2021, the remaining carrying value of the note was $232,502, net of debt discount of $17,498.

 

As of September 30, 2021 and December 31, 2020, the Company owed principal of $1,888,446 and $219,520 (of which $128,857 and $60,000 is long-term), net of debt discount of $17,498 and $0, and accrued interest of $372,480 and $251,612, respectively, on non-convertible notes.

 

PPP Note Payable

 

On May 4, 2020, the Company received proceeds of $50,000 from a PPP note. The note had a maturity date of May 4, 2022 and bore 1% interest per annum. On April 6, 2021, the Small Business Administration forgave the Company’s Paycheck Protection Program loan in the principal amount of $50,000 and accrued interest of $466, resulting in gain on forgiveness of debt of $50,466. As of September 30, 2021 and December 31, 2020, the Company owed $0 and $50,000 in principal and $0 and $330 in accrued interest, respectively, on this note.

 

NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

As of September 30, 2021 and December 31, 2020, the Company owed accounts payable and accrued expenses of $4,218,421 and $4,948,890, respectively. These are primarily comprised of payments to vendors, accrued interest on debt, and accrued legal bills.

 

NOTE 7 – ACCRUED PAYROLL AND RELATED EXPENSES

 

The Company is delinquent in filing its payroll taxes, primarily related to stock compensation awards in 2016 and 2017, but also including payroll for 2018 through 2021. As of September 30, 2021 and December 31, 2020, the Company owed payroll tax liabilities, including penalties, of $4,037,298 and $3,864,055, respectively, to federal and state taxing authorities. The actual liability may be higher or lower due to interest or penalties assessed by federal and state taxing authorities. The Company expects to settle these liabilities during 2022.

 

NOTE 8 – COMMITMENTS AND CONTINGENCIES

 

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

 

Power Up Lending Group, Ltd. Complaint

 

As disclosed in the Company’s Annual Report on Form 10-K filed with the SEC on April 16, 2021, on October 11, 2019, Power Up Lending Group, Ltd. (“Power Up”) filed a complaint against the Company and Isaac Dietrich, an officer and director of the Company, in the Supreme Court of the State of New York, County of Nassau. The complaint alleged, among other things, (i) the occurrence of events of default in certain notes (the “Power Up Notes”) issued by the Company to Power Up, (ii) misrepresentations by the Company including, but not limited to, with respect to the Company’s obligation to timely file its required reports with the SEC and (iii) lost profits as a result of the Company’s failure to convert the Power Up Notes in accordance with the terms thereof.

 

13

 

 

On April 30, 2021, the Company entered into a settlement agreement (the “Settlement”) with PowerUp by accepting an offer communicated to the Company via electronic mail. In accordance with the terms of the Settlement, PowerUp, the judgment creditor of a judgment against the Company and Isaac Dietrich, the Company’s Chief Information Officer and director, in the total amount of $350,551.10 entered in the Office of the Clerk of the County of Nassau on February 23, 2021 (the “Judgement”), agreed to a settlement and filing of a satisfaction of judgment in consideration of receipt of the sum of $150,000.00 (the “Settlement Amount”) on April 30, 2021. The Company accepted the aforementioned offer by remitting the Settlement Amount timely and in full. Accordingly, a satisfaction of Judgment was filed by PowerUp with the Office of the Clerk of the County of Nassau on May 3, 2021.

 

Sheppard Mullin’s Demand for Arbitration

 

On December 1, 2020, Sheppard, Mullin, Richter& Hampton LLP (“Sheppard Mullin”), the Company’s former securities counsel, filed a demand for arbitration at JAMS in New York, New York against the Company, alleging the Company’s breach of an engagement agreement dated January 4, 2018, and a failure of the Company to pay $487,390.73 of outstanding legal fees to Sheppard Mullin. Sheppard Mullin was awarded $459,251 in unpaid legal fees, disbursements and interest on June 25, 2021. A judgement confirming the arbitration award was entered on September 8, 2021 in the Federal District Court located in Denver, Colorado.

 

On September 23, 2021, the Company entered into a Resolution Agreement with Sheppard, Mullin, Richter & Hampton concerning the $459,250.88 judgement entered against the Company. Under the terms of the Resolution Agreement, the Company was required to make a $25,000 initial payment by September 30, 2021 and is required to make $15,000 monthly payments from October 2021 to January 2023 with a final $10,000 payment due in February 2023. The Company has made both the September and October 2021 payments.

 

Rother Investments’ Petition

 

On October 28, 2020, Rother Investments, LLC (“Rother Investments”) filed a complaint in the District Court of 419th Judicial District, Travis County, Texas against the Company, alleging the Company’s default under a certain promissory note (the “Rother Investments Note”) in payment of the outstanding principal amount and interest under the Note, as described in the complaint. Rother Investments seeks to collect the amount of $124,750 as of the date of the complaint with late fees continuing to accrue on a daily basis, monetary relief of over $100,000 but not more than $200,000 pursuant to Tex. R. Civ. P. 47(c)(3), court’s costs and attorney’s fees, pre-judgment and post-judgment interest, and such other relief as the court deems appropriate. On May 19, 2021, Rother Investments, LLC received a default judgment against the Company in the amount of $144,950. On June 17, 2021, MassRoots filed a motion to set aside default and motion for new trial asserting it was improperly served. On July 20, 2021, the court granted the Company’s motion finding and ordered a new trial of the matter.

 

Trawick’s Complaint

 

As previously reported by the Company in its Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 16, 2021, on or about January 25, 2021, Travis Trawick (“Trawick”) filed a complaint (“Trawick’s Lawsuit”) against the Company and Isaac Dietrich, the Company’s Chief Information Officer and director, in the Circuit Court for the City of Virginia Beach, Virginia (the “Court”), asserting the Company’s failure to remit payments under the certain promissory note, as subsequently amended and modified, and ancillary documents thereto (collectively, the “Note”), and Mr. Dietrich’s failure to fulfill its obligations, as the guarantor, under the Note.

 

On May 4, 2021, Trawick requested that the Clerk of the Court filed for entry an order to dismiss Trawick’s Lawsuit with prejudice.

 

14

 

 

Iroquois Master Fund

 

On June 30, 2021, the Company received an e-mail containing a demand (the “Demand”) for arbitration (the “Arbitration”) at American Arbitration Association in Denver, Colorado, by Iroquois Master Fund Ltd. (“Iroquois”) against the Company, Isaac Dietrich and Danny Meeks, the Company’s directors, and Empire Services, Inc. (“Empire”). The Demand alleges breach of contract and various related state law claims against the defendants, and sought, inter alia, specific performance of the subject warrant, damages in an amount not less than $12 million, equitable relief, and attorney’s fees for the Company’s alleged failure to reserve more than 150 million shares of common stock that Iroquois is allegedly entitled to in connection with the exercise of a certain warrant issued by the Company on July 21, 2017, and subsequently purchased by Iroquois from an unrelated third party. As a result of a legal action commenced by Isaac Dietrich, Danny Meeks, and Empire (See – “Litigation” below), Iroquois informed the American Arbitration Association (the arbitral body overseeing the Arbitration) that it would (i) dismiss the Counterclaim Defendants from the Arbitration without prejudice, (ii) assert its claims against Isaac Dietrich, Danny Meeks, and Empire the in the action commended by them, and (iii) proceed with the Arbitration with respect to the Company only.

 

Litigation

 

On July 21, 2021, in response to the Demand, Isaac Dietrich, Danny Meeks, and Empire, filed a complaint (the “Complaint”) against Iroquois in the United States District Court of the Southern District of New York alleging that the aforementioned plaintiffs were not parties to the warrant the Demand based on, and as such, the Demand could not have brought against them. Declaratory relief and injunctive relief were sought in the Complaint. On August 20, 2021, Iroquois submitted an answer with counterclaims stating that Iroquois informed the American Arbitration Association (the arbitral body overseeing the Arbitration) that it would (i) dismiss the Counterclaim Defendants from the Arbitration without prejudice, (ii) assert its claims against Isaac Dietrich, Danny Meeks, and Empire the in the action commended by them, and (iii) proceed with the Arbitration with respect to the Company only. In its answer, Iroquois made allegations substantially similar to the claims made in the Arbitration, asserted defenses, and requested an award in not less than $12 million against Demand, Isaac Dietrich, Danny Meeks, and Empire, an entry of an award of a constructive trust against them, and costs and expenses, including its reasonable attorneys’ fees, incurred in prosecuting said action and the Arbitration.

 

Settlement

 

On September 30, 2021, the Company entered into a Settlement Agreement (the “Settlement Agreement”) with Iroquois; Dietrich; Meeks; and Empire. Pursuant to the Settlement Agreement, in exchange for terminating any duties owed by the Company to Iroquois under the Warrant, the Company agreed to pay, on its own behalf and on behalf of Dietrich, Meeks, and Empire, one million dollars ($1,000,000) and issue shares of the Series Z Convertible Preferred Stock, par value $0.001 per share (the “Series Z”), sufficient in number such that if they are converted into the Company’s common stock, par value $0.001 per share (“Common Stock”) by Iroquois, such shares of Common Stock will be equal in number to 9.99% of the issued and outstanding shares of Common Stock at the time of such conversion.

  

NOTE 9 – CONVERTIBLE NOTES PAYABLE

 

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

 

15

 

 

In connection with the December 2018 note, the Company also entered into a security agreement (the “Security Agreement”) on the closing date pursuant to which the Company granted the investor a security interest in the Collateral (as defined in the Security Agreement). On July 16, 2019, the Company received a notice from the noteholder indicating that events of default had occurred and asserting default penalties of $761,330. During the year ended December 31, 2019, the noteholder converted $345,000 of principal into an aggregate of 53,522,295 shares of common stock. During the year ended December 31, 2020, (i) the noteholder converted $37,000 of principal into an aggregate of 31,109,551 shares of common stock; and (ii) $1,049,329 of accrued interest was reclassified to the principal balance of this note. On January 20, 2021, the noteholder converted $13,345 of principal into an aggregate of 4,448,251 shares of common stock, having a fair value of $133,002, resulting in a reduction of the derivative liability by $118,778 and a loss on conversion of $880. As of September 30, 2021 and December 31, 2020, the remaining carrying value of the note was $2,878,985 and $2,892,330, respectively. As of September 30, 2021 and December 31, 2020, accrued interest payable of $1,575,001 and $1,073,809, respectively, was outstanding on the note.

 

On January 25, 2019, the Company issued a convertible promissory note in the principal amount of $55,000 (including original issuance discount of $5,000) that matured July 25, 2019 and bearing a one-time interest fee of 10%. The investor has the right to convert the Outstanding Balance (as defined in the note) of the note at any time into shares of common stock of the Company at a conversion price of $0.075 per share, subject to adjustment. Upon maturity, payment may be made in cash, by converting the redemption amount into shares of the Company’s common stock at a conversion price of the lesser of: (a) $0.075 per share, subject to adjustment; and (b) the Market Price (as defined in the note), or a combination thereof. Upon the occurrence of an event of default, the investor may accelerate the note pursuant to which the Outstanding Balance will become immediately due and payable in cash at the Mandatory Default Amount (as defined in the note). The Company is prohibited from effecting a conversion of any note to the extent that, as a result of such conversion, the investor, together with its affiliates, would beneficially own more than 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the note, which beneficial ownership limitation may be increased by the investor up to, but not exceeding, 9.99%. On May 19, 2021, the investor received a default judgment against the Company in the amount of $144,950. In accordance with the judgment, commencing May 19, 2021, the Company began accruing interest at the rate of 18% per annum. On June 17, 2021, the Company filed a motion to set aside default and motion for new trial asserting it was improperly served. On July 20, 2021, the court granted the Company’s motion finding and ordered a new trial of the matter. As of September 30, 2021 and December 31, 2020, the remaining carrying value of the note was $148,685 and $55,000, respectively. As of September 30, 2021 and December 31, 2020, accrued interest payable of $0 and $92,600, respectively, was outstanding on the note (See Note 8 – Rother Investments’ Petition).

  

From January to June 2019, the Company issued convertible promissory notes in the aggregate principal amount of $389,000 (including aggregate original issuance discount of $39,000) that matured at dates ranging from July 15, 2019 to June 6, 2020 and accruing interest at rates ranging from 5% to 12% per annum. The investors have the right to convert the Outstanding Balance (as defined in the notes) of the notes at any time into shares of common stock of the Company at a conversion price of $0.075 per share, subject to adjustment. Upon maturity, payment may be made in cash, by converting the redemption amount into shares of the Company’s common stock at a conversion price of the lesser of: (a) $0.075 per share, subject to adjustment; and (b) the Market Price (as defined in the notes), or a combination thereof. Upon the occurrence of an event of default, the investors may accelerate the note pursuant to which the Outstanding Balance will become immediately due and payable in cash at the Mandatory Default Amount (as defined in the notes). The Company is prohibited from effecting a conversion of any note to the extent that, as a result of such conversion, the investor, together with its affiliates, would beneficially own more than 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the note, which beneficial ownership limitation may be increased by the investor up to, but not exceeding, 9.99%. In January 2020, one of the promissory notes was amended whereby the conversion price for $9,202 which is a portion of the principal amount of the note was amended to $0.0004 per share. The amendment was deemed a debt modification and accounted for accordingly. During the year ended December 31, 2019, the noteholders converted $31,180 of principal and $8,000 of accrued interest into an aggregate of 10,000,000 shares of common stock. During the year ended December 31, 2020, one of the holders converted $24,826 of principal into an aggregate of 35,005,850 shares of common stock; and one of the holders converted $168,820 of principal and $362,027 of accrued interest into 26.54237 shares of Series Y preferred shares having a stated value of $530,847, resulting in a reduction of the derivative liability by $719,416 and a gain on settlement of $719,416. On April 30, 2021, one of the holders of non-convertible notes entered into an agreement to cancel the entire amount owed to them (including principal of $131,174 and accrued interest of $304,485) in exchange for a cash payment of $150,000 by the Company, resulting in a reduction of the derivative liability of $300,424 and a gain on settlement of debt of $586,083 (See Note 8 – Power Up Lending Group, Ltd. Complaint). On May 1, 2021, one of the holders converted $33,000 of principal and $1,185,200 of accrued interest into 60.91 shares of Series Y preferred shares having a stated value of $1,218,200, resulting in a reduction of the derivative liability by $936,405 and a gain on settlement of $936,405. As of September 30, 2021 and December 31, 2020, the remaining carrying value of the notes was $0 and $164,174, respectively. As of September 30, 2021 and December 31, 2020, accrued interest payable of $0 and $1,191,998, respectively, was outstanding on the notes.

 

16

 

 

 

On November 13, 2019, the Company issued three convertible promissory notes in the aggregate principal amount of $108,900, having an aggregate original issuance discount of $9,900, resulting in cash proceeds of $99,000. The notes matured on May 13, 2020 and accrue interest at a rate of 12% per annum. The investors have the right to convert the Outstanding Balance (as defined in the notes) of the notes at any time into shares of common stock of the Company at a conversion price of $0.01 per share, subject to adjustment. In the event of default, the conversion price shall be 60% of the average of the three lowest closing bid prices of the Company’s common stock during the 20 days prior to the conversion date. The Company is prohibited from effecting a conversion of any note to the extent that, as a result of such conversion, the investor, together with its affiliates, would beneficially own more than 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the note, which beneficial ownership limitation may be increased if the Market Capitalization (as defined in the notes) falls below $2,500,000, but not exceeding, 9.99%. During the year ended December 31, 2020, two of the holders converted $72,600 of principal and $112,671 of accrued interest into 9.26353 shares of Series Y preferred shares having a stated value of $185,271, resulting in a reduction of the derivative liability by $301,257 and a gain on settlement of $301,257. As of September 30, 2021 and December 31, 2020, the carrying value of the remaining note was $36,300. As of September 30, 2021 and December 31, 2020, accrued interest payable of $87,789 and $57,231, respectively, was outstanding on the remaining note.

 

On December 6, 2019, the Company issued convertible promissory notes in the aggregate principal amount of $110,000, having an aggregate original issuance discount of $10,000, resulting in cash proceeds of $100,000. The notes matured on June 6, 2020 and accrue interest at a rate of 12% per annum. The investors have the right to convert the Outstanding Balance (as defined in the notes) of the notes at any time into shares of common stock of the Company at a conversion price of $0.01 per share, subject to adjustment. In the event of default, the conversion price shall be 60% of the average of the three lowest closing bid prices of the Company’s common stock during the 20 days prior to the conversion date. The Company is prohibited from effecting a conversion of any note to the extent that, as a result of such conversion, the investor, together with its affiliates, would beneficially own more than 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the note, which beneficial ownership limitation may be increased if the Market Capitalization (as defined in the notes) falls below $2,500,000, but not exceeding, 9.99%. During the year ended December 31, 2020, the holders converted $110,000 of principal and $123,451 of accrued interest into 11.67255 shares of Series Y preferred shares having a stated value of $233,451, resulting in a reduction of the derivative liability by $379,600 and a gain on settlement of $379,600. As of September 30, 2021 and December 31, 2020, the remaining carrying value of the notes was $0. As of September 30, 2021 and December 31, 2020, accrued interest payable of $0 was outstanding on the notes.

  

In December 2019, the Company and the holders of all of the outstanding Series A and Series B Preferred Shares (the “Preferred Shares”) entered into Exchange Agreements whereby 2,800 Series A Preferred Shares and 1,126 Series B Preferred Shares were canceled in exchange for the issuance of an aggregate of $3,500,000 and $1,548,250 of convertible promissory notes, respectively. The notes matured at dates ranging from December 24, 2019 to May 18, 2020 and accrue interest at a rate of 12% per annum. The investors have the right to convert the Outstanding Balance (as defined in the notes) of the notes at any time into shares of common stock of the Company at a conversion price of $0.005 per share, subject to adjustment. In the event of default, the Outstanding Balance shall immediately increase to 130% of the Outstanding Balance and a penalty of $100 per day shall accrue until the default is remedied. For a period of two years from the issuance date, in the event the Company issues or sells any additional shares of common stock or common stock equivalents at a price less than the Conversion Price (as defined in the notes) then in effect (a “Dilutive Issuance”), the Conversion Price of the notes shall be reduced to the Dilutive Issuance Price and the number of shares issuable upon conversion shall be increased on a full ratchet basis. The Company is prohibited from effecting a conversion of any note to the extent that, as a result of such conversion, the investor, together with its affiliates, would beneficially own more than 9.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the note. During the year ended December 31, 2019, the noteholders converted $185,500 of principal and $300 of accrued interest into an aggregate of 30,669,903 shares of common stock and 37,160,000 shares of common stock to be issued. During the year ended December 31, 2020, the noteholders converted $31,137 of principal and $128 of accrued interest into an aggregate of 6,253,056 shares of common stock; and the noteholders converted $4,793,113 of principal and $2,564,325 of accrued interest into 367.8719 shares of Series Y preferred shares having a stated value of $7,357,438, resulting in a reduction of the derivative liability by $89,648,951 and a gain on settlement of $89,648,951. On January 7, 2021, a noteholder converted $38,500 of principal and $55,261 of accrued interest into 3.72667 shares of Series Y preferred shares having a stated value of $74,533, resulting in a reduction of the derivative liability by $3,880,958 and a gain on settlement of $3,900,186. As of September 30, 2021 and December 31, 2020, the remaining carrying value of the notes was $0 and $38,500, respectively. As of September 30, 2021 and December 31, 2020, accrued interest payable of $0 and $54,473, respectively, was outstanding on the notes.

 

17

 

 

From January to September 2020, the Company issued convertible promissory notes in the aggregate principal amount of $700,700, having an aggregate original issuance discount of $63,700, resulting in cash proceeds of $637,000. The notes mature from July 2020 to March 2021 and accrue interest at a rate of 12% per annum. During the first 180 days the notes are outstanding, the Company shall have the right to prepay the notes for an amount equal to 120% (during the first 90 days) or 135% (during the subsequent 90 days) of the Outstanding Balance (as defined in the notes) being prepaid. The investors have the right to convert the Outstanding Balance of the notes at any time into shares of common stock of the Company at a conversion price of $0.01 per share, subject to adjustment. In the event of default, the conversion price shall be 60% of the average of the three lowest closing bid prices of the Company’s common stock during the 20 days prior to the conversion date. Notwithstanding the foregoing, upon the occurrence of an event of default, the conversion price for the April 2020 notes, having an aggregate original principal amount of $330,000, shall not be less than $0.001. The Company is prohibited from effecting a conversion of any note to the extent that, as a result of such conversion, the investor, together with its affiliates, would beneficially own more than 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the note, which beneficial ownership limitation may be increased if the Market Capitalization (as defined in the notes) falls below $2,500,000, but not exceeding, 9.99%. During the year ended December 31, 2020, the noteholders converted $700,700 of principal and $462,763 of accrued interest into 58.17315 shares of Series Y preferred shares having a stated value of $1,163,463, resulting in a reduction of the derivative liability by $1,885,194, a reduction in debt discount by $72,637 and a gain on settlement of $1,812,557. On March 23, 2021, a noteholder converted $21,944 of accrued interest into 1.09721 shares of Series Y preferred shares having a stated value of $21,945, resulting in a reduction of the derivative liability by $17,548 and a gain on settlement of $17,548. As of September 30, 2021 and December 31, 2020, the remaining carrying value of the notes was $0. As of September 30, 2021 and December 31, 2020, accrued interest payable of $0 and $13,844 was outstanding on the notes.

 

On December 15, 2020, $79,143 of accrued compensation owed to the Company’s former Chief Financial Officer was settled by the issuance of a convertible note in the amount of $64,143, having a maturity date of June 15, 2021 and bearing interest of 12% per annum, resulting in a gain on settlement of accounts payable of $15,000. The holder has the right to convert the Outstanding Balance (as defined in the note) of the note at any time into shares of common stock of the Company at a conversion price of $0.0003 per share, subject to adjustment. In the event of default, the conversion price shall be 60% of the average of the three lowest closing bid prices of the Company’s common stock during the 20 days prior to the conversion date. As a result of the beneficial conversion feature of the note, debt discount of $64,143 was recognized with a corresponding increase in additional paid-in capital. On December 24, 2020, the holder converted $64,143 of principal into 3.20716 shares of Series Y preferred shares having a stated value of $64,143, resulting in a reduction in debt discount by $60,971 and a loss on settlement of $60,971. As of September 30, 2021 and December 31, 2020, the remaining carrying value of the note was $0. As of September 30, 2021 and December 31, 2020, accrued interest payable of $0 was outstanding on the note.

 

As of September 30, 2021 and December 31, 2020, the remaining carrying value of the convertible notes was $3,063,970 and $3,186,303, respectively. As of September 30, 2021 and December 31, 2020, accrued interest payable of $1,661,704 and $2,483,955, respectively, was outstanding on the notes.

 

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

 

18

 

 

The Company does not have enough authorized and unissued shares of common stock to convert all of the convertible promissory notes into shares of common stock. As a result of this authorized shares shortfall, all of the convertible notes payable, including those where the maturity date has not yet been reached, are in default. Accordingly, (i) interest has been accrued at the default interest rate, if applicable, and (ii) the embedded conversion option has been accounted for, at fair value, as a derivative liability (See Note 10).

 

NOTE 10 – DERIVATIVE LIABILITIES AND FAIR VALUE MEASUREMENTS

 

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

 

During the nine months ended September 30, 2021, upon issuance of the instruments underlying the derivative liabilities and upon revaluation (immediately prior to conversion of the underlying instrument), the Company estimated the fair value of the embedded derivatives using the Black-Scholes Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 133.69% to 138.77%, (3) risk-free interest rate of 0.01% to 0.14%, and (4) expected life of 0.06 to 1.85 years.

 

On September 30, 2021, the Company estimated the fair value of the embedded derivatives of $4,289,634 using the Black-Scholes Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 137.90%, (3) risk-free interest rate of 0.07% to 0.09%, and (4) expected life of 0.01 to 1.33 years.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

As of September 30, 2021 and December 31, 2020, the Company did not have any derivative instruments that were designated as hedges.

 

Items recorded or measured at fair value on a recurring basis consisted of the following items as of September 30, 2021 and December 31, 2020:

 

    September 30,
2021
    Quoted Prices 
in Active 
Markets for 
Identical Assets
(Level 1)
    Significant 
Other 
Observable 
Inputs 
(Level 2)
    Significant 
Unobservable 
Inputs 
(Level 3)
 
Derivative liabilities   $ 4,289,634     $
             -
    $
                -
    $ 4,289,634  

 

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

 

The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities for the nine months ended September 30, 2021: 

 

Balance, December 31, 2020   $ 25,475,514  
Transfers out due to conversions of convertible notes, accrued interest and warrants into shares of Series Y preferred stock     (4,834,911 )
Transfers out due to conversions of convertible notes and accrued interest into shares of common stock     (118,778 )
Transfers out due to cash payments made pursuant to settlement agreements     (175,565,103 )
Change in derivative liability due to authorized shares shortfall     159,633,797  
Mark to market to September 30, 2021     (300,885 )
Balance, September 30, 2021   $ 4,289,634  
         
Gain on change in derivative liabilities for the nine months ended September 30, 2021   $ 300,885  

 

20

 

 

Fluctuations in the Company’s stock price are a primary driver for the changes in the derivative valuations during each reporting period. As the stock price increases/(decreases) for each of the related derivative instruments, the value to the holder of the instrument generally increases/(decreases), therefore increasing/(decreasing) the liability on the Company’s balance sheet. Decreases in the conversion price of the Company’s convertible notes are another driver for the changes in the derivative valuations during each reporting period. As the conversion price decreases for each of the related derivative instruments, the value to the holder of the instrument (especially those with full ratchet price protection) generally increases, therefore increasing the liability on the Company’s balance sheet. Additionally, stock price volatility is one of the significant unobservable inputs used in the fair value measurement of each of the Company’s derivative instruments. The simulated fair value of these liabilities is sensitive to changes in the Company’s expected volatility. Increases in expected volatility would generally result in higher fair value measurements. A 10% change in pricing inputs and changes in volatilities and correlation factors would not result in a material change in our Level 3 fair value. 

 

NOTE 11 – STOCKHOLDERS’ DEFICIT

 

Preferred Stock

 

Series A

 

The Company is authorized to issue 10,000,000 shares of blank check preferred stock, par value $0.001 per share.

 

On July 2, 2019, the Company authorized the issuance of 6,000 Series A preferred stock, par value $0.001 per share. The Series A preferred stock has a $1,250 stated value per share and is convertible into shares of common stock at $0.05 per share, subject to certain adjustments. The Certificate of Designation for the Series A preferred stock was filed on July 9, 2019.

 

During the periods presented, there were 0 shares of Series A Preferred Stock outstanding.

 

Series B

 

On June 24, 2019, the Company authorized the issuance of 2,000 shares of Series B Preferred Stock, par value $0.001 per share. The Series B Preferred Stock has a $1,250 stated value per share and is convertible into shares of common stock at $0.05 per share, subjected to certain adjustments. The Certificate of Designation for the Series B Preferred Stock was filed on July 9, 2019.

 

During the periods presented, there were 0 shares of Series B Preferred Stock outstanding.

 

Series C

 

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

 

As of September 30, 2021 and December 31, 2020, there were 1,000 shares of Series C Preferred Stock outstanding.

 

Series X

 

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

 

21

 

 

From November 25 to December 23, 2020, the Company issued an aggregate of 16.05 shares of Series X Preferred Stock for aggregate proceeds of $321,000. Upon each issuance of Series X shares, the conversion price was less than the Company’s stock price. Accordingly, during the year ended December 31, 2020, the Company recognized an aggregate beneficial conversion feature of $454,200 upon issuance of the Series X preferred shares with a $454,200 increase in Discount on preferred stock and a corresponding increase in additional paid-in capital. The preferred stock discount was amortized over 120 days commencing November 25, 2020 (the date of the initial issuance of the Series X preferred shares), which is the maximum amount of time the Company had to conduct a stockholder vote to increase the Company’s authorized shares. Amortization of the preferred stock discount of $46,448 was recognized as a deemed dividend for the year ended December 31, 2020. As of December 31, 2020, unamortized debt discount on Series X Preferred Stock was $407,752.

 

From February 16 to March 10, 2021, the Company issued an aggregate of 10.00 shares of Series X Preferred Stock for aggregate proceeds of $200,000. Upon each issuance of Series X shares, the conversion price was less than the Company’s stock price. Accordingly, during the nine months ended September 30, 2021, the Company recognized an aggregate beneficial conversion feature of $2,852,500 upon issuance of the Series X preferred shares with a $2,852,500 increase in Discount on preferred stock and a corresponding increase in additional paid-in capital. The preferred stock discount was amortized over 120 days commencing November 25, 2020 (the date of the initial issuance of the Series X preferred shares), which is the maximum amount of time the Company had to conduct a stockholder vote to increase the Company’s authorized shares. Amortization of the preferred stock discount of $3,260,252 was recognized as a deemed dividend for the nine months ended September 30, 2021. As of September 30, 2021, unamortized debt discount on Series X Preferred Stock was $0.

 

As of September 30, 2021 and December 31, 2020, there were 26.05 and 16.05 shares, respectively, of Series X Preferred Stock outstanding.

 

Series Y

 

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

 

From December 23 to December 30, 2020, the Company issued 654.781794 shares of Series Y Preferred Stock, having a stated value of $13,095,636, in exchange for convertible notes payable of $5,775,767 (net of debt discount of $133,608), accrued interest of $3,625,237, and 14,765,624,721 warrants. The exchanges resulted in a reduction of derivative liabilities related to the convertible notes and accrued interest of $92,934,419, a reduction of derivative liabilities related to the warrants of $72,892,563, and a net gain on settlement of $162,132,350. Included in the foregoing amounts is 3.20716 shares of Series Y Preferred Stock, having a stated value of $64,143, issued to the Company’s Chief Financial Officer, in exchange for convertible notes of $3,172 (net of debt discount of $60,971), resulting in a loss on settlement of $60,971. Upon each issuance of Series Y shares, the conversion price was less than the Company’s stock price. Accordingly, during the year ended December 31, 2020, the Company recognized an aggregate beneficial conversion feature of $21,594,115 upon issuance of the Series Y preferred shares with a $21,594,115 increase in Discount on preferred stock and a corresponding increase in additional paid-in capital. The preferred stock discount was amortized over 120 days commencing December 23, 2020 (the date of the initial issuance of the Series Y preferred shares), which is the maximum amount of time the Company had to conduct a stockholder vote to increase the Company’s authorized shares. Amortization of the preferred stock discount of $1,028,091 was recognized as a deemed dividend for the year ended December 31, 2020. As of December 31, 2020, unamortized debt discount on Series Y Preferred Stock was $20,566,024.

 

From January 7 to March 23, 2021, the Company issued 4.82388 shares of Series Y Preferred Stock, having a stated value of $96,478, in exchange for convertible notes payable of $38,500, accrued interest of $77,205, and 131,249,975 warrants. The exchanges resulted in a reduction of derivative liabilities related to the convertible notes and accrued interest of $2,502,223, a reduction of derivative liabilities related to the warrants of $1,396,283, and a net gain on settlement of $3,917,734. On May 1, the Company issued 60.91 shares of Series Y Preferred Stock, having a stated value of $1,218,200, in exchange for a convertible note payable of $33,000 and accrued interest of $1,185,200. The exchange resulted in a reduction of derivative liabilities related to the convertible notes and accrued interest of $936,405, and a net gain on settlement of $936,405. Upon each issuance of Series Y shares, the conversion price was less than the Company’s stock price. Accordingly, during the nine months ended September 30, 2021, the Company recognized an aggregate beneficial conversion feature of $10,972,647 upon issuance of the Series Y preferred shares with a $10,972,647 increase in Discount on preferred stock and a corresponding increase in additional paid-in capital. The preferred stock discount was amortized over 120 days commencing December 23, 2020 (the date of the initial issuance of the Series Y preferred shares), which is the maximum amount of time the Company had to conduct a stockholder vote to increase the Company’s authorized shares. Amortization of the preferred stock discount of $31,538,671 was recognized as a deemed dividend for the nine months ended September 30, 2021. As of September 30, 2021, unamortized debt discount on Series Y Preferred Stock was $0.

 

22

 

 

On March 17, 2021, the Company issued 27.78633 shares of Series Y Preferred Stock that were recorded as to be issued as of December 31, 2020.

 

As of September 30, 2021 and December 31, 2020, there were 720.515674 and 626.995464 shares of Series Y Preferred Stock outstanding and 0 and 27.78633 shares to be issued, respectively.

 

Series Z

 

On September 30, 2021, the Company authorized the issuance of 500 shares of Series Z Preferred Stock, par value $0.001 per share. The Series Z Preferred Stock has a $20,000 stated value per share and all 500 Series Z preferred shares, in aggregate, are convertible into 19.98% of the issued and outstanding common shares of the Company (post conversion). The conversion rate is applicable on a pro rata basis to each share of Series Z Preferred Stock upon conversion. This anti-dilutive conversion feature is in effect until such time an S-1 Registration Statement is declared effective by the SEC in conjunction with a NASDAQ listing.

 

On September 30, 2021, the Company entered into a Series Z Preferred Stock Issuance Agreement with the Company’s Chief Executive Officer whereby the Company received $1,000,000 in exchange for the issuance of: (i) a $1,000,000 note payable; and (ii) 250 Series Z Preferred Shares having a fair value of $632,019 (See Note 14). The note bears interest of 8% per annum and is due within three days of the Company’s next closing of equity financing of $3,000,000 or more. The proceeds received were allocated to the debt and equity on a relative fair value basis. Accordingly, debt discount of $387,262 was recognized with a corresponding increase in additional paid-in capital. Since the due date is contingent upon a future event, the entire debt discount was amortized to interest expense immediately.

 

On September 30, 2021, an investor owning warrants to purchase 156,250,079 common shares at $0.0004 per share entered into an agreement to cancel the aforementioned warrants in exchange for: (i) a cash payment of $1,000,000 by the Company; and (ii) 250 Series Z Preferred Shares having a fair value of $632,019. The settlement resulted in a reduction in the derivative liability of $5,750,067, offset by a reduction in cash of $1,000,000, an increase in additional paid-in capital of $632,019 and a gain on settlement of debt of $4,118,048.

 

Common Stock

 

On September 30, 2021, the Company amended its Articles of Incorporation to change the number of authorized common shares to 1,200,000,000 shares of common stock, par value $0.001 per share, which has been reflected retroactively in the accompanying consolidated financial statements.

 

On January 8, 2020, the Company issued 37,160,000 shares of the Company’s common stock previously recorded as to be issued as of December 31, 2019.

 

On March 7, 2020, a stockholder returned 69,000 shares of the Company’s common stock back to the Company. The shares were immediately retired. Accordingly, common stock was decreased by the par value of the shares of common stock contributed of $69 with a corresponding increase in additional paid in capital.

 

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

 

During the year ended December 31, 2020, the Company issued an aggregate of 72,368,457 shares of its common stock, having an aggregate fair value of $370,755, upon the conversion of convertible notes with a principal amount of $92,964 and accrued interest of $128, which resulted in the reduction of $278,545 of derivative liabilities and an aggregate net gain on conversion of convertible notes of $882. Accordingly, common stock was increased by the par value of the shares of common stock issued of $72,369 and additional paid in capital was increased by $298,386.

 

23

 

 

On January 20, 2021, the Company issued 4,448,251 shares of its common stock, having a fair value of $133,002, upon the conversion of convertible notes with a principal amount of $13,345, which resulted in the reduction of $118,778 of derivative liabilities and a loss on conversion of $880.

 

On June 2, 2021, the Company issued 1,006,250 shares of the Company’s common stock previously recorded as to be issued as of December 31, 2020.

 

On June 4, 2021, an investor owning 1,485,000 shares of the Company’s common stock and warrants to purchase 971,562,497 common shares at $0.0004 per share entered into an agreement to cancel the aforementioned common shares and warrants in exchange for a cash payment of $11,000 by the Company. Accordingly, the cancelation agreement resulted in a reduction in common stock of $1,485 for the par value of the common shares, a reduction in additional paid-in capital of $9,515, and a reduction in the derivative liability of $74,134,327 and a gain on settlement of $74,134,327.

 

On June 6, 2021, the Company awarded an aggregate of 2,175,431 fully-vested shares of common stock, having a fair value of $166,855, to the Chief Executive Officer for services rendered.

 

As of September 30, 2021 and December 31, 2020, there were 499,871,337 and 493,726,405 shares, respectively, of common stock issued and outstanding.

 

NOTE 12 – WARRANTS

 

From January 7 to March 23, 2021, the Company issued 4.82388 shares of Series Y preferred stock, having a stated value of $96,478, in exchange for convertible notes payable of $38,500, accrued interest of $77,205, and 131,249,975 warrants. The exchanges resulted in a reduction of derivative liabilities related to the convertible notes and accrued interest of $2,502,223, a reduction of derivative liabilities related to the warrants of $1,396,283, and a net gain on settlement of $3,917,734 (See Note 9).

 

On June 4, 2021, an investor owning 1,485,000 shares of the Company’s common stock and warrants to purchase 971,562,497 common shares at $0.0004 per share entered into an agreement to cancel the aforementioned common shares and warrants in exchange for a cash payment of $11,000 by the Company. The cancelation agreement resulted in a reduction in common stock of $1,485 for the par value of the common shares, a reduction in additional paid-in capital of $9,515, and a reduction in the derivative liability of $74,134,327 and a gain on settlement of debt of $74,134,327 (See Note 11).

 

On June 4, 2021, an investor owning warrants to purchase 1,250,000,002 common shares at $0.0004 per share entered into an agreement to cancel the aforementioned common shares and warrants in exchange for a cash payment of $15,000 by the Company. Accordingly, the cancelation agreement resulted in a reduction in the derivative liability of $95,380,286 and a gain on settlement of $95,365,286.

 

On September 30, 2021, an investor owning warrants to purchase 156,250,079 common shares at $0.0004 per share entered into an agreement to cancel the aforementioned warrants in exchange for: (i) a cash payment of $1,000,000 by the Company; and (ii) 250 Series Z Preferred Shares having a fair value of $632,019. The settlement resulted in a reduction in the derivative liability of $5,750,067, offset by a reduction in cash of $1,000,000, an increase in additional paid-in capital of $632,019 and a gain on settlement of debt of $4,118,048.

 

24

 

 

A summary of the Company’s warrant activity during the nine months ended September 30, 2021, is presented below:

 

    Shares     Weighted-
Average
Exercise
Price
    Weighted-
Average
Remaining
Contractual
Term
    Aggregate
Intrinsic
Value
 
Outstanding at December 31, 2020     2,521,077,555     $ 0.00109       2.04     $ 14,804,944  
Grants    
-
     
-
                 
Exercised    
-
     
-
                 
Expired/Canceled     (2,509,502,555 )   $ 0.0005                  
Outstanding at September 30, 2021     11,575,000     $ 0.12927       1.17     $ 9,200  
Exercisable at September 30, 2021     11,575,000     $ 0.12927       1.17     $ 9,200  

  

Exercise Price   Warrants
Outstanding
    Weighted Avg.
Remaining
Life
    Warrants
Exercisable
 
$0.0004 – 0.20     11,450,000       1.17       11,450,000  
0.40     125,000       1.25       125,000  
      11,575,000       1.17       11,575,000  

 

The aggregate intrinsic value of outstanding stock warrants was $9,200, based on warrants with an exercise price less than the Company’s stock price of $0.0372 as of September 30, 2021, which would have been received by the warrant holders had those holders exercised the warrants as of that date.

 

NOTE 13 – STOCK OPTIONS

 

Our stockholders approved our 2014 Equity Incentive Plan in June 2014 (the “2014 Plan”), our 2015 Equity Incentive Plan in December 2015 (the “2015 Plan”), our 2016 Equity Incentive Plan in October 2016 (“2016 Plan”), our 2017 Equity Incentive Plan in December 2016 (“2017 Plan” and together with the 2014 Plan, 2015 Plan, 2016 Plan, the “Prior Plans”), our 2018 Equity Incentive Plan in June 2018 (the “2018 Plan”), and our 2021 Equity Incentive Plan in September 2021 (“2021 Plan” , and together with the Prior Plans, the “Plans”). The Prior Plans are identical, except for the number of shares reserved for issuance under each. As of September 30, 2021, the Company had granted an aggregate of 64,310,000 securities under the Plans, with 50,190,000 shares available for future issuances.

 

The Plans provide for the grant of incentive stock options to our employees and our subsidiaries’ employees, and for the grant of stock options, stock bonus awards, restricted stock awards, performance stock awards and other forms of stock compensation to our employees, including officers, consultants and directors. The Prior Plans also provide that the grant of performance stock awards may be paid out in cash as determined by the committee administering the Prior Plans.

 

Option valuation models require the input of highly subjective assumptions. The fair value of stock-based payment awards was estimated using the Black-Scholes option pricing model with a volatility figure derived from historical data. The Company accounts for the expected life of options based on the contractual life of the options.

 

A summary of the Company’s stock option activity during the nine months ended September 30, 2021, is presented below:

 

    Shares     Weighted-
Average
Exercise
Price
    Weighted-
Average
Remaining
Contractual
Term
    Aggregate
Intrinsic
Value
 
Outstanding at December 31, 2020     27,621,765     $ 0.49       6.59     $
               -
 
Grants    
-
                         
Exercised    
-
                         
Expired/Canceled    
-
                         
Outstanding at September 30, 2021     27,621,765     $ 0.49       5.74     $
-
 
Exercisable at September 30, 2021     27,621,765     $ 0.49       5.74     $
-
 

 

25

 

 

Exercise Price   Number of
Options
    Remaining Life
In Years
    Number of Options
Exercisable
 
$0.01 – 0.25     13,306,786       6.51       13,306,786  
0.26 – 0.50     1,939,631       5.51       1,939,631  
0.51 – 0.75     1,820,112       4.93       1,820,112  
0.76 – 1.00     9,926,072       4.96       9,926,072  
1.01 – 2.00     629,164       4.85       629,164  
      27,621,765       5.74       27,621,765  

 

The aggregate intrinsic value of outstanding stock options was $0, based on options with an exercise price less than the Company’s stock price of $0.0372 as of September 30, 2021, which would have been received by the option holders had those option holders exercised their options as of that date.

 

NOTE 14 – RELATED PARTY TRANSACTIONS

 

During the nine months ended September 30, 2021 and 2020, the Company received aggregate advances of $2,091 and $0 and repaid an aggregate of $5,278 and $0, respectively, to the Company’s Chief Information Officer and $25,000 of advances from Empire Services, Inc. The advances are non-interest bearing and due on demand. As of September 30, 2021 and December 31, 2020, the Company owed $0 and $3,187, respectively, in advances to the Company’s Chief Information Officer and $25,000 and $0, respectively, in advances to Empire Services, Inc. (See Note 5).

 

During the nine months ended September 30, 2021 and 2020, the Company received aggregate proceeds of $1,515,424 and $20,520, respectively, and repaid $0 from the issuance of non-convertible notes to the Company’s Chief Executive Officer and Empires Services, Inc. The non-convertible notes bear interest from 15% to 20% and have maturity dates ranging from December 31, 2020 through October 15, 2021. For those notes in default, the interest rate increases to 35% per annum from the date of default. As of September 30, 2021 and December 31, 2020, the Company owed $1,535,944 and $0, respectively, in non-convertible notes payable to the Company’s Chief Executive Officer and Empire Services, Inc. (See Note 5).

 

On September 30, 2021, the Company entered into a Series Z Preferred Stock Issuance Agreement with the Company’s Chief Executive Officer whereby the Company received $1,000,000 in exchange for the issuance of: (i) a $1,000,000 note payable; and (ii) 250 Series Z Preferred Shares having a fair value of $632,019. The note bears interest of 8% per annum and is due within three days of the Company’s next closing of equity financing of $3,000,000 or more. The proceeds received were allocated to the debt and equity on a relative fair value basis. Accordingly, debt discount of $387,262 was recognized with a corresponding increase in Additional paid-in capital. Since the due date is contingent upon a future event, the entire debt discount was amortized to interest expense immediately (See Note 11).

 

NOTE 15 – SUBSEQUENT EVENTS

 

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

 

On September 30, 2021, MassRoots, Inc. entered into definitive agreements to acquire the Company for consideration of (i) 495,000,000 shares of Common Stock, (ii) within 3 business days of the closing of the Company’s next capital raise, repayment of a $1 million advance made to purchase Empire’s Virginia Beach location and (iii) a promissory note in the principal amount of $3.7 million with a maturity date of September 30, 2023. The acquisition was effective October 1, 2021 upon the effectiveness of a Certificate of Merger in Virginia.

 

26

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

You should read the following discussion and analysis in conjunction with our condensed consolidated financial statements and related notes contained in Part I, Item 1 of this Quarterly Report. Please also refer to the note about forward-looking information for information on such statements contained in this Quarterly Report immediately preceding Part I, Item 1.

 

Overview 

 

MassRoots, Inc. was formed in April 2013 as a technology company. The Company recently closed its acquisition of Empire Services, Inc. (“Empire”), acquiring the entirety of its issued and outstanding equity. Our primary focus is expanding the number of metal recycling facilities Empire operates and utilizing technology to improve its operational efficiency.

 

COVID-19 Pandemic

 

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

 

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

 

For the Three Months Ended September 30, 2021 and 2020

 

    For the three months ended  
    Sept 30,
2021
    Sept 30,
2020
    $
Change
    %
Change
 
Revenue   $ 54     $ 2,316     $ (2,262 )     (97.67 %)
                                 
Operating Expenses     395,312       208,238       187,074       89.84 %
                                 
Loss from Operations     (395,258 )     (205,922 )     (189,336 )     91.95 %
                                 
Other Income (Expense)     6,274,716       64,885,144       (58,610,428 )     (90.62 %)
                                 
Net Income (Loss) Available to Common Stockholders   $ 5,879,458     $ 64,679,222     $ (58,799,764 )     (90.91 %)

 

27

 

 

Revenues

 

For the three months ended September 30, 2021 and 2020, we generated revenues of $54 and $2,316, respectively, a decrease of $2,262 primarily due to the relaunch of product placements on the Company’s YouTube and social media channels.

 

Operating Expenses

 

For the three months ended September 30, 2021 and 2020, our operating expenses were $395,258 and $208,238, respectively, an increase of $187,074. There was a decrease in advertising expenses from $43,020 for the three months ended September 30, 2020 to ($4,578) for the same period in 2021, a decrease of $47,598 as the Company advertised less. There was an increase in payroll and related expenses of 2,814, as payroll and related expenses increased to $66,693 for the three months ended September 30, 2021 from $63,879 for same period in 2020. Other general and administrative expenses increased by $232,008 from $101,189 for the three months ended September 30, 2020, to $333,197 for the three months ended September 30, 2021. This increase was attributable to higher travel and legal costs for the three months ended September 30, 2021 as compared to the same period in 2020. 

 

Loss from Operations

 

During the three months ended September 30, 2021, we incurred losses of $395,258 from operations, as compared to losses of $205,922 during the same period in 2020, a difference of $189,336, for the reasons stated above.

 

Other Income (Expense)

 

For the three months ended September 30, 2021 and 2020, the Company recorded interest expense of $699,254 and $ 1,602,204, respectively, primarily related to Company’s convertible notes. The Company recorded $0 and a $0 loss on the conversion of convertible notes payable for the three months ended September 30, 2021 and 2020, respectively. For the three months ended September 30, 2021 and 2020, the Company recorded a $0 change and a $85,287 loss, respectively, on the change in fair value of derivative liabilities. For the three months ended September 30, 2021 and 2020, the Company recorded gains of $2,641,481 and $66,572,635, respectively, of the change in the fair value of the derivative liability for the authorized shares shortfall. The Company recorded a $4,332,489 gain on settlement of convertible notes payable and accrued interest, warrants and accounts payable during the three months ended September 30, 2021, as compared to $0 during the same period in 2020. There was a $0 gain on the forgiveness of debt for the three months ended September 30, 2021, as compared to $0 during the same period in 2020.

 

Net Income (Loss) Available to Common Stockholders

 

For the three months ended September 30, 2021, we had income available to common stockholders of $5,879,458 as compared to a net loss of $64,679,222 for the same period in 2020, a difference of $58,799,764 for the reasons discussed above.

 

For the Nine Months Ended September 30, 2021 and 2020

    For the nine months ended  
    Sept 30,
2021
    Sept 30,
2020
    $
Change
    %
Change
 
Revenue   $ 1,660     $ 2,316     $ (656 )     (28.32 %)
                                 
Operating Expenses     1,196,292       696,357       502,251       72.37 %
                                 
Loss from Operations     (1,196,292 )     (694,041 )     (502,251 )     72.37 %
                                 
Other Income (Expense)     18,463,640       (46,708,918 )     65,172,558       (139.53 %)
                                 
Net Income (Loss) Available to Common Stockholders   $ (17,531,575 )   $ (142,405,892 )   $ 124,874,317       (87.69 %)

 

28

 

 

Revenues

 

For the nine months ended September 30, 2021 and 2020, we generated revenues of $1,660 and $2,316, respectively, a decrease of $656 primarily due to the relaunch of product placements on the Company’s YouTube and social media channels.

 

Operating Expenses

 

For the nine months ended September 30, 2021 and 2020, our operating expenses were $1,196,292 and $696,357, respectively, an increase of $502,251. There was a decrease in advertising expenses from $43,020 for the nine months ended September 30, 2020 to $18,125 for the same period in 2021, a decrease of $24,895. There was a decrease in payroll and related expenses of $14,167 due to reduction in the number of employees, as payroll and related expenses decreased to $225,603 for the nine months ended September 30, 2021 from $ 239,770 for same period in 2020. Other general and administrative expenses increased by $540,510 from $413,417 for the nine months ended September 30, 2020, to $953,927 for the nine months ended September 30, 2021. This increase was attributable to higher travel and legal costs for the nine months ended September 30, 2021 as compared to the same period in 2020. 

 

Loss from Operations

 

During the nine months ended September 30, 2021, we incurred losses of $1,196,292 from operations, as compared to losses of $694,041 during the same period in 2020, a difference of $502,251, for the reasons stated above.

 

Other Income (Expense)

 

For the nine months ended September 30, 2021 and 2020, the Company recorded interest expense of $1,667,413 and $3,607,210, respectively, primarily related to Company’s convertible notes. The Company recorded a $880 loss and $882 gain on the conversion of convertible notes payable for the nine months ended September 30, 2021 and 2020, respectively. For the nine months ended September 30, 2021 and 2020, the Company recorded a $300,885 and a $303,593 gain, respectively, on the change in fair value of derivative liabilities. For the nine months ended September 30, 2021 and 2020, the Company recorded losses of $159,633,797 and $43,406,183, respectively, of changes in the fair value of the derivative liability for the authorized shares shortfall. The Company recorded a $179,272,324 gain on settlement of convertible notes payable and accrued interest, warrants and accounts payable during the nine months ended September 30, 2021, as compared to $0 during the same period in 2020. There was a $192,521 gain on the forgiveness of debt for the nine months ended September 30, 2021, as compared to $0 during the same period in 2020.

 

Net Income (Loss) Available to Common Stockholders

 

For the nine months ended September 30, 2021, we had net losses available to common stockholders of $17,531,575 as compared to a net loss of $142,405,892 for the same period in 2020, a difference of $124,874,317 for the reasons discussed above.

 

Liquidity and Capital Resources

 

Net cash used in operations for the nine months ended September 30, 2021 and 2020 was $548,640 and $717,062, respectively. This $168,422 decrease was primarily caused by an increase in accounts payable and accrued expenses, accrued payroll and related expenses, and deferred revenue. Net cash used in operations for the nine months ended September 30, 2020 was primarily based on the loss for the nine months ended September 30, 2020, partially offset by decreases in accounts payable and accrued payroll. 

 

Net cash provided by financing activities for the nine months ended September 30, 2021 and 2020 was $548,237 and $716,592 respectively. During the nine months ended September 30, 2021, these funds were derived mainly from proceeds related to the issuance of preferred shares and non-convertible notes. During the nine months ended September 30, 2020, net cash provided by financing activities was derived from the issuance of convertible notes, offset by repayment of non-convertible notes.

 

29

 

 

Capital Resources

 

As of September 30, 2021, the Company had cash of $1,082 and working capital deficit (current liabilities in excess of current assets) of $17,514,830. During the nine months ended September 30, 2021, the net loss available to common stockholders was $17,531,575 and net cash used in operating activities was $548,640. These conditions raise substantial doubt about our ability to continue as a going concern for one year from the issuance of the condensed consolidated financial statements. Our primary source of operating funds since inception has been cash proceeds from the public and private placements of our securities, including debt securities, and proceeds from the exercise of warrants and options. We have experienced net losses and negative cash flows from operations since inception and expect these conditions to continue for the foreseeable future. For the foreseeable future, our ability to continue our operations is dependent upon our ability to obtain additional capital through public or private equity offerings, debt financings or other sources; however, financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy and we may be forced to curtail or cease operations.

 

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

 

Accordingly, the accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business for one year from the date the condensed consolidated financial statements are issued. The carrying amounts of assets and liabilities presented in the condensed consolidated financial statements do not necessarily purport to represent realizable or settlement values. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty such as the final settlement amounts of our notes payable and accrued interest.

 

Off-Balance Sheet Arrangements

 

As of September 30, 2021, we did not have any off-balance sheet arrangements.

 

Contractual Obligations

 

Our contractual obligations are included in our notes to the condensed consolidated financial statements included in Part I, Item I of this Quarterly Report on Form 10-Q. To the extent that funds generated from our operations, together with our existing capital resources, are insufficient to meet future requirements, we will be required to obtain additional funds through equity or debt financings. No assurance can be given that any additional financing will be made available to us or will be available on acceptable terms should such a need arise.

 

Critical Accounting Policies and Estimates

 

For a discussion of our accounting policies and related items, please see the notes to the condensed consolidated financial statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

 

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

 

30

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Pursuant to Rules 13a-15(b) and 15-d-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. The term “disclosure controls and procedures,” as defined under Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based upon such evaluation, the Company’s CEO (the principal executive officer) and CFO (the principal financial officer) concluded that the Company’s disclosure controls and procedures as of September 30, 2021 were not effective.

 

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

 

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

 

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

 

Changes in Internal Control over Financial Reporting

 

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

 

31

 

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

As disclosed in Note 8 to the Company’s Condensed Consolidated Financial Statements, the Company is engaged in certain legal matters and there have been no material developments since December 31, 2020 with respect to our legal proceedings, except as described in Note 8. The disclosures set forth in Note 8 relating to certain legal matters are incorporated herein by reference.

 

ITEM 1A. RISK FACTORS

 

As a “smaller reporting company,” we are not required to provide the information required by this Item 1A. Please see the Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the SEC on April 16, 2021.

 

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

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

The Company does not have enough authorized and unissued shares of common stock to convert all of the convertible promissory notes into shares of common stock. As a result of this authorized shares shortfall, all of the convertible notes payable, including those where the maturity date has not yet been reached, are in default. Accordingly, (i) interest has been accrued at the default interest rate, if applicable, and (ii) the embedded conversion option has been accounted for, at fair value, as a derivative liability The Company has recorded the full value of the principal, default penalties, and interest as current liabilities, as fully described in “Note 9 - Convertible Notes Payable” in the Company’s notes to the condensed consolidated financial statements included in Part I, Item I of this Quarterly Report on Form 10-Q. The amount of principal in default pursuant to the convertible notes is $3,063,970 as of September 30, 2021.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

32

 

 

ITEM 6. EXHIBITS

 

(b) Exhibit Index

 

No.   Description
2.1   Merger Agreement dated as of September 30, 2021 (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on October 6, 2021)
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 (Incorporated by reference to our Annual Report on Form 10-K filed with the SEC on April 16, 2021)
3.10   Certificate of amendment of the certificate of incorporation of the Company effective May 24, 2021, amending Certificate of Designations, Preferences, and Rights of the Series X Convertible Preferred Stock filed with the Secretary of State on May 24, 2021 (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on May 25, 2021)
3.11   Certificate of amendment of the certificate of incorporation of the Company effective May 24, 2021, amending Certificate of Designations, Preferences, and Rights of the Series Y Convertible Preferred Stock filed with the Secretary of State on December 30, 2020 (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on May 25, 2021)
3.12   Certificate of amendment of the certificate of incorporation of the Company dated increasing the number of authorized shares of the Company’s common stock to 1,200,000,000 (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on October 6, 2021)
3.13   Certificate of Designations, Preferences and Rights of the Series Z Preferred Stock (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on October 20, 2021)
10.1**   Employment Agreement by and between the Company and Danny Meeks dated as of September 30, 2021 (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on October 6, 2021)
10.2*+   Settlement Agreement, dated September 30, 2021
10.3   Stock Issuance Agreement, dated September 30, 2021 (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on October 20, 2021)
10.4   Exchange Agreement, dated September 30, 2021 (Incorporated by reference to our Current Report on Form 8-K filed with the SEC on October 20, 2021)
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*   Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document).
101.SCH*   Inline XBRL Taxonomy Extension Schema Document.
101.CAL*   Inline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*   Inline XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*   Inline XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*   Inline XBRL Taxonomy Extension Presentation Linkbase Document.
104*   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

 

* Filed or furnished herewith.

+ Attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company hereby undertakes to furnish copies of such omitted materials supplementally upon request by the U.S. Securities and Exchange Commission.

** Agreement with management or compensatory plan or arrangement

 

33

 

 

SIGNATURES

 

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

 

  MASSROOTS, INC.
   
Date: November 22, 2021 By: /s/ Danny Meeks
    Danny Meeks, Chief Executive Officer
(Principal Executive Officer)
     
Date: November 22, 2021 By: /s/ Isaac Dietrich
    Isaac Dietrich, Chief Financial Officer
(Principal Financial and Accounting Officer)

 

 

34

 

 

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Massroots (PK) (USOTC:MSRT)
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