10-Q 1 mest10q051616.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended March 31, 2016

 

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 333-196735

 

http:||www.sec.gov|Archives|edgar|data|1589149|000072174814000909|image_037.gif

 

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.)

 

 

1624 Market Street, Suite 201, Denver, CO 80202

(Address, including zip code, of principal executive offices)

 

(720) 442-0052

(Issuer’s telephone number)

 

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 [X] No [ ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every

Interactive Data File required to be submitted and posted 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 and post such files). Yes [x] No [ ]

 

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

 

Large accelerate filer [ ] Accelerated Filer [ ]

Non-accelerated filer [ ] Smaller reporting company [x]

 

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

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of May 11, 2016, the issuer had 48,695,151 shares of common stock issued and outstanding.

 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION 1
Item 1. Financial Statements 1
Balance Sheets as of March 31, 2016 (Unaudited) and December 31, 2015 1
Statement of Operations for the Three Months Ended March 31, 2016 (Unaudited) and March 31, 2015 (Unaudited) 2
Statements of Stockholders’ Deficit for the Three Months Ended March 31, 2016 (Unaudited) and Year Ended December 31, 2015 3
Statements of Cash Flows for the Three Months Ended March 31, 2016 and March 31, 2015 (Unaudited) 4
Notes To Financial Statements 5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 17
Item 3. Quantitative & Qualitative Disclosures about Market Risks 27
Item 4. Controls and Procedures 27
PART II OTHER INFORMATION 28
Item 1. Legal Proceedings 28
Item 1A. Risk Factors 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 28
Item 3. Defaults upon Senior Securities 28
Item 5. Other Information 28
Item 6. Exhibits 28

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

MASSROOTS, INC.
CONDENSED BALANCE SHEETS
AS OF MARCH 31, 2016 AND DECEMBER 31, 2015
       
   2016  2015
   (UNAUDITED)   
ASSETS          
CURRENT ASSETS:          
   Cash  $413,610   $386,316 
   Accounts receivables   23,074    39,500 
   Note receivables   130,000    —   
   Prepaid expense   8,628    12,938 
   Total current assets   575,312    438,754 
           
PROPERTY AND EQUIPMENT, NET   85,185    73,023 
           
OTHER ASSETS:          
   Investment in Flowhub   175,000    175,000 
   Deposits and other assets   33,502    33,502 
   Total Other Assets   208,502    208,502 
           
TOTAL ASSETS  $868,999   $720,279 
           
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY          
CURRENT LIABILITIES:          
   Accounts payable  $96,295   $109,997 
   Accrued expenses   74,937    84,355 
   Convertible note payable, net of $1,430,119 and  $0 discount, respectively   119,548    —   
   Derivative liabilities   732,260    —   
   Total Current Liabiliteis   1,023,040    194,352 
           
LONG-TERM LIABILITIES:          
   Convertible debentures, net of $0 and $0 discount, respectively   209,100    209,100 
   Total liabilities   1,232,140    403,452 
           
STOCKHOLDERS' (DEFICIT) EQUITY:          
Common stock, $0.001 par value, 200,000,000 shares authorized; 47,806,744 and 46,939,966 shares issued and outstanding   47,807    46,940 
Common stock to be issued, 143,477 and 624,000 shares, respectively   143    624 
   Additional paid in capital   14,057,653    12,101,784 
   Accumulated deficit   (14,468,744)   (11,832,521)
   Total stockholders' (deficit) equity   (363,141)   316,827 
           
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY  $868,999   $720,279 

 

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

 

MASSROOTS, INC.
CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
(UNAUDITED)
       
   2016  2015
       
REVENUES  $93,385   $941 
           
OPERTING EXPENSES:          
Advertising   188,287    53,589 
Cost of revenues   8,552    700 
Payroll and related expense   595,498    162,930 
Common stock issued for services   263,583    113,712 
Options issued for services   670,767    47,009 
Warrants issued for services   68,369    3,832 
Other general and administrative expenses   583,511    183,979 
Total General and Administrative expenses   2,378,567    565,751 
           
(LOSS) FROM OPERATIONS   (2,285,182)   (564,810)
           
OTHER INCOME (EXPENSE):          
Change in derivative liabilities   (222,857)   42,737 
Interest expense   (8,635)   (2,290)
Amortization of discount on notes payable   (119,549)   (26,146)
Total Other Income (Expense)   (351,041)   14,301 
           
(LOSS) BEFORE INCOME TAXES   (2,636,223)   (550,509)
           
PROVISION FOR INCOME TAXES   —      —   
           
NET (LOSS)  $(2,636,223)  $(550,509)
           
Basic and fully diluted net (loss) per common share:  $(0.06)  $(0.01)
           
Weighted average common shares outstanding - basic and fully diluted   47,135,702    40,391,311 

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

 

MASSROOTS, INC.
CONDENSED STATEMENT OF CASHFLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
(UNAUDITED)
       
   2016  2015
       
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(2,636,223)  $(550,509)
Adjustments to reconcile net loss to net cash (used in ) operating activities:          
Amortization of discounts on notes payable   119,549    26,146 
Depreciation   3,542    1,097 
Common stock issued for services   263,583    113,712 
Options issued for services   670,767    47,009 
Warrants issued for services   68,369    3,832 
Change in derivative liabilities   222,857    (42,737)
Inputed Interest expense   —      2,290 
Changes in operating assets and liabilities          
Accounts receivables   16,426   (12,712)
Notes receivable   (130,000)   —   
Prepaid expense   4,310    (14,283)
Deposit   —      (33,152)
Accounts payable and other liabilities   11,818    50,166 
Net Cash (Used in) Operating Activities   (1,385,002)   (409,141)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Payments for equipment   (15,704)   (9,896)
Net Cash (Used in) Investing Activities   (15,704)   (9,896)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
Proceeds from exercise of warrants   3,000    332,000 
Proceeds from exercise of options   5,000    —   
Proceeds from issuance of convertible notes payable   1,420,000    —   
Net Cash Provided by Financing Activities   1,428,000    332,000 
           
NET INCREASE (DECREASE) IN CASH   27,294    (87,037)
           
CASH AT BEGINNING OF PERIOD   386,316    141,928 
           
CASH AT END OF PERIOD  $413,610   $54,891 
           
NON-CASH FINANCING ACTIVITIES          
Convertible note issued in payment of liabilities  $35,000.00   $—   

 

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

 

MASSROOTS , IINC.
CONDENSED STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2016
(UNAUDITED)
                     Total
   Common Stock  Common Stock to be Issued  Additional Paid  Accumulated  Stockholders' (Deficit)
   Shares  Amount  Shares  Amount  In Capital  Deficit  Equity
                                    
Balance as of December 31, 2015   46,939,965   $46,940   624,000   $624  $12,101,724 $(11,832,521)  $316,767 
                                    
Common stock issued related to 2015 stock grants   574,000    574    (574,000)   (574)   —      —      —   
                                    
Common stock issued for services   235,000    235    76,250    76    263,272    —      263,583 
                                    
Common stock issued upon exercise of warrants for cash   7,500    8    —      —      2,993    —      3,000 
                                    
Common stock issued upon exercise of options for cash   10,000    10    —      —      4,990    —      5,000 
                                    
Stock based compensation   —      —      —      —      670,767    —      670,767 
                                    
Fair value of warrants issued for services   —      —      —      —      68,369    —      68,369 
                                    
Debt discount related to convertible notes   —      —     —      —      945,596    —      945,596 
                                    
Common shares issued upon cashless exercise of warrants   —      —      5,227    5    (5)   —      —   
                                    
Common shares issued upon cashless exercise of options   40,279    40    12,000    12    (52)   —      —   
                                    
Net loss   —      —      —      —      —      (2,636,223)   (2,636,223)
                                    
Balance as of March 31, 2016 (unaudited)   47,806,744   $47,807   143,477   $143  $14,057,653  $(14,468,744)  $(363,141)

 

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

 

 Massroots, Inc.

Notes to Condensed Financial Statements

March 31, 2016

(Unaudited)

 

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

 

Basis of Presentation

The unaudited condensed interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

 

The condensed balance sheet as of December 31, 2015 has been derived from audited financial statements.

 

Operating results for the three months ended March 31, 2016 are not necessarily indicative of results that may be expected for the year ending December 31, 2016. These condensed financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2015 filed with the Company’s Form 10-K with the Securities and Exchange Commission on March 30, 2016.

 

Management’s Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include revenue recognition, fair value of the Company’s stock, stock-based compensation, fair values relating to warrant and other derivative liabilities and the valuation allowance related to deferred tax assets. Actual results may differ from these estimates.

 

Deferred Taxes

The Company accounts for income taxes under Section 740-10-30 of the FASB Accounting Standards Codification. Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the period that includes the enactment date.

 

Cash and Cash Equivalents

For purposes of the Statement of Cash Flows, the Company considers highly liquid investments with an original maturity of three months or less to be cash equivalents.

 

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. As of March 31, 2016 and December 31, 2015, based upon the review of the outstanding accounts receivable, the Company has determined that an allowance for doubtful accounts is not required.

 

Massroots, Inc.

Notes to Condensed Financial Statements

March 31, 2016

(Unaudited)

 

Property and Equipment

Property and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives of 3 to 5 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.

 

Revenue Recognition

The Company recognizes revenue when services are realized or realizable and earned less estimated future doubtful accounts. The Company considers revenue realized or realizable and earned when all of the following criteria are met:

 

(i)persuasive evidence of an arrangement exists,
(ii)the services have been rendered and all required milestones achieved,
(iii)the sales price is fixed or determinable, and
(iv)Collectability is reasonably assured.

 

MassRoots primarily generates revenue by charging businesses to advertise on the network. MassRoots has the ability to target advertisements directly to a clients’ target audience, based on their location, on their mobile devices. In cases where clients sign advertising contracts for an extended period of time, MassRoots only realizes revenue for services provided during that quarter and defers all other revenue to future quarters.

 

MassRoots’ secondary source of income is merchandise sales. The objective with the sales is not to generate large profit margins, but to help offset the cost of marketing. Each t-shirt, sticker and jar MassRoots sells will likely lead to more downloads and active users.

 

Cost of Revenue

The Company’s main cost of revenue originates from its merchandise store, where often times the Company realizes low profit margins and is not the main focus of the Company.

 

Comprehensive Income (Loss)

The Company reports comprehensive income and its components following guidance set forth by section 220-10 of the FASB Accounting Standards Codification which establishes standards for the reporting and display of comprehensive income and its components in the financial statements. There were no items of comprehensive income (loss) applicable to the Company during the periods covered in the financial statements.

 

Convertible Debt

If the conversion features of conventional convertible debt provides for a rate of conversion that is below market value at issuance, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20 “Debt with Conversion and Other Options.” In those circumstances, the convertible debt is recorded net of the discount related to the BCF, and the Company amortizes the discount to interest expense, over the life of the debt.

 

Stock-Based Compensation

The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured on vesting dates and interim financial reporting dates until the service period is complete. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period.

 

 

Massroots, Inc.

Notes to Condensed Financial Statements

March 31, 2016

(Unaudited)

 

Fair Value of Financial Instruments

Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) requires disclosure of the fair value of certain financial instruments. The carrying value of cash and cash equivalents, accounts payable and accrued liabilities as reflected in the balance sheets, approximate fair value because of the short-term maturity of these instruments. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed.

 

The Company follows Accounting Standards Codification subtopic 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”) and Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”), which permits entities to choose to measure many financial instruments and certain other items at fair value.

 

Derivative Financial Instruments

The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks. The Company evaluates all of it financial instruments, including stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported as charges or credits to income.

 

For option-based simple derivative financial instruments, the Company uses the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.  As of March 31, 2016, the Company had outstanding convertible notes that contained embedded derivatives. These embedded derivatives include certain conversion features and reset provisions.

 

Convertible Debentures

If the conversion features of conventional convertible debt provides for a rate of conversion that is below market value at issuance, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20 “Debt with Conversion and Other Options.” In those circumstances, the convertible debt is recorded net of the discount related to the BCF, and the Company amortizes the discount to interest expense, over the life of the debt.

 

 Stock-Based Compensation

The Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award. For employees and directors, the fair value of the award is measured on the grant date and for non-employees, the fair value of the award is generally re-measured on vesting dates and interim financial reporting dates until the service period is complete. The fair value amount is then recognized over the period during which services are required to be provided in exchange for the award, usually the vesting period.

 

Net Income (loss) Per Common Share

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

 

The computation of basic and diluted loss per share as of March 31, 2016 and December 31, 2015 excludes potentially dilutive securities when their inclusion would be anti-dilutive, or if their exercise prices were greater than the average market price of the common stock during the period.

 

Massroots, Inc.

Notes to Condensed Financial Statements

March 31, 2016

(Unaudited)

 

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

  

   March 31,
2016
  December 31,
2015
Common stock issuable upon conversion of convertible debentures   3,652,333    2,091,000 
Options to purchase common stock   6,210,461    2,815,000 
Warrants to purchase common stock   10,653,278    9,766,000 
Totals   20,516,072    14,672,000 

  

Deferred Revenue

In January 2016, MassRoots began entering into multi-month advertising contracts with its clients under which they agree to pay MassRoots a fixed amount, due in monthly installments. Under the Company's revenue recognition policy, the Company books the fixed amount due in accounts receivable, recognizes the revenue for services performed during the reporting period, and defers the revenue for services to be performed in future quarters. MassRoots entered into approximately 50 advertising contracts during the first quarter of 2016 with approximately 30 unique clients, primarily with ancillary brands to the cannabis industry. The value of these contracts was approximately $340,000, with $71,000 being realized in first quarter and $269,000 deferred to future quarters.

 

Reclassification

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

 

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (Topic 606). This ASU provides guidance for revenue recognition and affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets and supersedes the revenue recognition requirements in Topic 605, “Revenue Recognition,” and most industry specific guidance. The standard’s core principle is the recognition of revenue when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under the current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers" (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to fiscal years beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is permitted for fiscal years beginning after December 15, 2016. The Company is currently evaluating the method and impact the adoption of ASU 2014-09 will have on the Company’s financial statements and disclosures.

 

 

Massroots, Inc.

Notes to Condensed Financial Statements

March 31, 2016

(Unaudited)

 

In August 2014, FASB issued ASU 2014-15, “Presentation of Financial Statements Going Concern (Subtopic 205-40) – Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern”. Currently, there is no guidance in U.S. GAAP about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern or to provide related footnote disclosures. The amendments in this ASU provide that guidance. In doing so, the amendments are intended to reduce diversity in the timing and content of footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this ASU are effective for public and nonpublic entities for annual periods ending after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2014-15 on the Company’s financial statements.

 

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

  

NOTE 2 GOING CONCERN AND UNCERTAINTY

 

The Company has suffered losses from operations since inception. In addition, the Company has yet to generate significant cash flow from its business operations. These factors raise substantial doubt as to the ability of the Company to continue as a going concern for a reasonable period of time.

 

Management’s plans with regard to these matters encompass the following actions: 1) obtain funding from new and potentially current investors to alleviate the Company’s working deficiency, and 2) implement a plan to generate sales. The Company’s continued existence is dependent upon its ability to translate its user base into sales. However, the outcome of management’s plans cannot be ascertained with any degree of certainty. The accompanying financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.

 

NOTE 3  NOTE RECEIVABLE

 

On March 24, 2016, the Company entered into an agreement with Santino Walter Productions, LLC ("SWP") in which the Company purchased a Senior Secured Promissory Note ("Note”) with a principle amount of $156,000 for a purchase price of $130,000. The funds are solely to be used by SWP for costs related to the Denver Annual 420 Rally ("420 Rally"). The Note matures in 60 days and is secured against all assets of SWP. The Company also entered into License and Letter Agreements with SWP pursuant to which  the Company will earn a 50% licensing fee on all ticket sales and sponsorship sales, along with 15% of all booth sales, of the 420 Rally. The Company is obligated to provide the ticketing system and cover all activation costs related to the tickets. The first $130,000 in revenue received related to the 420 Rally will to be used to cover the remaining costs of talent for the event; the next $156,000 in revenue will be used to repay the Note. All proceeds from ticket sales and sponsorships will be held by the Company initially; after payment of the Note, and all fees earned by the Company under the agreement, the remaining proceeds will then be distributed to SWP. All talent booked by SWP for the 420 Rally will be required to create a MassRoots profile, which can be waived at the Company's sole discretion. The Company also retains the right to participate in a materially similar transaction related to the 420 Rally every year through 2020.

 

 

Massroots, Inc.

Notes to Condensed Financial Statements

March 31, 2016

(Unaudited)

 

NOTE 4 PROPERTY AND EQUIPMENT

 

Fixed assets were comprised of the following as of March 31, 2016 and December 31, 2015:

 

  

March 31, 2016

 

December 31, 2015

       
Computers  $65,720   $58,121 
Office equipment   35,208    27,083 
Total   100,928    85,224 
Less: Accumulated depreciation   15,743    12,201 
Property and equipment, net  $85,185   $73,023 

 

Depreciation expense for the quarters ended March 31, 2016 and March 31, 2015 were $3,542 and $1,097, respectively.

 

NOTE 5  CONVERTIBLE DEBT

 

On March 24, 2014, the Company issued convertible debentures to certain accredited investors. The total principal amount of the debentures is $269,100 and originally matured on March 24, 2016 with a zero percent interest rate. The debentures are convertible into shares of the Company’s common stock at $0.10 per share. In March 2016, the debentures were amended to extend the maturity date to March 24, 2018. As of March 31, 2016 and December 31, 2015, the aggregate carrying value of the debentures was $209,100 net of debt discounts of $0.

 

In February 2016, the Company issued to a service provider a 12 month convertible debentures at 15% interest with a principal amount of $35,000 along with 35,000 3-year warrants to purchase shares common stock at $1.00 per share The convertible debentures are payable at maturity, and convertible at the investor’s determination at a price equal to 90% of the price of a subsequent public underwritten offering if one occurs over $5 million, or, if no subsequent offering occurs, at $0.75 per share. As of March 31, 2016 and December 31, 2015, the aggregate carrying value of the debentures was $4,303 and $0, net of debt discounts of $30,697 and $0, respectively.

 

On March 17, 2016, the Company sold to investors six (6) month secured convertible original issue discount notes with principal amount in the aggregate of $1,514,667, together with five year warrants to purchase up to an amount of shares of the Company’s common stock equal to the number of shares of common stock issuable upon the conversion of the notes in full and having an exercise price of $1.00 per share. If the Company exercises its right to prepay the note, the Company shall make payment to the investor of an amount in cash equal to the sum of the then outstanding principal amount of the note that it desires to prepay, multiplied by (a) 1.2, during the first ninety (90) days after the execution of this Note, or (b) 1.35, at any point thereafter. The notes are convertible into shares of the Company’s common stock at a price per share equal to the lower of (i) one dollar ($1.00), and (ii) a 25% discount to the price at which the Company next conducts an offering after the issuance date of the note; provided, however, if any part of the principal amount of the note remains unpaid at its maturity date , the conversion price will be equal to 65% of the average of the three trading days with the lowest daily weighted average prices of the Company’s common stock occurring during the fifteen days prior to the notes’ maturity date. The notes require that any net proceeds received subsequent offerings made by the Company first be used to repay the notes’ outstanding principal amount. If the note is not repaid by the maturity date, the investors will receive, in aggregate, but calculated pro rata to the principal amounts remaining outstanding at the time of maturity, up to five hundred thousand (500,000) shares of the Company’s common stock. Gross proceeds received by the Company for the notes and warrants in this Offering was $1,420,000, while net proceeds were $1,271,600 (excluding any legal fees). As of March 31, 2016 and December 31, 2015, the aggregate carrying value of the notes was $115,246 and $0, net of debt discounts of $1,399,422 and $0, respectively.

 

 

Massroots, Inc.

Notes to Condensed Financial Statements

March 31, 2016

(Unaudited)

 

The Company’s convertible debt is summarized as follows as of March 31, 2016 and December 31, 2015:

 

    2016    2015 
Principal balance  $1,758,667   $209,100 
Less: debt discount   (1,430,119)       (-) 
Convertible debentures, net   328,548    209,100 
Less, current portion   (119,448)   (-)  
Long term portion  $209,100   $209,100 

 

NOTE 6  DERIVATIVE LIABILITIES AND FAIR VALUE MEASUREMENTS

 

The Company identified conversion features embedded within convertible debt and warrants outstanding for the quarter ended March 31, 2016 and the year ending December 31, 2015. The Company has determined that the features associated with the embedded conversion option and exercise prices, in the form a ratchet provisions, 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 third quarter of 2015, the Company and the convertible debt note and warrant holders agreed to amend terms of the agreements to remove the ratchet provisions. Accordingly, the Company reclassified the derivative liability to equity classification resulting in an increase to additional paid in capital by $3,336,109.

 

During the fourth quarter of 2015, the Company and the holders of warrants previously issued as part of our offering from September 2014 to March 2015 with an exercise price of $1.00 per share and all other warrants agreed to amend the warrants to remove the ratchet provision in exchange for a warrant for an additional 20% of their original warrant shares at $1.06 per share. This reduced the Company’s derivative liability by $1,155,199 and increased additional paid in capital by $761,426.

 

The Company adopted the provisions of Accounting Standards Codification subtopic 825-10, Financial Instruments (“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 nonperformance. 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.

 

 

Massroots, Inc.

Notes to Condensed Financial Statements

March 31, 2016

(Unaudited)

 

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

 

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

 

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

 

As of March 31, 2016 and December 31, 2015, the Company did not have any derivative instruments that were designated as hedges.

 

Items recorded or measured at fair value on a recurring basis in the accompanying financial statements consisted of the following items as of December 31, 2015:

 

   Level 1  Level 2  Level 3  Total
Derivative liability  $—     $—     $—    $—  
Total  $—     $—     $—    $—  

 

Items recorded or measured at fair value on a recurring basis in the accompanying financial statements consisted of the following items as of March 31, 2016:

 

   Level 1  Level 2  Level 3  Total
Derivative liability  $—     $—     $732,260   $732,260 
Total  $—     $—     $732,260   $732,260 

 

 The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities for the three months ended March 31, 2016:

 

Balance, December 31, 2015  $—   
Transfers in of Level 3   509,404 
Mark-to-market – loss on change in fair value of derivative liability - 2016   222,856 
Balance, March 31, 2016  $732,260 

 

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 decreases for each of the related derivative instruments, the value to the holder of the instrument generally decreases, therefore decreasing 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 measurement. 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.

 

Massroots, Inc.

Notes to Condensed Financial Statements

March 31, 2016

(Unaudited)

 

 

During the three months ended March 31, 2016, the fair value of the derivative liabilities containing certain variable conversion features were determined using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 112.29%, (3) weighted average risk-free interest rate of 0.39% to 0.47% (4) expected life of 6 months, and (5) estimated fair value of the Company's common stock of $1.04 to $1.26 per share. 

  

NOTE 7  CAPITAL STOCK

 

The Company is currently authorized to issue 21 Series A preferred shares at $1.00 par value per share with 1:1 conversion and voting rights. As of March 31, 2016, there were no shares of Series A preferred shares issued and outstanding.

 

The Company is currently authorized to issue 200,000,000 shares of its common stock at $0.001 par value per share. As of December 31, 2015 and 2014, there were 46,939,965 and 38,909,000 shares of common stock issued and outstanding and 624,000 and 1,048,000 shares of common stock to be issued, respectively. As of March 31, 2016, there were 47,806,744 shares of common stock issued and outstanding and 143,527 shares of common stock to be issued.

 

The following common stock transactions were recorded during the three months ended March 31, 2016:

 

The Company issued 574,000 shares of shares of common stock which was previously classified as shares to be issued as of December 31, 2015.

 

The Company issued 311,250 shares of common stock for services rendered at an average stock price of $0.85 per share, 76,250 common shares were classified as to be issued as of March 31, 2016.

 

The Company issued 7,500 shares of common stock for the exercise of options at a price of $0.40 per share.

 

The Company issued 10,000 shares of common stock for the exercise of options at a price of $0.50 per share.

 

The Company is obligated to issue 5,227 shares of common stock upon a cashless exercise of a stock warrant. As of March 31, 2016, the shares of common stock were classified as to be issued.

 

The Company issued 40,279 shares of common stock and is obligated to issue 12,000 shares of common stock upon cashless exercises of a stock options. As of March 31, 2016, the 12,000 shares of common stock were classified as to be issued.

 

NOTE 8  STOCK WARRANTS

 

In January 2016, the Company issued warrants to purchase 100,000 shares of common stock at $0.83 per share to certain service providers, valued at $68,369.

 

On March 24, 2016, in connection to the issuance of convertible debentures, the Company granted to the same investors five year warrants to purchase an aggregate of 1,514,669 shares of the Company’s common stock at $1.00 per share. The warrants may be exercised any time after the issuance through and including the fifth (5th) anniversary of its original issuance. The warrants have a fair market value of $910,596. The fair market value was calculated using the Binomial Option Pricing Model, assuming approximately 0% risk-free interest, 0% dividend yield, 112.3% volatility, and expected life of 5 years.

 

Massroots, Inc.

Notes to Condensed Financial Statements

March 31, 2016

(Unaudited)

 

Stock warrants outstanding and exercisable on March 31, 2016 are as follows:

 

Warrants Outstanding  Warrants Exercisable
      Weighted   
      Average  Exercisable
Exercise  Number of  Remaining Life  Number of
Price  Warrants  In Years  Warrants
$0.001    3,963,659    1.2    3,963,659 
 0.40    3,400,275    0.9    3,400,275 
 0.50    100,000    3.8    100,000 
 0.60    50,000    3.9    50,000 
 0.83    100,000    4.7    100,000 
 0.90    175,000    4.6    175,000 
 1.00    2,310,669    4.7    2,310,669 
 1.06    146,200    2.7    146,200 
 3.00    407,475    2.5    407,475 
      10,653,278    1.84    10,653,278 

 

A summary of warrant activity for the three months ended March 31, 2016:

 

         Weighted-Average
      Weighted-Average  Remaining
   Shares  Exercise Price  Contractual Term
 Outstanding at December 31, 2015    9,018,609    $0 .42    2.26 
 Grants    1,649,669   $0.99    4.95 
 Exercised    (15,000)  $0.4    0.96 
 Canceled    —      —      —   
 Outstanding at March 31, 2016    10,653,278   $0.503    1.84 
 Exercisable at March 31, 2016    10,653,278   $0.503    1.84 

 

The aggregate pre-tax intrinsic value of outstanding stock warrants was $8,759,497 as of March 31, 2016, based on warrants with an exercise price less than the Company’s stock price of $1.26 as of March 31, 2016, which would have been received by the warrant holders had those warrant holders exercised their warrants as of that date.

 

NOTE 9  EQUITY INCENTIVE PLANS - OPTIONS

 

During the three months ended March 31, 2016, the Company granted options to purchase 691,250 shares at an average of $0.96 per share to 12 employees and consultants of the Company under the Company’s 2015 Equity Incentive Plan, with most vesting monthly over the course of one year. The fair market value of the options is $624,234.

 

 

Massroots, Inc.

Notes to Condensed Financial Statements

March 31, 2016

(Unaudited)

 

Stock options outstanding and exercisable on March 31, 2016 are as follows:

  

Options Outstanding  Options Exercisable
      Weighted   
      Average  Exercisable
Exercise  Number of  Remaining Life  Number of
Price  Options  In Years  Options
$0.10    1,500,000    7.9    825,000 
 0.50    959,211    9.0    925,876 
 0.60    105,000    8.9    105,000 
 0.80    160,000    9.7    66,660 
 0.83    100,000    9.8    0 
 0.90    1,955,000    9.6    1,155,785 
 1.00    850,000    9.6    12,498 
 1.06    381,250    9.9    113,534 
      6,010,461    9.1    3,204,353 

 

A summary of the stock option activity for the three months ended March 31, 2016:

 

      Weighted-Average   
      Weighted-Average  Remaining
   Shares  Exercise Price  Contractual Term
 Outstanding at December 31, 2015    5,425,000   $0.59    9.3 
                  
 Grants    691,250    0.97    9.8 
 Exercised    (105,789)   0.5    8.7 
 Canceled    —      —      —   
 Outstanding at March 31, 2016    6,010,461    0.63    9.1 
 Exercisable at March 31, 2016    3,204,353    0.57    8.9 

 

 

The aggregate intrinsic value of outstanding stock options was $3,659,062, based on options with an exercise price less than the Company’s stock price of $1.26 as of March 31, 2016, which would have been received by the option holders had those option holders exercised their options as of that date.

 

Option valuation models require the input of highly subjective assumptions. The fair value of stock-based payment awards was estimated using the Black-Scholes option model with a volatility figure derived from an index of historical stock prices of comparable entities until sufficient data exists to estimate the volatility using the Company’s own historical stock prices. Management determined this assumption to be a more accurate indicator of value. The Company accounts for the expected life of options based on the contractual life of options for non-employees.

 

 

Massroots, Inc.

Notes to Condensed Financial Statements

March 31, 2016

(Unaudited)

 

The fair value of the granted options for the three months ended March 31, 2016 was determined using the Black Scholes option pricing model with the following assumptions:

 

Dividend yield:   0%    
Volatility   111.89% to 119.16%    
Risk free rate:   1.75% to 2.10 %    
Expected life:       
Estimated fair value of the Company’s common stock   $ 0.80 to $1.05%    
Estimated forfeiture rate   0%    

  

NOTE 10 COMMITMENTS AND CONTINGENCIES

 

Operating leases

 

On April 14, 2015, the Company completed the relocation of its headquarters to 1624 Market Street, Suite 201, Denver, CO 80202 which we leased on March 20, 2015 pursuant to a lease agreement with RVOF Market Center, LLC (“201 Lease”). Under the 201 Lease, we agreed to rent 3,552 square feet of office space at that location for a term of 37 months, under which the Company will pay a base rate of $0 for the first month, $8,288 for months two through 13, $8,584 for the months 14 through 25, and $8,880 for the months 26 through 37. We did not incur a significant cost related to the move to this location. 

 

The Company amended this lease in January 2016 to include Suite 203, also located at 1624 Market Street in Denver, CO 80202, which allows us to expand our headquarters by an additional 1,508 square feet of office space. For this expansion (and in addition to the rent paid under the 201 Lease), we will pay $0 until May 30, 2016, $3,644 for each month from June 1, 2016 to May 30, 2017, $3,770 for each month from June 1, 2017 to May 30, 2018, and $3,896 for each month from June 1, 2018 to November 30, 2018.

 

Rent expense charged to operations, which differs from rent paid due to rent credits and to increasing amounts of base rent, is calculated by allocating total rental payments on a straight-line basis over the term of the lease. During the three months ended March 31, 2016 and 2015, rent expense was $38,815 and $6,750, respectively.

 

NOTE 11  SUBSEQUENT EVENTS

 

On April 16, 2016, the original date of the 420 Rally (see Note 3), a severe snowstorm hit Denver and forced event organizers to postpone the festival. The 420 Rally has since been rescheduled for May 21, 2016 and event organizers expect approximately 75,000 people to be in attendance

 

From March 31, 2016 through May 11, 2016, the Company issued 888,407 shares of common stock, of which 143,527 shares were to be issued as of March 31, 2016, 403,000 were issued in connection to exercises of warrants resulting in proceeds to the Company of $161,000, and 341,880 were issued in connection to cashless exercises of options.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

You should read the following discussion and analysis in conjunction with our unaudited financial statements and related notes contained in Part I, Item 1 of this Quarterly Report. Please also refer to the Note About Forward Looking Statements for information on such statements contained in this Quarterly Report immediately preceding Item 1.

 

Overview

 

MassRoots, Inc. is a Delaware corporation formed on April 24, 2013. Our principal place of business is located at 1624 Market Street, Suite 201, Denver, CO 80202, our telephone number is (720) 442-0052 and our corporate website is www.MassRoots.com. The information on our website, mobile apps, and blog is not a part of this Quarterly Report on Form 10-Q.

 

Definitions of Key Metrics 

Total users ("Users") is defined as every user who currently has an account with MassRoots. It does not include users who have deleted their account. It does not reflect active usage over any set period of time. 

User interactions ("Interactions") is defined as anytime a User follows another User, posts a status, comments on a status, or likes a status.

The Product

 

MassRoots has created a leading technology platform for cannabis consumers, businesses and activists. Through our mobile applications and web platform, people are able to share their cannabis experiences, follow their favorite dispensaries, and stay connected with the legalization movement.

 

During the first quarter of 2016, MassRoots’ top development priority was migrating its backend infrastructure from Parse, a backend as a service owned by Facebook, to Amazon Web Services (“AWS”). This migration required us to restructure MassRoots’ database, redevelop certain portions of MassRoots’ mobile applications, and develop an application program interface (API) for the core functionality and features of our platform. We believe the combination of these infrastructure improvements will result in significant improvements in MassRoots’ migration to AWS was completed in early May 2016 the Company expects the performance of its platform to continue to improve as it continues to optimize its AWS infrastructure.

 

With a solid foundation now built on Amazon Web Services, MassRoots intends to introduce several features and products over the coming weeks and months.

 

 

Revamped MassRoots for Business Portal

 

 

 

Figure 1: Revamped MassRoots for Business Portal

 

We originally introduced MassRoots for Business in early 2015 as an online portal for businesses to schedule posts and view analytics; while useful for businesses, it did not have the features or capacity to scale to millions of dollars in revenue. Simultaneously with our migration from Parse, MassRoots began developing a new business portal directly on AWS that took into account the feedback and research we received from over 2,500 cannabis-related businesses over the past year.

 

The revamped MassRoots for Business portal consolidates many online marketing functions for cannabis-related business in one central platform. Businesses can schedule posts on MassRoots, Facebook and Twitter; purchase advertising on both MassRoots owned-properties as well as third party digital properties; and view actionable, real-time data from MassRoots and third party sources in easy-to-read formats. We believe this will serve as a solid foundation for future business-related features as we prepare to integrate dispensary point-of-sale data. We expect the revamped MassRoots for Business to launch in the second quarter of 2016.

 

 

Revamped Dispensary Finder and Features

 

 

Figure 2: MassRoot’s Dispensary Funds Shown in our iOS Application

 

One of the main reasons people use MassRoots is to find quality dispensaries and products in their area. With our revamped dispensary finder and profiles, our goal is to provide the easiest and quickest way for consumers to do so, while integrating social recommendations to aid consumers in finding the best products. We expect our revamped dispensary finder and profiles to launch in the second quarter of 2016.

 

 

Revamped Discover Page

 

 

Figure 3: MassRoots’ Discover page shown on our iOS Application.

 

There are currently tens of millions of Google searches every month for cannabis-related terms and questions – consumers, voters, activists and government officials looking for high-quality, reliable information on cannabis. Since launching MassRoots’ web platform in December 2015, we have been able to generate over 2 million page views from hundreds of thousands of unique visitors by indexing the content from our network on Google; however, this is only a fraction of the total searches that occurred during the same timeframe. In order to expand our market share of search results and web traffic, we intend to expand the functionality and content of MassRoots’ discover page to better connect consumers with the information they are looking for.

 

The Team

MassRoots currently has 33 full-time employees working out of headquarters in downtown Denver, Colorado. The majority of these employees are engineers and designers focused on developing new features for the MassRoots platform.

 

Over the past several months, one of MassRoots’ top priorities has been recruiting and retaining some of the top talent in the industry. In February 2016, we recruited Jeremiah Marquis as MassRoots’ Vice President of Sales and Business Development. Previously, Mr. Marquis was one of the first 20 employees at WeddingWire, where he was instrumental in scaling the company to over $100 million in revenue and 750 employees from 2008 to 2015. Additionally, during Q1 2016, MassRoots recruited two iOS engineers, one sales representative, an Android engineer, and an additional web engineer. We believe these hires will allow MassRoots to introduce new features more rapidly, which will improve our ability to register new users and generate revenue.

 

MassRoots is currently in the process of recruiting a Chief Technology Officer to lead our development team as we scale into the millions of users. We believe that by recruiting and retaining the top talent in the industry, MassRoots can develop the best platform for cannabis consumers and businesses.

 

 

User Growth and Web Traffic

From January 1, 2016 to May 16, 2016, MassRoots expanded its userbase from 725,000 to approximately 900,000. From January 1 to April 30, 2016, MassRoots’ web platform, which does not allow users to register, generated 2.26 million pageviews from 487,000 unique visitors. This resulted in MassRoots’ Alexa rating increasing from 209,848 as of December 31, 2015 to 148,282 as of May 2, 2016.

 

Figure 4: MassRoots User Growth from July 2014 to May 2016

 

 

Figure 5: MassRoots Alexa Score as of May 10, 2016 (Source: http://www.alexa.com/siteinfo/massroots.com)

 

In February 2016, MassRoots temporarily scaled back its advertising budget until its backend migration from Parse to AWS was complete, which occurred in early May 2016. We believe – and the preliminary data is indicating – that the performance and speed improvements of this migration to AWS is significantly improving MassRoots’ retention and engagement rates, which we believe is more important than top-line user growth.

 

In March 2016, MassRoots entered into agreements with Santino Walter Productions, LLC, the organizer of Denver Annual 420 Rally to produce and promote the Denver Annual 420 Rally (“420 Rally Deal”). Under the terms of the agreements, which are included in our 8-K filed on March 31, 2016, MassRoots purchased a debt note with a principal amount of $156,000 from Santino Walter Productions for a purchase price of $130,000. These funds were used to book Lil Wayne and Wiz Khalifa to perform at the 420 Rally. Additionally, MassRoots is to receive 50% of all ticket and sponsorship sales, 15% of all booth sales and has the right to enter into a materially-similar agreement every year through 2020.

 

MassRoots primarily entered into the 420 Rally Deal to grow its user and clientele base in the Denver metro area – over 75,000 people, primarily from the Denver area, pre-registered for the 420 Rally within 3 weeks of Lil Wayne and Wiz Khalifa being announced as headliners, which would have been one of the largest marijuana-related festivals in the world. On April 16, 2016, the original date of the 420 Rally, a severe snowstorm hit Denver and forced event organizers to postpone the festival. The 420 Rally has since been rescheduled for May 21, 2016 and event organizers expect around 75,000 people will still be in attendance.

 

The combined effect of the Parse to AWS migration taking longer than anticipated, reduced spending on marking, the disablement of web user registrations, and the postponement of the 420 Rally caused MassRoots’ user growth to slow during Q1 2016. Going forward, we believe that the speed and infrastructure improvements from our AWS migration, the introduction of new features, continued SEO growth, and the rescheduled 420 Rally will continue to fuel MassRoots’ organic growth.

 

Business Model

 

While MassRoots’ consumer-facing network launched in July 2013, we did not start generating advertising revenue until we crossed a half million users in mid-August 2015. Our clients have primarily been ancillary businesses marketing their products to cannabis consumers through endorsed posts on MassRoots, sponsored content on our blog, and mentions in our email newsletter. It is not necessary for a user to join MassRoots in order for us to generate revenue from them – we are finding that many people will visit our website, join our email newsletter, or view a dispensary’s profile without registering for our MassRoots network.

 

During the first quarter of 2016, we signed advertising contracts with a value of $324,530 with 37 of the leading cannabis brands in the industry. As many of these contracts were for 3, 6 or 12-month campaigns, only a portion of the value was realized during the first quarter of 2016, and the rest will be realized over the coming quarters, building a solid foundation on which we can expand.

 

In March 2016, we entered into the 420 Rally Deal, under which we receive 50% of all ticket and sponsorship sales, 15% of all booth sales, and have the right to enter into a materially-similar agreement every year through 2020. From March 21 to March 31, 2016, we generated $78,138 in ticket sales for the 420 Rally through MassRoots’ digital marketing, all of which was deferred until the second quarter of 2016.

 

While the vast majority of MassRoots’ advertising revenue to date has come from brands within the cannabis industry, we have started to see significant interest from mainstream brands and advertising agencies looking to market to cannabis consumers. Uber and Fusion, a division of Univision, became the first mainstream brands to sponsor the 420 which has opened the doors for other major brands to evaluate the space. We believe that as the regulated cannabis market continues to expand, mainstream brands and advertising agencies will begin to allocate portions of multi-million advertising budgets towards outreach to the millions of cannabis consumers in the United States – especially food, lighter and agricultural brands. We are positioning MassRoots to be one of the first companies to receive these budget allocations.

 

 

While our backend was still hosted on Parse, it did not make sense for us to develop localized advertising features as they would have had to be completely re-developed once we had migrated to AWS. Now that the migration is complete, one of our top priorities is rolling out localized advertising features, which will enable dispensaries and glass shops to target their advertising to just people within a certain distance of their location. In conjunction with the roll out of our dispensary map, we believe this will significantly expand the number of businesses engaging and allocating advertising budgets to our platform -- WeedMaps reportedly generated over $20 million in revenue during 2015 primarily from dispensary advertising. We expect to begin rolling out our dispensary map and features in the Denver metro area shortly after the 420 Rally on May 21, 2016 and expand to additional markets over the balance of 2016.

 

If MassRoots’ user and web traffic continue to grow at their current pace, we believe MassRoots could be cash flow positive on a monthly basis by the end of 2016.

 

On Competitive Advantage and Network Effects

 

We believe network effects serve as the most powerful form of competitive advantage for all consumer-facing social networks, including MassRoots. Once a person and their friends join a social network, it is unlikely they switch their active usage to another social network in the same category. For example, in 2011, Google+ launched to much fanfare as a competitor to Facebook with the resources of Google at its disposal: billions of dollars in launch and advertising costs, immediate integration with the largest search engine in the world, and the use of the Google brand. However, it failed to gain traction because Facebook already dominated desktop-based social networking.

 

Similarly, Facebook launched Poke in 2013 as an competition to Snapchat. Poke had more functionality and features than Snapchat, and was immediately pushed to millions of Facebook users and it had the backing of Facebook’s assets at its disposal. However, even Poke failed to make a dent in Snapchat’s market share and was scrapped shortly after.

 

We believe MassRoots’ userbase is at the size at which it will be extremely difficult for potential competitors to enter the social networking for cannabis consumers space. Over the coming quarters, MassRoots aims to continue to aggressively grow the number of cannabis consumers, business, and activists engaging on our platform to make this barrier to entry ever higher.

 

Market Share

 

As of early May 2016, MassRoots had approximately 900,000 users of an estimated 10 million Americans who consume cannabis on a regular basis and actively engage on social media, a market that we believe will continue to grow as additional states pass laws to regulate and control the sale of cannabis. We have approximately 2,500 of the estimated 15,000 cannabis-related businesses in America actively posting on our network, a market that we believe will continue to grow as additional states pass laws to regulate and control the sale of cannabis. MassRoots has approximately 4,400 shareholders according to an April 25, 2016 non-objecting beneficial owner list and more than 500 round-lot holders.

 

The 2016 Elections

 

The Company believes that the 2016 elections have the potential to significantly increase the size and scope of the regulated cannabis industry. Activists in Maine and Nevada have already succeeded in placing recreational-use on their state’s ballots, while United for Care has succeeded in placing medical marijuana on Florida’s ballot. Arizona, California, Michigan, Ohio and Massachusetts are expected to have some type of cannabis legalization initiative on their states’ ballots for this year’s elections.

 

Historically-speaking, the demographic make-up of the electorate during presidential election years tends to be younger and more diverse than in off-year elections, groups that are generally more supportive of the legalization of cannabis. We believe a number of the state initiatives on this year’s ballot stand a significant chance of becoming law. A 2016 ArcView Market Research Report projects the regulated cannabis industry could grow to $10 billion by 2018.


 

Our business model is designed to benefit from this trend. When a new state passes a medical or recreational cannabis law, we are able to start registering users and businesses in that state with minimal marginal cost. Because MassRoots is not involved in the production or sale of cannabis, we do not have to build out grow operations, open retail stores, or have a physical presence in the state in order to generate revenue. At the same time, MassRoots’ financial model is not tied to the success of a particular location or brand – we believe we will have a significant percentage of all dispensaries and brands on our platform, making MassRoots a play on the industry as a whole.

 

MassRoots is also in a unique position to help these legalization initiatives become law. With 900,000 users on our network, approximatly half a million followers on other social channels, a 600,000+ person opt-in email list, and relationships with 2,500 businesses. We believe MassRoots has the reach and scale to raise awareness of these initiatives, push voter registration, and drive grassroots donations to these campaigns. To be clear, MassRoots does not intend to allocate material shareholder resources to these campaigns, but to use our social reach and influence to help legalization initiatives pass. Not only will this help expand regulated cannabis markets and our potential revenue, but it will raise awareness and improve favorability of the MassRoots brand amongst cannabis consumers.

 

Competition

 

We do not believe we face any significant competition in the social network for the cannabis community niche; there are no other cannabis social networks with more than 100,000 users or significant capital. However, Over the coming months, we expect to actively compete with dispensary locators and strain guides, such as WeedMaps and Leafly, for dispensaries' advertising budgets. Our advertising revenue is currently generated mainly from national cannabis brands; as more of our localized advertising features come online during 2016, we will begin to more actively compete with WeedMaps and Leafly for local advertising budgets.

 

Over the coming months, MassRoots plans to implement many of the utilities WeedMaps and Leafly offer as added-in features of our community. We believe that while you can replicate a map and duplicate a strain database, you cannot replicate relationships and you cannot duplicate a community. As with any social application, recurring engagement and network effects are MassRoots' primary competitive advantage.

 

 Results of Operations

 

Results of Operations  For the three-months ended      
   March 31, 2016  March 31, 2015  $ Change  % Change
Gross revenue  $93,385   $941   $92,444    9,824%
                     
General and administrative expenses   2,378,567    565,751    (1,812,816)   320%
                     
Loss from Operations   (2,285,182)   (564,810)   (1,720,372)   305%
                     
Other Income /(Expense)   (351,041)   14,301    (365,342)   (2,555%)
                     
Net Loss  ($2,636,223)   (550,509)   (2,085,714)   (379%)
                     
Net loss per share - basic and diluted  ($0.06)  ($0.01)  ($0.05)   (367%)

 

Revenues

 

While MassRoots’ consumer-facing network launched in July 2013, we did not start generating advertising revenue until we crossed a half million users in mid-August 2015. Our clients have primarily been ancillary businesses marketing their products to cannabis consumers through endorsed posts on MassRoots, sponsored content on our blog, and mentions in our email newsletter. It is not necessary for a user to join to MassRoots in order for us to generate revenue from them – we are finding that many people will visit our website, join our email newsletter, or view a dispensary’s profile without registering for MassRoots.

 

For the three months ended March 31, 2016 and March 31, 2015, we generated revenues of $93,385 and $941, respectively. This is an increase of $92,444 over the same period in 2015. Of this $93,385 generated in the quarter ended March 31, 2016, $79,600, was made up of advertising revenue related to the MassRoots network, while the remaining revenue of $13,700 was made up of sales on our online merchandise store. We also signed advertising contracts and generated ticket sales for an additional $347,222 that was deferred to future quarters. These sales are primarily related to digital advertising.

 

Cost of Goods Sold

 

For the three months ended March 31, 2016 and March 31, 2015, cost of goods sold was $8,552 and $700, respectively. This is an increase of $7,852 over the same period in 2015, which represents the cost of items sold from our online merchandise store, MassRoots.com/Shop. Our main purpose with the online store is to raise awareness of the MassRoots brand and drive user downloads and web traffic, not to generate profits. MassRoots’ main business model will remain generating digital advertising sales.

 

Operating Expenses

 

For the three months ended March 31, 2016 and March 31, 2015, our operating expenses were $2,378,567 and $565,751, respectively. This $1,812,816 increase is attributed mainly to an increase of $432,568 in payroll-related expenditures as we expanded our development team, an increase of $838,166 in equity issuances for services to employees and service providers, and a $402,002 increase in other general and administrative expenditures, including rent, travel, and legal expenses. Approximately $200,000 of these expenditures were related to commissions, legal, and closing fees of the convertible debt financing closed in March 2016.

  

Other Income (Expense)

 

For the three months ended March 31, 2016 and March 31, 2015, the Company realized loss related to the fair value mark to market adjustments of its derivative liabilities of $222,857 and a gain of $42,737, respectively. The derivative liabilities are caused by certain price protections found in the warrants issued as part of the Company’s March 2016 convertible debt offering and will be automatically waived upon the repayment or conversion of the convertible debentures. For the three months ended March 31, 2016 and March 31, 2015, the Company recorded amortization of discount on notes payable of $119,549 and $26,146, respectively.

 

For the three months ended March 31, 2016 and March 31, 2015, we had net losses of $2,636,323 and $550,509, respectively. The increase in net loss was due to the increase in expenses noted above.

 

Liquidity and Capital Resources

 

Net cash used in operations for the three months ended March 31, 2016 and March 31, 2015 was $1,385,002 and $409,141 respectively. This cash used in operating activities was attributed to $2,636,223 net loss for the period, offset by cash provided by equity issuances of $1,002,719 and a decrease in accounts payable and other liabilities.

 

Net cash used in investing activities for the three months ended March 31, 2016 and March 31, 2015 was $15,704 and $9,896, respectively. This increase was attributed to the purchase of equipment, primarily computers, of $14,944 during the first quarter in 2016.

 

Net cash provided by financing activities for the three months ended March 31, 2016 and March 31, 2015 was $1,428,000 and $332,000, respectively. This increase was primarily related to the $1,420,000 received in the Company’s March 2016 convertible debt offering.

 

 

Capital Resources

 

Our current cash on hand as of March 31, 2016 was $413,610. As of March 31, 2016, there are warrants to purchase up to 3,400,275 shares of the Company’s common stock outstanding with an exercise price of $0.40 per share and warrants to purchase up to 2,310,699 shares of the Company’s common stock outstanding with an exercise price of $1.00 per share, which, if exercised, would supply up to approximately $3.67 million in cash to the Company.

 

We currently have no external sources of liquidity such as arrangements with credit institutions or off-balance sheet arrangements that will have or are reasonably likely to have a current or future effect on our financial condition or immediate access to capital.

 

We are dependent on the sale of our securities to fund our operations, and will remain so until we generate sufficient revenues to pay for our operating costs. Our officers and directors have made no written commitments with respect to providing a source of liquidity in the form of cash advances, loans and/or financial guarantees.

 

Fundraising

 

On March 17, 2016, the Company sold to investors six (6) month secured convertible original issue discount notes in the principal amount in the aggregate of $1,514,667, together with five year warrants to purchase up to an amount of shares of the Company’s common stock equal to the number of shares of common stock issuable upon the conversion of the notes in full and having an exercise price of $1.00 per share. If the Company exercises its right to prepay the note, the Company shall make payment to the investor of an amount in cash equal to the sum of the then outstanding principal amount of the note that it desires to prepay, multiplied by (a) 1.2, during the first ninety (90) days after the execution of this Note, or (b) 1.35, at any point thereafter. The notes are convertible into shares of the Company’s common stock at a price per share equal to the lower of (i) one dollar ($1.00), and (ii) a 25% discount to the price at which the Company next conducts an offering after the issuance date of the note; provided, however, if any part of the principal amount of the note remains unpaid at its maturity date, the conversion price will be equal to 65% of the average of the three trading days with the lowest daily weighted average prices of the Company’s common stock occurring during the fifteen days prior to the notes’ maturity date. The notes require that any net proceeds received from subsequent offerings made by the Company first be used to repay the notes’ outstanding principal amount. If the note is not repaid by the maturity date, the investors will receive, in aggregate, but calculated pro rata to the principal amounts remaining outstanding at the time of maturity, up to five hundred thousand (500,000) shares of the Company’s common stock. Gross proceeds received by the Company for the notes and warrants in this Offering was $1,420,000, while net proceeds were $1,271,600 (excluding any legal fees).

 

Required Capital Over the Next Fiscal Year

 

Our cash on hand and receivable as of March 31, 2016, is expected to be able to fund our operations through June 2016. We believe MassRoots will need to raise an additional $2.5 million over the next fiscal year to sustain operations; however, we expect to be able to raise the majority of these funds through warrant exercises. As of March 31, 2016, there were warrants outstanding to purchase up to 3,400,275 shares with an exercise price of $0.40 per share and warrants outstanding to purchase up to 2,310,669 shares, with an exercise price of $1.00 per share, which, if all were exercised, would supply approximately $3.67 million in cash to the Company.

 

If we are unable to raise the funds we will seek alternative financing through means such as borrowings from institutions or private individuals. There can be no assurance that we will be able to raise the capital we need for our operations from the sale of our securities. We have not located any sources for these funds and may not be able to do so in the future. We expect that we will seek additional financing in the future. However, we may not be able to obtain additional capital or generate sufficient revenues to fund our operations. If we are unsuccessful at raising sufficient funds, for whatever reason, to fund our operations, we may be forced to cease operations. If we fail to raise funds we expect that we will be required to seek protection from creditors under applicable bankruptcy laws.

 

Our independent registered public accounting firm has expressed doubt about our ability to continue as a going concern and believes that our ability is dependent on our ability to implement our business plan, raise capital and generate revenues. See Note 2 of our financial statements.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

Critical Accounting Policies and Estimates

 

For a discussion of our accounting policies and related items, please see the Notes to the Condensed Unaudited Financial Statements, included in Item 1.

 

Item 3. Quantitative & Qualitative Disclosures about Market Risks

 

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

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In connection with the preparation of our annual financial statements, management has undertaken an assessment of the effectiveness of our internal control over financial reporting as of March 31, 2016 based on the framework in Internal Control—Integrated Framework (“2013 Framework”) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls. 

  

Based on this evaluation, under that framework, management has concluded that our internal control over financial reporting was not effective as of March 31, 2016. The Company concluded that the Company has material weaknesses in our internal control over financial reporting because there is not an adequate segregation of duties due to a limited number of employees among whom duties can be allocated. The lack of segregation of duties is due to the limited resources of the Company, which the Company plans to address as it continues to grow.

 

Changes in Internal Controls over Financial Reporting

 

There have been no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-(f) of the Exchange Act) that occurred during the our last fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II OTHER INFORMATION

 

Item 1. Legal Proceedings

 

We are not a party to any current or pending legal proceedings.

 

Item 1A. Risk Factors

 

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

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3. Defaults upon Senior Securities

 

None

 

Item 5. Other Information

 

On April 16, 2016, the original date of the 420 Rally, a severe snowstorm hit Denver and forced event organizers to postpone the festival. The 420 Rally has since been rescheduled for May 21, 2016 and event organizers expect around 75,000 people will still be in attendance.

 

Item 6. Exhibits

 

4.1Form of Note issued in the March 2016 note offering (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed March 18, 2016).
4.2Form of Warrant issued in the March 2016 note offering (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed March 18, 2016).
10.1Senior Secured Promissory Note between the Company and Santino Walter Productions, LLC (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 31, 2016).
10.2420 Event Agreement between the Company and Santino Walter Productions, LLC (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed March 31, 2016).
10.3License Agreement between the Company and Santino Walter Productions, LLC (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed March 31, 2016).
10.4Form of Securities Purchase Agreement utilized in the March 2016 note offering (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 18, 2016).
10.5Form of Security Agreement utilized in the March 2016 note offering (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed March 18, 2016).
31.2Certification of Principal Executive Officer as required by Rule 13a-14 or 15d-14 of the Exchange Act, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2Certification of Principal Accounting Officer as required by Rule 13a-14 or 15d-14 of the Exchange Act, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.2Certification of Principal Executive Officer Pursuant to 18 U.S.C 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2Certification of Principal Accounting Officer Pursuant to 18 U.S.C 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

101.INS XBRL Instance Document

 

101.SCH XBRL XBRL Taxonomy Extension Schema Document

 

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF XBRL Taxonomy Extension Definition Linkbase Document

 

101.LAB XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

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 hereunto duly authorized.

 

MASSROOTS, INC.

(Registrant)

 

Dated: May 16, 2016

By: /s/ Isaac Dietrich

Isaac Dietrich, Chief Executive Officer

(Principal Executive Officer)

 

Dated: May 16, 2016

By: /s/ Jesus Quintero

Jesus Quintero, Chief Financial Officer

(Principal Accounting Officer)