PART
I
ITEM
1. BUSINESS
Overview
MassRoots,
Inc. (“MassRoots” or the “Company”) was formed in April 2013 as a technology platform for the cannabis
industry. Powered by more than one million registered users, MassRoots enables consumers to rate cannabis products and strains
based on their efficacy (i.e., effectiveness for treating ailments such as back-pain or epilepsy) and then presents this information
in easy-to-use formats for consumers to make educated purchasing decisions at their local dispensary. Businesses are able to leverage
MassRoots by strategically advertising to consumers based on their preferences and tendencies.
“Registered
users” (“Users”) are defined as users who currently have an account with MassRoots. It does not include users
who have deleted their account nor does it reflect active usage over any set period of time.
Over
the past six years, MassRoots has established itself as a leading technology company in the emerging cannabis industry, building
a User-base of more than one million registered Users, partnering with some of the most recognized brands in the industry and
raising significant capital from institutional and private investors. Since inception, the Company has generated approximately
$1.2 million in revenue.
Historically,
we have focused on building a consumer-facing application and have not spent significant resources on developing our advertising
portal for dispensaries. However, we are now focusing our efforts on developing our advertising portal so as to automate the processes
and platform needed to deliver our underlying services. In the summer of 2018, we launched a revamped MassRoots Business Portal
and a consumer rewards program, WeedPass®, accessible through the MassRoots mobile app. After an introductory free trial period,
we charge dispensaries a monthly fee for their dispensary listing and access to our consumer rewards program. With MassRoots’
wide-spread audience and following in some of the leading medical cannabis markets in the country, we believe our business portal
will be well-received by our client base. According to ArcView Market Research, there are projected to be over 2,700 state-regulated
dispensaries in the United States by 2020.
Background
We
were incorporated in the state of Delaware on April 26, 2013 as a technology platform for the cannabis industry.
Our
principal executive office is located at 7083 Hollywood Blvd., Office 4084, Los Angeles, CA 90028, and our telephone number is
(833) 467-6687.
On
January 25, 2017, we consummated a reverse triangular merger (the “Whaxy Merger”) pursuant to which we acquired all
of the outstanding common stock of DDDigtal Inc (“DDDigtal”), a Colorado corporation. Upon closing of the Whaxy Merger,
each share of DDDigtal’s common stock was exchanged for such number of shares of our common stock (or a fraction thereof)
based on an exchange ratio equal to approximately 5.273-for-1, such that 1 share of our common stock was issued for every 5.273
shares of DDDigtal’s common stock. At the closing of the Whaxy Merger, all shares of common stock of our newly-formed merger
subsidiary formed for the sole purpose of effectuating the Whaxy Merger, were converted into and exchanged for one share of common
stock of DDDigtal, and all shares of DDDigtal’s common stock that were outstanding immediately prior to the closing of the
Whaxy Merger were automatically cancelled and retired. Upon the closing of the Whaxy Merger, DDDigtal continued as our surviving
wholly-owned subsidiary, and the merger subsidiary ceased to exist.
On
July 13, 2017, we consummated a reverse triangular merger (the “Odava Merger”) pursuant to which we acquired all of
the outstanding common stock of Odava Inc (“Odava”), a Delaware corporation. Upon closing of the Odava Merger, each
share of Odava’s common stock was exchanged for such number of shares of our common stock (or a fraction thereof), based
on an exchange ratio equal to approximately 4.069-for-1, such that 1 share of our common stock was issued for every 4.069 shares
of Odava’s common stock. At the closing of the Odava Merger, all shares of common stock of our newly-formed merger subsidiary
formed for the sole purpose of effectuating the Odava Merger, were converted into and exchanged for one share of common stock
of Odava, and all shares of Odava’s common stock that were outstanding immediately prior to the closing of the Odava Merger
automatically cancelled and retired. Upon the closing of the Odava Merger, Odava continued as our surviving wholly-owned subsidiary,
and the merger subsidiary ceased to exist.
Our Products and Services
Our technology platform consists of MassRoots,
our consumer-facing social network, which is accessible through the Apple App Store, the Amazon App Store and the Google Play Marketplace,
and our business and advertising portal for companies which can be accessed at
www.massroots.com/business
.
The MassRoots Network
The MassRoots network is accessible as
a free mobile application through the Apple App Store, the Amazon App Store, the Google Play Marketplace, and as a web application
at
www.massroots.com
. These applications and services work in a manner similar to other social review platforms such
as Vivino, Untappd and Yelp. Using our network after agreeing to our Terms and Conditions,
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Users can create a profile by selecting a username
and setting their password;
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Users have the ability to follow other Users
on our network which permits them to follow other Users’ posts which are displayed on their newsfeed;
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Users have the ability to review strains and
products based on factors including, but not limited to, quality. These reviews are displayed on product pages within the
app and on the User’s profile;
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Users have the ability to like, comment and
report statuses from other Users. By “liking” a status, a User is indicating their approval of the post’s
content. By commenting on a status, Users are free to voice their opinions or comments with respect to the post. By reporting
a status, Users can flag content that violates our Terms and Conditions, including spam, harassing content, and posts or comments
that appear to solicit the transaction of cannabis or other products;
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Users have the ability to tag other Users and
use hashtags to categorize posts. By using the “@” symbol followed by a username, Users can tag other Users in
posts they want them to see or if such Users are included in the picture or post. By using the “#” followed by
a categorical word, Users can categorize posts based on their content;
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Users have the ability to post pictures with
text captions or just text statuses;
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Users have the ability to search for other
Users based on their username and the ability to search by hashtag to display all results within a particular category. Users
can sort hashtag searches by their popularity or when they were posted; and
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Users have the ability to set their profile
to public or private. By setting their profile to public, any User on MassRoots’ apps will be able to see the public
profile’s posts and follow the account. When a profile is private, another User must request to follow such account
and the account owner must grant permission before they can view any of the account’s posts.
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User Growth and Product Distribution
Channels
The
MassRoots app is distributed free-of-charge through the Apple App Store, the Google Play Marketplace and the Amazon App Store.
The MassRoots network is also accessible through desktop and mobile web browsers by navigating to
www.massroots.com
. Our
business and advertising portal can be accessed at
www.massroots.com/business
. Through this portal companies can edit their
profiles, distribute information to Users and view analytics such as impressions, views and clicks.
Blockchain Technologies
MassRoots Blockchain Technologies, Inc.
(“MassRoots Blockchain”) was formed in December 2017 as a wholly-owned subsidiary of the Company to continue the Company’s
efforts in exploring how new technologies may be utilized in the cannabis industry. Initially, we are focusing on blockchain technology
for several reasons, including, but not limited to:
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that it may enable better tracking of impressions,
views, and interactions with posts, advertisements and dispensary listings;
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that it has the potential to streamline the
collection and organization of data while eliminating traditional security risks;
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that it may provide a greater degree of reliability
and accuracy with respect to data;
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that it may allow us to implement an intelligent
newsfeed to deliver high-quality and more relevant content to our Users;
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that it may enable the development of contracts
that are automatically executed when certain parameters are met;
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that it has the potential to reduce friction
in the cannabis market-place and save businesses valuable and resources; and
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that it may provide greater transparency to
government regulators.
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In December 2017, we commenced the re-development
of the MassRoots Business Portal, a platform where dispensaries and other industry participants, such as producers and other ancillary
businesses, may advertise their goods and services. To date, we have used approximately $370,000 for the initial development of
the MassRoots Business Portal, including features that allow for tracking of advertising impressions, enhanced targeting and serving
of advertisements, as well as a program that would be designed to reward Users of the MassRoots platform for providing high quality
reviews on cannabis strains and products. The development and implementation of these any other features, including the possible
use of digital instruments, is currently contemplated to be made within the MassRoots App and platform, and is intended to generate
the growth of Users of the MassRoots platform and stimulate the MassRoots platform’s overall activity.
All initial development has been outsourced
to third party development firms and consultants. Specifically, we have outsourced the following services: software development
services, including, but not limited to, web and mobile development services, blockchain development and integration services,
and infrastructure development, automation, support and management services. As stated in “Risk Factors,” the development
of features based upon the use of blockchain technology is subject to numerous risks and uncertainties, and there can be no assurance
as to when, or if, any such features will be successfully developed, or that if developed, that they will be accepted or adopted.
Further, the likelihood of our development and implementation of features based upon new technology must be considered in light
of the problems, expenses, difficulties, complications and delays frequently encountered in connection with the inception and
development of a product or service based upon any such relatively new and developing technology.
While MassRoots Blockchain and the Company
intend to devote resources to exploring the feasibility of developing these or other solutions, there can be no assurances that
we will be successful in implementing such solutions, that any such solutions will be economically viable, or that any of them
will result in the generation of User interest, participation or revenue.
We currently anticipate that MassRoots
Blockchain and/or the Company will need to raise additional funds to continue to explore and develop potential uses and applications
of blockchain technologies and uses for our business and other businesses in the cannabis industry; however, no assurance can
be given that additional financing will be available on terms favorable to us, or at all.
App/Play Store Issues, User Support
and Similar Matters
On November 4, 2014, the MassRoots App
was removed from Apple’s iOS App Store because the App Store changed its guidelines to prohibit the promotion of social
cannabis applications. Although existing iOS Users were still able to access and use the MassRoots App, new users were prohibited
from downloading our app. After correspondences with Apple, other cannabis companies and cannabis advocates, in February 2015
Apple advised us that it revised its enforcement guidelines to permit cannabis applications in the Apple App Store which restricted
access to users located in the states where use of cannabis was permitted. On February 12, 2015, our application was reinstated
to the Apple App Store and can now only be accessed by users in the states which permit the use of cannabis. Although our app
has been reinstated to the Apple App Store, we cannot provide any assurance that Apple’s policy will not change in the future
or that our application will not once again be removed from the Apple App Store.
The Apple App Store is one of the largest
content distribution channels in the world and is the only way to effectively distribute software to the large percentage of the
United States population who own iPhones and iPads. The Apple App Store review team effectively operates as our iOS App’s
regulator; they decide what guidelines iOS apps must operate under and how to enforce such guidelines. The Apple guidelines related
to cannabis-related apps are not published, enforcement of such guidelines is difficult to predict, and the review and appeal
processes are conducted without public oversight. Although we will continue advocating for a more open and transparent Apple App
Store review process that will allow decisions that affect a significant portion of the United States smartphone owning population
to be open to public scrutiny, there can be no assurance that we will be successful in these efforts.
MassRoots, along with other cannabis apps,
regularly encounter issues with the Google Play Store review team in the normal course of business due to Google Play Store’s
absence of clear guidelines regarding cannabis-related apps. On November 8, 2016, the MassRoots App was removed from the Google
Play Store due to a compliance review. However, on March 21, 2017, Google approved the MassRoots App for distribution
to Android devices through the Google Play Store, making it available for download on the Google Play Store once again.
On December 1, 2016, MassRoots’
Android application received approval from the Amazon App Store for listing, and is currently available for download on the Amazon
App Store.
Under their respective developer license
agreements, Apple, Inc., Google, Inc. and Amazon.com, Inc. have the right to update the Apple App Store, Google Play Store and
Amazon App Store policies, respectively, to prohibit cannabis-related applications at any time. This could result in many prospective
users being unable to access and join our network and existing Users being unable to access our app.
Our activities outside of the application
stores have also faced backlash and resistance due to our status as a cannabis-related company. For example, our Instagram account
is followed by more than 400,000 users and we utilize this following to help expand our user-base. However, in a situation similar
to the removal of our application from the Apple App Store, our Instagram account was suspended in January 2016 without notice
or explanation. Our account was reinstated on February 26, 2016. While management believes that our platform is at the point where
any potential suspensions effecting our Company will not affect our User growth, we expect to continue to face similar situations
in the future that may cause disruptions to the execution of our business plan.
Market Conditions
MassRoots is poised to take advantage
of two rapidly growing industries: cannabis and mobile technology.
Cannabis Market Growth and Current
Trends
On January 4, 2018, Attorney General Jefferson
B. Sessions, III issued a memo which rescinded the Cole Memo (as described below) which was adopted by the Obama administration
as a policy of non-interference with marijuana-friendly state laws.
The Cole Memo
On August 29, 2013, Deputy Attorney
General James Cole issued a memo (the “Cole Memo”) in response to certain states passing measures to regulate the
medical and adult-use of cannabis. In the Cole Memo, the Department of Justice made clear that marijuana remains an illegal drug
under the Controlled Substances Act and that federal prosecutors will continue to aggressively enforce the statute. The Department
of Justice identified eight enforcement areas that federal prosecutors should prioritize. Outside of such enforcement priorities,
the federal government has traditionally relied on state and local authorities to address marijuana activity. The Cole Memo established
several basic guidelines by which state-regulated cannabis businesses could operate to minimize the risk of intervention and enforcement
by the Department of Justice. The guidelines focused on ensuring that cannabis did not cross state lines, keeping dispensaries
away from schools and public facilities and strict-enforcement of state laws by regulatory agencies, among other priorities.
The Sessions
Memo
On January 4, 2018, Attorney
General Jefferson B. Sessions, III issued a memo (the “Sessions Memo”) on federal marijuana enforcement policy announcing
a return to the rule of law and the rescission of previous nationwide guidance by the Department of Justice (including, but not
limited to, the Cole Memo). In the memorandum, Attorney General Jefferson Sessions directs all U.S. attorneys to enforce the laws
enacted by Congress and to follow the well-established principles when pursuing prosecutions related to marijuana activities.
These principles include weighing all relevant considerations, including federal law enforcement priorities set by the Attorney
General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes
on the community.
Guidance to Banks Relating
to the Marijuana Industry
On February 14, 2014, the Department
of Justice and the Department of Treasury issued guidance to banks about how to serve the marijuana industry without running afoul
of federal regulations. Prior to such guidance, dispensaries were forced to operate on a cash basis, presenting significant security
and accounting issues. Although banks have remained reluctant to work with marijuana businesses because of federal prohibition
laws, this guidance was a major step in legitimizing and accepting the cannabis industry on a national level. In addition, the
adoption of the Joyce Amendment (formerly known as the Rohrabacher-Farr Amendment) (as discussed below) indicates some level of
support in Congress for medicinal cannabis, even if its actual effect is still undetermined.
For additional information concerning the
Cole Memo, the Sessions Member, the Joyce Amendment and regulatory conditions, see the section entitled “Business –
Government Regulation.”
Current States with Laws Permitting
the Medical or Adult Use of Cannabis
Recreational
marijuana is regulated in ten states and the District of Columbia and medical marijuana is regulated in 33 states. In addition,
thirteen additional states have legalized low-tetrahydrocannabinol (“THC”)/high-cannabidiol(“CBD”)
extracts for select medical conditions. The states which have enacted such laws are listed in the following table:
State
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Year
Passed
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1. Alaska*
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1998
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2. Arizona
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2010
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3. Arkansas
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2016
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4. California*
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1996
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5. Colorado*
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2000
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6. Connecticut
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2012
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7. District of Columbia*
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2010
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8. Delaware
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2011
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9. Florida
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2016
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10. Hawaii
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2000
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11. Illinois
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2013
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12. Louisiana
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2015
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13. Maine*
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1999
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14. Maryland
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2014
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15. Massachusetts*
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2012
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16. Michigan
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2008
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17. Minnesota
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2014
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18. Missouri
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2018
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19. Montana
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2004
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20. Nevada*
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2000
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21. New Hampshire
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2013
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22. New Jersey
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2010
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23. New Mexico
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2007
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24. New York
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2014
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25. North Dakota
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2016
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26. Pennsylvania
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2016
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27. Ohio
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2016
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28. Oklahoma
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2018
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29. Oregon*
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1998
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30. Rhode Island
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2006
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31. Utah
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2018
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32. Vermont*
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2004
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33. Washington*
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1998
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34. West Virginia
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2017
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* State has enacted laws permitting the adult use of cannabis, in addition to medical use.
Public Support for Regulation of
Cannabis Increasing
A Gallup poll conducted in October 2018
found that 66% of Americans supported regulating the use of cannabis, and a February 2017 Quinnipiac poll found that 71% of Americans
were opposed to federal government interference with state marijuana programs. These statistics continue the trend over the past
decade toward public support for cannabis.
Market Conditions that Could Limit
Our Business
Cannabis is a Schedule I controlled substance
under Federal law and, as such, there are several factors that could limit our business operations including, but not limited
to:
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The Federal government and many private employers prohibit drug
use of any kind, including cannabis, even where it is permissible under state law. Random drug screenings and potential enforcement
of such employment provisions may significantly reduce the size of the potential cannabis market;
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Enforcement of Federal law prohibiting cannabis occurs randomly
and often without notice. This could scare many potential investors away from cannabis-related investments and makes it difficult
to make accurate market predictions;
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On January 4, 2018, the Department of Justice issued the Sessions
Memo announcing a return to the rule of law and the rescission of previous guidance documents. The Sessions Memo rescinded
the Cole Memo. Although there is no guarantee that additional states will pass measures to regulate cannabis use under state
law, the Sessions Memo may further deter states from passing such measures. Furthermore, irrespective of the Sessions Memo,
in many states, public support of regulation initiatives may not maintain enough support to pass. This is especially true
when a supermajority is needed to pass measures, like in Florida where a state constitutional amendment permitting medical
cannabis required 60% approval to pass. Changes due to the Sessions Memo and in voters’ attitudes and turnout have the
potential to slow or stop the cannabis regulation movement and potentially reverse recent cannabis regulation victories;
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There has been some resistance and negativity as a result of
recent cannabis regulation at the state level, especially as it relates to drugged driving. The lack of clearly defined and
enforced laws at the state level has the potential to sway public opinion against marijuana regulation; and
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In the event that the Federal government does not enforce the
Federal law prohibiting cannabis, state laws regarding the regulation of cannabis are being challenged through lawsuits.
Lawsuits have been brought by private groups and local law enforcement officials. If these lawsuits are successful, state
laws permitting cannabis sales may be overturned which will significantly reduce the size of the potential cannabis market
and have a material adverse effect on our business.
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Please see “Government Regulation”
below for additional information.
Government Regulation
Marijuana is a categorized as a Schedule I controlled substance by the Drug Enforcement Agency and the United
States Department of Justice and is illegal to grow, possess and consume under Federal law. However, 33 states have passed state
laws that permit doctors to recommend cannabis for medical-use and ten of those states and the District of Columbia have enacted
laws that regulate the adult-use of cannabis for any reason. In addition,
thirteen
additional states have legalized low-THC/high- CBD extracts for select medical conditions. Because doctors are prohibited from
prescribing a Schedule I controlled substance, the passage of a state medical marijuana does not necessarily guarantee the implementation
of a regulated, commercial system through which patients can purchase cannabis products. This has created an unpredictable business-environment
for dispensaries and collectives that operate under certain state laws but in violation of Federal law.
Cole Memo
On August 29, 2013, United States
Deputy Attorney General James Cole issued the Cole Memo to United States attorneys guiding them to prioritize enforcement of Federal
law away from the cannabis industry operating as permitted under certain state laws, so long as:
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cannabis is not being distributed to minors and dispensaries
are not located around schools and public buildings;
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the proceeds from sales are not going to gangs, cartels or criminal
enterprises;
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cannabis grown in states where it is legal is not being diverted
to other states;
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cannabis-related businesses are not being used as a cover for
sales of other illegal drugs or illegal activity;
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there is not any violence or use of firearms in the cultivation
and sale of marijuana;
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there is strict enforcement of drugged-driving laws and adequate
prevention of adverse health consequences; and
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cannabis is not grown, used, or possessed on Federal properties.
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The Cole Memo was a guide for United States
attorneys and did not alter in any way the Department of Justice’s authority to enforce Federal law, including Federal laws
relating to cannabis, regardless of state law. As described below, as a result of the issuance of the Sessions Memo by the Department
of Justice, on January 4, 2018, the Cole memo was rescinded. Prior to the issuance of the Sessions Memo, we had implemented standard
operating procedures and policies to ensure that we were operating in compliance with the Cole Memo. We cannot provide assurance
that our actions were, are or will be in compliance with the Cole Memo, the Sessions Memo or any other laws or regulations that
currently exist or may be amended or adopted in the future.
Pursuant to our currently existing Terms
and Conditions:
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Users must agree that they are located in a state where medical-use
or adult-use of cannabis is regulated;
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Users must be of age to consume cannabis in their particular
state (18 or 21 years old, depending on the state);
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Users may only post content that is in compliance with their
state’s laws;
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Users may not solicit or distribute cannabis through MassRoots
unless they are a licensed dispensary;
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Posting of any of the following materials to MassRoots is prohibited
and will result in account termination:
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Posting other drugs or substances, including prescription pain
pills;
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Posting of any violence or threat of violence;
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Posting of any drugged-driving content; and
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Posting of any copyright-protected content.
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We have implemented an aggressive content
and account review program to ensure compliance with our Terms and Conditions. Users have the ability to report any status or
account that is in violation of our Terms and Conditions and we encourage Users to do so as any illegal content jeopardizes the
network for all our Users. When a status or account is reported, the post is automatically removed from the network until further
review. A MassRoots employee then reviews the content within 24 hours and either approves it as in compliance within our Terms
and Conditions or permanently deletes it and bans the User’s account.
In addition, as part of the agreement
to allow our app to return to the Apple App Store, we implemented geographic restrictions to restrict new Users to our mobile
apps to the District of Columbia and the 33 states in which the use of marijuana is permitted.
Our business plan includes allowing cannabis
dispensaries to advertise on our network, which we believe could be deemed to be aiding and abetting illegal activities, a violation
of Federal law. We continue to evaluate the effects of the Sessions Memo; however, we cannot provide assurance that we were, are
or will be in compliance with the Cole Memo, the Sessions Memo or any other laws or regulations.
Joyce Amendment (formerly known as the
Rohrabacher-Farr Amendment)
On December 16, 2014, H.R. 83 - Consolidated
and Further Continuing Appropriations Act, 2015 was enacted and included a provision now known as the “Joyce Amendment”
which states:
None of the funds made available in this Act
to the Department of Justice may be used, with respect to the States of Alabama, Alaska, Arizona, California, Colorado, Connecticut,
Delaware, District of Columbia, Florida, Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota,
Mississippi, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, Oregon, Rhode Island, South Carolina, Tennessee,
Utah, Vermont, Washington, and Wisconsin, to prevent such States from implementing their own State laws that authorize the use,
distribution, possession, or cultivation of medical marijuana.
The Joyce Amendment would appear to protect
the right of the states to determine their own laws on medical cannabis use; however, the actual effects of the amendment are still
unclear. The Joyce Amendment did not remove the federal ban on medical cannabis and cannabis remains regulated as a Schedule I
controlled substance. Further, the United States Department of Justice has interpreted the Joyce Amendment as only preventing federal
action that prevents states from creating and implementing cannabis laws - not against the individuals or businesses that actually
carry out cannabis laws – and has continued to sporadically initiate enforcement actions against individuals or businesses
participating in the cannabis industry despite such participation being regulated under state law. Whether this interpretation
is appropriate is still being litigated, and, while an initial district court decision has not supported the Department of Justice’s
interpretation, such decision is currently under appellate review. In addition, no matter what the interpretation is adopted by
the courts, there is no question that the Joyce Amendment does not protect any party not in full compliance with state medicinal
cannabis laws.
The Joyce Amendment represents one of the
first times in recent history that Congress has taken action indicating support of medical cannabis. The Joyce Amendment was renewed
by Congress in 2015, 2016, 2017 and 2018 and is in effect until September 30, 2019.
Sessions Memo
On January 4, 2018, Attorney General Jefferson
B. Sessions, III issued a memo on federal marijuana enforcement policy announcing a return to the rule of law and the rescission
of previous nationwide guidance by the Department of Justice (including, but not limited to, the Cole Memo). In the memorandum,
Attorney General Jefferson Sessions directs all U.S. attorneys to enforce the laws enacted by Congress and to follow well-established
principles when pursuing prosecutions related to marijuana activities. These principles include weighing all relevant considerations,
including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of
criminal prosecution, and the cumulative impact of particular crimes on the community. The effect of this memo is to shift federal
policy from a hands-off approach adopted by the Obama administration to permitting federal prosecutors across the country to determine
how to prioritize resources to regulate marijuana possession, distribution and cultivation in states where marijuana use is legal.
While we do not directly harvest or distribute
cannabis today, we still may be deemed to be violating federal law, or aiding and abetting the violation of Federal law and may
be irreparably harmed by a change in enforcement by the federal or state governments.
Additional Government Regulations
We are subject to general business regulations
and laws as well as Federal and state regulations and laws specifically governing the Internet and e-commerce. These regulations
and laws cover among others, sweepstakes, taxation, tariffs, user privacy, data protection, pricing, content, copyrights, distribution,
electronic contracts and other communications, consumer protection, broadband residential Internet access and the characteristics
and quality of services. Any noncompliance with the foregoing laws and regulations may harm our business and results of operations.
Competitors
We compete with other cannabis information
platforms such as WeedMaps and Leafly, which provide information with respect to dispensary locations, strain information, and
news relating to the cannabis industry. We believe our primary competitive advantage is the community we have created and the
significant reviews and data we have collected on key cannabis markets.
Recent Developments
In February 2019, we entered into an Agreement
and Plan of Merger (the “Merger Agreement”) with MassRoots Supply Chain, Inc., our wholly-owned subsidiary (“Merger
Subsidiary”), COWA Science Corporation, a Delaware corporation (“COWA”), and Christopher Alameddin, an individual
acting solely in his capacity as a stockholder representative pursuant to which Merger Subsidiary will be merged with and into
COWA, whereby the separate corporate existence of Merger Subsidiary will cease and COWA will be the surviving entity (the “Surviving
Entity”) and our wholly-owned subsidiary (the “Merger”). Upon effectiveness of the Merger, we will issue an
aggregate of 50,000,000 shares of our common stock to the stockholders of COWA and each share of the common stock of Merger Subsidiary
will be converted into one newly issued, fully paid and non-assessable share of common stock of the Surviving Entity. If COWA
attains certain revenue targets, its stockholders may receive up to an additional 50 million shares of our common stock. The closing
of the Merger is subject to various conditions, including, but not limited to, approval of the Merger and the Merger Agreement
by COWA stockholders and the delivery of audited financial statements by COWA, In the event the Merger has not closed by May 15,
2019, the Company may terminate the Merger Agreement upon providing written notice to COWA.
COWA provides dispensaries, cannabis cultivators,
distributors and ancillary companies with the supply chain products they need to run their businesses. We anticipate that the
Merger will enable both our business and COWA’s business to expand their client-bases by offering customers a complete suite
of cannabis-centric products and services, including:
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Advertising
services, including listings on MassRoots’ dispensary finder and WeedPass rewards program;
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Growing
supplements and nutrients, including white-labeled growing materials;
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Consumer
packaging compliant with industry-specific regulations;
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Process
and product development;
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Heating,
ventilation and air conditioning, or HVAC, resources tailored to the unique needs of
regulated cannabis businesses; and
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Miscellaneous
office and cleaning supplies, lab equipment, and bulk chemicals.
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Intellectual Property
MASSROOTS and TOKE are federally registered
trademarks of MassRoots, ODAVA is a state registered trademark of MassRoot and RETAIL is a state registered trademark of Odava.
Employees and Consultants
As of April 11, 2019, MassRoots has 8 full-time employees, 2 part-time employees, and one full-time independent
contractor.
ITEM 1A. RISK FACTORS
An investment in our securities involves
a high degree of risk. This Annual Report on Form 10-K contains the risks applicable to an investment in our securities. The risks
and uncertainties we have described are not the only ones we face. Additional risks and uncertainties not presently known to us
or that we currently deem immaterial may also affect our operations. The occurrence of any of these known or unknown risks might
cause you to lose all or part of your investment in the offered securities.
Risks Relating to Our Business and
Industry
We have a limited history upon which
an evaluation of our prospects and future performance can be made and have no history of profitable operations.
We were incorporated in April 2013 and
have a limited operating history and our business is subject to all of the risks inherent in the establishment of a new business
enterprise. Our likelihood of success must be considered in light of the problems, expenses, difficulties, complications and delays
frequently encountered in connection with development and expansion of a new business enterprise. We may sustain losses in the
future as we implement our business plan. There can be no assurance that we will operate profitably.
Since we have a limited operating
history, it is difficult for potential investors to evaluate our business.
Our limited operating history makes it
difficult for potential investors to evaluate our business or prospective operations. As an early stage company, we are subject
to all the risks inherent in the initial organization, financing, expenditures, complications and delays inherent in a new business.
Investors should evaluate an investment in us in light of the uncertainties encountered by developing companies in a competitive
and evolving environment. Our business is dependent upon the implementation of our business plan. We may not be successful in
implementing such plan and cannot guarantee that, if implemented, we will ultimately be able to attain profitability.
We will need to obtain additional
financing to fund our operations.
We will need additional capital in the
future to continue to execute our business plan. Therefore, we will be dependent upon additional capital in the form of either
debt or equity to continue our operations. At the present time, we do not have arrangements to raise all of the needed additional
capital, and we will need to identify potential investors and negotiate appropriate arrangements with them. We may not be able
to arrange enough investment within the time the investment is required or that if it is arranged, that it will be on favorable
terms. If we cannot obtain the needed capital, we may not be able to become profitable and may have to curtail or cease our operations.
Cannabis remains illegal under Federal
law.
Despite the development of a regulated
cannabis industry under the laws of certain states, these state laws regulating medical and adult cannabis use are in conflict
with the Federal Controlled Substances Act, which classifies cannabis as a Schedule I controlled substance and makes cannabis
use and possession illegal on a national level. The United States Supreme Court has ruled that the Federal government has the
right to regulate and criminalize cannabis, even for medical purposes, and thus Federal law criminalizing the use of cannabis
preempts state laws that regulate its use. Although the prior administration determined that it was not an efficient use of resources
to direct Federal law enforcement agencies to prosecute those lawfully abiding by state laws allowing the use and distribution
of medical and recreational cannabis, on January 4, 2018, the current administration issued the Sessions Memo announcing a return
to the rule of law and the rescission of previous guidance documents. The Sessions Memo rescinds the Cole Memo which was adopted
by the Obama administration as a policy of non-interference with marijuana-friendly state laws. The Sessions Memo shifts federal
policy from a hands-off approach adopted by the Obama administration to permitting federal prosecutors across the country to decide
how to prioritize resources to regulate marijuana possession, distribution and cultivation in states where marijuana use is regulated.
There can be no assurance that federal prosecutors will not prosecute and dedicate resources to regulate marijuana possession,
distribution and cultivation in states where marijuana use is regulated which may cause states to reconsider their regulation
of marijuana which would have a detrimental effect on the marijuana industry. Any such change in state laws based upon the Sessions
Memo and the Federal government’s enforcement of Federal laws could cause significant financial damage to us and our stockholders.
As the possession and use of cannabis
is illegal under the Federal Controlled Substances Act, we may be deemed to be aiding and abetting illegal activities through
the services and data that we provide to government regulators, dispensaries, cultivators and consumers. As a result, we may be
subject to enforcement actions by law enforcement authorities, which would materially and adversely affect our business.
Under Federal law, and more specifically
the Federal Controlled Substances Act, the possession, use, cultivation, and transfer of cannabis is illegal. Our business provides
services to customers that are engaged in the business of possession, use, cultivation, and/or transfer of cannabis. As a result,
law enforcement authorities, in their attempt to regulate the illegal use of cannabis, may seek to bring an action or actions
against us, including, but not limited, to a claim of aiding and abetting another’s criminal activities. The Federal aiding
and abetting statute provides that anyone who “commits an offense against the United States or aids, abets, counsels, commands,
induces or procures its commission, is punishable as a principal.” As a result of such an action, we may be forced to cease
operations and our investors could lose their entire investment. Such an action would have a material negative effect on our business
and operations.
Federal enforcement practices could
change with respect to services provided to participants in the cannabis industry, which could adversely impact us. If the Federal
government were to expend its resources on enforcement actions against service providers in the cannabis industry under guidance
provided by the Sessions Memo, such actions could have a material adverse effect on our operations, our customers, or the sales
of our products.
It is possible that due to the recent
Sessions Memo our clients may discontinue the use of our services, our potential source of customers may be reduced and our revenues
may decline. Further, additional government disruption in the cannabis industry could cause potential customers and users to be
reluctant to use and advertise our products, which would be detrimental to the Company. We cannot predict the impact of the Sessions
Memo at this time nor can we predict the nature of any future laws, regulations, interpretations or applications including the
effect of such additional regulations or administrative policies and procedures, when and if promulgated, could have on our business.
We are subject to legislative uncertainty
that could slow or halt the legalization and use of cannabis, which could negatively affect our business.
Continued development of the cannabis industry
is dependent upon continued legislative authorization of cannabis at the state level, as well as the U.S. government’s continued
non-enforcement of federal cannabis laws against state-law-compliant cannabis businesses. Further, progress, while generally
expected, is not assured. Some industry observers believe that well-funded interests, including businesses in the alcohol beverage
and the pharmaceutical industries, may have a strong economic opposition to the continued legalization of cannabis. The pharmaceutical
industry, for example, is well funded with a strong and experienced lobby that eclipses the funding of the medical cannabis movement.
Any inroads legalization opponents could make in halting the impending cannabis industry could have a detrimental impact on our
business. While there may be ample public support for legislative action, numerous factors impact the legislative process. Any
one of these or other factors could slow or halt use of cannabis, which would negatively impact our business.
Our business depends on continued purchases
by businesses and individuals selling or using cannabis pursuant to state laws in the United States.
Thirty-three states allow their citizens to
use medical cannabis, and the District of Columbia and ten states have regulated the sale of cannabis for adult use. In addition,
thirteen additional states have legalized low-THC/high-CBD extracts for select medical conditions (“CBD States”). Several
CBD States are considering legalizing medical cannabis, and several medical states may extend legalization to adult use.
The states’ cannabis programs have proliferated
and grown even though the cultivation, sale and possession of cannabis is considered illegal under U.S. federal law. Under the
Controlled Substances Act (“CSA”), cannabis is a Schedule I drug, meaning that the Drug Enforcement Administration
recognizes no accepted medical use for cannabis, and the substance is considered illegal under federal law.
In an effort to provide guidance to U.S. Attorneys’
offices regarding the enforcement priorities associated with cannabis in the United States, the U.S. Department of Justice (the
“DOJ”) has issued a series of memoranda detailing its suggested enforcement approach. During the administration of
former President Obama, each memorandum acknowledged the DOJ’s authority to enforce the CSA in the face of state laws, but
noted that the DOJ was more committed to using its limited investigative and prosecutorial resources to address the most significant
threats associated with cannabis in the most effective, consistent, and rational way.
On August 29, 2013, the DOJ issued what
came to be called the Cole Memo which gave U.S. Attorneys the discretion not to prosecute federal cannabis cases that were otherwise
compliant with applicable state law that had legalized medical or adult-use cannabis and that have implemented strong regulatory
systems to control the cultivation, production, and distribution of cannabis. Accordingly, the Cole Memo provided lawful cannabis-related enterprises
a tacit federal go-ahead in states with legal cannabis programs, provided that the state had adopted and was enforcing strict regulations
and oversight of the medical or adult-use cannabis program in accordance with the specific directives of the Cole Memorandum.
On January 4, 2018, Attorney General Jefferson
Sessions issued a memorandum that rescinded previous DOJ guidance on the state-legal cannabis industry, including the Cole
Memo. Attorney General Sessions wrote that the previous guidance on cannabis law enforcement was unnecessary, given the well-established
principles governing federal prosecution that are already in place. As a result, federal prosecutors could and still can use their
prosecutorial discretion to decide whether to prosecute even state-legal adult-use cannabis activities.
In November 2018, Attorney General Sessions
resigned and left the DOJ. As a nominee, Attorney General William Barr testified before the U.S. Senate and wrote to Congress that,
as Attorney General, he would not seek to prosecute cannabis companies that relied on the Cole Memorandum and are complying with
state law.
Since December 2014, companies that are strictly
complying with state medical cannabis laws have been protected against enforcement for that activity by an amendment
(originally called the Rohrabacher-Blumenauer Amendment, now called the Joyce Amendment) to the Omnibus Spending Bill, which prevents
federal prosecutors from using federal funds to impede the implementation of medical cannabis laws enacted at the state level.
Federal courts have interpreted the provision to bar the DOJ from prosecuting any person or entity in strict compliance with state
medical cannabis laws.
While the protection of the Joyce Amendment
prevents prosecutions, it does not make cannabis legal. Accordingly, if the protection expires, prosecutors could prosecute federally
illegal activity that occurred within the statute of limitations even if the Joyce Amendment protection was in place when the illegal
activity occurred. The protection of the Joyce Amendment depends on its continued inclusion in the federal Omnibus Spending Bill,
or in some other legislation, and entities’ strict compliance with the state medical cannabis laws. That protection has been
extended into 2019 through recent budget negotiations. While industry observers expect Congress to extend the protection in future
Omnibus Spending Bills, there can be no assurance that it will do so.
Although several cannabis law reform bills
are pending in the U.S. Congress, passage of any of them and ultimately the President’s support and approval remain uncertain.
President Trump has stated that he would support federal legislation that would defer to states that have legalized cannabis (in
other words, if a state legalized cannabis, cannabis in that state would not be federally illegal after the point at which the
state legalized it).
Until the U.S. Government changes the law with
respect to cannabis, and particularly if Congress does not extend the protection of state medical cannabis programs, there is a
risk that federal authorities could enforce current federal cannabis law. An increase in federal enforcement against companies
licensed under state cannabis laws could negatively impact the state cannabis industries and, in turn, our revenues, profits, financial
condition, and business model.
Because our business is dependent, in part, upon continued
market acceptance of cannabis by consumers, any negative trends will adversely affect our business operations.
We are dependent on public support, continued
market acceptance and the proliferation of consumers in the legal cannabis markets. While we believe that the market and opportunity
in the space continue to grow, we cannot predict the future growth rate or size of the market. Any downturns in, or negative outlooks
on, the cannabis industry may adversely affect our business and financial condition.
New platform features or changes
to existing platform features could fail to attract new users, retain existing users or generate revenue.
Our business strategy is dependent on
our ability to develop platforms and features to attract new businesses and users, while retaining existing ones. Staffing changes,
changes in user behavior or development of competing platforms may cause Users to switch to alternative platforms or decrease
their use of our platform. There is no guarantee that companies and dispensaries will use these features and we may fail to generate
revenue. Additionally, any of the following events may cause decreased use of our platform:
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Emergence of competing platforms and applications;
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Inability to convince potential companies to join our platform;
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Technical issues on certain platforms or in the cross-compatibility
of multiple platforms;
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Securities breaches with respect to our data;
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A rise in safety or privacy concerns; and
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An increase in the level of spam or undesired content on
the network.
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We are highly dependent on the services
of key executives, the loss of whom could materially harm our business and our strategic direction. If we lose key management
or significant personnel, cannot recruit qualified employees, directors, officers, or other personnel or experience increases
in our compensation costs, our business may materially suffer.
We are highly dependent on our management
team, specifically our Chief Executive Officer, Isaac Dietrich. While we have an employment agreement with Isaac Dietrich, such
employment agreement permits Mr. Dietrich to terminate such agreement upon notice. If we lose key employees, our business may
suffer. Furthermore, our future success will also depend in part on the continued service of our key management personnel and
our ability to identify, hire, and retain additional personnel. We do not carry “key-man” life insurance on the lives
of our executive officer, employees or advisors. We experience intense competition for qualified personnel and may be unable to
attract and retain the personnel necessary for the development of our business. Because of this competition, our compensation
costs may increase significantly.
We will need to obtain additional
financing to fund our operations.
We will need additional capital in the
future to continue to execute our business plan. Therefore, we will be dependent upon additional capital in the form of either
debt or equity to continue our operations. At the present time, we do not have arrangements to raise all of the needed additional
capital, and we will need to identify potential investors and negotiate appropriate arrangements with them. We may not be able
to arrange enough investment within the time the investment is required or that if it is arranged, that it will be on favorable
terms. If we cannot obtain the needed capital, we may not be able to become profitable and may have to curtail or cease our operations.
Additional equity financing, if available, may be dilutive to the holders of our capital stock. Debt financing may involve significant
cash payment obligations, covenants and financial ratios that may restrict our ability to operate and grow our business.
Our monetization strategy is dependent
on many factors outside our control.
There is no guarantee that our efforts
to monetize the MassRoots Retail platform will be successful. Furthermore, our competitors may introduce more advanced technologies
that deliver a greater value proposition to cannabis related businesses in the future. For example, Google, MJ Freeway, LLC and
BioTrackTHC, LLC may decide to introduce features similar to ours to their products, significantly increasing the competitive
environment. In addition, dispensaries may not be able to accept credit or bank cards due to banking regulations, which could
significantly increase the cost and time required for us to generate revenue. All these factors individually or collectively may
preclude us from effectively monetizing our business which would have a material adverse effect on our financial condition and
results of operation.
Changes in Amazon App Store, Apple
App Store or Google Play Store policies could result in our mobile applications being de-listed. In addition, our third party
service providers may decline to provide services due to their policies, or cease to provide services previously provided to us
due to a change of policy.
On November 4, 2014, the MassRoots
App was removed from Apple’s iOS App Store due to the Apple App Store review team changing their app enforcement guidelines
to prohibit all social cannabis applications. After negotiation with Apple and the addition of certain restrictions, the MassRoots
App returned to the Apple App Store in February 2015. Although Apple reversed its decision and included our app in the Apple App
Store, we cannot provide any assurance that Apple’s policy will not change in the future or that our application will not
once again be removed from the Apple App Store.
The Apple App Store is one of the largest
content distribution channels in the world and management believes that it is the only way to effectively distribute our iOS application
to users who own iPhones and iPads. The Apple App Store review team effectively operates as our iOS App’s regulator; they
decide what guidelines iOS apps must operate under and how to enforce such guidelines. The Apple guidelines related to cannabis-related
apps are not published, enforcement of such guidelines is difficult to predict, and the review and appeal processes are conducted
without public oversight. Although we will continue advocating for a more open and transparent Apple App Store review process
that will allow decisions that affect a significant portion of the United States smartphone owning population to be open to public
scrutiny, there can be no assurance that we will be successful in these efforts.
MassRoots, along with other cannabis apps,
regularly encounter issues with the Google Play Store review team in the normal course of business due to Google Play Store’s
absence of clear guidelines regarding cannabis-related apps. In November 2016, the MassRoots App was removed from the Google Play
Store due to a compliance review. However, on March 21, 2017, Google Play approved the MassRoots App for distribution
to Android devices through the Google Play Store once again.
On December 1, 2016, MassRoots’
Android application received approval from the Amazon App Store for listing, and is currently available for download on the Amazon
App Store.
In addition to challenges we face with
respect to compliance with the Amazon App Store, Apple App Store and Google Play Store guidelines, service providers may refuse
to provide services to us even if they previously provided such services due to our status as a cannabis related company. For
example, in January 2016, after building a strong presence on Instagram and having previously used our Instagram account
to grow our user count and highlight posts about our business, our account was suspended without warning by Instagram. While the
account was reinstated on February 26, 2016, we cannot provide any assurance that our Instagram account will not be suspended
in the future and if suspended that our account will be reinstated. Furthermore, we may face similar situations in the future
with our other services providers that may cause disruptions to our business plan, all of which may have a material adverse effect
on our business and financial condition.
Government actions or digital distribution
platform restrictions could result in our products and services being unavailable in certain geographic regions which may harm
our future growth.
Due to our connections to the cannabis
industry, governments and government agencies could ban or cause our network or apps to become unavailable in certain regions
and jurisdictions. This could greatly impair or prevent us from registering new users in affected areas and prevent current users
from accessing our network. In addition, government action taken against our service providers or partners could cause our network
to become unavailable for extended periods of time.
As discussed herein, as part of our agreement
with Apple in connection with our application being returned to the Apple App Store, we agreed to limit registration of new members
within our iOS application to the locations where cannabis is permitted under state law (medicinally or recreationally). This
restriction prohibits users in several states and countries from accessing our network. Expansions of such policies by Apple,
Google or Amazon may slow our user registration rate which may have a material adverse effect on our business and future prospects.
Failure to generate user growth
or engagement could greatly harm our business model.
Our business model involves attracting
users to our mobile application and linking their MassRoots account with their profile in MassRoots Retail. There is no guarantee
that growth strategies used in the past will continue to bring new users to our network or that users will agree to link their
MassRoots and MassRoots Retail profiles. Changes in relationships with our partners, contractors and businesses we retain to grow
our network may result in significant increases in the cost to acquire new users. In addition, new users may fail to engage with
our network to the same extent current users are engaging with our network resulting in decreased use of our network. Decreases
in the size of our user base and/or decreased engagement on our network may impair our ability to generate revenue.
Failure to attract clients could
greatly harm our ability to generate revenue.
Our ability to generate revenue is dependent
on the continued growth of our platform. If we are unable to continue to grow our network or bring new clients to our network,
our ability to generate revenue would be greatly compromised. There is no guarantee businesses will want to join our platform
or that we will be able to generate revenue from our existing user base.
Historically, we have generated
most of our revenue from advertising. The loss of clients or reduction in spending by advertisers may have a material adverse
effect on our business.
Historically, we have generated most of
our revenue from third parties advertising on our website. Some of our third party advertisers include cannabis companies such
as regulated cannabis dispensaries and mainstream brands such as Uber. As is common in the industry, our advertisers usually do
not have long-term advertising commitments with us. It is possible that such advertisers may not continue to do business with
us for several reasons including that they no longer believe that their advertisements on our website will generate a competitive
return relative to other alternatives or in the alternative they may reduce the prices they are willing to pay to advertise their
products and services on our website.
Our revenue could be adversely affected
by a number of other factors including, but not limited to:
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decreases in User engagement, including time spent on our website
and mobile app;
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our inability to improve our analytics and measurement solutions
that demonstrate the value of our ads and other commercial content;
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loss of market share to our competitors;
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adverse legal developments relating to our business, including
legislative and regulatory developments and developments in litigation, if any;
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adverse media reports or other negative publicity involving
us or other companies in our industry; and
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the impact of macroeconomic conditions and conditions in the
industry in general.
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The occurrence of any of these or other
factors could result in decreased traffic to our website which may result in less views of third party ads. If we are unable to
generate traffic to our website and as a result third party advertisers no longer continue to do business with us, our business,
financial conditions and results of operation may be materially affected.
User engagement and growth depends
on software and device updates beyond our control.
Our mobile application and websites are
currently available on multiple operating systems, including iOS and Android, across multiple different manufacturers, including
Motorola, LG, Apple and Samsung and on thousands of devices. Changes to the device infrastructure or software updates on such
devices could render our platforms and services useless or inoperable and require users to utilize our website rather than our
mobile application which may result in decreased user engagement. Any decrease in user engagement may devalue our value proposition
to third party advertisers who may no longer continue to do business with us which may have a material adverse effect on business,
financial conditions and results of operation.
We may be unable to manage growth.
Successful implementation of our business
strategy requires us to manage our growth. Growth could place an increasing strain on our management and financial resources.
To manage growth effectively, we need to continuously:
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Evaluate definitive business strategies, goals and objectives;
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Maintain a system of management controls; and
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Attract and retain qualified personnel, as well as, develop,
train and manage management-level and other employees.
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If we fail to manage our growth effectively,
our business, financial condition or operating results could be materially harmed.
We may not be able to compete successfully
with other established companies offering the same or similar services and, as a result, we may not achieve our projected revenue
and user targets.
We compete with both start-up and established
technology companies. Our competitors may have substantially greater financial, marketing and other resources than we do and may
have been in business longer than we have or have greater name recognition and be better established in the technological or cannabis
markets than we are. If we are unable to compete successfully with other businesses in our existing market, we may not achieve
our projected revenue and/or user targets which may have a material adverse effect on our financial condition.
Expansion by our well-established
competitors into the cannabis industry could prevent us from realizing anticipated growth in users and revenues.
Competitors in the social network space,
such as Twitter and Facebook, have continued to expand their businesses in recent years into other social network markets. If
they decided to expand their social networks into the cannabis community, this could harm the growth of our business and user
base and cause our revenues to be lower than we expect. In addition, competitors in the point-of-sale and compliance software
space, such as IQ Metrics, may continue to expand their businesses into the cannabis space which could harm the growth of our
business and user base and cause our revenues to be lower than we expect.
Government regulation of the Internet
and e-commerce is evolving, and unfavorable changes could substantially harm our business and results of operations.
We are subject to general business regulations
and laws as well as Federal and state regulations and laws specifically governing the Internet and e-commerce. Existing and future
laws and regulations may impede the growth of the Internet, e-commerce or other online services, and increase the cost of providing
online services. These regulations and laws may cover sweepstakes, taxation, tariffs, user privacy, data protection, pricing,
content, copyrights, distribution, electronic contracts and other communications, consumer protection, broadband residential Internet
access and the characteristics and quality of services. It is not clear how existing laws governing issues such as property ownership,
sales, use and other taxes, personal privacy apply to the Internet and e-commerce. Unfavorable resolution of these issues may
harm our business and results of operations.
The
failure to enforce and maintain our intellectual property rights could enable others to use trademarks used by our business which
could adversely affect the value of the Company.
The
success of our business depends on our continued ability to use our existing tradename in order to increase our brand awareness.
As of the date hereof, MASSROOTS and TOKE are federally registered trademarks owned by us, ODAVA is a state registered trademark
owned by us and RETAIL is a state registered trademark of Odava, Inc. The unauthorized use or other misappropriation of any of
the foregoing trademarks could diminish the value of our business which would have a material adverse effect on our financial
condition and results of operation.
Due
to our involvement in the cannabis industry, we may have a difficult time obtaining insurance coverage for our business which
may expose us to additional risk and financial liabilities.
Insurance
that may otherwise be readily available, such as workers compensation, general liability, and directors and officers insurance,
is more expensive and difficult for us to obtain because we are a service provider to companies in the cannabis industry. Although
we currently maintain director’s and officer’s liability insurance there can be no assurance that we will be able
to maintain such policy in the future or at costs that are affordable to us due to the nature of our business operations. If we
are unable to maintain insurance related to our Company and business operations we will be exposed to additional risk and financial
liabilities which may have a material adverse effect on our business and financial condition.
We and our customers may have difficulty
accessing the service of banks, which may make it difficult for us and for them to sell our products.
Financial transactions involving proceeds
generated by cannabis-related activities can form the basis for prosecution under the U.S. federal money laundering statutes,
unlicensed money transmitter statutes and the U.S. Bank Secrecy Act. Guidance issued by the Financial Crimes Enforcement
Network clarifies how financial institutions can provide services to cannabis-related businesses consistent with their obligations
under the Bank Secrecy Act. Furthermore, since the rescission by U.S. Attorney General Sessions on January 4, 2018 of the
Cole Memo, U.S. federal prosecutors have had greater discretion when determining whether to charge institutions or individuals
with any of the financial crimes described above based upon cannabis-related activity. As a result, given these risks and
their own related disclosure requirements, some banks remain hesitant to offer banking services to cannabis-related businesses.
Consequently, those businesses involved in the cannabis industry continue to encounter difficulty establishing banking relationships.
While we do not presently have challenges with our banking relationships, should we have an inability to maintain our current
bank accounts, or the inability of our customers to maintain their current banking relationships, it would be difficult for us
to operate our business, may increase our operating costs, could pose additional operational, logistical and security challenges
and could result in our inability to implement our business plan.
Our
independent registered accounting firm has expressed concerns about our ability to continue as a going concern.
The
report of our independent registered accounting firm expresses concern about our ability to continue as a going concern based
on the absence of significant revenues, our significant losses from operations and our need for additional financing to fund all
of our operations. It is not possible at this time for us to predict with assurance the potential success of our business. The
revenue and income potential of our proposed business and operations are unknown. If we cannot continue as a viable entity, we
may be unable to continue our operations and you may lose some or all of your investment in our securities.
In
the past we have experienced material weaknesses in our internal control over financial reporting, which if continued, could impair
our financial condition.
As
reported in our Annual Report on Form 10-K, our management concluded that our internal control over financial reporting was not
effective as of December 31, 2018 and 2017 due to material weaknesses regarding our controls and procedures. The Company did not
have sufficient segregation of duties to support its internal control over financial reporting. Due to our small size and limited
resources, segregation of all conflicting duties has not always been possible and may not be economically feasible in the near
term; however, we do expect to hire additional accounting personnel in the near future. We have and do endeavor to take appropriate
and reasonable steps to make improvements to remediate these deficiencies. If we have continued material weaknesses in our internal
financial reporting, our financial condition could be impaired or we may have to restate our financials, which could cause us
to expend additional funds that would have a material impact on our ability to generate profits and on the success of our business.
Risks
Relating to Use of New Technology
Government
regulation of the Internet, blockchain technology and cryptocurrency is evolving, and unfavorable changes could substantially
harm us and our subsidiary.
We
are subject to federal and state regulations and laws governing the Internet, blockchain technology and e-commerce. Existing and
future laws and regulations may impede the growth of the Internet, blockchain technology and e-commerce and/or other online services,
and may increase the cost of providing online services. Changes in regulations and laws may effect sweepstakes, taxation, tariffs,
user privacy, data protection, pricing, content, intellectual property rights, distribution, electronic contracts and other communications,
consumer protection, broadband residential Internet access and the characteristics and quality of services. In addition, many
governments and regulatory agencies have not established specific regulations pertaining to blockchain technology and other instruments
that use such technology and no assurance can be given that such governments or regulatory authorities will not implement adverse
changes to laws and regulations. Any such changes to federal and state regulations and laws may harm our and our subsidiary’s
business and results of operations.
There
are no assurances that we will be successful in developing blockchain-based solutions, that such solutions will be economically
viable or that such solutions will be able to generate any revenue.
While
we are devoting development resources to exploring the feasibility of developing block-chain based solutions, there can be no
assurances that we will be successful in implementing such solutions, that they will be economically viable, or such solutions
will generate any revenue.
The
development and acceptance of digital instruments is subject to a variety of factors which are difficult to evaluate.
We
may explore the use of digital instruments for use in connection with our platform or programs; however, there can be no assurance
that we will adopt or use any such instruments, or be successful in doing so. The development and use of such instruments is subject
to a variety of factors that are difficult to evaluate including, but not limited to:
|
●
|
the problems, expenses,
difficulties, complications, and delays frequently encountered in connection with the development of a new product or service
based upon relatively new and developing technology;
|
|
●
|
the acceptance and
use of the new technology by consumers;
|
|
●
|
regulation by governmental
and quasi-governmental agencies;
|
|
●
|
the maintenance
and development of the protocols for the new technology;
|
|
●
|
generic economic
conditions and the regulatory environment relating to the new technology; and
|
|
●
|
the availability
and popularity of other forms or methods of buying and selling goods and services.
|
The
slowing or stopping of the development, general acceptance, adoption and usage of digital instruments or compliance with regulations
by governmental and quasi-governmental agencies may deter or delay the acceptance of such instruments.
The
potential application of U.S. laws with respect to traditional investment securities to digital instruments is unclear
.
The
use of digital instruments is novel and the application of U.S. federal and state securities laws is unclear in many respects.
Specifically, regulation with respect to such instruments is currently undeveloped, likely to evolve, may vary significantly among
international, federal, state and local jurisdictions and is subject to significant uncertainty. Various legislative and executive
bodies in the United States and in other countries may in the future adopt laws, regulations, or guidance, or take other actions,
which may severely impact the permissibility of the use of digital instruments, the technology behind them or the means of transaction
in or transferring them. In the event that securities laws restrict the ability for digital instruments to be transferred in a
manner similar to traditional investment securities, this would have a material adverse effect on the value of such instruments,
which could result in a material impact on the use of such instruments as a possible means to provide rewards on the MassRoots
platform.
Our
failure to comply with any laws, rules and regulations, some of which may not exist yet or that are subject to interpretations
that may be subject to change, could result in a variety of adverse consequences, including civil penalties and fines. The effect
of any future regulatory change is impossible to predict, but such change could be substantial and materially adverse to the adoption
and value our new technology, when and if developed, accepted and adopted.
Risks
Relating to our Common Stock
Due
to our connection to the cannabis industry, there can be no assurance that our common stock will ever be approved for listing
on a national securities exchange.
Currently,
shares of our common stock are quoted on the OTCQB and are not traded or listed on any securities exchange. Even if we desire
to have our shares listed on a national securities exchange, the fact that our network is associated with the use of cannabis,
the legal status of which is uncertain at the state and Federal level, may make any efforts to become listed on a securities exchange
more problematic. While we remain determined to work towards getting our securities listed on a national exchange, there can be
no assurance that this will occur. As a result we may never develop an active trading market for our securities which may limit
our investors’ ability to liquidate their investments.
The
market price of our common stock may be volatile and adversely affected by several factors.
The
market price of our common stock could fluctuate significantly in response to various factors and events, including, but not limited
to: our ability to execute our business plan; operating results below expectations; announcements regarding regulatory developments
with respect to the cannabis industry; our issuance of additional securities, including debt or equity or a combination thereof,
necessary to fund our operating expenses; announcements of technological innovations or new products by us or our competitors;
and period-to-period fluctuations in our financial results.
In
addition, the securities markets have from time to time experienced significant price and volume fluctuations that are unrelated
to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market
price of our common stock.
Our
common stock is subject to the “penny stock” rules of the SEC and the trading market in the securities is limited, which
makes transactions in the stock cumbersome and may reduce the value of an investment in the stock.
Rule
15g-9 under the Exchange Act establishes the definition of a “penny stock,” for the purposes relevant to us, as any
equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject
to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: (a) that a broker or dealer
approve a person’s account for transactions in penny stocks; and (b) the broker or dealer receive from the investor a written
agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In
order to approve a person’s account for transactions in penny stocks, the broker or dealer must: (a) obtain financial information
and investment experience objectives of the person and (b) make a reasonable determination that the transactions in penny stocks
are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating
the risks of transactions in penny stocks.
The
broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating
to the penny stock market, which, in highlight form: (a) sets forth the basis on which the broker or dealer made the suitability
determination; and (b) confirms that the broker or dealer received a signed, written agreement from the investor prior to the
transaction. Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock”
rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of
our common stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the
commissions payable to both the broker or dealer and the registered representative, current quotations for the securities and
the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have
to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in
penny stocks.
We
are an “emerging growth company” within the meaning of the Securities Act, and if we decide to take advantage of certain
exemptions from various reporting requirements applicable to emerging growth companies, our common stock could be less attractive
to investors.
For
as long as we remain an “emerging growth company”, as defined in the Jumpstart Our Business Startups (“JOBS”)
Act, we will have the option to take advantage of certain exemptions from various reporting and other requirements that are applicable
to other public companies that are not “emerging growth companies,” including, but not limited to, not being required
to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley
Act”), and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder
approval of any golden parachute payments not previously approved. We may take advantage of these and other exemptions until we
are no longer an “emerging growth company”. In addition, the JOBS Act provides that an emerging growth company
can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with
new or revised accounting standards.
We
will remain an emerging growth company until the earliest of (1) the last day of the fiscal year during which we have total
annual gross revenues of $1.07 billion or more, (2) the last day of the fiscal year following the fifth anniversary of the
completion of our initial public offering, (3) the date on which we have, during the previous three-year period, issued more
than $1.0 billion in non-convertible debt, and (4) the date on which we are deemed to be a “large accelerated filer”
under the Exchange Act (i.e., the first day of the fiscal year after we have (a) more than $700,000,000 in outstanding common
equity held by our non-affiliates, measured each year on the last day of our second fiscal quarter, and (b) been public for
at least 12 months).
Even
after we no longer qualify as an emerging growth company, we may still qualify as a “smaller reporting company,” which
would allow us to take advantage of many of the same exemptions from disclosure requirements including exemption from compliance
with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and reduced disclosure obligations regarding
executive compensation in our periodic reports and proxy statements. We cannot predict if investors will find our common stock
less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result,
there may be a less active trading market for our common stock and our stock price may be more volatile.
We
do not anticipate paying dividends on our common stock, and investors may lose the entire amount of their investment.
Cash
dividends have never been declared or paid on our common stock, and we do not anticipate such a declaration or payment for the
foreseeable future. We expect to use future earnings, if any, to fund business growth. Therefore, stockholders will not receive
any funds absent a sale of their shares of common stock. If we do not pay dividends, our common stock may be less valuable because
a return on your investment will only occur if our stock price appreciates. We cannot assure stockholders of a positive return
on their investment when they sell their shares, nor can we assure that stockholders will not lose the entire amount of their
investment.
You
could lose all of your investment.
An
investment in our securities is speculative and involves a high degree of risk. Potential investors should be aware that the value
of an investment in the Company may go down as well as up. In addition, there can be no certainty that the market value of
an investment in the Company will fully reflect its underlying value. You could lose your entire investment.
Our
management controls a large block of our common stock that will allow them to control us.
As
of the date of this Annual Report, members of our management team beneficially own approximately 12.62% of our outstanding common
stock. As a result, management may have the ability to control substantially all matters submitted to our stockholders for approval
including:
|
●
|
election and removal
of our directors;
|
|
●
|
amendment of our
Second Amended and Restated Certificate of Incorporation (“Certificate of Incorporation”) or Bylaws; and
|
|
●
|
adoption of measures
that could delay or prevent a change in control or impede a merger, takeover or other business combination involving us.
|
In
addition, management’s stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting
to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over
our stock price. Any additional investors will own a minority percentage of our common stock and will have minority voting rights.
Because
we can issue additional shares of common stock, purchasers of our common stock may incur immediate dilution and experience further
dilution.
We
are authorized to issue up to 500,000,000 shares of common stock of which 182,390,849 shares of common stock are issued and outstanding
as of April 11, 2019. Our Board of Directors has the authority to cause us to issue additional shares of common stock without
consent of any of stockholders. In addition, we are authorized to issued up to 10,000,000 shares of preferred stock of which 0
shares of preferred stock are issued and outstanding as of April 11, 2019. Consequently, our stockholders may experience further
dilution in their ownership of our stock in the future,
which could have an adverse
effect on the trading market for our
common stock
.
Furthermore, our Certificate
of Incorporation gives our Board the right to create one or more new series of preferred stock. As a result, our Board may, without
stockholder approval, issue preferred stock with voting, dividend, conversion, liquidation or other rights that could adversely
affect the voting power and equity interests of the holders of our common stock. Preferred stock, which could be issued with the
right to more than one vote per share, could be used to discourage, delay or prevent a change of control of our Company, which
could materially adversely affect the price of our common stock.
Our
Certificate of Incorporation contains an exclusive forum provision with respect to all Internal Corporate Claims, which may limit
a stockholder’s ability to bring a claim in a judicial forum that it finds favorable and discourage lawsuits against us
or our current or former directors or officers and/or stockholders in such capacity
.
Our
Certificate of Incorporation provides that all Internal Corporate Claims (as defined in the Certificate of Incorporation) must
be brought solely and exclusively in the Court of Chancery of the State of Delaware (or, if such court does not have jurisdiction,
the Superior Court of the State of Delaware, or, if such other court does not have jurisdiction, the United States District Court
for the District of Delaware). All of our stockholders are subject to the exclusive forum provision of our Certificate of Incorporation.
The exclusive forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable
for disputes based upon Internal Corporate Claims, which may discourage lawsuits against us or our current or former directors
or officers and/or stockholders in such capacity. In addition, if a court were to find this exclusive-forum provision to be inapplicable
or unenforceable in an action, we may incur costs associated with resolving the dispute in other jurisdictions, which could have
a material adverse effect on our business and operations.
ITEM
1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM
2. PROPERTIES
On
July 24, 2018, we entered into a Membership Agreement (the “Membership Agreement”) with WeWork pursuant to which we
transferred our WeWork lease to our office located at 7083 Hollywood Blvd., Los Angeles, California 90028 effective as of August
1, 2018. The term of the Membership Agreement is for one month which term shall automatically be renewed for successive one month
terms unless terminated by either party pursuant to the terms of the Membership Agreement. We pay a fee of $4,125 per month for
the leased premises.
We
do not own any properties or land.
We
believe that our facilities are adequate for our current needs and that, if required, we will be able to expand our current space
or locate suitable new office space and obtain a suitable replacement for our executive and administrative headquarters.
ITEM
3. LEGAL PROCEEDINGS
We
are not currently a party to any legal proceedings, and we are not aware of any pending or potential legal actions.
ITEM
4. MINE SAFETY DISCLOSURES
Not
applicable.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors
and Executive Officers
The
names and ages of our Directors and Executive Officers are set forth below. All Directors are elected annually by the stockholders
to serve until the next annual meeting of the stockholders and until their successors are duly elected and qualified. The officers
are elected by our Board.
Name
|
|
Age
|
|
Executive
Position
|
Isaac Dietrich
|
|
27
|
|
Chief Executive Officer and Chairman of the Board of Directors
|
|
|
|
|
|
Jesus Quintero
|
|
56
|
|
Chief Financial Officer
|
|
|
|
|
|
Charles Blum
|
|
81
|
|
Director
|
|
|
|
|
|
Cecil Kyte
|
|
48
|
|
Director
|
|
|
|
|
|
Graham Farrar
|
|
42
|
|
Director
|
Isaac
Dietrich, Chief Executive Officer, Chairman of the Board and Director –
Isaac Dietrich is the founder, largest
shareholder, and has been a director of the Company since our inception. He also serves as Chief Executive Officer and Chairman
of the Board effective as of December 13, 2017. In addition, he previously held the following positions with the Company: Chief
Executive Officer (April 2013 – October 2017); Chairman of the Board of the Company (April 2013 – October 2017); and
Chief Financial Officer (April 2013 – May 2014 and August 2017 – October 2017). In his various positions, Mr. Dietrich
has been responsible for executing MassRoots’ strategic business development. Mr. Dietrich was the co-founder and majority
shareholder of RoboCent.com from June 2012 where he helped scale the business until his buyout in December 2016. He has served
as Chairman of 2Meet, Inc. since May 2017. He also founded Tidewater Campaign Solutions, LLC, a Virginia Beach-based political
strategy firm that was retained by 30 political local and congressional campaigns and political action committees from January
2010 to December 2012. From February 2010 to December 2010, Mr. Dietrich served as Field Director for former Congressman E. Scott
Rigell’s campaign. Mr. Dietrich is qualified to serve as a member of the Board because of his business management experience
and his years of service with us in various executive capacities together with his knowledge of our Company and relevant experience
in the cannabis industry.
Jesus
Quintero, Chief Financial Officer –
From January 2017 through December 2017 Jesus Quintero served as a financial
consultant to several domestic and international companies including, but not limited to, Premier Radiology Services, ATR Wireless
Inc. and GAM Distribution Corporation. From May 2014 until December 2016, Mr. Quintero served as Chief Financial Officer of the
Company, and from January 2013 until October 2014, he served as Chief Financial Officer of Brazil Interactive Media. Mr. Quintero
has held senior finance positions with Avnet Inc., Latin Node, Inc., Globetel Communications Corp and Telefonica of Spain and
has extensive experience in public company reporting and SEC compliance matters. His prior experience also includes tenure with
PricewaterhouseCoopers and Deloitte & Touch. Mr. Quintero received a B.S. in Accounting from St. John’s University and
is a Certified Public Accountant in the State of New York.
Charles
R. Blum, Director
– Charles Blum has served as a director of MassRoots since December 2017. Mr. Blum served as
President and Chief Executive Officer of QS Energy (formerly STWA, Inc.) from July 2007 to January 2009, and until June 2017 he
served as a member of the Board of QS Energy. Mr. Blum spent 22 years as the President/CEO of the Specialty Equipment Market
Association (“SEMA”). SEMA, a trade group representing 6,500 business members who are actively engaged in the manufacture
and distribution of automotive parts and accessories. SEMA produces the world’s largest automotive aftermarket Trade Show
which is held annually in Las Vegas, Nevada. Mr. Blum led the association as its members grew from a handful of small entrepreneurial
companies into an industry membership that sells over 31 billion dollars of product at the retail level annually. Mr. Blum is
qualified to serve as a member of the Board because he has a proven record of accomplishment as a senior executive.
Cecil
Kyte, Director
– Cecile Kyte has served as a director of MassRoots since December 2017. Mr. Kyte has served in
various capacities at Rightscorp’s, including serving as Chief Executive Officer since June 2015, Chief Financial Officer
since October 2016 and Chairman of the company’s board of directors since December 2015. Rightscorp’s mission is to
support copyright holders’ abilities to litigate and monetize efforts aimed at piracy and peer to peer infringement on the
internet. From 2007 to 2013, Mr. Kyte served as CEO and Chairman of Save The World Air, Inc., a California based publicly traded
energy technology company. Under his stewardship, that company grew from roughly $10 million in market capitalization in 2007
to an excess of $350 million by 2013 and accessed roughly $40 million in equity based capital. From 2008 until 2013, Mr. Kyte
served as Chief Executive Officer and Chairman of the Board of QS Energy (formerly STWA, Inc.). Additionally, having been a pilot
for 30 years, Mr. Kyte has served as an airline captain and flight instructor who is recognized and included in the prestigious
FAA Airmen Certification database. This database recognizes pilots who have met or exceeded the high educational, licensing and
medical standards established by the Federal Aviation Administration. Mr. Kyte received a Bachelor of Science Degree in Business
Administration with emphasis in Accounting from California State University, Long Beach. Mr. Kyte is qualified to serve as a member
of the Board because of his previous and current experience running a public company, as well as his educational requirements
to hold such a position.
Graham
Farrar, Director
– Graham Farrar has served as Director of MassRoots since February 2018. He is the owner and founder
of Elite Garden Wholesale, a business which provides supplies for the growth of hydroponic crops, since January 2016. In addition,
since April 2016, Mr. Farrar has also served as the President of G&H Supply Company which is a licensed commercial cannabis
grower. From March 2014 until October 2015, Mr. Farrar served as Chief Product Officer of iStoryTime Inc, and from April 2008
until March 2014 he served as the founder and owner of zukka, a company which published the iStoryTime library of narrated
and interactive children’s books for iPhones, iPads, Kindles and Nooks. In addition, Mr. Farrar has served in various other
capacities including, but not limited to: Senior Account Executive for Network Hardware Resale; Manager, World Wide Customer Support
and Senior Manager Quality Assurance for Sonos Inc.; and Senior Manager Partner Sales Engineers and Manager, World Wide Technical
Sales for Openwave Systems (previously Software.com). Furthermore, Mr. Farrar has served as Chair of Education Outreach Committee
and a member of the board of Santa Barbara Bowl Foundation since January 2011 and August 2004, respectively. In addition, from
January 2001 until May 2010, Mr. Farrar served as a member of the board of Heal the Ocean and from January 2000 until March 2007
he served as a member of the board of Seacology. Mr. Farrar is qualified to serve as a member of the Company’s Board
because of his experience in the cannabis industry as well as his experience serving a member of the board of various organizations.
Family
Relationships
There
are no family relationships among our directors and executive officers.
Other
Directorships
Other
than as disclosed above, none of the directors of the Company are also directors of issuers with a class of securities registered
under Section 12 of the Exchange Act (or which otherwise are required to file periodic reports under the Exchange Act).
Legal
Proceedings
We
are not aware of any of our directors or officers being involved in any legal proceedings in the past ten years relating to any
matters in bankruptcy, insolvency, criminal proceedings (other than traffic and other minor offenses) or being subject to any
of the items set forth under Item 401(f) of Regulation S-K.
CORPORATE
GOVERNANCE
Governance
of Our Company
We
seek to maintain high standards of business conduct and corporate governance, which we believe are fundamental to the overall
success of our business, serving our stockholders well and maintaining our integrity in the marketplace. Our corporate governance
guidelines and Code of Conduct and Ethics, together with our Certificate of Incorporation, Bylaws and the charters for each of
our Board committees, form the basis for our corporate governance framework. We also are subject to certain provisions of the
Sarbanes-Oxley Act and the rules and regulations of the SEC. The full text of the Code of Conduct and Ethics is available on our
website at
www.massroots.com/investors/governance
and is also filed as an exhibit to our Annual Report on Form
10-K for the year ended December 31, 2014 as filed with the SEC on April 1, 2015.
As
described below, our Board has established three standing committees to assist it in fulfilling its responsibilities to the Company
and its stockholders: The Audit Committee, the Compensation Committee and the Nominating and Corporate Governance Committee.
Our
Board of Directors
Our
Board currently consists of four members. The number of directors on our Board can be evaluated and amended by action of our Board.
Our
Board has decided that it would judge the independence of its directors by the heightened standards established by the Nasdaq
Stock Market, despite the Company not being subject to these standards at this time. Accordingly, the Board has determined that
our three non-employee directors, Cecil Kyte, Graham Farrar and Charles R. Blum each meet the independence standards established
by the Nasdaq Stock Market and the applicable independence rules and regulations of the SEC, including the rules relating to the
independence of the members of our Audit Committee and Compensation Committee. Our Board considers a director to be independent
when the director is not an officer or employee of the Company or its subsidiaries, does not have any relationship which would,
or could reasonably appear to, materially interfere with the independent judgment of such director, and the director otherwise
meets the independence requirements under the listing standards of the Nasdaq Stock Market and the rules and regulations of the
SEC.
Stockholder
Communications.
Although we do not have a formal policy regarding communications with the Board, stockholders may communicate
with the Board by writing to us at 7083 Hollywood Blvd., Office 4084 Los Angeles, CA 90028, Attention: Legal. Stockholders who
would like their submission directed to a member of the Board may so specify, and the communication will be forwarded, as appropriate.
Please note that the foregoing communication procedure does not apply to (i) stockholder proposals pursuant to Exchange Act Rule
14a-8 and communications made in connection with such proposals or (ii) service of process or any other notice in a legal proceeding.
Board
Committees
On
December 9, 2015, our Board designated the following three committees of the Board: the Audit Committee, the Compensation
Committee and the Nominating and Corporate Governance Committee.
Audit
Committee
.
The Board appointed each of Cecil Kyte, Graham Farrar and Charles R. Blum as a member of the Audit
Committee. Cecil Kyte is the Chairman of the Audit Committee. The Audit Committee is responsible for, among other things, overseeing
the financial reporting and audit process and evaluating our internal controls over financial reporting. The Board has determined
that Cecil Kyte is an “audit committee financial expert” serving on its Audit Committee. The Board has determined
that each member of the Audit Committee is “independent,” as that term is defined by applicable SEC rules. In addition,
the Board has determined that each member of the Audit Committee is “independent,” as that term is defined by the
rules of the Nasdaq Stock Market. A copy of the Audit Committee Charter is available on our website at
www.massroots.com/investors/governance
.
Compensation
Committee
.
The Board appointed each of Cecil Kyte, Graham Farrar and Charles R. Blum as a member of the Compensation
Committee. Cecil Kyte is the Chairman of the Compensation Committee. The Compensation Committee is responsible for, among other
things, establishing and overseeing the Company’s executive and equity compensation programs, establishing performance goals
and objectives, and evaluating performance against such goals and objectives. The Board has determined that each member of the
Compensation Committee is “independent,” as that term is defined by applicable SEC rules. In addition, the Board has
determined that each member of the Compensation Committee is “independent,” as that term is defined by the rules of
the Nasdaq Stock Market. A copy of the Compensation Committee Charter is available on our website at
www.massroots.com/investors/governance
.
Nominating
and Corporate Governance Committee
.
The Board appointed each of Cecil Kyte, Graham Farrar and Charles R. Blum
as a member of the Nominating and Corporate Governance Committee. Cecil Kyte is the Chairman of the Nominating and Corporate Governance
Committee. The Nominating and Corporate Governance Committee is responsible for, among other things, identifying and recommending
candidates to fill vacancies occurring between annual stockholder meetings and reviewing the Company’s policies and programs
relating to matters of corporate citizenship, including public issues of significance to the Company and its stockholders. The
Board has determined that each member of the Nominating and Corporate Governance Committee is “independent,” as that
term is defined by applicable SEC rules. In addition, the Board has determined that each member of the Nominating and Corporate
Governance Committee is “independent,” as that term is defined by the rules of the Nasdaq Stock Market. A copy of
the Nominating and Corporate Governance Committee Charter is available on our website at
www.massroots.com/investors/governance
.
Changes
in Nominating Procedures
None.
Section
16 Reporting Compliance
Section
16(a) of the Exchange Act requires our directors and executive officers and persons who beneficially own more than 10% of our
outstanding shares of common stock (collectively, “Reporting Persons”) to file with the SEC initial reports of ownership
and reports of changes in ownership in our common stock and other equity securities. Such persons are required by SEC regulations
to furnish to us copies of all Section 16(a) forms they file. To our knowledge, based solely on our review of copies of the reports
received by us or written representations from certain Reporting Persons that no other reports were required, we believe that
during the fiscal year ended December 31, 2018, all filing requirements applicable to the Reporting Persons were timely met except:
|
●
|
Charles Blum failed
to file a Form 3 on time and failed to report one transaction on time on a Form 4;
|
|
|
|
|
●
|
Nathan Shelton failed
to file a Form 3 on time;
|
|
|
|
|
●
|
Cecil Kyte failed
to file a Form 3 on time and failed to report one transaction on time on a Form 4;
|
|
|
|
|
●
|
Graham Farrar filed
to report on transaction on time on a Form 4;
|
|
|
|
|
●
|
Jesus Quintero failed
to report one transaction on time on a Form 3 and failed to report two transactions on time on two Form 4s; and
|
|
|
|
|
●
|
Steven Osborn failed
to report 34 transactions on time on two Form 4s.
|
ITEM
11. EXECUTIVE COMPENSATION
Named
Executive Officers
Our
“named executive officers” for the 2018 fiscal year consisted of the following individuals:
|
|
Isaac
Dietrich, Chief Executive Officer
Jesus
Quintero, Chief Financial Officer
|
No
other executive officers earned over $100,000 during the previous fiscal year.
Summary Compensation Table
The table below summarizes all compensation
awarded to, earned by, or paid to our Chief Executive Officer and our two most highly compensated executive officers (the “named
executive officers”) at the end of our last fiscal year for all services rendered in all capacities to us during the years
during which they served as executive officers. Where a named executive officer is also a director, all compensation related to
such individuals position as an officer.
Name &
Principal
Position
|
|
Year
|
|
Salary
$
|
|
|
Bonus
$
|
|
|
Stock
Awards (1)
$
|
|
|
Option
Awards (1)
$
|
|
|
Non-Equity
Incentive Plan
Compensation
$
|
|
|
All Other
Compensation
$
|
|
|
Total
$
|
|
Isaac Dietrich
|
|
2018
|
|
|
145,000
|
|
|
|
132,627
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
94,500 (7)
|
|
|
|
372,127
|
|
Chief Executive Officer, Director
|
|
2017
|
|
|
96,971
|
|
|
|
190,659
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
287,630
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven Osborn
|
|
2018
|
|
|
—
|
|
|
|
10,000
|
|
|
|
434,252
|
(3)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
444,252
|
|
former Chief Technology Officer (2)
|
|
2017
|
|
|
57,442
|
|
|
|
—
|
|
|
|
173,698
|
(3)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
231,140
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jesus Quintero
|
|
2018
|
|
|
68,000
|
|
|
|
—
|
|
|
|
211,875
|
(5)
|
|
|
56,923
|
(6)
|
|
|
—
|
|
|
|
—
|
|
|
|
336,798
|
|
Chief Financial Officer (4)
|
|
2017
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
(1)
|
|
These amounts are the aggregate fair value of the
equity compensation incurred by the Company for payments to executives during the fiscal year. The aggregate fair value is
computed in accordance with FASB ASC Topic 718. The fair market value was calculated using the Black-Scholes options pricing
model. Assumptions underlying the valuation of each specific award are included in Note 9 of our Financial Statements included
in this Annual Report on Form 10-K.
|
|
|
|
(2)
|
|
Appointed as Chief Technology Officer on October 16, 2017 and
resigned on January 8, 2018.
|
|
|
|
(3)
|
|
On July 18, 2017 and July 19, 2017, the Company’s Compensation Committee approved the grant of 50,000
restricted shares of common stock which vested in full upon grant and 1,000,000 restricted shares of common stock which vested
over a period of one year to Mr. Osborn, respectively. Upon Mr. Osborn’s resignation as Chief Technology Officer in January
2018, stock awards were fully vested.
|
|
|
|
(4)
|
|
Appointed as Chief Financial Officer
on January 10, 2018.
|
|
|
|
(5)
|
|
On January 10, 2018, the Company’s
Compensation Committee approved the grant of 250,000 restricted shares of common stock to Mr. Quintero which vested in full upon
grant.
|
|
|
|
(6)
|
|
On July 26, 2018, the Company’s Compensation Committee
approved the grant of options to purchase up to 500,000 shares of common stock at $0.20 per share to Mr. Quintero which options
vested in full upon grant.
|
|
|
|
(7)
|
|
During fiscal year 2018, Mr. Dietrich received a housing and relocation allowance of $94,500 (of which $19,500 was
attributable to state and federal tax liability).
|
Outstanding Equity Awards at December
31, 2018
The following table sets forth the equity
awards held by our named executive officers as of December 31, 2018.
Option Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
Number of securities underlying unexercised options exercisable
|
|
|
Number of securities underlying unexercised
options
unexercisable
|
|
|
Equity incentive plan awards: number of securities underlying unexercised unearned
options
|
|
|
Option
exercise price
|
|
|
Option
expiration date
|
|
Isaac Dietrich
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jesus Quintero
|
|
|
500,000
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
0.20
|
|
|
|
July 26, 2028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven Osborn (1)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
(1)
|
Appointed as Chief Technology
Officer on October 16, 2017 and resigned on January 8, 2018.
|
Narrative Disclosure to Summary Compensation
and Option Tables
Isaac Dietrich
On December 12, 2017, the Company entered into
an employment agreement with Isaac Dietrich pursuant to which Mr. Dietrich serves as the Company’s Chief Executive Officer.
Pursuant to the terms of the employment agreement, Mr. Dietrich shall receive an annual base salary of $145,000. In addition, Mr.
Dietrich shall be eligible to receive an annual bonus and shall be eligible to receive such awards under the Company’s incentive
plans as determined by the Company’s Compensation Committee. Mr. Dietrich may be terminated by the Company or may voluntarily
resign, at any time, with or without cause. Either the Company or Mr. Dietrich may terminate Mr. Dietrich’s employment upon
two weeks prior written notice.
Upon termination except by death (the “Termination
Date”), the Company shall pay Mr. Dietrich (i) any accrued but unpaid compensation, (ii) a pro-rata portion of his annual
bonus calculated as of the Termination Date and (iii) reimbursement of expenses incurred on or prior to the Termination Date. In
addition, Mr. Dietrich may elect to receive
Consolidated Omnibus Budget Reconciliation Act benefits
for up to twelve months from the Termination Date. Upon termination of Mr. Dietrich’s employment for death, the Company shall
pay Mr. Dietrich (i)
any accrued but unpaid compensation and (ii) reimbursement of expenses incurred on or prior to the
such date. Mr. Dietrich is also entitled to participate in any and all benefit plans such as health, dental and life insurance,
from time to time, in effect for senior executives, along with vacation, sick and holiday pay in accordance with the Company’s
policies established and in effect from time to time. In fiscal year 2018 and 2017, Mr. Dietrich received $132,627 and $190,659
in bonuses, respectively. Mr. Dietrich did not receive any compensation related to his position as a director.
Jesus Quintero
On
April 1, 2018, the Company entered into a CFO Services Agreement
with
Jesus Quintero pursuant to which Mr. Quintero serves as our Chief Financial Officer. Pursuant to the agreement, Mr. Quintero receives
a monthly salary of $6,000. In addition, Mr. Quintero received 250,000 shares of the Company’s common stock which vested
in full on the date of grant.
Either the Company or Jesus
Quintero may terminate the agreement upon 90 days prior written notice. Upon termination of Mr. Quintero’s employment by
the Company, Mr. Quintero shall receive payment for all work performed through the date of termination. From January 10, 2018 to
March 31, 2018, Mr. Quintero was paid a fee of $4,000 per month pursuant to the terms of his prior CFO Services Agreement. Since
April 1, 2018, Mr. Quintero has been paid a fee of $6,000 per month.
Director Compensation
Our employee director does not receive
any additional compensation for his service as a director.
The following table shows information
with respect to the compensation of all non-employee directors of the Company for the fiscal year ended December 31, 2018:
Name
|
|
Fees Earned or
Paid in Cash
|
|
|
Stock
Awards
(1)
|
|
|
Option and Warrant
Awards
(1)
|
|
|
Total
|
|
Charles Blum
|
|
$
|
15,000
|
|
|
$
|
99,500
|
(4)
|
|
$
|
150,661
|
(7)
|
|
$
|
265,161
|
|
Cecil Kyte
|
|
$
|
136,000
|
|
|
$
|
298,500
|
(5)
|
|
$
|
395,061
|
(8)
|
|
$
|
829,561
|
|
Graham Farrar (2)
|
|
$
|
15,000
|
|
|
$
|
90,000
|
(6)
|
|
$
|
141,803
|
(9)
|
|
$
|
246,803
|
|
Nathan Shelton (3)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
(1)
|
These amounts are the aggregate fair value of the
equity compensation granted to our directors during the fiscal year. The fair value is computed in accordance with FASB ASC
Topic 718. The fair market value was calculated using the Black-Scholes options pricing model. Assumptions underlying the
valuation of each specific award are included in Note 9 of our Financial Statements included in this Annual Report on Form
10-K.
|
|
|
(2)
|
Mr. Farrar was appointed to our
Board effective February 21, 2018.
|
|
|
(3)
|
Mr. Shelton resigned from our Board effective February 21, 2018.
|
|
|
(4)
|
On February 1, 2018, the Company’s
Compensation Committee approved the grant of 250,000 shares of common stock to Mr. Blum which vested in full upon grant.
|
|
|
(5)
|
On February 1, 2018, the Company’s
Compensation Committee approved the grant of 750,000 shares of common stock to Mr. Kyte which vested in full upon grant.
|
|
|
(6)
|
On February 21, 2018, the Company’s
Compensation Committee approved the grant of 250,000 shares of common stock to Mr. Farrar which vested in full upon grant.
|
|
|
(7)
|
On February 1, 2018 and July 26,
2018, the Company’s Compensation Committee approved the grant of 250,000 and 500,000 options to purchase shares of common
stock at $0.40 and $0.20, respectively, to Mr. Blum.
|
|
|
(8)
|
On February 1, 2018 and July 26,
2018, the Company’s Compensation Committee approved the grant of 750,000 and 1,000,000 options to purchase shares of common
stock at $0.40 and $0.20, respectively, to Mr. Kyte.
|
|
|
(9)
|
On February 21, 2018 and July 26, 2018, the Company’s
Compensation Committee approved the grant of 250,000 and 500,000 options to purchase shares of common stock at $0.36 and $0.20,
respectively, to Mr. Farrar.
|
Indemnification of Officers and Directors
Our Certificate of Incorporation provides
that we shall indemnify our officers and directors to the fullest extent permitted by applicable law against all liability and
loss suffered and expenses (including attorneys’ fees) incurred in connection with actions or proceedings brought against
them by reason of their serving or having served as officers, directors or in other capacities. We shall be required to indemnify
a director or officer in connection with an action or proceeding commenced by such director or officer only if the commencement
of such action or proceeding by the director or officer was authorized in advance by the Board of Directors.
We currently maintain director’s
and officer’s liability insurance having a total aggregate limit of liability of $1,000,000, and an umbrella policy for
up to $1,000,000 in excess coverage.
Our Equity Incentive Plans
Our stockholders approved our 2014 Equity
Incentive Plan (“2014 Plan”) in June 2014, our 2015 Equity Incentive Plan (the “2015 Plan”) in December
2015, our 2016 Equity Incentive Plan (“2016 Plan”) in October 2016, our 2017 Equity Incentive Plan (“2017 Plan”)
in December 2016 and our 2018 Equity Incentive Plan (“2018 Plan” and together with the 2014 Plan, 2015 Plan, 2016
Plan and 2017 Plan, the “Plans”) in June 2018. The 2014 Plan, 2015 Plan, 2016 Plan and 2017 Plan (collectively, the
“Prior Plans”) are identical, except for number of shares reserved for issuance under each.
The Prior Plans provide for the grant
of incentive stock options to our employees and our parent and subsidiary corporations’ employees, and for the grant of
nonstatutory 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. Our Prior Plans also provide that the grant of performance stock
awards may be paid out in cash as determined by the Committee (as defined herein).
Plan Details
The following table and information below
sets forth information as of December 31, 2018 with respect to our Plans:
Plan Category
|
|
Number of securities to be issued upon exercise of outstanding options, warrants and rights
(a)
|
|
|
Weighted-average exercise price of outstanding options, warrants and rights
(b)
|
|
|
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
(c)
|
|
Equity compensation plans approved by security holders:
|
|
|
|
|
|
|
|
|
|
2014 Equity Incentive Plan
|
|
|
1,685,792
|
|
|
$
|
0.31
|
|
|
|
-
|
|
2015 Equity Incentive Plan
|
|
|
3,059,157
|
|
|
$
|
0.94
|
|
|
|
-
|
|
2016 Equity Incentive Plan
|
|
|
1,715,104
|
|
|
$
|
0.51
|
|
|
|
-
|
|
2017 Equity Incentive Plan
|
|
|
7,660,850
|
|
|
$
|
0.87
|
|
|
|
-
|
|
2018 Equity Incentive Plan
|
|
|
13,700,000
|
|
|
$
|
0.20
|
|
|
|
2,740,000
|
|
Equity compensation plans not approved by security holders
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Total
|
|
|
27,820,903
|
|
|
$
|
0.50
|
|
|
|
2,740,000
|
|
Summary of the Prior Plans
Authorized Shares
A total of 4,000,000 shares of our common
stock are reserved for issuance pursuant to the 2014 Plan. A total of 4,500,000 shares of our common stock are reserved for issuance
pursuant to the 2015 Plan. A total of 6,000,000 shares of our common stock are reserved for issuance pursuant to the 2016 Plan.
A total of 25,000,000 shares of our common stock are reserved for issuance pursuant to the 2017 Plan. Shares issued under our
Prior Plans may be authorized but unissued or reacquired shares of our common stock. Shares subject to stock awards granted under
our Prior Plans that expire or terminate without being exercised in full, or that are paid out in cash rather than in shares,
will not reduce the number of shares available for issuance under our Prior Plans. Additionally, shares issued pursuant to stock
awards under our Prior Plans that we repurchase or that are forfeited, as well as shares reacquired by us as consideration for
the exercise or purchase price of a stock award, will become available for future grant under our Prior Plans.
Administration
Our Board, or a duly authorized committee
thereof (collectively, the “Committee”), has the authority to administer our Prior Plans. Our Board may also delegate
to one or more of our officers the authority to designate employees other than Directors and officers to receive specified stock,
which, in respect to those awards, said officer or officers shall then have all that the Committee would have.
Subject to the terms of our Prior Plans,
the Committee has the authority to determine the terms of awards, including recipients, the exercise price or strike price of
stock awards, if any, the number of shares subject to each stock award, the fair market value of a share of our common stock,
the vesting schedule applicable to the awards, together with any vesting acceleration, the form of consideration, if any, payable
upon exercise or settlement of the stock award and the terms and conditions of the award agreements for use under the Prior Plans.
The Committee has the power to modify outstanding awards under the Prior Plans, subject to the terms of the Prior Plans and applicable
law. Subject to the terms of our Prior Plans, the Committee has the authority to reprice any outstanding option or stock appreciation
right, cancel and re-grant any outstanding option or stock appreciation right in exchange for new stock awards, cash or other
consideration, or take any other action that is treated as a repricing under generally accepted accounting principles, with the
consent of any adversely affected participant.
Stock Options
Stock options may be granted under the
Prior Plans. The exercise price of options granted under our Prior Plans must at least be equal to the fair market value of our
common stock on the date of grant. The term of an incentive stock option may not exceed 10 years, except that with respect to
any participant who owns more than 10% of the voting power of all classes of our outstanding stock, the term must not exceed 5
years and the exercise price must equal at least 110% of the fair market value on the grant date. The Committee will determine
the methods of payment of the exercise price of an option, which may include cash, shares or other property acceptable to the
Committee, as well as other types of consideration permitted by applicable law. No single participant may receive more than 25%
of the total options awarded in any single year. Subject to the provisions of our Prior Plans, the Committee determines the other
terms of options.
Performance Shares
Performance shares may be granted under
our Prior Plans. Performance shares are awards that will result in a payment to a participant only if performance goals established
by the administrator are achieved or the awards otherwise vest. The Committee will establish organizational or individual performance
goals or other vesting criteria in its discretion, which, depending on the extent to which they are met, will determine the number
and/or the value of performance shares to be paid out to participants. After the grant of a performance share, the Committee,
in its sole discretion, may reduce or waive any performance criteria or other vesting provisions for such performance shares.
The Committee, in its sole discretion, may pay earned performance units or performance shares in the form of cash, in shares or
in some combination thereof, per the terms of the agreement approved by the Committee and delivered to the participant. This agreement
will state all terms and condition of the agreements.
Restricted Stock
The terms and conditions of any restricted
stock awards granted to a participant will be set forth in an award agreement and, subject to the provisions in the Prior Plans,
will be determined by the Committee. Under a restricted stock award, we issue shares of our common stock to the recipient of the
award, subject to vesting conditions and transfer restrictions that lapse over time or upon achievement of performance conditions.
The Committee will determine the vesting schedule and performance objectives, if any, applicable to each restricted stock award.
Unless the Committee determines otherwise, the recipient may vote and receive dividends on shares of restricted stock issued under
our Prior Plans.
Other Share-Based Awards and Cash Awards
The Committee may make other forms of
equity-based awards under our Prior Plans, including, for example, deferred shares, stock bonus awards and dividend equivalent
awards. In addition, our Prior Plans authorizes us to make annual and other cash incentive awards based on achieving performance
goals that are pre-established by our compensation committee.
Change in Control
If the Company is merged or consolidated
with another entity or sells or otherwise disposes of substantially all of its assets to another company while awards or options
remain outstanding under the Prior Plans, unless provisions are made in connection with such transaction for the continuance of
the Prior Plans and/or the assumption or substitution of such awards or options with new options or stock awards covering the
stock of the successor company, or parent or subsidiary thereof, with appropriate adjustments as to the number and kind of shares
and prices, then all outstanding options and stock awards which have not been continued, assumed or for which a substituted award
has not been granted shall, whether or not vested or then exercisable, unless otherwise specified in the relevant agreements,
terminate immediately as of the effective date of any such merger, consolidation or sale.
Change in Capitalization
If the Company shall effect a subdivision
or consolidation of shares or other capital readjustment, the payment of a stock dividend, or other increase or reduction of the
number of shares of the common stock outstanding, without receiving consideration therefore in money, services or property, then
awards amounts, type, limitations, and other relevant consideration shall be appropriately and proportionately adjusted. The Committee
shall make such adjustments, and its determinations shall be final, binding and conclusive.
Prior Plan Amendment or Termination
Our Board has the authority to amend,
suspend, or terminate our Prior Plans, provided that such action does not materially impair the existing rights of any participant
without such participant’s written consent. The Prior Plans will terminate ten years after the earlier of (i) the date the
each Prior Plan is adopted by the Board, or (ii) the date a Prior Plan is approved by the stockholders, except that awards that
are granted under the applicable Prior Plan prior to its termination will continue to be administered under the terms of the that
Prior Plan until the awards terminate, expire or are exercised.
Summary of the 2018 Plan
Key Features of the 2018 Plan
Certain key features
of the 2018 Plan are summarized as follows:
|
●
|
If not terminated earlier by the Board, the
2018 Plan will terminate on April 27, 2028.
|
|
●
|
Up to a maximum aggregate of 25,000,000 shares
of Common Stock may be issued under the 2018 Plan. The maximum number of shares that may be issued pursuant to the exercise
of ISOs is also 25,000,000.
|
|
●
|
The 2018 Plan will generally be administered
by a committee comprised solely of independent members of the Board. This committee will be the Compensation Committee unless
otherwise designated by the Board (the “2018 Plan Committee”). The Board may designate a separate committee to
make awards to employees who are not officers subject to the reporting requirements of Section 16 of the Securities Exchange
Act of 1934 (the “Exchange Act”).
|
|
●
|
Employees, consultants and Board members are
eligible to receive awards, provided that the 2018 Plan Committee has the discretion to determine (i) who shall receive
any awards, and (ii) the terms and conditions of such awards.
|
|
●
|
Awards may consist of ISOs, NQSOs, restricted
stock, RSUs, SARs, other equity awards and/or cash awards.
|
|
●
|
Stock options and SARs may not be granted
at a per share exercise price below the fair market value of a share of our Common Stock on the date of grant.
|
|
●
|
Stock options and SARs may not be repriced
or exchanged without stockholder approval.
|
|
●
|
The maximum exercisable term of stock options
and SARs may not exceed ten years.
|
|
●
|
Awards are subject to recoupment of compensation
policies adopted by the Company.
|
|
●
|
A non-employee director serving in the following
positions cannot receive awards in any fiscal year which in the aggregate exceeds the following number of shares: (i) chairperson
or Lead Director (as defined in the 2018 Plan) – 2,500,000 shares; (ii) other non-employee director - 2,500,000 shares.
In addition, the aggregate amount of all cash compensation (including annual retainers and other fees, whether or not granted
under the 2018 Plan) plus the aggregate grant date fair market value of all awards issued under the 2018 Plan (or under any
other incentive plan) provided to any non-employee director during any single calendar year may not exceed $1,000,000.
|
Background and
Purpose of the 2018 Plan.
The purpose of the 2018 Plan is to promote our long-term success and the creation of stockholder
value by:
|
●
|
Attracting and retaining the services of key
employees who would be eligible to receive grants as selected participants;
|
|
●
|
Motivating selected participants through equity-based
compensation that is based upon the performance of our Common Stock; and
|
|
●
|
Further aligning selected participants’
interests with the interests of our stockholders, through the award of equity compensation grants which increases their interest
in the Company, to achieve long-term growth over short-term performance.
|
The 2018 Plan permits
the grant of the following types of equity-based incentive awards: (1) stock options (which can be either ISOs or NQSOs),
(2) SARs, (3) restricted stock, (4) RSUs, (5) other equity awards and (6) cash awards. The vesting
of awards can be based on either continuous service and/or performance goals. Awards are evidenced by a written agreement between
the selected participant and the Company.
Eligibility
to Receive Awards.
Employees, consultants and Board members of the Company and certain of our affiliated companies
are eligible to receive awards under the 2018 Plan. The 2018 Plan Committee determines, in its discretion, the selected participants
who will be granted awards under the 2018 Plan. As of the Record Date, approximately 20 individuals (including 2 executive officers)
and 3 non-employee directors were eligible to participate in the 2018 Plan.
Non-Employee
Director Limitations
.
With respect to our non-employee directors, the 2018 Plan provides that any non-employee director
serving in the following positions cannot receive awards in any fiscal year which in the aggregate exceeds the following number
of shares: (i) chairperson or Lead Director (as defined in the 2018 Plan) - 2,500,000 shares; (ii) other non-employee director
- 2,500,000 shares. In addition, the aggregate amount of all compensation (including annual retainers and other fees, whether
or not granted under the 2018 Plan) plus the aggregate grant date fair market value of all awards issued under the 2018 Plan (or
under any other incentive plan) provided to any non-employee director during any single calendar year may not exceed $1,000,000
in any calendar year. Provided that the Board affirmatively acts to implement such a process, the 2018 Plan also provides that
non-employee directors may elect to receive stock grants or stock units (which would be issued under the 2018 Plan) in lieu of
fees that would otherwise be paid in cash.
Shares Subject
to the 2018 Plan.
The maximum number of shares of Common Stock that can be issued under the 2018 Plan is 25,000,000
shares. The shares underlying forfeited or terminated awards (without payment of consideration), or unexercised awards become
available again for issuance under the 2018 Plan. The 2018 Plan also imposes certain share grant limits such as the limit on grants
to non-employee directors described above and other limits that are intended to comply with the legal requirements of Section
422 of the Internal Revenue Code of 1986, as amended (the “Code”) and which are discussed elsewhere in this proposal.
No fractional shares may be issued under the 2018 Plan. No shares will be issued with respect to a participant’s award unless
applicable tax withholding obligations have been satisfied by the participant.
Administration
of the 2018 Plan.
The 2018 Plan will be administered by our Board’s Compensation Committee, acting as the 2018
Plan Committee, which shall consist of independent Board members. With respect to certain awards issued under the 2018 Plan, the
members of the 2018 Plan Committee also must be “Non-Employee Directors” under Rule 16b-3 of the Exchange Act.
Subject to the terms of the 2018 Plan, the 2018 Plan Committee has the sole discretion, among other things, to:
|
●
|
Select the individuals who will receive awards;
|
|
●
|
Determine the terms and conditions of awards (for example, performance
conditions, if any, and vesting schedule);
|
|
●
|
Correct any defect, supply any omission, or reconcile any inconsistency
in the 2018 Plan or any award agreement;
|
|
●
|
Accelerate the vesting, extend the post-termination exercise
term or waive restrictions of any awards at any time and under such terms and conditions as it deems appropriate, subject
to the limitations set forth in the 2018 Plan;
|
|
●
|
Permit a participant to defer compensation to be provided by
an award; and
|
|
●
|
Interpret the provisions of the 2018 Plan and outstanding awards.
|
The 2018 Plan Committee
may suspend vesting, settlement, or exercise of awards pending a determination of whether a selected participant’s service
should be terminated for cause (in which case outstanding awards would be forfeited). Awards may be subject to any policy that
the Board may implement on the recoupment of compensation (referred to as a “clawback” policy). The members of the
Board, the 2018 Plan Committee and their delegates shall be indemnified by the Company to the maximum extent permitted by applicable
law for actions taken or not taken regarding the 2018 Plan. In addition, the 2018 Plan Committee may use the 2018 Plan to issue
shares under other plans or sub-plans as may be deemed necessary or appropriate, such as to provide for participation by non-U.S. employees
and those of any of our subsidiaries and affiliates.
Types of Awards.
Stock Options
. A
stock option is the right to acquire shares at a fixed exercise price over a fixed period of time. The 2018 Plan Committee will
determine, among other terms and conditions, the number of shares covered by each stock option and the exercise price of the shares
subject to each stock option, but such per share exercise price cannot be less than the fair market value of a share of our Common
Stock on the date of grant of the stock option. The fair market value of a share of our Common Stock for the purposes of pricing
our awards shall be equal to the closing price for our Common Stock as reported by the OTCQB or such other principal trading market
on which our securities are traded on the date of determination. Stock options may not be repriced or exchanged without stockholder
approval, and no re-load options may be granted under the 2018 Plan.
Stock options granted
under the 2018 Plan may be either ISOs or NQSOs. As required by the Code and applicable regulations, ISOs are subject to various
limitations not imposed on NQSOs. For example, the exercise price for any ISO granted to any employee owning more than 10% of
our Common Stock may not be less than 110% of the fair market value of the Common Stock on the date of grant, and such ISO must
expire no later than five years after the grant date. The aggregate fair market value (determined at the date of grant) of Common
Stock subject to all ISOs held by a participant that are first exercisable in any single calendar year cannot exceed $100,000.
ISOs may not be transferred other than upon death, or to a revocable trust where the participant is considered the sole beneficiary
of the stock option while it is held in trust. In order to comply with Treasury Regulation Section 1.422-2(b), the 2018 Plan
provides that no more than 25,000,000 shares may be issued pursuant to the exercise of ISOs.
A stock option granted
under the 2018 Plan generally cannot be exercised until it becomes vested. The 2018 Plan Committee establishes the vesting schedule
of each stock option at the time of grant. The maximum term for stock options granted under the 2018 Plan may not exceed ten years
from the date of grant although the 2018 Plan Committee may establish a shorter period at its discretion. The exercise price of
each stock option granted under the 2018 Plan must be paid in full at the time of exercise, either with cash, or through a broker-assisted
“cashless” exercise and sale program, or net exercise, or through another method approved by the 2018 Plan Committee.
The optionee must also make arrangements to pay any taxes that are required to be withheld at the time of exercise.
SARs
. A
SAR is the right to receive, upon exercise, an amount equal to the difference between the fair market value of the shares on the
date of the SAR’s exercise and the aggregate exercise price of the shares covered by the exercised portion of the SAR. The
2018 Plan Committee determines the terms of SARs, including the exercise price (provided that such per share exercise price cannot
be less than the fair market value of a share of our Common Stock on the date of grant), the vesting and the term of the SAR.
The maximum term for SARs granted under the 2018 Plan may not exceed ten years from the date of grant, subject to the discretion
of the 2018 Plan Committee to establish a shorter period. Settlement of a SAR may be in shares of Common Stock or in cash, or
any combination thereof, as the 2018 Plan Committee may determine. SARs may not be repriced or exchanged without stockholder approval.
Restricted Stock
. A
restricted stock award is the grant of shares of our Common Stock to a selected participant and such shares may be subject to
a substantial risk of forfeiture until specific conditions or goals are met. The restricted shares may be issued with or without
cash consideration being paid by the selected participant as determined by the 2018 Plan Committee. The 2018 Plan Committee also
will determine any other terms and conditions of an award of restricted stock. In determining whether an award of restricted stock
should be made, and/or the vesting schedule for any such award, the 2018 Plan Committee may impose whatever conditions to vesting
it determines to be appropriate. During the period of vesting, the participant will not be permitted to transfer the restricted
shares but will generally have voting and dividend rights (subject to vesting) with respect to such shares.
RSUs
. RSUs
are the right to receive an amount equal to the fair market value of the shares covered by the RSU at some future date after the
grant. The 2018 Plan Committee will determine all of the terms and conditions of an award of RSUs, including the vesting period.
Upon each vesting date of a RSU, a selected participant will become entitled to receive an amount equal to the number of shares
indicated in the grant notice, or, if expressed in dollar terms, the fair market value of the shares on the settlement date. Payment
for vested RSUs may be in shares of Common Stock or in cash, or any combination thereof, as the 2018 Plan Committee may determine.
Settlement of vested stock units will generally occur at or around the time of vesting but the 2018 Plan Committee may permit
a participant to defer such compensation until a later point in time. Stock units represent an unfunded and unsecured obligation
for us, and a holder of a stock unit has no rights other than those of a general creditor.
Other Awards
. The
2018 Plan also provides that other equity awards, which derive their value from the value of our shares or from increases in the
value of our shares, may be granted. In addition, cash awards may also be issued. Substitute awards may be issued under the 2018
Plan in assumption of or substitution for or exchange for awards previously granted by an entity which we (or an affiliate) acquire.
Limited Transferability
of Awards
. Awards granted under the 2018 Plan generally are not transferrable other than by will or by the laws of descent
and distribution. However, the 2018 Plan Committee may in its discretion permit the transfer of awards other than ISOs. Generally,
where transfers are permitted, they will be permitted only by gift to a member of the selected participant’s immediate family
or to a trust or other entity for the benefit of the selected participant and/or member(s) of his or her immediate family.
Termination of
Employment, Death or Disability
. The 2018 Plan generally determines the effect of the termination of employment on awards,
which determination may be different depending on the nature of the termination, such as terminations due to cause, resignation,
death, or disability and the status of the award as vested or unvested, unless the award agreement or a selected participant’s
employment agreement or other agreement provides otherwise.
Dividends and Dividend
Equivalents
. Any dividend equivalents distributed in the form of shares under the 2018 Plan will count against the 2018
Plan’s maximum share limit. The 2018 Plan also provides that dividend equivalents will not be paid or accrue on unexercised
stock options or unexercised SARs. Dividends and dividend equivalents that may be paid or accrue with respect to unvested Awards
shall be subject to the same vesting conditions as the underlying award and shall only be distributed to the extent that such
vesting conditions are satisfied.
Adjustments upon
Changes in Capitalization.
In the event of the
following actions:
|
●
|
stock split of our outstanding shares of Common
Stock;
|
|
●
|
dividend payable in a form other than shares in an amount that
has a material effect on the price of the shares;
|
|
●
|
combination or reclassification of the shares;
|
|
●
|
other similar occurrences,
|
then the following
shall each be equitably and proportionately adjusted by the Committee:
|
●
|
maximum number of shares that can be issued
under the 2018 Plan (including the ISO share grant limit);
|
|
●
|
number and class of shares issued under the 2018 Plan and subject
to each award;
|
|
●
|
exercise prices of outstanding awards; and
|
|
●
|
number and class of shares available for issuance under the
2018 Plan.
|
Change in Control
. In
the event that we are a party to a merger or other reorganization or similar transaction, outstanding 2018 Plan awards will be
subject to the agreement pertaining to such merger or reorganization. Such agreement may provide for (i) the continuation
of the outstanding awards by us if we are a surviving corporation, (ii) the assumption or substitution of the outstanding
awards by the surviving entity or its parent, (iii) full exercisability and/or full vesting of outstanding awards, or (iv) cancellation
of outstanding awards either with or without consideration, in all cases with or without consent of the selected participant.
The Board or the Committee need not adopt the same rules for each award or selected participant.
The Committee will
decide the effect of a change in control of the Company on outstanding awards. The Committee may, among other things, provide
that awards will fully vest and/or be canceled upon a change in control, or fully vest upon an involuntary termination of employment
following a change in control. The Committee may also include in an award agreement provisions designed to minimize potential
negative income tax consequences for the participant or the Company that could be imposed under the golden parachute tax rules
of Code Section 280G.
Term of the 2018
Plan
. The 2018 Plan is in effect until April 27, 2028 or until earlier terminated by the Board. Outstanding awards shall
continue to be governed by their terms after the termination of the 2018 Plan.
Governing Law
. The
2018 Plan shall be governed by the laws of the State of Delaware (which is the state of our incorporation) except for conflict
of law provisions.
Amendment and Termination
of the 2018 Plan
. The Board generally may amend or terminate the 2018 Plan at any time and for any reason, except that
it must obtain stockholder approval of material amendments to the extent required by applicable laws, regulations or rules.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth certain
information regarding the beneficial ownership of our Common Stock by (i) each person who, to our knowledge, owns more than 5%
of our Common Stock, (ii) each of our current directors and the named executive officer identified under the heading “Executive
Compensation” and (iii) all of our current directors and executive officers as a group. We have determined beneficial ownership
in accordance with applicable rules of the SEC, and the information reflected in the table below is not necessarily indicative
of beneficial ownership for any other purpose. Under applicable SEC rules, beneficial ownership includes any shares of Common
Stock as to which a person has sole or shared voting power or investment power and any shares of Common Stock which the person
has the right to acquire within 60 days after April 11, 2019 through the exercise of any option, warrant or right or through the
conversion of any convertible security. Unless otherwise indicated in the footnotes to the table below and subject to community
property laws where applicable, we believe, based on the information furnished to us that each of the persons named in this table
has sole voting and investment power with respect to the shares indicated as beneficially owned.
The information set forth in the table
below is based on 182,390,849 shares of our Common Stock issued and outstanding on April 11, 2019. In computing the number of
shares of Common Stock beneficially owned by a person and the percentage ownership of that person, we deemed to be outstanding
all shares of Common Stock subject to options, warrants, rights or other convertible securities held by that person that are currently
exercisable or will be exercisable within 60 days after April 11, 2019. We did not deem these shares outstanding, however, for
the purpose of computing the percentage ownership of any other person. Unless otherwise indicated, the principal address of each
of the stockholders below is in care of MassRoots, Inc., 7083 Hollywood Blvd., Office 4084 Los Angeles, CA 90028.
|
|
Number of
Shares
Beneficially
Owned
|
|
|
Percentage
Beneficially
Owned
|
|
|
|
|
|
|
|
|
Directors and Named Executive Officers
|
|
|
|
|
|
|
Isaac Dietrich
|
|
|
17,738,831
|
(1)
|
|
|
9.73
|
%
|
Charles R. Blum
|
|
|
1,000,000
|
(2)
|
|
|
*
|
|
Cecil Kyte
|
|
|
2,500,000
|
(3)
|
|
|
*
|
|
Graham Farrar
|
|
|
1,000,000
|
(4)
|
|
|
*
|
|
Jesus Quintero
|
|
|
820,075
|
(5)
|
|
|
*
|
|
All directors and named executive officers as a group (5 persons)
|
|
|
23,058,906
|
|
|
|
12.62
|
%
|
(1)
|
Includes 17,738,831 shares of common stock. Excludes
warrants to purchase up to 193,333 shares of common stock.
The forgoing warrants
contains an ownership limitation such that the holder may not convert any of such securities to the extent that such conversion
would result in the holder’s beneficial ownership being in excess of 4.99% of the Company’s issued and outstanding
common stock together with all shares owned by the holder and its affiliates.
|
|
|
(2)
|
Includes (i) 250,000 shares of
common
stock
and (ii) an option to purchase up to 750,000 shares of
common
stock
.
|
|
|
(3)
|
Includes (i) 750,000 shares of
common
stock
and (ii) an option to purchase up to 1,750,000 shares of
common
stock
.
|
|
|
(4)
|
Includes (i) 250,000 shares of
common
stock
and (ii) an option to purchase up to 750,000 shares of
common
stock
.
|
|
|
(5)
|
Includes
(i) 320,075 shares of common stock and (ii) an option to purchase up to 500,000 shares of common stock.
|
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
During our fiscal years ended December
31, 2018 and 2017, we have not been a party to any transaction in which the amount involved in the transaction exceeds the lesser
of $120,000 or 1% of the average of our total assets at year-end for the last two completed fiscal years, and in
which any of our directors, executive officers or, to our knowledge, beneficial owners of more than 5% of our capital stock or
any member of the immediate family of any of the foregoing persons had or will have a direct or indirect material interest, other
than equity and other compensation which are described elsewhere in this Annual Report on Form 10-K.
ITEM 14. PRINCIPAL
ACCOUNTING FEES AND SERVICES
Liggett Webb resigned as our independent
accountant on December 21, 2017. On December 28, 2017, we engaged RBSM LLP (“RBSM”) to serve as our new independent
accountant.
The following table sets forth the aggregate
fees billed to us by Liggett Webb for the fiscal year ended December 31, 2018 and a portion of the fiscal year ended December
31, 2017.
|
|
Liggett Webb
|
|
|
|
2018
|
|
|
2017
|
|
Audit Fees
|
|
$
|
-
|
|
|
$
|
72,500
|
|
Audit-Related Fees
|
|
|
19,500
|
|
|
|
54,000
|
|
Tax Fees
|
|
|
-
|
|
|
|
-
|
|
Other Fees
|
|
|
-
|
|
|
|
-
|
|
Totals
|
|
$
|
19,500
|
|
|
$
|
126,500
|
|
The following table sets forth the aggregate
fees billed to us by RBSM for the fiscal years ended December 31, 2018 and 2017.
|
|
RBSM
|
|
|
|
2018
|
|
|
2017
|
|
Audit Fees
|
|
$
|
94,000
|
|
|
$
|
-
|
|
Audit-Related Fees
|
|
|
20,000
|
|
|
|
-
|
|
Tax Fees
|
|
|
-
|
|
|
|
-
|
|
Other Fees
|
|
|
-
|
|
|
|
-
|
|
Totals
|
|
$
|
114,000
|
|
|
$
|
-
|
|
Audit Fees
The aggregate fees billed for each of
the last two fiscal years for professional services rendered by Liggett Webb for the audit of the Company’s annual financial
statements and review of financial statements included in the Company’s Form 10-K or services that are normally provided
by the registered independent accountant in connection with statutory and regulatory filings or engagements for the fiscal years
ending December 31, 2018 and 2017 were $0 and $72,500, respectively.
The aggregate fees billed for each of
the last two fiscal years for professional services rendered by RBSM for the audit of the Company’s annual financial statements
and review of financial statements included in the Company’s Form 10-K or services that are normally provided by the registered
independent accountant in connection with statutory and regulatory filings or engagements for the fiscal years ending December
31, 2018 and 2017 were $94,000 and $0, respectively.
Audit-Related Fees
The aggregate fees billed in either of the
last two fiscal years for assurance and related services by RBSM that are reasonably related to the performance of the audit or
review of the registrant’s financial statements and are not reported under item (1) for the fiscal years ending December
31, 2018 and 2017 were $20,000, and $0, respectively, primarily for the review of the Company’s registration statements.
Audit related fees primarily include the audit of the Company’s annual financial statements and review of financial statements
included in the Company’s quarterly reports on Form 10-Q during 2018.
The aggregate fees billed in either of the
last two fiscal years for assurance and related services by Liggett Webb that are reasonably related to the performance of the
audit or review of the registrant’s financial statements and are not reported under item (1) for the fiscal years ending
December 31, 2018 and 2017 were $19,500, and $54,000, respectively, primarily for the review of the Company’s registration
statements. Audit related fees primarily include the audit of the Company’s annual financial statements and review of financial
statements included in the Company’s quarterly reports on Form 10-Q during 2017.
Tax Fees
The aggregate fees were billed for professional
services rendered by the principal accountant for tax compliance, tax advice, and tax planning for the fiscal years ending December
31, 2018 and 2017 was $0 and $0, respectively, for each of RBSM and Liggett Webb.
All Other Fees
Other fees billed for professional services
provided by the principal accountant, other than the services reported above, for the fiscal years ending December 31, 2018 and
2017 were $0 and $0, respectively, for each of RBSM and Liggett Webb.
The Audit Committee of the Company approves
all auditing services and the terms thereof and non-audit services (other than non-audit services published under Section 10A(g)
of the Exchange Act or the applicable rules of the SEC or the Pubic Company Accounting Oversight Board) to be provided to us by
the independent auditor; provided, however, the pre-approval requirement is waived with respect to the provisions of non-audit
services for us if the “de minimus” provisions of Section 10A(i)(1)(B) of the Exchange Act are satisfied.
The accompanying notes are an integral part of these audited
consolidated financial statements.
The accompanying notes are an integral part of these audited
consolidated financial statements.
Notes
to Consolidated Financial Statements
December
31, 2018 and 2017
NOTE
1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION
MassRoots,
Inc. (“MassRoots” or the “Company”) has created a technology platform for the cannabis industry focused
on enabling users to share their cannabis content, follow their favorite dispensaries, and stay connected with the legalization
movement. The Company was incorporated in the State of Delaware on April 26, 2013.
The
accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”) for financial information and pursuant to the rules and regulations
of the Securities and Exchange Commission (the “SEC”). Our consolidated financial statements include the accounts
of DDDigtal, Inc., Odava, Inc., MassRoots Supply Chain, Inc., and MassRoots Blockchain Technologies, Inc., our wholly-owned subsidiaries.
All intercompany transactions were eliminated during consolidation.
Acquisitions
DDDigtal
Inc.
On
December 15, 2016, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Whaxy Inc.,
a wholly-owned subsidiary of the Company (“Merger Subsidiary”), DDDigtal Inc., a Colorado corporation (“DDDigtal”),
Zachary Marburger, an individual acting solely in his capacity as stockholder representative of DDDigtal, and all of the stockholders
of DDDigtal. Pursuant to the Merger Agreement, the parties agreed to merge Merger Subsidiary with and into DDDigtal, whereby DDDigtal
survived as a wholly-owned subsidiary of MassRoots (the “Merger”). The primary reason for this combination was the
acquisition of DDDigtal’s menu management software, which has been integrated with MassRoots’ business portal to expand
the services provided to our clients.
On
January 25, 2017 (the “Effective Date”), the Merger became effective upon the filing of certificates of merger with
the respective Secretary of State of the States of Delaware and Colorado, in such forms as required by, and executed in accordance
with, the relevant provisions of the Delaware General Corporation Law and the Colorado Business Corporation Act.
Pursuant
to the terms of the Merger Agreement, each share of DDDigtal’s common stock was exchanged such number of shares of the Company’s
common stock (or a fraction thereof), based on an exchange ratio equal to approximately 5.273-for-1, such that 1 share of the
Company’s common stock was issued for every 5.273 shares of DDDigtal’s common stock.
On
the Effective Date, the Company issued an aggregate of 2,926,830 shares of the Company’s common stock on a pro rata basis
to all stockholders of DDDigtal in exchange for all of the outstanding shares of common stock of DDDigtal’s. In addition,
on the Effective Date, each share of the common stock of Merger Subsidiary was exchanged for one share of common stock of DDDigtal,
and all shares of DDDigtal common stock outstanding immediately prior to the Effective Date were automatically cancelled and retired.
As of the Effective Date, DDDigtal continued as a surviving wholly-owned subsidiary of the Company, and the Merger Subsidiary
ceased to exist.
Pursuant
to the terms of the Merger Agreement, in December 2016, the Company paid each of Zachary Marburger and Micah Davidson $40,000
and $20,000, respectively, as repayment for outstanding debts owed by DDDigtal to such individuals.
As
a condition to the closing of the Merger, the Company hired Zachary Marburger as its Vice President of Strategy, and engaged Micah
Davidson as a Senior Software Engineer. As a condition of Mr. Marburger’s employment and pursuant to the terms of the Merger
Agreement, the Company paid Mr. Marburger an additional $40,000 following the one-year anniversary of his employment with the
Company.
MASSROOTS,
INC.
Notes
to Consolidated Financial Statements
December
31, 2018 and 2017
A
summary of consideration is as follows:
Cash (paid
in December 2016)
|
|
$
|
60,000
|
|
2,926,830 shares of
the Company’s common stock
|
|
|
2,883,220
|
|
Liabilities
assumed
|
|
|
40,140
|
|
Total purchase
price
|
|
$
|
2,983,360
|
|
The
following summarizes the current estimates of fair value of assets acquired and liabilities assumed:
Cash
|
|
$
|
8,672
|
|
Accounts receivable
|
|
|
3,583
|
|
Property and equipment
|
|
|
3,333
|
|
Goodwill
|
|
|
2,967,772
|
|
Assets
acquired
|
|
$
|
2,983,360
|
|
During
management’s annual review of these assets for fiscal year 2017, it was determined that the fair-market value of DDDigtal’s
menu management software was $1,253,000 based upon projected cash-flows and valuations of comparable software services. This value
was to be amortized over an expected three-year useful life. The remaining $1,714,772 in goodwill was impaired and written-off
in December 2017.
During
management’s annual review of these assets for fiscal year 2018, the remaining value of these assets was written-off due
to minimal revenue generated from this software.
Odava,
Inc.
On
July 5, 2017, the Company entered into an Agreement and Plan of Merger (the “July 2017 Merger Agreement”) with MassRoots
Compliance Technology, Inc., a wholly-owned subsidiary of the Company (“MCT”), Odava, Inc., a Delaware corporation
(“Odava”), and Scott Kveton, an individual acting solely in his capacity as a stockholder representative of Odava.
Pursuant to the July 2017 Merger Agreement, the parties agreed to merge MCT with and into Odava, whereby Odava survived as a wholly-owned
subsidiary of MassRoots (the “Odava Merger”). The primary reason for this combination was the acquisition of Whaxy’s
point-of-sale software for dispensaries, which MassRoots planned to offer as an additional service to its clients.
On
July 13, 2017 (the “Odava Merger Effective Date”), the Odava Merger became effective upon the filing of a certificate
of merger with the Secretary of State of the State of Delaware, in the form as required by and executed in accordance with the
relevant provisions of the Delaware General Corporation Law.
Pursuant
to the terms of the July 2017 Merger Agreement, each share of Odava’s common stock was exchanged for such number of shares
of MassRoots’ common stock (or a fraction thereof), based on an exchange ratio equal to approximately 4.069-for-1, such
that one share of MassRoots’ common stock was issued for approximately every 4.069 shares of Odava’s common stock.
On
the Odava Merger Effective Date, the Company issued an aggregate of 3,250,000 shares of common stock pro rata to all stockholders
of Odava in exchange for all of their shares of Odava’s common stock. In addition, on the Odava Merger Effective Date, shares
of the common stock of MCT were converted into and exchanged for one share of common stock of Odava, and all shares of Odava common
stock outstanding immediately prior to the Odava Merger Effective Date were automatically cancelled and retired. As of the Odava
Merger Effective Date. Odava continued as a wholly-owned subsidiary of Massroots, and MCT ceased to exist. In addition, the Company
issued an aggregate of 2,600,000 shares of its common stock to the founders of Odava in connection with the Odava Merger. Furthermore,
pursuant to the terms of the Odava Merger Agreement, the Company paid each of Scott Kveton and Steven Osborn $30,000 and $5,000,
respectively, as repayment for outstanding debts owed by Odava to such individuals.
MASSROOTS,
INC.
Notes
to Consolidated Financial Statements
December
31, 2018 and 2017
As
a condition to the closing of the Odava Merger, the Company hired Scott Kveton as its new Director of Business Development, and
Steven Osborn as its Principal Architect.
A
summary of consideration is as follows:
Cash and
costs incurred
|
|
$
|
40,570
|
|
3,250,000
shares of the Company’s common stock
|
|
|
1,966,250
|
|
Total purchase
price
|
|
$
|
2,006,820
|
|
The
following summarizes the current estimates of fair value of assets acquired and liabilities assumed:
Cash
|
|
$
|
2,601
|
|
Goodwill
|
|
|
2,004,219
|
|
Assets
acquired
|
|
$
|
2,006,820
|
|
The
Company accounts for and reports acquired goodwill under Accounting Standards Codification (“ASC”) subtopic 350-10,
Intangibles-Goodwill and Other (“ASC 350-10”). In accordance with ASC 350-10, at least annually, the Company tests
its intangible assets for impairment or more often if events and circumstances warrant. Any write-downs will be included in results
from operations.
The
above estimated fair value of the intangible assets is based on a preliminary purchase price allocation prepared by management.
As this software has never been monetized and market conditions have changed significantly since the acquisition, the value of
this asset is significantly impaired and we have written off the $2,006,820 in goodwill associated with Odava.
The
Company accounts for acquisitions in accordance with the provisions of ASC 805 Business Combinations (“ASC 805”).
The Company assigns to all identifiable assets acquired a portion of the cost of the acquired company equal to the estimated fair
value of such assets at the date of acquisition. The Company records the excess of the cost of the acquired company over the sum
of the amounts assigned to identifiable assets acquired as goodwill.
NOTE
2 – GOING CONCERN AND MANAGEMENT’S LIQUIDITY PLANS
As
of December 31, 2018, the Company had cash of $29,568 and working capital deficit (current liabilities in excess of current assets)
of $7,361,875. During the twelve months ended December 31, 2018, the Company used net cash in operating activities of $6,423,900.
These conditions raise substantial doubt about the Company’s ability to continue as a going concern for one year from the
issuance of the financial statements.
During
the year ended December 31, 2018, the Company received $637,230, $3,304,000, $528,650 and $3,567,500 from the exercise of common
stock warrants, sale of common stock, advances including from the issuance of Simple Agreements for Future Tokens and proceeds
from issuance of convertible notes, respectively. The Company does not have cash sufficient 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 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 will require additional financing to fund future operations.
MASSROOTS,
INC.
Notes
to Consolidated Financial Statements
December
31, 2018 and 2017
Management’s
plans with regard to 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 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.
Accordingly,
the accompanying consolidated financial statements have been prepared in conformity with U.S. GAAP, 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 financial statements are issued. The carrying amounts of assets and liabilities presented in the
consolidated financial statements do not necessarily purport to represent realizable or settlement values. The consolidated financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of MassRoots, Inc. and its wholly-owned operating subsidiaries.
All material intercompany accounts and transactions are eliminated in consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with 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 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”) ASC 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
receivable, 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.
The
Company follows ASC 825-10, which permits entities to choose to measure many financial instruments and certain other items at
fair value.
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.
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 occurred. 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.
MASSROOTS,
INC.
Notes
to Consolidated Financial Statements
December
31, 2018 and 2017
Accounts
Receivable and Allowance for Doubtful Accounts
The
Company monitors outstanding receivables based on factors surrounding the credit risk of specific customers, historical trends,
and other information. The allowance for doubtful accounts is estimated based on an assessment of the Company’s ability
to collect on customer accounts receivable. There is judgment involved with estimating the allowance for doubtful accounts and
if the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make the required
payments, the Company may be required to record additional allowances or charges against revenues. The Company writes-off accounts
receivable against the allowance when it determines a balance is uncollectible and no longer actively pursues its collection.
Revenue
Recognition
The
Company recognizes revenue when services are realized or realizable and earned less estimated future doubtful accounts.
The
Company’s revenues accounted for under ASC Topic 606 generally do not require significant estimates or judgments based on
the nature of the Company’s revenue streams. The sales prices are generally fixed at the point of sale and all consideration
from contracts is included in the transaction price. The Company’s contracts do not include multiple performance obligations
or material variable consideration.
In
accordance with ASC 606, the Company recognizes revenue to depict the transfer of promised goods or services to customers in
an amount that reflects the consideration to which MassRoots expects to be entitled in exchange for those goods or
services. MassRoots 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) MassRoots satisfies a performance obligation.
|
The
Company primarily generates revenue by charging businesses to advertise on the network. The Company 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, the Company only realizes revenue for services provided during
that quarter and defers all other revenue to future periods.
MASSROOTS,
INC.
Notes
to Consolidated Financial Statements
December
31, 2018 and 2017
Acquisitions
and Subsidiaries
Subsidiaries
are all entities over which MassRoots has the power to govern the financial and operating policies generally accompanying a shareholding
of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable
or convertible are considered when assessing whether MassRoots controls another entity. Subsidiaries are fully consolidated from
the date on which control is transferred to MassRoots.
The
purchase method of accounting is used to account for the acquisition of subsidiaries by MassRoots. The cost of an acquisition
is measured as the fair value of the assets transferred in consideration, equity instruments issued and liabilities incurred or
assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities
and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date,
irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the MassRoots’
share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value
of the net assets of the subsidiary acquired, the difference is recognized directly in the income statement.
Advertising
The
Company follows the policy of charging the costs of advertising to expense as incurred. For the twelve months ended December 31,
2018 and 2017, the Company charged to operations $501,451 and $960,239, respectively, as advertising expense.
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.
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 free standing 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.
MASSROOTS,
INC.
Notes
to Consolidated Financial Statements
December
31, 2018 and 2017
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.
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
free-standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities
is required.
The
Company’s free-standing derivatives consisted of warrants to purchase common stock that were issued in connection with the
issuance of debt and sale of common stock, and of embedded conversion options with convertible debentures. The Company evaluated
these derivatives to assess their proper classification in the balance sheet as of December 31, 2017 using the applicable classification
criteria enumerated under ASC 815 Derivatives and Hedging. The Company determined that certain embedded conversion and/or exercise
features do not contain fixed settlement provisions. The convertible debentures contain a conversion feature such that the Company
could not ensure it would have adequate authorized shares to meet all possible conversion demands.
As
such, the Company was required to record the derivatives which do not have fixed settlement provisions as liabilities and mark
to market all such derivatives to fair value at the end of each reporting period.
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 lives
of three to five years. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed
from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings.
Indefinite
Lived Intangibles and Goodwill Assets
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 for indefinite lived intangibles and goodwill 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.
MASSROOTS,
INC.
Notes
to Consolidated Financial Statements
December
31, 2018 and 2017
Segment
Reporting
Operating
segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly
by the Chief Executive Officer, or decision-making group, in deciding the method to allocate resources and assess performance.
The Company currently has one reportable segment for financial reporting purposes, which represents the Company’s core business.
Net
Earnings (Loss) Per Common Share
The
Company computes earnings (loss) per share under ASC subtopic 260-10, Earnings Per Share. Net loss per common share is computed
by dividing net loss by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per
share, if presented, would include the dilution that would occur upon the exercise or conversion of all potentially dilutive securities
into common stock using the “treasury stock” and/or “if converted” methods as applicable.
The
computation of basic and diluted income (loss) per share, for the year ended December 31, 2018 and 2017 excludes potentially dilutive
securities when their inclusion would be anti-dilutive, or if their exercise prices were greater than the average market price
of the common stock during the period.
Potentially
dilutive securities excluded from the computation of basic and diluted net loss per share are as follows:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Common
stock issuable upon conversion of convertible debentures
|
|
|
13,146,218
|
|
|
|
6,147,059
|
|
Options to purchase
common stock
|
|
|
27,371,765
|
|
|
|
14,377,570
|
|
Warrants
to purchase common stock
|
|
|
74,910,002
|
|
|
|
35,187,847
|
|
Totals
|
|
|
115,427,985
|
|
|
|
55,712,476
|
|
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).
Recent
Accounting Pronouncements
FASB
Accounting Standards Updates (“ASU”) 2017-04 (Topic 350), “Intangibles – Goodwill and Others”
–
Issued in January 2017, ASU 2017-04 simplifies how an entity is required to test goodwill for impairment by eliminating Step 2
from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting
unit’s goodwill with the carrying amount of that goodwill. ASU 2017-04 is effective for annual periods beginning after December
15, 2019 including interim periods within those periods. The Company is currently evaluating the effect that ASU 2017-04 will
have on our consolidated financial statements and related disclosures.
FASB
ASU 2017-01 (Topic 805), “Business Combinations: Clarifying the Definition of a Business”
– Issued in
January 2017, ASU 2017-01 revises the definition of a business and provides new guidance in evaluating when a set of transferred
assets and activities is a business. This guidance was effective for the Company in the first fiscal quarter of 2018. The Company
believes the standard does not have a material impact on its consolidated financial statements and related disclosures.
FASB
ASU 2016-15, “Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)”
–
Issued in August 2016, the amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities that are
required to present a statement of cash flows under ASC Topic 230,
“Statement of Cash Flows”
. The amendments
in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods
within those fiscal years. The Company has adopted this guidance and does not believe it materially impacts its consolidated financial
statements and related disclosures.
MASSROOTS,
INC.
Notes
to Consolidated Financial Statements
December
31, 2018 and 2017
FASB
ASU No. 2014-09 (Topic 606), “Revenue from Contracts with Customers”
– Issued in May 2014, ASU
2014-09 will require an entity to recognize revenue when it transfers promised goods or services to customers using a five-step
model that requires entities to exercise judgment when considering the terms of the contracts. In August 2015, the FASB issued
ASU No. 2015-14,
“Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date”
.
This amendment defers the effective date of ASU 2014-09 by one year. In March 2016, the FASB issued ASU 2016-08,
“Principal
versus Agent Considerations (Reporting Gross versus Net)”,
which amends the principal versus agent guidance and
clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred
to the customer. In addition, the FASB issued ASU Nos. 2016-20,
“Technical Corrections and Improvements to Topic
606, Revenue from Contracts with Customers”
and 2016-12,
“Narrow-Scope Improvements and Practical
Expedients”
, both of which provide additional clarification of certain provisions in Topic 606. These ASUs are effective
for annual reporting periods beginning after December 15, 2017; however, early adoption is permitted as of annual reporting periods
after December 15, 2016. The standard permits the use of either the retrospective or cumulative effect transition method.
The
Company has applied the guidance using the modified retrospective transition method. The Company does not believe the adoption
of ASU 2014-09 had a material impact on the Company’s financial position or results of operations but such adoption resulted
in additional disclosures regarding the Company’s revenue recognition policies. The Company also does not believe the adoption
of ASU 2014-09 required material or significant changes to its internal controls over financial reporting. In connection with
the application of that guidance and the adoption of ASU 2014-09, the Company has expanded its revenue recognition inquiries and
updated its questionnaires to identify matters that would signal variable consideration implications under the new guidance.
FASB
ASU No. 2014-15, “Disclosure of Uncertainties about an Entities Ability to Continue as a Going Concern, which is included
in ASC 205, Presentation of Financial Statements
” –
Issued in August 2014, this update provides
an explicit requirement for management to assess an entity’s ability to continue as an ongoing concern, and to provide related
footnote disclosures in certain circumstances.
The
amendments are effective for annual periods ending after December 15, 2016, and interim periods within annual periods
beginning after December 15, 2016. The Company has adopted this standard and included the necessary disclosures in the
footnotes to its financial statements. The adoption of this standard has not had a material impact on the Company’s financial
position and results of operations.
FASB
ASU 2016-02, Leases (Topic 842)
- ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise
from operating leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the
lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with
a term of twelve months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not
to recognize lease assets and lease liabilities. In transition, lessees and lessors are required to recognize and measure leases
at the beginning of the earliest period presented using a modified retrospective approach. Public business entities should apply
the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim periods within those
fiscal years (i.e., January 1, 2019, for a calendar year entity). Early application is permitted for all public business
entities and all nonpublic business entities upon issuance. The adoption of this standard is not expected to have a material impact
on the Company’s financial position and results of operations.
FASB
ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting”
- The amendment is part
of the FASB’s simplification initiative and is intended to simplify the accounting around share-based payment award transactions.
The amendments include changing the recording of excess tax benefits from being recognized as a part of surplus capital to being
charged directly to the income statement, changing the classification of excess tax benefits within the statement of cash flows,
and allowing companies to account for forfeitures on an actual basis, as well as tax withholding changes. The amendments in this
update are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal
years. The adoption of this standard has not had a material impact on the Company’s financial position and results of operations.
MASSROOTS,
INC.
Notes
to Consolidated Financial Statements
December
31, 2018 and 2017
FASB
issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)
–
Adopted in November 2016, this ASU requires that the reconciliation of the beginning-of-period and end-of-period amounts shown
in the statement of cash flows include cash and restricted cash equivalents. This ASU is effective for public business entities
for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of this
standard did not have a material impact on the Company’s financial position and results of operations.
FASB
issued ASU 2017-11, Earnings Per Share, Distinguishing Liabilities from Equity, and Derivatives and Hedging (“ASU 2017-11”)
– Adopted in July 2017, ASU No. 2017-11 is intended to simplify the accounting for financial instruments with characteristics
of liabilities and equity. Among the issues addressed are: (i) determining whether an instrument (or embedded feature) is indexed
to an entity’s own stock; (ii) distinguishing liabilities from equity for mandatorily redeemable financial instruments of
certain nonpublic entities; and (iii) identifying mandatorily redeemable non-controlling interests. The Company has adopted ASU
No. 2017-11 effective as of January 1, 2018. The adoption of ASU No. 2017-11 has eliminated the derivative liabilities from the
Company’s financial statements. The adoption of this standard has not had a material impact on the Company’s financial
position and results of operations.
FASB
ASU No. 2018-07 (Topic 718), “Compensation – Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting”
–
Issued in June 2018, ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions
for acquiring goods and services from nonemployees. The amendments also clarify that Topic 718 does not apply to share-based payments
used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to
customers as part of a contract accounted for under Topic 606. The new standard will be effective for the Company on January 1,
2019. Early adoption is permitted. We do not expect adoption of this guidance will have a material impact on the Company’s
consolidated financial condition or results of operations.
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 – INVESTMENTS
In
2016, the Company paid a $60,000 acquisition deposit to acquire DDDigital, LLC.
As
of December 31, 2018 and 2017, the carrying value of our investments in privately held companies totaled $247,912 and $403,249,
respectively. These investments are accounted for as cost method investments, as we own less than 20% of the voting securities
and do not have the ability to exercise significant influence over operating and financial policies of the entities.
To
facilitate the integration with dispensary point of sale systems, in 2015, the Company invested $175,000 in exchange for preferred
shares of Flowhub LLC (“Flowhub”), a seed-to-sale system, equal to 8.95% of the then outstanding equity of Flowhub.
The preferred shares are considered non-marketable securities. On May 12, 2017, the Company sold its preferred shares in Flowhub
for net proceeds of $250,000. The gain on sale of securities of $75,000 was recorded in current period operations.
During
the twelve months ended December 31, 2017, the Company acquired 23,810 shares of Class A common stock of Hightimes Holding Corp.
for $100,002, or $4.20 per share. As a result of a forward share split of 1.9308657-for-one on January 15, 2018, MassRoots currently
owns 45,974 shares of Class A common stock. The acquired Class A common stock are considered non-marketable securities.
On
July 13, 2017, the Company purchased an unsecured convertible promissory note in the principal amount of $300,000 from CannaRegs,
Ltd, a Colorado limited liability company (“CannaRegs”). The note bears interest at a rate of 5% per annum and matures
on at December 19, 2019. In the event CannaRegs consummates an equity financing in excess of $2,000,000 prior to the maturity
date of the note, the outstanding principal and any accrued and unpaid interest automatically converts into equity securities
of the same class or series issued by CannaRegs at the lesser of: a) 90% of the price paid per equity security or b) a price reflecting
a valuation cap of $4,500,000.
MASSROOTS,
INC.
Notes
to Consolidated Financial Statements
December
31, 2018 and 2017
On
July 17, 2017, MassRoots converted the note into 430,622 shares of CannaRegs’ common stock. In 2018, CannaRegs re-incorporated
as a Delaware C corporation under the name Regs Technology, Inc. (“Regs Technology”), keeping the same capitalization
structure and business operations. Based on an equity raise priced at $0.3434 per share completed by Regs Technology in February
2019, MassRoots values its holdings at $147,876 as of December 31, 2018. The Company recorded an impairment expense of $155,336
on its holdings during fiscal year 2018. MassRoots owns less than 1% of Regs Technology’s issued and outstanding shares
as of December 31, 2018.
NOTE
5 – PROPERTY AND EQUIPMENT
Property
and equipment as of December 31, 2018 and December 31, 2017 is summarized as follows:
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
Computers
|
|
$
|
6,366
|
|
|
$
|
55,244
|
|
Office
equipment
|
|
|
17,621
|
|
|
|
43,590
|
|
Subtotal
|
|
|
23,987
|
|
|
|
98,834
|
|
Less
accumulated depreciation
|
|
|
(17,254
|
)
|
|
|
(43,688
|
)
|
Property
and equipment, net
|
|
$
|
6,733
|
|
|
$
|
55,146
|
|
Depreciation
expense for the years ended December 31, 2018 and 2017 was $4,797 and $27,914, respectively. The Company incurred a loss on the
write-off of property and equipment of $47,612 and $55,849 for fiscal years December 31, 2018 and 2017, respectively.
NOTE
6 – SOFTWARE COSTS
On
December 15, 2016, the Company entered into the Merger Agreement with Whaxy, a wholly-owned subsidiary of the Company,
DDDigtal, a Colorado corporation, Zachary Marburger, an individual acting solely in his capacity as stockholder representative,
and all of the stockholders of DDDigtal. Pursuant to the Merger Agreement, the parties agreed to merge Merger Subsidiary with
and into DDDigtal, whereby DDDigtal survived as a wholly-owned subsidiary of MassRoots.
On
January 25, 2017 the Merger was completed and became effective upon the filing of certificates of merger with the respective Secretary
of State of the States of Delaware and Colorado, in such forms as required by, and executed in accordance with, the relevant provisions
of the Delaware General Corporation Law and the Colorado Business Corporation Act.
Pursuant
to the terms of the Merger Agreement, each share of DDDigtal’s common stock was to be exchanged for a number of shares of
the Company’s common stock (or a fraction thereof), based on an exchange ratio, as ultimately calculated, equal to approximately
5.273-for-1, such that 1 share of the Company’s common stock was issued for every 5.273 shares of DDDigtal’s common
stock.
On
the Effective Date, the Company issued an aggregate of 2,926,830 shares of the Company’s common stock pro rata to
all stockholders of DDDigtal in exchange for all of the outstanding shares of DDDigtal’s common stock. At the same time,
each share of the common stock of Merger Subsidiary was converted into and exchanged for one share of common stock of DDDigtal
held by the Company, and all shares of DDDigtal common stock outstanding immediately prior to the Effective Date were automatically
cancelled and retired. At the Effective Date, DDDigtal continued as a surviving wholly-owned subsidiary of the Company and Merger
Subsidiary ceased to exist.
MASSROOTS,
INC.
Notes
to Consolidated Financial Statements
December
31, 2018 and 2017
In
addition, pursuant to the terms of the Merger Agreement, the Company paid cash consideration, in December 2016, of $40,000 to
Zachary Marburger and $20,000 to Micah Davidson, as repayment of outstanding debts owed by DDDigtal to such individuals.
As
a condition to the closing of the Merger, the Company hired Zachary Marburger as its Vice President of Strategy and engaged Micah
Davidson as a Senior Software Engineer. As a condition of Mr. Marburger’s employment and pursuant to the Merger Agreement,
the Company paid Mr. Marburger an additional $40,000 following the one-year anniversary of his constant employment with the Company.
Cash (paid
in December 2016)
|
|
$
|
60,000
|
|
2,926,830 shares of
the Company’s common stock
|
|
|
2,883,220
|
|
Liabilities
assumed
|
|
|
40,140
|
|
Total purchase
price
|
|
$
|
2,983,360
|
|
|
|
|
|
|
Cash
|
|
$
|
8,672
|
|
Accounts receivable
|
|
|
3,583
|
|
Property and equipment
|
|
|
3,333
|
|
|
|
|
|
|
Software
|
|
|
1,253,000
|
(1)
|
|
|
|
|
|
Goodwill
|
|
|
1,714,772
|
|
|
|
|
|
|
Assets
acquired
|
|
$
|
2,983,360
|
|
|
(1)
|
The
estimated useful life for software development is assumed at three years. The acquisition
was completed in January 2017, however the allocation of proceeds to identifiable assets
was recognized during fourth quarter of 2017. During management’s annual review
of these assets for fiscal year 2018, the remaining value of these assets was written-off
due to minimal revenue generated from this software. MassRoots recorded an impairment
expense of $415,378 during fiscal year 2018 for these assets, as compared to $1,714,772
during fiscal year 2017, a reduction of $1,299,394.
|
In
January 2018, MassRoots entered into a Master Services Agreement with MEV, LLC (“MEV”) pursuant to which MEV will
assist with the development and servicing of the Company’s technology platform, including its mobile applications, business
portal and WeedPass. MassRoots has capitalized the billable costs of engineers that were devoted to building the system and developing
additional features that enhanced its ability to generate revenue. MassRoots did not capitalize any costs associated with maintenance,
user-testing, analysis and planning of the system. The Company is amortizing these capitalized costs using a straight-line methodology
over five years, beginning July 5, 2018.
During
fiscal year 2018, MassRoots paid MEV $521,839 with respect to the development and maintenance of its platform, of which MassRoots
has capitalized $260,565 in development costs.
During
fiscal year 2018 and 2017, MassRoots incurred amortization of software costs of $438,264 and $389,059, respectively.
MASSROOTS,
INC.
Notes
to Consolidated Financial Statements
December
31, 2018 and 2017
NOTE
7 – CONVERTIBLE NOTES PAYABLE
On
March 24, 2014, the Company issued convertible debentures to certain accredited investors in the aggregate principal amount of
$269,100. The debentures originally matured on March 24, 2016 and accrued no interest. 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. In 2016, the Company issued an aggregate of 1,010,000 shares of its common stock in settlement of $101,000
of outstanding debentures and during the twelve months ended December 31, 2017, the Company issued an aggregate of 1,081,000 shares
of its common stock in settlement of $108,100 of outstanding debentures.
In
February 2016, the Company issued to a service provider a twelve month convertible debenture at 15% interest with a principal
amount of $35,000 along with three-year warrants to purchase up to 35,000 shares of common stock at $1.00 per share. The convertible
debenture is 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 such subsequent offering occurs, at $0.75 per
share. During the year ended December 31, 2016, the Company issued an aggregate of 343,767 shares in full settlement
of the debenture obligation.
On
March 14, 2016, the Company sold to investors six month secured convertible original issue discount notes with a principal
amount in the aggregate of $1,514,669, together with five-year warrants to purchase 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 with reset provisions. If the Company exercises its right to prepay the note, the Company must 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 90 days after the execution of the 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) $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, for any part of the principal amount of the note that is not paid at its maturity date, or September 14, 2016, the
conversion price for such amount is 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 in subsequent offerings made by the Company first be used to repay the notes’ outstanding
principal amount. Because the notes were not repaid by the maturity date, the investors became entitled to receive, in aggregate,
but calculated pro rata to the principal amounts remaining outstanding at the time of maturity, up to 500,000 shares of the Company’s
common stock. Gross proceeds received by the Company for the notes and warrants in this offering were $1,420,000, while net proceeds
were $1,271,600 (excluding any legal fees). On September 14, 2016, upon maturity of the notes, the Company was unable to
make the required payment of the then outstanding aggregate principal amount of $966,384 and was in default under the notes. Penalties
in aggregate of $584,735 were added to the carrying amount of the notes and were charged to current period interest.
During
the year ended December 31, 2016, the Company paid an aggregate of $1,479,498 cash and issued 1,754,462 shares of its
common stock upon conversion of $619,906 of the debenture obligation and accrued interest. In addition, the Company issued an
aggregate of 304,523 shares of its common stock as penalty shares valued at $163,621 and was charged to current period interest.
As of December 31, 2016, the debentures were paid in full.
On
August 17, 2017, the Company issued secured convertible notes to certain accredited investors in the aggregate principal amount
of $1,045,000. The notes matured on February 18, 2018 and accrued no interest. Net proceeds received by the Company were $942,500
after deduction of legal and other fees. If the Company exercises its right to prepay the notes, the Company shall make payment
to the investors in an amount equal to the sum of the then outstanding principal amount of the notes that the Company desires
to prepay, multiplied by (a) 1.1, during the first 90 days after the execution of the note, or (b) 1.25, 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) $0.75
and (ii) a 25% discount to the price at which the Company next conducts an offering after the issuance date of the notes; provided,
however, if any part of the principal amount of the notes 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.
In
connection with the issuance of the notes, the Company and the investors also entered into a security agreement pursuant to which
the notes were secured by all of the assets of the Company currently held or thereafter acquired.
In
connection with the issuance of the notes, the Company issued five-year warrants to purchase an aggregate of 2,090,000 shares
of Company’s common stock with an initial exercise price of $0.50. The warrants contain certain anti-dilutive (reset) provisions.
From
January 1 to January 16, 2018, the Company made payment to the holders of the notes in an aggregate of (i) $510,937.50 in cash
and (ii) pursuant to the right of conversion of the notes, an aggregate of 3,742,648 shares of the Company’s common stock.
The Company believes that it has completed all of its obligations under the notes and they are retired.
MASSROOTS,
INC.
Notes
to Consolidated Financial Statements
December
31, 2018 and 2017
On
July 5, 2018, the Company issued secured convertible notes to certain accredited investors in the aggregate principal amount of
$1,650,000. The notes have a maturity date of January 5, 2019 and accrued no interest. Net proceeds received by the Company were
$1,492,500 after deduction of legal and other fees. If the Company exercises its right to prepay the notes, the Company shall
make payment to the investors in an amount equal to the sum of the then outstanding principal amount of the notes that the Company
desires to prepay, multiplied by (a) 1.1, during the first 90 days after the execution of the note, or (b) 1.25, 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) $0.25 and (ii) a 15% discount to the price at which the Company next conducts an offering after the issuance date of the
notes; provided, however, if any part of the principal amount of the notes remains unpaid after the 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.
In
connection with the issuance of the notes, the Company and the investors also entered into a security agreement pursuant to which
the notes are secured by all of the assets of the Company currently held as of July 5, 2018 or thereafter acquired. The Company
also issued five-year warrants to purchase an aggregate of 6,600,000 shares of Company’s common stock with an initial exercise
price of $0.25. The warrants contain certain anti-dilutive (reset) provisions.
In
December 2018, the Company made payments of
$1,762,500 to holders of July 2018 notes
.
As of December 31, 2018, the aggregate carrying value of the debentures was $390,000. The balance of these notes were converted
during 2019.
On
December 17, 2018, the Company issued a secured convertible promissory note. The note in the principal amount of $2,225,000 (including
an original issuance discount of $200,000) matures December 17, 2019 and bears interest at a rate of 8% per annum (which shall
be increased to 22% upon the occurrence of an event of default). The Company shall have the right to prepay the note for an amount
equal to 125% multiplied by the portion of the Outstanding Balance (as defined in the note) being prepaid. In addition, the note
is secured by the Security Agreement (as defined below). The investor shall have the right to convert the Outstanding Balance
of the note at any time into shares of common stock of the Company at a conversion price of $0.35 per share, subject to adjustment.
Commencing on June 17, 2019, the investor shall have 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%.
Pursuant
to the terms of the Agreement, 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). As of December 31, 2018, the aggregate carrying value of the note was $2,105,102.
During
the twelve months ended December 31, 2018 and 2017, the Company amortized $1,020,673 and $652,921 of debt discounts to current
period interest, respectively.
MASSROOTS,
INC.
Notes
to Consolidated Financial Statements
December
31, 2018 and 2017
NOTE
8 – DERIVATIVE LIABILITIES AND FAIR VALUE MEASUREMENTS
The
Company identified conversion features embedded within convertible debt and certain warrants outstanding during the twelve months
ended December 31, 2017. The Company determined that the features associated with the embedded conversion option and exercise
prices, in the form of 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.
On
January 4, 2017, warrant holders exercised outstanding warrants to purchase an aggregate of 682,668 shares of the Company’s
common stock, and as such the Company transferred to estimated fair value of the embedded derivatives $610,967 from liability
to equity. The Company estimated the fair value at the time of exercise using the Binomial Option Pricing Model based on the following
assumptions: (1) dividend yield of 0%, (2) expected volatility of 110.13%, (3) weighted average risk-free interest rate of 1.94%,
(4) expected life of 4.20 years, and (5) estimated fair value of the Company’s common stock of $1.07 per share.
On
July 21, 2017, upon issuance of the warrants in connection with the sale of common stock, the Company determined that the features
associated with the reset provisions embedded in the issued warrants, in the form of a ratchet provision, should be accounted
for at fair value, as a derivative liability, as the Company could not determine if a sufficient number of shares would be available
to settle all potential future conversion transactions. The Company estimated the fair value of the embedded derivatives of $1,003,870
using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility
of 103.46%, (3) weighted average risk-free interest rate of 1.81% (4) expected life of 5.00 years, and (5) estimated fair value
of the Company’s common stock of $0.5687 per share. The estimated fair value of the embedded derivative of $1,003,870 was
reclassified from equity at the date of issuance.
On
August 17, 2017, upon issuance of the secured convertible notes and warrants, the Company determined that the features associated
with the embedded conversion option and reset provisions embedded in the issued notes and warrants, in the form of a ratchet provision,
should be accounted for at fair value, as a derivative liability, as the Company could not determine if a sufficient number of
shares would be available to settle all potential future conversion transactions.
The
Company estimated the fair value of the embedded derivatives of $798,429 using the Binomial Option Pricing Model based on the
following assumptions: (1) dividend yield of 0%, (2) expected volatility of 102.73%, (3) weighted average risk-free interest rate
of 1.11% to 1.78% (4) expected life of 0.49 to 5.00 years, and (5) estimated fair value of the Company’s common stock of
$0.457 per share. The estimated fair value of the embedded derivative of $798,429 together with the issuance costs of $102,500
(aggregate of $900,929) was charged to debt discount and amortized over the term of the debenture with the excess charged to current
period interest.
On
December 31, 2017, the Company estimated the fair value of the embedded derivatives of $9,493,307 using the Binomial Option Pricing
Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 108.44%, (3) weighted average risk-free
interest rate of 1.28% to 2.20%, (4) expected life of 0.13 to 4.65 years, and (5) estimated fair value of the Company’s
common stock of $0.601 per share.
The
Company adopted the provisions of ASC 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.
|
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.
MASSROOTS,
INC.
Notes
to Consolidated Financial Statements
December
31, 2018 and 2017
As
of December 31, 2018 and December 31, 2017, 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, 2018 and December 31, 2017:
|
|
December 31,
2018
|
|
|
Quoted
Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Derivative
liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
December 31,
2017
|
|
|
Quoted
Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Derivative
liability
|
|
$
|
9,493,307
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
9,493,307
|
|
The
following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities for the two years
ended December 31, 2018:
Balance, January 1, 2017
|
|
$
|
1,301,138
|
|
Transfers in due to
issuance of liability warrants in connection with sale of common stock
|
|
|
1,003,870
|
|
Transfers in due
to issuance of convertible notes and warrants with embedded conversion and
|
|
|
|
|
Reset options
|
|
|
798,431
|
|
Transfers out due to
warrant exercise
|
|
|
(610,967
|
)
|
Mark
to market to December 31, 2017
|
|
|
7,000,835
|
|
Balance, December
31, 2017
|
|
$
|
9,493,307
|
|
Loss on change in warrant
liabilities for the twelve months ended December 31, 2017
|
|
$
|
(7,000,835
|
)
|
Balance,
January 1, 2018
|
|
$
|
9,493,307
|
|
Cumulative
effect adjustment to reclassify fair value of derivative liabilities to retained earnings
|
|
|
(9,493,307
|
)
|
Balance,
December 31, 2018
|
|
$
|
-
|
|
Loss
on change in warrant and derivative liabilities for the year ended December 31, 2018
|
|
$
|
-
|
|
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 for each of the related derivative instruments, the value to the holder of the instrument 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 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 Consolidated Financial Statements
December
31, 2018 and 2017
NOTE
9 – CAPITAL STOCK
Preferred
Stock
The
Company is authorized to issue 10,000,000 shares of blank check preferred stock, par value $0.001 per share. As of December 31,
2018, there were no shares of preferred stock issued and outstanding.
Common
Stock
The
Company is authorized to issue 500,000,000 shares of common stock, par value $0.001 per share. As of December 31, 2018, there
were 168,706,472 shares of common stock issued and outstanding.
The
following common stock transactions were recorded during the years ended December 31, 2018 and 2017:
During
the year ended December 31, 2017, the Company issued an aggregate of 22,740,898 shares of its common stock for services valued
at $15,474,330.
During
the year ended December 31, 2017, the Company sold an aggregate of 2,434,000 shares of its common stock and warrants to purchase
shares of common stock for net proceeds of $2,676,444.
During
the year ended December 31, 2017, the Company issued an aggregate of 436,011 shares for its common stock upon the cashless exercise
of common stock options.
During
the year ended December 31, 2017, the Company issued an aggregate of 355,689 shares of its common stock for the cashless exercise
of common stock warrants.
During
the year ended December 31, 2017, the Company issued an aggregate of 1,081,000 shares of its common stock in settlement of $108,100
of convertible debt.
During
the year ended December 31, 2017, the Company issued an aggregate of 7,033,041 shares of its common stock upon the exercise of
common stock warrants for net proceeds of $4,759,762.
During
the year ended December 31, 2017, the Company issued an aggregate of 2,926,830 shares of its common stock to acquire DDDigtal
(Note 1).
During
the year ended December 31, 2017, the Company issued an aggregate of 3,250,000 shares of its common stock to acquire Odava (Note
1).
During
the year ended December 31, 2017, three former board members agreed to surrender an aggregate of 1,750,000 shares of the Company’s
common stock in exchange for five-year warrants to purchase up to 4,850,000 shares of the Company’s common stock at an exercise
price of $0.20 per share. As a result of the exchange in equity, the Company recorded stock-based compensation of $811,988.
During
the year ended December 31, 2018, the Company issued an aggregate of 14,362,500 shares of its common stock recorded as to be issued
on December 31, 2017.
During
the year ended December 31, 2018, the Company retired an aggregate of 1,790,000 shares of its common stock recorded as to be retired
on December 31, 2017 in exchange for warrants issued in December 2017.
During
the year ended December 31, 2018, the Company issued an aggregate of 13,594,000 shares of its common stock, having an aggregate
fair value of $3,508,187, for services rendered.
During
the year ended December 31, 2018, the Company issued an aggregate of 95,134 shares for its common stock upon the cashless exercise
of outstanding options.
MASSROOTS,
INC.
Notes
to Consolidated Financial Statements
December
31, 2018 and 2017
During
the year ended December 31, 2018, the Company issued an aggregate of 7,906,470 shares of its common stock upon the cashless exercise
of outstanding warrants.
During
the year ended December 31, 2018, the Company issued an aggregate of 3,742,648 shares of its common stock for the settlement of
convertible debt with a principal amount of $636,250.
During
the year ended December 31, 2018, the Company issued an aggregate of 4,605,000 shares of its common stock upon the exercise of
outstanding warrants for net proceeds of $637,230.
During
the year ended December 31, 2018, the Company issued an aggregate of 13,700,000 shares of common stock for cash proceeds of $2,740,000.
During
the year ended December 31, 2018, the Company received $564,000 recorded as subscription receivable as of December 31, 2017.
During
the year ended December 31, 2018, the Company issued an aggregate of 324,881 shares in lieu of interest expense $52,483.
During
the year ended December 31, 2018, the Company received cash proceeds of $6,000 upon the exercise of warrants
.
The
Company has yet not issued 80,000 shares of common stock underlying the warrants and are accounted for as common stock to be
issued.
NOTE
10 – WARRANTS
In July 2017,
upon the sale of the Company’s common stock, the Company issued warrants to purchase up to 2,394,000 shares of the Company’s
common stock at an exercise price of $0.65 per share, exercisable through July 24, 2022. These warrants contain certain anti-dilutive
(reset) provisions (See Note 8).
In
August and September 2017, in connection with the issuance of convertible notes, the Company granted to the same investors five-year
warrants to purchase an aggregate of 2,090,000 shares of the Company’s common stock at an exercise price $0.50 per share.
The warrants may be exercised any time after the issuance through and including the fifth anniversary of its original issuance.
The warrants have a fair market value of $715,432. The fair market value was calculated using the Binomial Option Pricing Model,
assuming approximately 0.47% risk-free interest, 0% dividend yield, 102.73% volatility, and expected life of five years. These
warrants contain certain anti-dilutive (reset) provisions (See Note 8).
In
December 2017, the Company issued warrants to purchase to up 4,850,000 shares of the Company’s common stock at an exercise
price of $0.20 per share to former directors of the Company. The estimated fair value of $1,450,737 was charged to current period
operations. The fair market value was calculated using the Black Scholes Option Pricing Model, assuming approximately 2.18% risk-free
interest, 0% dividend yield, 223,02% volatility, and expected life of 5 years.
In
December 2017, upon the sale of the Company’s common stock, the Company issued warrants to purchase up to 10,250,000 shares
of the Company’s common stock at an exercise price of $0.40 per share, exercisable through December 31, 2022.
In
December 2017, upon the sale of the Company’s common stock, the Company issued warrants to purchase up to 8,521,000 shares
of the Company’s common stock at an exercise price of $0.20 per share, exercisable through December 31, 2022. The exercise
price of the previously issued 4,484,000 warrants issued in connection with the July 2017 common stock sale and August and September
convertible debt was reset from $0.65 and $0.50 per share, respectively, to $0.20. These warrants contain certain anti-dilutive
(reset) provisions (See Note 8).
In
January 2018, the Company issued warrants to purchase up to 250,000 shares of the Company’s common stock at an exercise
price of $0.20 per share to a service provider of the Company. The estimated fair value of $86,483 was charged to current period
operations. The fair market value was calculated using the Black Scholes option pricing model, assuming approximately 2.49% risk-free
interest, 0% dividend yield, 112.14% volatility, and expected life of five years.
MASSROOTS,
INC.
Notes
to Consolidated Financial Statements
December
31, 2018 and 2017
In
January 2018, in conjunction with the sale of the Company’s common stock, the Company granted warrants to purchase up to
13,700,000 shares of the Company’s common stock at an exercise price of $0.40 per share, exercisable through January 31,
2023. Due to price protection provisions, the exercise price of the warrants was adjusted to $0.20 on July 26, 2018.
In
July 2018, the Company issued warrants to purchase up to an aggregate of 6,600,000 shares of the Company’s common stock
as part of the sale of convertible debentures.
In November 2018, MassRoots repriced warrants to purchase common
stock covered by the Registration Statement on Form S-1 that was declared effective by the SEC on July 17, 2018 to $0.075 per
share.
Warrants
outstanding and exercisable at December 31, 2018 are as follows:
Exercise Price
|
|
Warrants
Outstanding
|
|
|
Weighted Avg.
Remaining Life
|
|
|
Warrants
Exercisable
|
|
$0.01 – 0.25
|
|
|
69,194,998
|
|
|
|
4.14
|
|
|
|
69,254,998
|
|
0.26 – 0.50
|
|
|
565,002
|
|
|
|
2.42
|
|
|
|
565,002
|
|
0.51 – 0.75
|
|
|
50,000
|
|
|
|
1.27
|
|
|
|
50,000
|
|
0.76 – 1.00
|
|
|
5,100,002
|
|
|
|
0.75
|
|
|
|
5,100,002
|
|
|
|
|
74,910,002
|
|
|
|
|
|
|
|
74,970,002
|
|
A
summary of the warrant activity for the years ended December 31, 2018 and 2017 is as follows:
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at January 1, 2017
|
|
|
15,448,056
|
|
|
$
|
0.81
|
|
|
|
1.4
|
|
|
$
|
4,225,936
|
|
Grants
|
|
|
28,105,500
|
|
|
|
0.27
|
|
|
|
3.2
|
|
|
|
|
|
Exercised
|
|
|
(7,728,209
|
)
|
|
|
0.68
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(637,500
|
)
|
|
|
0.62
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
35,187,847
|
|
|
$
|
0.41
|
|
|
|
2.3
|
|
|
$
|
9,314,959
|
|
Grants
|
|
|
60,832,338
|
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(20,184,508
|
)
|
|
|
0.21
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(925,675
|
)
|
|
|
1.89
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2018
|
|
|
74,910,002
|
|
|
$
|
0.14
|
|
|
|
3.89
|
|
|
$
|
-
|
|
Exercisable at December 31, 2018
|
|
|
74,910,002
|
|
|
$
|
0.14
|
|
|
|
3.89
|
|
|
$
|
-
|
|
The
aggregate intrinsic value outstanding stock warrants was $0, based on warrants with an exercise price less than the Company’s
stock price of $0.059 as of December 31, 2018, which would have been received by the warrant holders had those warrant holders
exercised their warrants as of that date.
MASSROOTS,
INC.
Notes
to Consolidated Financial Statements
December
31, 2018 and 2017
NOTE
11 – 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 (“2016 Plan”) in October 2016, our 2017 Equity
Incentive Plan in December 2016 (“2017 Plan”) and our 2018 Equity Incentive Plan in June 2018 (the “2018 Plan”,
and together with the 2014 Plan, 2015 Plan, 2016 Plan, 2017 Plan, and 2018 Plan the ” Prior Plans”). The 2014 Plan,
the 2015 Plan, the 2016 Plan and the 2017 Plan are identical, except for number of shares reserved for issuance under each. As
of December 31, 2018, the Company had granted an aggregate of 60,600,000 securities under the Plans, with 3,900,000 shares available
for future issuances.
The Plans provide
for the grant of incentive stock options to our employees and our parent and subsidiary corporations’ employees, and for
the grant of non-statutory stock options, stock bonus awards, restricted stock awards, performance stock awards and other forms
of stock compensation to our employees, including officers, consultants and directors. Our 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.
During
the year ended December 31, 2017, the Company granted ten-year options to purchase up to 2,854,000 shares of common stock. The
fair value of $2,014,591, was determined using the Black-Scholes Option Pricing Model, assuming approximately 1.81% to 2.35% risk-free
interest, 0% dividend yield, 103.66% to 110.16% volatility, and expected life of five to ten years and will be charged to operations
over the vesting terms of the options.
During
the year ended December 31, 2018, the Company granted ten-year options outside of our Plans to purchase up to 13,250,000 shares
of the Company’s common stock. The fair value of $2,146,193, was determined using the Black-Scholes option pricing model,
assuming approximately 2.78% - 2.98% risk-free interest, 0% dividend yield, 112.67% -116.28% volatility, and expected life of
ten years and will be charged to operations over the vesting terms of the options.
The
summary terms of the issuances are as follows:
Exercise Price
|
|
|
Number of
Options
|
|
|
Vesting Terms
|
$
|
0.20
|
|
|
|
12,000,000
|
|
|
Immediately
|
|
0.36
|
|
|
|
250,000
|
|
|
Immediately
|
|
0.40
|
|
|
|
1,000,000
|
|
|
Immediately
|
Stock
options outstanding and exercisable on December 31, 2018 are as follows:
Exercise Price
|
|
Number of
Options
|
|
|
Remaining Life
In Years
|
|
|
Number of Options
Exercisable
|
|
$0.01 – 0.25
|
|
|
13,056,786
|
|
|
|
9.24
|
|
|
|
13,056,786
|
|
0.26 - 0.50
|
|
|
1,939,631
|
|
|
|
8.26
|
|
|
|
1,939,631
|
|
0.51 – 0.75
|
|
|
1,820,112
|
|
|
|
7.68
|
|
|
|
1,820,112
|
|
0.76 - 1.00
|
|
|
9,926,072
|
|
|
|
7.71
|
|
|
|
9,926,072
|
|
1.01 - 2.00
|
|
|
629,164
|
|
|
|
7.61
|
|
|
|
629,164
|
|
|
|
|
27,371,765
|
|
|
|
|
|
|
|
27,371,765
|
|
MASSROOTS,
INC.
Notes
to Consolidated Financial Statements
December
31, 2018 and 2017
A
summary of the stock option activity for the years ended December 31, 2018 and 2017 is as follows:
|
|
Shares
|
|
|
Weighted-
Average
Exercise
Price
|
|
|
Weighted-
Average
Remaining
Contractual
Term
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at January 1, 2017
|
|
|
14,824,158
|
|
|
$
|
0.52
|
|
|
|
8.37
|
|
|
$
|
4,566,717
|
|
Grants
|
|
|
2,854,000
|
|
|
|
0.50
|
|
|
|
8.60
|
|
|
|
|
|
Exercised
|
|
|
(436,011
|
)
|
|
|
0.16
|
|
|
|
7.80
|
|
|
|
|
|
Forfeiture/Cancelled
|
|
|
(2,454,761
|
)
|
|
|
0.73
|
|
|
|
7.80
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
14,378,432
|
|
|
$
|
0.76
|
|
|
|
7.48
|
|
|
$
|
771,359
|
|
Grants
|
|
|
13,250,000
|
|
|
|
0.22
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(256,667
|
)
|
|
|
0.51
|
|
|
|
|
|
|
|
|
|
Forfeiture/Cancelled
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
27,371,765
|
|
|
|
0.50
|
|
|
|
8.67
|
|
|
$
|
-
|
|
Exercisable at December 31, 2018
|
|
|
27,371,765
|
|
|
$
|
0.50
|
|
|
|
8.67
|
|
|
$
|
-
|
|
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 $0.059 as of December 31, 2018, 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 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 options for non-employees.
The
fair value of all options that were vested as of the year ended December 31, 2018 and 2017 was $0 and $5,821,631,
respectively. Unrecognized compensation expense of $0 at December 31, 2018 will be expensed in future periods.
NOTE
12 – INCOME TAXES
The Tax
Cuts and Jobs Acts (the “Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate income
tax rate from 35% to 21%. ASC 740, “Income Taxes”, requires that effects of changes in tax rates to be recognized
in the period enacted. Recognizing the late enactment of the Act and complexity of accurately accounting for its impact, the Securities
and Exchange Commission in SAB 118 provides guidance that allows registrants to provide a reasonable estimate of the Act in their
financial statements and adjust the reported impact in a measurement period not to exceed one year.
At December 31, 2018, the
Company has available for federal income tax purposes a net operating loss carry forward of approximately $55,362,071, which begin
expiring in the year 2033, that may be used to offset future taxable income. The Company has provided a valuation reserve against
the full amount of the net operating loss benefit, since in the opinion of management based upon the earnings history of the Company;
it is more likely than not that the benefits will not be realized. Due to possible significant changes in the Company’s ownership,
the future use of its existing net operating losses may be limited. All or portion of the remaining valuation allowance may
be reduced in future years based on an assessment of earnings sufficient to fully utilize these potential tax benefits. During
the year ended December 31, 2018, the Company has increased the valuation allowance from $11,090,000 to $14,503,490.
MASSROOTS,
INC.
Notes
to Consolidated Financial Statements
December
31, 2018 and 2017
The Company has adopted the provisions
of ASC 740-10-25, which provides recognition criteria and a related measurement model for uncertain tax positions taken or expected
to be taken in income tax returns. ASC 740-10-25 requires that a position taken or expected to be taken in a tax return be recognized
in the financial statements when it is more likely than not that the position would be sustained upon examination by tax authorities.
Tax position that meet the more likely
than not threshold are then measured using a probability weighted approach recognizing the largest amount of tax benefit that is
greater than 50% likely of being realized upon ultimate settlement. The Company had no tax positions relating to open income tax
returns that were considered to be uncertain.
Sections 382 and 383 of the Internal
Revenue Code of 1986, as amended (the “Code”), provide for annual limitations on the utilization of net operating loss
and credit carryforwards if the Company were to undergo an ownership change, as defined in Section 382 of the Code. In general,
an ownership change occurs whenever the percentage of the shares of a corporation owned, directly or indirectly, by 5-percent shareholders,
as defined in Section 382 of the Code, increases by more than 50 percentage points over the lowest percentage of the shares of
such corporation owned, directly or indirectly, by such 5-percent shareholders at any time over the preceding three years. In the
event such ownership change occurs, the annual limitation may result in the expiration of the net operating losses prior to full
utilization.
The Company is required to file income
tax returns in the U.S. Federal jurisdiction and in Colorado. The Company is no longer subject to income tax examinations by tax
authorities for tax years ending before December 31, 2013.
The Company’s deferred taxes as
of December 31, 2018 and 2017 consist of the following:
|
|
2018
|
|
|
2017
|
|
Non-Current deferred tax asset: (Estimated)
|
|
|
|
|
|
|
Net operating loss carry-forwards
|
|
|
14,503,490
|
|
|
|
11,090,000
|
|
Valuation allowance
|
|
|
(14,503,490
|
)
|
|
|
(11,090,000
|
)
|
Net non-current deferred tax asset
|
|
|
-
|
|
|
|
-
|
|
The Company is delinquent in filing
its payroll taxes related to stock compensation awards. At December 31, 2018, the Company has, in payroll tax liabilities, including
interest and penalties, of approximately $2,992,023, due to federal and state taxing authorities. The actual liability may be higher
or lower due to interest or penalties assessed by federal and state taxing authorities. The Company expects to settle these liabilities
by September 30, 2019.
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.
NOTE
13 – RELATED PARTY TRANSACTIONS
On July
21, 2017, Isaac Dietrich, the Company’s Chief Executive Officer, participated in the Company’s private placement
of securities, whereby Mr. Dietrich purchased $10,000 of the Company’s securities consisting of 20,000 shares of the Company’s
common stock and warrants to purchase 20,000 shares at $0.65 per share. As a result of the ratchet provision in the warrants that
was triggered by the Company’s December 2017 private placement, the number of warrants increased to 65,000 and the exercise
price decreased to $0.20. As a result of the ratchet provision in the warrants that was triggered by the Company’s November
2018 warrant repricing, the number of warrants increased to 173,333 and the exercise price decreased to $0.075.
MASSROOTS,
INC.
Notes
to Consolidated Financial Statements
December
31, 2018 and 2017
NOTE
14 – SUBSEQUENT EVENTS
The
Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued.
From
January 1, 2019 to April 15, 2019, MassRoots issued 80,000 shares of common stock that were recorded as to be issued as of December 31, 2018.
From
January 1, 2019 to April 15, 2019, MassRoots received $116,637 upon the exercise of warrants to purchase 1,555,160 shares of common
stock which were recorded as to be issued.
From
January 1, 2019 to April 15, 2019, MassRoots issued 8,906,275 shares of common stock and recorded 1,196,078 as to be issued for
the settlement of $392,580 in convertible debt from its July 2018 Offering. MassRoots issued an additional 250,000 shares of common
stock under the maturity date kicker provision of the July 2018 notes. The July 2018 notes have been fully satisfied and are retired.
From
January 1, 2019 to April 15, 2019, MassRoots issued 448,102 shares of common stock upon the cashless exercise of 2,750,000 warrants
to purchase common stock.
From January 1,
2019 to April 15, 2019, MassRoots issued 1,050,000 shares of common stock for an interest expense.
From
January 1, 2019 to April 15, 2019, MassRoots granted options to purchase 250,000 shares of common stock at an exercise price of
$0.075 per share.
From January 1, 2019 to April
15, 2019, MassRoots issued 2,950,000 shares of common stock for services rendered.
F-28