UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

 

FORM 10-Q

 

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

For the quarterly period ended June 30, 2016

 

OR

 

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

For the transition period from ___________to ____________

 

Commission File Number 000-55431

 

 

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

 

Delaware	46-2612944
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

1624 Market Street, Suite 201, Denver, CO 80202

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

 

(720) 442-0052

(Issuer’s telephone number)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [ ]

 

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

Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [x] No [ ]

 

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

 

Large accelerate filer [ ] Accelerated Filer [ ]

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of August 17, 2016, the issuer had 51,001,884 shares of common stock issued and outstanding.

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION	1
Item 1. Condensed Financial Statements	1
Balance Sheets as of June 30, 2016 (Unaudited) and December 31, 2015	1
Statement of Operations for the Three and Six Months Ended June 30, 2016 and 2015 (Unaudited)	2
Statement of Stockholders’ Equity (Deficit) for the Six Months Ended June 30, 2016 (Unaudited)	3
Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015 (Unaudited)	4
Notes To Consolidated Financial Statements	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3. Quantitative & Qualitative Disclosures about Market Risks	24
Item 4. Controls and Procedures	24
PART II OTHER INFORMATION	25
Item 1. Legal Proceedings	25
Item 1A. Risk Factors	25
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	25
Item 3. Defaults upon Senior Securities	25
Item 5. Other Information	25
Item 6. Exhibits	25

PART I. FINANCIAL INFORMATION

 

Item 1. Condensed Financial Statements 

 

MASSROOTS, INC.

CONDENSED BALANCE SHEETS

AS OF JUNE 30, 2016 AND DECEMBER 31, 2015

 

			2016				2015
			(Unaudited)
ASSETS
CURRENT ASSETS
Cash		$	50,521			$	386,316
Accounts receivables			76,752				39,500
Prepaid expense			20,000				12,938
TOTAL CURRENT ASSETS			147,273				438,754
Property and equipment - net			83,398				73,023
OTHER ASSETS
Investment in Flowhub			175,000				175,000
Deposits and other assets			33,502				33,502
Total Other Assets			208,502				208,502
TOTAL ASSETS		$	439,173			$	720,279
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable		$	393,434			$	109,997
Accrued expenses			99,263				84,355
Convertible debt, net of $557,068 and  $0 discount, respectively			992,499				0
Derivative liabilities			195,108				0
TOTAL CURRENT LIABILITIES			1,680,304				194,352
LONG-TERM LIABILITY
Convertible debentures, net of $0 and $0 discount, respectively			209,100				209,100
TOTAL LIABILITIES			1,899,404				403,452
STOCKHOLDERS' (DEFICIT) EQUITY
Common stock, $0.001 par value, 200,000,000 shares authorized; 49,197,385 and 46,939,966 shares issued and outstanding			49,197				46,940
Common stock to be issued, 136,227 and 624,000 shares, respectively			136				624
Additional paid in capital			15,135,437				12,101,784
Accumulated deficit			(16,635,001	)			(11,832,521	)
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY			(1,450,231	)			316,827
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY		$	439,173			$	720,279

 

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

MASSROOTS, INC.

CONDENSED STATEMENT OF OPERATIONS

(UNAUDITED)

 

		Three Months Ended								Six Months Ended
		June 30, 2016				June 30, 2015				June 30, 2016				June 30, 2015
REVENUES		$	492,233			$	2,126			$	585,618			$	3,066
OPERATING EXPENSES
Advertising			369,132				208,830				557,419				263,119
Cost of revenues			285,228				-				293,780				-
Payroll and related expense			640,546				359,440				1,236,044				522,370
Common stock issued for services			30,373				254,388				293,956				368,100
Options issued for services			660,217				266,562				1,330,984				313,571
Warrants issued for services			-				22,579				68,369				26,411
Other general and administrative expenses			337,097				381,332				920,608				565,312
Total General and Administrative expenses			2,322,953				1,493,131				4,701,160				2,058,883
(LOSS) FROM OPERATIONS			(1,830,360	)			(1,491,005	)			(4,115,542	)			(2,055,817	)
OTHER INCOME (EXPENSE)
Change in derivative liabilities			537,153				-				314,296				42,737
Interest expense			-				(2,091	)			(8,635	)			(4,381	)
Amortization of discount on notes payable			(873,050	)			(24,201	)			(992,559	)			(50,347	)
Total Other Income (Expense)			(335,897	)			(26,292	)			(686,938	)			(11,991	)
(LOSS) BEFORE INCOME TAXES			(2,166,257	)			(1,517,297	)			(4,802,480	)			(2,067,808	)
PROVISION FOR INCOME TAXES			-				-				-				-
NET (LOSS)		$	(2,166,257	)		$	(1,517,297	)		$	(4,802,480	)		$	(2,067,808	)
Basic and fully diluted net income (loss) per common share:		$	(0.05	)		$	(0.03	)		$	(0.10	)		$	(0.05	)
Weighted average common shares outstanding			48,509,071				43,535,697				47,920,007				41,972,190

 

 

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

   

MASSROOTS , IINC.

CONDENSED STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2016

(UNAUDITED)

 

			Common Stock								Common Stock to be Issued								Additional Paid				Accumulated				Total Stockholders'
			Shares				Amount				Shares				Amount				In Capital				Deficit				(Deficit) Equity
Balance as of December 31, 2015			46,939,965			$	46,940				624,000			$	624			$	12,101,784			$	(11,832,521	)		$	316,827
Common stock issued related to 2015 stock grants			624,000				624				(624,000	)			(624	)			—				—				—
Common stock issued for services			341,250				341				25,000				25				293,600				—				293,966
Common stock issued upon exercise of warrants for cash			812,734				813				106,000				106				370,588				—				371,507
Common stock issued upon exercise of options for cash			210,000				210				—				—				24,790				—				25,000
Stock based compensation			—				—				—				—				1,330,984				—				1,330,984
Fair value of warrants issued for services			—				—				—				—				68,369				—				68,369
Debt discount related to convertible notes			—				—				—				—				945,596				—				945,596
Common shares issued upon cashless exercise of warrants			5,277				5				5,227				5				(10	)			—				—
Common shares issued upon cashless exercise of options			264,158				264								—				(264	)			—				—
Net loss			—				—				—				—				—				(4,802,480	)			(4,802,480	)
Balance as of June 30, 2016 (unaudited)			49,197,384			$	49,197				136,227			$	136			$	15,135,437			$	(16,635,001	)		$	(1,450,231	)

The accompanying notes en integral part of these condensed financial statements. 

 

MASSROOTS, INC.

CONDENSED STATEMENT OF CASHFLOWS

 

(UNAUDITED)
		For the six months ended June 30, 2016				For the six months ended June 30, 2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)		($	4,802,480	)		($	2,067,808	)
Adjustments to reconcile net (loss ) to net cash (used in )
operating activities:
Amortization of discounts on notes payable			992,599				50,347
Depreciation			8,725				4,094
Common stock issued for services			293,956				368,100
Options issued for services			1,330,984				313,571
Warrants issued for services			68,369				26,411
Change in derivative liabilities			(314,296	)			(42,737	)
Inputed Interest expense			-				4,381
Changes in operating assets and liabilities
Accounts receivables			(37,252	)			11,131
Prepaid expense			(7,062	)			-
Deposit			-				(32,802	)
Accounts payable and other liabilities			333,255				15,911
Accrued payroll tax			-				(2,642	)
Net Cash (Used in) Operating Activities			(2,133,202	)			(1,352,043	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for equipment			(19,100	)			(38,158	)
Investment in Flowhub			-				(175,000	)
Net Cash (Used in) Investing Activities			(19,100	)			(213,158	)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock for cash			-				1,298,700
Proceeds from exercise of warrants			371,507				295,936
Proceeds from exercise of options			25,000				-
Proceeds from issuance of convertible notes payable			1,420,000				-
Net Cash Provided by Financing Activities			1,816,507				1,594,636
NET INCREASE (DECREASE) IN CASH			(335,795	)			29,435
CASH AT BEGINNING OF PERIOD			386,316				141,928
CASH AT END OF PERIOD		$	50,521			$	171,363
CASH PAID FOR:
Interest			-				-
Taxes			-				-
NON-CASH FINANCING ACTIVITIES
Warrants/Common stock/Option issued for services		$	0			$	0
Convertible note issued in payment of liabilities		$	35,000			$	0
Common stock, Warrants and Options as prepaid expense		$	0			$	849,128

 

The report on the financial statements and accompanying notes are an integral part of these condensed financial statements.  

MassRoots, Inc. 

Notes to the Condensed Financial Statements

June 30, 2016 (Unaudited)

 

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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

 

Basis of Presentation

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

 

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

 

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

 

Management’s Use of Estimates

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

 

Deferred Taxes

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

 

Cash and Cash Equivalents

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

 

Accounts Receivable and Allowance for Doubtful Accounts

The Company monitors outstanding receivables based on factors surrounding the credit risk of specific customers, historical trends, and other information. The allowance for doubtful accounts is estimated based on an assessment of the Company’s ability to collect on customer accounts receivable. There is judgment involved with estimating the allowance for doubtful accounts and if the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make the required payments, the Company may be required to record additional allowances or charges against revenues. The Company writes-off accounts receivable against the allowance when it determines a balance is uncollectible and no longer actively pursues its collection. As of June 30, 2016 and December 31, 2015, based upon the review of the outstanding accounts receivable, the Company has determined that an allowance for doubtful accounts is not required.

 

MassRoots, Inc. 

Notes to the Condensed Financial Statements

June 30, 2016 (Unaudited)

 

Property and Equipment

Property and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives of 3 to 5 years. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings.

 

Revenue Recognition

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

 

(i)

persuasive evidence of an arrangement exists,

 

(ii)

the services have been rendered and all required milestones achieved,

 

(iii)

the sales price is fixed or determinable, and

 

(iv)

Collectability is reasonably assured.

 

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

 

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

 

Cost of Revenue

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

 

Comprehensive Income (Loss)

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

 

Convertible Debt

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

 

Stock-Based Compensation

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

 

MassRoots, Inc. 

Notes to the Condensed Financial Statements

June 30, 2016 (Unaudited)

 

Fair Value of Financial Instruments

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

 

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

 

Derivative Financial Instruments

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

 

For option-based simple derivative financial instruments, the Company uses the Black-Scholes option-pricing model to value the derivative instruments at inception and subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period.

 

 As of June 30, 2016, the Company had outstanding convertible notes that contained embedded derivatives. These embedded derivatives include certain conversion features and reset provisions.

 

Convertible Debentures

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

 

 Stock-Based Compensation

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

 

Net Income (loss) Per Common Share

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

 

The computation of basic and diluted loss per share as of June 30, 2016 and 2015 excludes potentially dilutive securities when their inclusion would be anti-dilutive, or if their exercise prices were greater than the average market price of the common stock during the period.

 

MassRoots, Inc. 

Notes to the Condensed Financial Statements

June 30, 2016 (Unaudited)

 

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

 

		June 30, 2016
Common stock issuable upon conversion of convertible debt			4,252,333
Options to purchase common stock			5,584,880
Warrants to purchase common stock			9,742,044
Totals			19,579,257

  

Reclassification

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

 

Recently Issued Accounting Pronouncements

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

 

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

 

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

 

NOTE 2 GOING CONCERN AND UNCERTAINTY

 

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

 

MassRoots, Inc. 

Notes to the Condensed Financial Statements

June 30, 2016 (Unaudited)

 

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

 

NOTE 3  NOTE RECEIVABLE

 

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

 

NOTE 4 PROPERTY AND EQUIPMENT

 

Fixed assets were comprised of the following as of June 30, 2016 and December 31, 2015:

 

		June 30, 2016				December 31, 2015
Computers			$ 69,116				$ 58,121
Office equipment			35,208				27,083
Total			104,324				85,224
Less: Accumulated depreciation			20,926				12,201
Property and equipment, net			$ 83,398				$ 73,023

 

Depreciation expense for the six months ended June 30, 2016 and 2015 was $8,725 and $4,094, respectively.

 

NOTE 5  CONVERTIBLE DEBT

 

On March 24, 2014, the Company issued convertible debentures to certain accredited investors. The total principal amount of the debentures is $269,100 and originally matured on March 24, 2016 with a zero percent interest rate. The debentures are convertible into shares of the Company’s common stock at $0.10 per share. In March 2016, the debentures were amended to extend the maturity date to March 24, 2018. As of June 30, 2016 and December 31, 2015, the aggregate carrying value of the debentures was $209,100 net of debt discounts of $0.

 

In February 2016, the Company issued to a service provider a 12 month convertible debentures at 15% interest with a principal amount of $35,000 along with 35,000 3-year warrants to purchase shares common stock at $1.00 per share The convertible debentures are payable at maturity, and convertible at the investor’s determination at a price equal to 90% of the price of a subsequent public underwritten offering if one occurs over $5 million, or, if no subsequent offering occurs, at $0.75 per share. As of June 30, 2016 and December 31, 2015, the aggregate carrying value of the debentures was $13,005 and $0, net of debt discounts of $21,995 and $0, respectively.

 

MassRoots, Inc. 

Notes to the Condensed Financial Statements

June 30, 2016 (Unaudited)

 

On March 17, 2016, the Company sold to investors six (6) month secured convertible original issue discount notes with principal amount in the aggregate of $1,514,667, together with five year warrants to purchase an amount of shares of the Company’s common stock equal to the number of shares of common stock issuable upon the conversion of the notes in full and having an exercise price of $1.00 per share. If the Company exercises its right to prepay the note, the Company shall make payment to the investor of an amount in cash equal to the sum of the then outstanding principal amount of the note that it desires to prepay, multiplied by (a) 1.2, during the first ninety (90) days after the execution of this Note, or (b) 1.35, at any point thereafter. The notes are convertible into shares of the Company’s common stock at a price per share equal to the lower of (i) one dollar ($1.00), and (ii) a 25% discount to the price at which the Company next conducts an offering after the issuance date of the note; provided, however, if any part of the principal amount of the note remains unpaid at its maturity date September 17, 2016, 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 September 17, 2016. The notes require that any net proceeds received subsequent offerings made by the Company first be used to repay the notes’ outstanding principal amount. If the note is not repaid by the maturity date, the investors will receive, in aggregate, but calculated pro rata to the principal amounts remaining outstanding at the time of maturity, up to five hundred thousand (500,000) shares of the Company’s common stock. Gross proceeds received by the Company for the notes and warrants in this Offering was $1,420,000, while net proceeds were $1,271,600 (excluding any legal fees). As of June 30, 2016 and December 31, 2015, the aggregate carrying value of the notes were $979,494, net of debt discounts of $535,173 and $0, respectively.

 

The Company’s convertible debt is summarized as follows as of June 30, 2016 and December 31, 2015:

 

			2016				2015
Principal balance		$	1,758,767			$	209,100
Less: debt discount		($	557,168	)			(-)
Convertible debentures, net		$	1,201,599				209,100
Less, current portion			($992,499)				(-)
Long term portion			$ 209,100				$ 209,100

 

NOTE 6  DERIVATIVE LIABILITIES AND FAIR VALUE MEASUREMENTS

 

The Company identified conversion features embedded within convertible debt and warrants outstanding for the six months ended June 30, 2016 and the year ending December 31, 2015. The Company has determined that the features associated with the embedded conversion option and exercise prices, in the form a ratchet provisions, should be accounted for at fair value, as a derivative liability, as the Company cannot determine if a sufficient number of shares would be available to settle all potential future conversion transactions.

 

During the third quarter of 2015, the Company and the convertible debt note and warrant holders agreed to amend terms of the agreements to remove the ratchet provisions. Accordingly, the Company reclassified the derivative liability to equity classification resulting in an increase to additional paid in capital by $3,336,109.

 

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

 

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

 

MassRoots, Inc. 

Notes to the Condensed Financial Statements

June 30, 2016 (Unaudited)

 

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.

 

As of June 30, 2016 and December 31, 2015, the Company did not have any derivative instruments that were designated as hedges.

 

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

 

Level 1

Level 2

Level 3

Total

Derivative liability

$

-

$

-

$

-

$

-

Total

$

-

$

-

$

-

$

-

 

Items recorded or measured at fair value on a recurring basis in the accompanying consolidated financial statements consisted of the following items as of June 30, 2016:

 

		Level 1				Level 2				Level 3				Total
Derivative liability		$				$	-			$	195,108			$	195,108
Total		$	-			$	-			$	195,108			$	195,108

 

The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities for the six months ended June 30, 2016:

 

Balance, December 31, 2015		$	-
Transfers in of Level 3			509,404
Mark-to-market – gain on change in fair value of derivative liability - 2016			(314,296)
Balance, June 30, 2016		$	195,108

 

MassRoots, Inc. 

Notes to the Condensed Financial Statements

June 30, 2016 (Unaudited)

 

Fluctuations in the Company’s stock price are a primary driver for the changes in the derivative valuations during each reporting period. As the stock price decreases for each of the related derivative instruments, the value to the holder of the instrument generally decreases, therefore decreasing the liability on the Company’s consolidated 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.

 

During the six months ended June 30, 2016, the fair value of the derivative liabilities containing certain variable conversion features were determined using the Binomial Option Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 112.29%, (3) weighted average risk-free interest rate of 0.39% to 0.47% (4) expected life of 6 months, and (5) estimated fair value of the Company's common stock of $1.04 to $1.26 per share. 

 

NOTE 7  CAPITAL STOCK

 

The Company is currently authorized to issue 200,000,000 shares of its common stock at $0.001 par value per share. As of December 31, 2015, there were 46,939,965 shares of common stock issued and outstanding and 624,000 shares of common stock to be issued. As of June 30, 2016, there were 49,197,385 shares of common stock issued and outstanding and 136,227 shares of common stock to be issued.

 

The Company is currently authorized to issue 21 Series A preferred shares at $1.00 par value per share with 1:1 conversion and voting rights. As of June 30, 2016, there were no shares of Series A preferred shares issued and outstanding.

  

The following common stock transactions were recorded during the six months ended June 30, 2016:

The Company issued 624,000 shares of common stock which was previously classified as shares to be issued as of December 31, 2015.

 

The Company issued 341,250 shares of common stock for services rendered at an average stock price of $0.87 per share, and recorded another 25,000 as to be issued for services rendered at an average stock price of $0.85 per share.

 

The Company issued 5,227 common shares for the cashless exercise of a stock warrant.

 

The Company issued 812,734 common shares and is obligated to issue an additional 106,000 common shares as of June 30, 2016 for the cash exercise of stock warrants.

 

The Company issued 264,158 common shares for the cashless exercises of stock options.

 

The Company issued 210,000 common shares for the cash exercise of stock options.

 

NOTE 8  STOCK WARRANTS

 

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

 

In February 2016, the Company issued warrants to purchase 35,000 shares of common stock at $1.00 per share to a service provider, valued at $24,301.

 

MassRoots, Inc. 

Notes to the Condensed Financial Statements

June 30, 2016 (Unaudited)

 

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

 

Stock warrants outstanding and exercisable on June 30, 2016 are as follows:

 

Warrants Outstanding															Warrants Exercisable
											Weighted
											Average				Exercisable
Exercise						Number of					Remaining Life				Number of
Price						Warrants					In Years				Warrants
$	0.001						3,963,659				1.0				3,963,659
	0.40						3,400,275				0.6				3,400,275
	0.50						2,489,041				3.6				2,489,041
	0.60						50,000				3.8				50,000
	0.83						100,000				4.5				100,000
	0.90						175,000				4.0				175,000
	1.00						2,310,669				3.5				2,310,669
	1.06						146,200				2.4				146,200
	3.00						407,475				2.3				407,475
							9,742,044				1.2				9,742,044

A summary of the warrant activity for the six months ended June 30, 2016:

 

								Weighted-Average				Weighted-Average
				Shares				Exercise Price				Remaining Contractual Term
	Outstanding at December 31, 2015				9,018,609			$	0.42				2.26
	Grants				1,649,669			$	0.99				4.95
	Exercised				(926,234	)		$	0.4				0.96
	Canceled				—				—				—
	Outstanding at June 30, 2016				9,742,044			$	0.514				1.68
	Exercisable at June 30, 2016				9,742,044			$	0.514				1.68

 

The aggregate intrinsic value outstanding stock warrants was $1,406,058 the total pretax intrinsic value, based on warrants with an exercise price less than the Company’s stock price of $0.86 as of June 30, 2016, which would have been received by the warrant holders had those warrant holders exercised their warrants as of that date.

 

NOTE 9  EMPLOYEE EQUITY INCENTIVE PLANS

 

During the six months ended June 30, 2016, the Company granted options to purchase 691,250 shares at an average of $0.96 per share to 12 employees and consultants of the Company under the Company’s 2015 equity incentive plan, with most vesting monthly over the course of one year. The fair market value of the options is $1,330,984.

 

Stock options outstanding and exercisable on June 30, 2016 are as follows:

 

MassRoots, Inc. 

Notes to the Condensed Financial Statements

June 30, 2016 (Unaudited)

 

 

Options Outstanding																Options Exercisable
										Weighted
										Average						Exercisable
Exercise				Number of						Remaining Life						Number of
Price				Options						In Years						Options
$	0.10					1,500,000						7.9						750,000
	0.50					628,217						8.80						604,881
	0.60					105,000						8.7						105,000
	0.80					160,000						9.4						106,656
	0.83					100,000						9.7						0
	0.90					1,860,413						9.5						1,465,341
	1.00					850,000						9.4						24,996
	1.05					381,250						9.7						246,335
						5,584,880						9.1						3,303,209

 

A summary of the stock option activity for the six months ended June 30, 2016:

 

													Weighted-Average
									Weighted-Average				Remaining
					Shares				Exercise Price				Contractual Term
	Outstanding at December 31, 2015				5,625,000			$	0.59				9.3
	Grants				691,250				0.97				9.7
	Exercised				(636,783	)			0.5				8.8
	Canceled				(94,587	)			0.5				8.8
	Outstanding at June 30, 2016				5,584,880			$	0.66				8.9
	Exercisable at June 30, 2016				3,303,209			$	0.64				8.6

  

The aggregate intrinsic value of outstanding stock options was ($1,406,058), based on options with an exercise price less than the Company’s stock price of $0.86 as of June 30, 2016, which would have been received by the option holders had those option holders exercised their options as of that date.

 

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

 

The fair value of the granted options for the six months ended June 30, 2016 was determined using the Black Scholes option pricing model with the following assumptions:

 

MassRoots, Inc. 

Notes to the Condensed Financial Statements

June 30, 2016 (Unaudited)

 

 

Dividend yield:			0			%
Volatility			111.89% to 119.16			%
Risk free rate:			1.75% to 2.10			%
Expected life:					10 years
Estimated fair value of the Company’s common stock		$	0.80 to $1.05
Estimated forfeiture rate			0			%

  

NOTE 10 COMMITMENTS AND CONTINGENCIES

 

Operating leases

 

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

 

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

 

Rent expense charged to operations, which differs from rent paid due to rent credits and to increasing amounts of base rent, is calculated by allocating total rental payments on a straight-line basis over the term of the lease. During the six months ended June 30, 2016 and 2015, rent expense was $60,674 and $22,998, respectively.

 

NOTE 11  SUBSEQUENT EVENTS

 

From August 12 to August 17, 2016, the Company raised $1,636,500 in gross proceeds from the sale of shares of the Company’s common stock, together with warrants, with one Warrant entitling the holder to purchase one share of Common Stock at a price equal to $0.90 per share in a registered “best efforts” offering to certain investors pursuant to an effective registration statement (the “Offering”). The purchase price paid by the investors was $0.50 for one share of Common Stock and one half Warrant. The Warrants are immediately exercisable and expire three years from the date of issuance. The shares of Common Stock and Warrants are immediately separable and will be issued separately. A total of 3,273,000 shares of Common Stock and 3,273,000 Warrants were sold in the Offering and will be issued pursuant to the prospectus, dated August 12, 2016 and filed with the Securities and Exchange Commission as of the same date. As of August 17, 2016, 1,247,000 of these shares had been issued.

 

Subsequent to close of the quarter, the Company issued 136,000 shares recorded as to be issued as of June 30, 2016, 349,000 additional shares for the cash exercise of $0.40 warrants, and 77,500 shares issued as severance compensation to five former employees.

 

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

 

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

 

Overview

 

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

 

As discussed in the Notes to the Financial Statements, the Company has experienced recurring losses and negative cash flows from operations since inception. We have relied on equity financing to fund operations. There can be no guarantee that we will ever become profitable, or that adequate additional financing will be realized in the future or otherwise may not be available to us on acceptable terms, or at all. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our development efforts. We will need to generate significant revenues to achieve profitability and we may never do so. These factors raise substantial doubt about the Company’s ability to continue as a going concern. We have been implementing our strategic plan, as set forth below, on which we believe we will be able to continue operations and become profitable in the future.

 

Revamped MassRoots for Business Portal

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

 

When fully developed, the revamped MassRoots for Business portal will consolidate many online marketing functions for cannabis-related business in one central platform. We expect businesses will be able to schedule posts on MassRoots, Facebook and Twitter; purchase advertising on both MassRoots owned-properties as well as third party digital properties; and view actionable, real-time data from MassRoots and third party sources in easy-to-read formats. We believe this will serve as a solid foundation for future business-related features as we prepare to integrate dispensary point-of-sale data later this year.

 

We believe that MassRoots can reach profitability from its current userbase and web traffic. We are focused on including in our app and website features that they previously lacked - the ability to connect users with the dispensaries and products for which they are looking. We believe that our dispensary finder is a solid first step in fixing this deficiency and product pages with live menu pricing will mostly resolve the problem by the end of Q3 2016. MassRoots’ management believes it can get the Company to cash-flow positive on a monthly basis by the end of 2016.

 

Continued Focus on Search Engine Optimization

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

 

Expense Reductions

During July 2016, the Company eliminated $54,000 in monthly expenses by terminating relationships with certain vendors, reducing headcount from 33 to 24 full-time employees, and utilizing new technological tools to achieve better results with fewer resources. As many of these contracts and agreements had 30, 60 or 90-day termination clauses, we expect these expense reductions not to be fully reflected until the fourth quarter of 2016. Reductions in staff were concentrated on the content, account services, and sales teams, while the team focused on our core product – development – remains fully intact. Even as MassRoots continues to scale its userbase and revenues, we do not expect a significant increase in the size of our team as we plan to automate as many processes as possible in a self-service platform for our clients. Like other leaders in the technology field, our plan is to scale through automation and technology, not by increasing our staff and overhead. We believe these expense reductions could result significant savings for the Company, currently estimated to be approximately $648,000 annually. MassRoots’ management will continue to review for unnecessary expenses on a weekly basis and believe the Company can reach cash-flow positive on a monthly basis by the end of 2016.

 

The Team

MassRoots has 24 full-time employees working out of headquarters in downtown Denver, Colorado. The majority of these employees are engineers and designers focused on developing new features for the MassRoots platform. We believe that over the long run, a small, talented and close knit team will outperform larger teams. We believe we have found talented individuals at every level – sales representatives who outperform expectations; managers who make architectural decisions that will prevent costly and time-consuming blunders; and engineers developing new features that have the potential to provide significant long term returns.

 

One of MassRoots’ top priorities in 2016 has been recruiting and retaining some of the top talent in the cannabis and technology industries. In June 2016, we hired Lance Galey as MassRoots’ Chief Technology Officer. Previously, Mr. Galey served as Chief Software Architect of Cloud Services for Autodesk and Vice President and Principle Architect at Salesforce, where he led the architecture and development of numerous core infrastructure and platform services underlying a large portfolio of Salesforce SaaS applications. In 2013, he was selected as the executive MVP for the technology division of Salesforce.com.

 

420 Rally

In March 2016, we entered into agreements with Santino Walter Productions and the Denver Annual 420 Rally to produce and promote the Denver Annual 420 Rally (“420 Rally Deal”). Under the terms of the agreements, which are included in our 8-K filed on March 31, 2016, MassRoots purchased a debt note with a principal amount of $156,000 from Santino Walter Productions for a purchase price of $130,000. These funds were wired directly to Young Money Touring and WME Entertainment to book Lil Wayne and Wiz Khalifa to perform at the 420 Rally. Additionally, MassRoots is to received 50% of all ticket and sponsorship sales, 15% of all booth sales and has the right to enter into a materially-similar agreement every year through 2020. MassRoots primarily entered into the 420 Rally Deal to grow its user and clientele base in the Denver metro area – an estimated 100,000 people primarily from the Denver metro area attended this year’s event, the target market for hundreds of dispensaries in Colorado.

 

On April 16, 2016, the original date of the 420 Rally, a severe snowstorm hit Denver and forced event organizers to postpone the festival until May 21, 2016. MassRoots generated roughly $230,000 in revenue from ticket sales from the 420 Rally but had to incur an additional $130,000 in expenses as a result of the reschedule. Although the event ended up being a monetary loss of approximately $30,000, we believe the exposure, relationships and information gained as a result of the event will be beneficial to the MassRoots brand. MassRoots’ management learned a valuable lesson in risk-exposure and protecting against unforeseen events as a result of the snowstorm and reschedule.

 

We do not expect MassRoots to be major sponsors or producers of events going forward – we believe we have an incredible core business in digital advertising and that is where our team’s focus needs to remain.

 

State and National Brand Business Model

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

 

During the second quarter of 2016, we signed advertising contracts with a total value of $259,450 with 32 of the leading cannabis brands in the industry. As many of these contracts were for 3, 6 or 12-month campaigns, only a portion of the value was realized during the second quarter of 2016, and the rest will be realized over the coming quarters, building a solid foundation on which we can expand.

 

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

 

Local Store Business Model

We launched a beta version of MassRoots’ dispensary finder on August 8, 2016 and currently have over 175 dispensary locations paying for a basic listing. With the core functionality now in place, we aim to rapidly iterate and expand on its functionality to include menus with live pricing, product pages with reviews, and top search result placement for paid advertisers. We believe that each of these features will create new revenue streams for our business – other businesses have generated tens of millions in revenue off of such features.

 

On Competitive Advantage and Network Effects

We believe network effects serve as the most powerful form of competitive advantage for consumer-facing consumer networks, including MassRoots. Once a person and their friends join a consumer or social network, it is unlikely they switch their active usage to another network in the same category. In 2011, Google+ launched to much fanfare as the, “Facebook Killer,” with the resources of Google at its disposal: billions of dollars in launch and advertising costs, immediate integration with the largest search engine in the world, and the use of the Google brand. However, it failed to gain traction because Facebook already dominated the market. Similarly, Facebook launched Poke in 2013 to compete with Snapchat. However, even with arguably more advanced features and Facebook’s backing, Poke failed to make a dent in Snapchat’s market share and was shuttered shortly after. 

 

Market Share

As of early August 2016, MassRoots had approximately 950,000 users of an estimated 10 million Americans who consume cannabis on a monthly basis according to ArcView Market Research, a market that we believe will continue to grow as additional states pass laws to regulate and control the sale of cannabis. We have approximately 2,500 of the estimated 15,000 cannabis-related businesses in America actively posting on our network according to ArcView Market Research, a market that we believe will continue to grow as additional states pass laws to regulate and control the sale of cannabis.

 

2016 Elections

MassRoots believes the 2016 elections have the potential to significantly increase the size and scope of the regulated cannabis industry. According to the Marijuana Policy Project, campaigns in Maine, Nevada, Arizona, California, Michigan, Florida, and Massachusetts are expected to succeed in placing initiatives on their states’ ballots for this year’s election.

 

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

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

 

MassRoots is also in a unique position to help these legalization initiatives become law. With close to 950,000 registered users on our network, half a million followers on other social channels, a 600,000+ person opt-in email list, and relationships with 2,500 businesses, MassRoots has the reach and scale to raise awareness of these initiatives, push voter registration, and drive grassroots donations to these campaigns. To be clear, MassRoots does not intend to allocate material shareholder resources to these campaigns, but to use our social reach and influence to help legalization initiatives pass. Not only will this help expand regulated cannabis markets and our potential revenue, but it will raise awareness and improve favorability of the MassRoots brand amongst cannabis consumers.

 

Sitting at the intersection of healthcare on the medical cannabis side and a vice industry on the recreational cannabis side, we believe the cannabis industry can continue to grow in any economic climate.

 

Competition

We do not believe we face any significant competition as a social platform for the cannabis community; there are no other companies with more than 100,000 users or significant capital. However, as more of our localized advertising features come online through the rest of 2016, we have begun to actively compete with dispensary locators and strain guides, such as WeedMaps and Leafly, for dispensaries' advertising budgets.

 

Results of Operations

 

	For the three-months ended
		June 30, 2016 (Unaudited)				June 30, 2015 (Unaudited)					$ Change						% Change
Gross revenue		$	492,233			$	2,126				$	490,107						230	%
General and administrative expenses			2,322,953				1,493,131					829,822						57	%
Loss from Operations			(1,830,360	)			(1,491,005		)			(339,355)						24	%
Other Income /(Expense)			(335,897)				(26,292		)			(309,605)						1,178	%
Net Loss		($	2,166,257	)		($	1,517,297		)		($	648,960		)				44	%
Net loss per share - basic and diluted		($	0.05	)			($0.03)					($0.02)						57%
	For the six-months ended
		June 30, 2016 (Unaudited)				June 30, 2015 (Unaudited)					$ Change						% Change
Gross revenue		$	585,618			$	3,066				$	582,552						1,900	%
General and administrative expenses			4,701,160				2,058,883					2,642,327						129	%
Loss from Operations			(4,155,542	)			(2,055,817		)			(2,059,725)						101	%
Other Income /(Expense)			(686,938)				(11,991		)			(674,947)						5,629	%
Net Loss		($	4,802,480	)		($	2,067,808		)		($	2,734,672		)				133	%
Net loss per share - basic and diluted		($	0.10	)			($0.05)					($0.05)						100%

 

Revenues

 

While MassRoots’ consumer-facing network launched in July 2013, we did not start generating advertising revenue until we crossed a half million users in mid-August 2015. Our clients have primarily been ancillary businesses marketing their products to cannabis consumers through endorsed posts on MassRoots, sponsored content on our blog, and mentions in our email newsletter.

 

For the three months ended June 30, 2016 and 2015, we generated revenues of $492,233 and $2,126, respectively, an increase of $490,107. For the six months ended June 30, 2016 and 2015, we generated revenues of $585,618 and $3,066, respectively, an increase of $582,552. Of this $585,618 generated in the six months ended June 30, 2016, $325,618 was made up of advertising revenue related to the MassRoots network, $240,000 was related to the 420 Rally, while the remaining revenue of $20,000 was made up of sales on our online merchandise store. The increase in revenues for both the three and six months ended June 30, 2016 was primarily caused by more digital advertising sales and 420 Rally ticket sales.

 

Cost of Goods Sold

 

For the three months ended June 30, 2016 and 2015, cost of goods sold was $285,228 and $0, respectively. For the six months ended June 30, 2016 and 2015, cost of goods sold was $293,780 and $0, respectively. This is an increase of $285,228 and $293,780 for the three and six months ended June 30, 2016, respectively, is primarily due to $240,000 in costs associated with the 420 Rally as well as the cost of items sold from our online merchandise store, MassRoots.com/Shop. Our primary purpose of both the 420 Rally and the merchandise store was to raise awareness of the MassRoots brand and drive user downloads and web traffic, not to generate profits. MassRoots’ main business model will remain generating digital advertising sales.

 

Operating Expenses

 

For the three months ended June 30, 2016 and 2015, our operating expenses were $2,322,952 and $1,493,131, respectively, an increase of $876,423. For the three months ended June 30, 2016, these increases were mainly attributed to an $257,959 increase in payroll-related expenditures and a $393,655 increase in options issued for services. For the six months ended June 30, 2016 and 2015, our operating expenses were $4,701,160 and $2,058,883, respectively. This $2,642,327 increase for the six months ended June 30, 2016 is attributed mainly to an increase of $690,527 in payroll-related expenditures, an increase of $1,017,413 in options issuances for services to employees and service providers, and a $432,629 increase in other general and administrative expenditures, including rent, travel, and legal expenses. Approximately $200,000 of these expenditures were related to commissions, legal, and closing fees of the convertible debt financing closed in March 2016.

 

Other Income (Expense)

 

For the three months ended June 30, 2016 and 2015, the Company recorded interest expense of $0 and $2,091, respectively. For the three months ended June 30, 2016 and 2015, the Company realized gains related to the fair value mark to market adjustments of its derivative liabilities of $537,153 and $0, respectively. The derivative liabilities are caused by certain price protections found in the warrants issued as part of the Company’s March 2016 convertible debt offering. For the three months ended June 30, 2016 and 2015, the Company recorded amortization of discount on notes payable of $873,052 and $24,201, respectively.

 

For the six months ended June 30, 2016 and 2015, the Company recorded interest expense of $8,635 and $4,381, respectively, with the increase primarily caused by interest on the Company’s March 2016 convertible debt offering. For the six months ended June 30, 2016 and 2015, the Company realized gains related to the fair value mark to market adjustments of its derivative liabilities of $314,296 and $42,737, respectively. The derivative liabilities are caused by certain price protections found in the warrants issued as part of the Company’s March 2016 convertible debt offering. For the six months ended June 30, 2016 and 2015, the Company recorded amortization of discount on notes payable of $992,601 and $50,347, respectively.

 

For the three months ended June 30, 2016 and 2015, we had net losses of $2,166,257 and $1,517,297, respectively, an increase of $648,960, for the reasons discussed above.

 

For the six months ended June 30, 2016 and 2015, we had net losses of $4,802,480 and $2,067,808, respectively, an increase of $2,734,672, for the reasons discussed above.

 

Liquidity and Capital Resources

 

Net cash used in operations for the six months ended June 30, 2016 and 2015 was $2,133,202 and $1,352,043, respectively. This increase was primarily caused by a widening net loss in the Company’s operations, an increase in the value of options issued to employees, and the interest charged on the Company’s March 2016 convertible debt offering. The root cause of these expenses is an increase of the size of MassRoots’ team from 7 employees in early 2015 to 33 in early 2016.

 

Net cash used in investing activities for the six months ended June 30, 2016 and 2015 was $19,100 and $213,158, respectively. These investing activities were related to the purchase of equipment, primarily computers for the six months ended June 30, 2016 and 2015 of $19,100 and $38,158, respectively. During the six months ended June 30, 2015, MassRoots made a one-time investment in Flowhub of $175,000; as we did not make any such investment in 2016, the net cash used in investing activities decreased.

 

Net cash provided by financing activities for the six months ended June 30, 2016 and 2015 was $1,816,507 and $1,594,636, respectively. During the six months ended June 30, 2016, these funds came mainly from warrant exercises and the Company’s March 2016 convertible debt offering, while during the six months ended June 30, 2015, they came primarily from equity issuances.

 

Capital Resources

As of June 30, 2016, we had cash on hand of $50,521 and receivables of $76,752, primarily from clients for advertising services. We believe this is sufficient to fund the Company’s operations through the end of July 2016; however, as of June 30, 2016, there are warrants outstanding to purchase up to 2,489,041 shares with an exercise price of $0.40 per share, which, if all were exercised, would supply $995,616 in cash to the Company.

 

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

 

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

 

Fundraising

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

 

From August 12 to August 17, 2016, the Company raised $1,636,500 in gross proceeds from the sale of shares of the Company’s common stock, together with warrants, with one Warrant entitling the holder to purchase one share of Common Stock at a price equal to $0.90 per share in a registered “best efforts” offering to certain investors pursuant to an effective registration statement (the “Offering”). The purchase price paid by the investors was $0.50 for one share of Common Stock and one half Warrant. The Warrants are immediately exercisable and expire three years from the date of issuance. The shares of Common Stock and Warrants are immediately separable and will be issued separately. A total of 3,273,000 shares of Common Stock and 3,273,000 Warrants were sold in the Offering and will be issued pursuant to the prospectus, dated August 12, 2016 and filed with the Securities and Exchange Commission as of the same date.

 

Required Capital Over the Next Fiscal Year

We believe MassRoots will need to raise an additional $2.5 million over the next fiscal year to sustain operations; however, we expect to be able to raise some of these funds through warrant exercises and through a registered offering of our securities. As of June 30, 2016, there were warrants outstanding to purchase up to 2,489,041 shares with an exercise price of $0.40 per share, which, if all were exercised, would supply $995,616 in cash to the Company.

 

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

 

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

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

Critical Accounting Policies and Estimates

 

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

 

Item 3. Quantitative & Qualitative Disclosures about Market Risks

 

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

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

As required under Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2016. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of June 30, 2016 were not effective, for the same reasons as previously disclosed under Item 9A. “Controls and Procedures” in our Annual Report on Form 10-K for our fiscal year ended December 31, 2015. 

  

Changes in Internal Controls over Financial Reporting

 

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

 

PART II OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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

 

Item 1A. Risk Factors

 

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

 

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

 

None.

 

Item 3. Defaults upon Senior Securities

 

None

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

31.2

(1) Certification of Principal Executive Officer as required by Rule 13a-14 or 15d-14 of the Exchange Act, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

31.2

(2) Certification of Principal Accounting Officer as required by Rule 13a-14 or 15d-14 of the Exchange Act, as adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

32.1(2)

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

 

32.2

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

 

101.INS

XBRL Instance Document

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

 

SIGNATURES

 

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

 

MASSROOTS, INC.

(Registrant)

 

Dated: August 17, 2016

By: /s/ Isaac Dietrich

Isaac Dietrich, Chief Executive Officer

(Principal Executive Officer)

 

Dated: August 17, 2016

By: /s/ Jesus Quintero

Jesus Quintero, Chief Financial Officer

(Principal Accounting Officer)