UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the quarterly period ended
OR
For the transition period from ___________to ____________
Commission
File Number
(Exact name of business as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
(Address of principal executive offices) | (Zip code) |
(Registrant’s telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
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.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☒ | Smaller reporting company | ||
Emerging growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As
of August 20, 2021, there were
TABLE OF CONTENTS
-i-
FORWARD-LOOKING STATEMENTS
Statements in this Quarterly Report on Form 10-Q may be “forward-looking statements.”
Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are often, but not always, made through the use of words or phrases such as “believe,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” and “would.” These statements are based on current expectations, estimates and projections about our business based in part on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may, and are likely to, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including those set forth in “Item 1A. Risk Factors” in our Annual Report on Form 10-K, and our other filings with SEC.
You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q. Any forward-looking statements speak only as of the date on which they are made, and we disclaim any obligation to publicly update or release any revisions to these forward-looking statements, whether as a result of new information, future events or otherwise, after the date of this Quarterly Report on Form 10-Q or to reflect the occurrence of unanticipated events, except as required by applicable law.
-ii-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MASSROOTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, | December 31, | |||||||
2021 | 2020 | |||||||
(unaudited) | ||||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash | $ | $ | ||||||
Prepaid expenses | ||||||||
Total current assets | ||||||||
Total assets | $ | $ | ||||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | $ | ||||||
Accrued payroll and related expenses | ||||||||
Deferred revenue | ||||||||
Advances | ||||||||
Non-convertible notes payable, current portion | ||||||||
Derivative liabilities | ||||||||
Convertible notes payable | ||||||||
Total current liabilities | ||||||||
Non-convertible notes payable | ||||||||
PPP note payable | ||||||||
Total liabilities | ||||||||
Commitments and contingencies (See Note 8) | ||||||||
Stockholders’ deficit: | ||||||||
Preferred stock - | ||||||||
Preferred stock - Series X, $ | ||||||||
Preferred stock - Series Y, $ | ||||||||
Preferred stock - Series C, $ | ||||||||
Preferred stock - Series A, $ | ||||||||
Preferred stock - Series B, $ | ||||||||
Common stock, $ | ||||||||
Common stock to be issued, | ||||||||
Additional paid in capital | ||||||||
Discount on preferred stock | ( | ) | ||||||
Accumulated deficit | ( | ) | ( | ) | ||||
Total stockholders’ deficit | ( | ) | ( | ) | ||||
Total liabilities and stockholders’ deficit | $ | $ |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
1
MASSROOTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three
Months Ended June 30, | Six
Months Ended June 30, | |||||||||||||||
2021 | 2020 | 2021 | 2020 | |||||||||||||
Revenues | $ | $ | $ | $ | ||||||||||||
Operating Expenses: | ||||||||||||||||
Cost of revenues | ||||||||||||||||
Advertising | ||||||||||||||||
Payroll and related expense | ||||||||||||||||
Other general and administrative expenses | ||||||||||||||||
Total Operating Expenses | ||||||||||||||||
Loss From Operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Other Income (Expense): | ||||||||||||||||
Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Change in derivative liability for authorized shares shortfall | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Change in fair value of derivative liabilities | ( | ) | ||||||||||||||
Gain on settlement of convertible notes payable and accrued interest, warrants and accounts payable in exchange for Series Y preferred shares | ||||||||||||||||
Gain on settlement of convertible notes payable and accrued interest and cancelation of common shares and warrants for cash | ||||||||||||||||
Gain on forgiveness of debt | ||||||||||||||||
Gain (loss) on conversion of convertible notes | ( | ) | ( | ) | ||||||||||||
Total Other Income (Expense) | ( | ) | ( | ) | ||||||||||||
Net Income (Loss) Before Income Taxes | ( | ) | ( | ) | ||||||||||||
Provision for Income Taxes (Benefit) | ||||||||||||||||
Net Income (Loss) | ( | ) | ( | ) | ||||||||||||
Deemed dividend resulting from amortization of preferred stock discount | ( | ) | ( | ) | ||||||||||||
Deemed dividend from warrant price protection | ( | ) | ||||||||||||||
Net Income (Loss) Available to Common Stockholders | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
Net Income (Loss) Per Common Share: | ||||||||||||||||
Basic | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
Diluted | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
Weighted Average Common Shares Outstanding: | ||||||||||||||||
Basic | ||||||||||||||||
Diluted |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
2
MASSROOTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2021
(unaudited)
Preferred Stock | Common Stock | Additional | Discount on | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Series X | Series Y | Series C | Common Stock | to be Issued | Paid In | Preferred | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Stock | Deficit | Total | |||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2021 (unaudited) | $ | - | | $ | | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||
Issuance of common shares previously to be issued | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common shares for services rendered | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Cancelation of common shares and warrants in exchange for cash paid per cancelation agreement | - | - | - | ( | ) | ( | ) | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
Series Y preferred shares issued in exchange for convertible notes, accrued interest and warrants | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
BCF recognized upon issuance of Series Y preferred shares | - | - | - | - | - | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Deemed dividend resulting from amortization of preferred stock discount | - | - | - | - | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2021 (unaudited) | $ | - | $ | $ | $ | $ | $ | - | $ | ( | ) | $ | ( | ) |
Preferred Stock | Common Stock | Additional | Discount on | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Series X | Series Y | Series C | Common Stock | to be Issued | Paid In | Preferred | Accumulated | |||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Stock | Deficit | Total | |||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2020 | $ | - | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||||
Issuance of common shares previously to be issued | - | - | - | - | - | - | ( | ) | ( | ) | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
Issuance of common shares for services rendered | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Common shares issued upon conversion of convertible notes | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Cancelation of common shares and warrants in exchange for cash paid per cancelation agreement | - | - | - | ( | ) | ( | ) | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
Sale of Series X preferred shares | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
BCF recognized upon issuance of Series X preferred shares | - | - | - | - | - | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Series Y preferred shares issued in exchange for convertible notes, accrued interest and warrants | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||
BCF recognized upon issuance of Series Y preferred shares | - | - | - | - | - | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||
Deemed dividend resulting from amortization of preferred stock discount | - | - | - | - | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2021 (unaudited) | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
MASSROOTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2020
(unaudited)
Preferred Stock | ||||||||||||||||||||||||||||||||||||||||||||
Series
B to be Issued | Series C | Common Stock | Common
Stock to be Issued | Additional Paid In | Accumulated | |||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||||||||||||||
Balance at March 31, 2020 (unaudited) | - | $ | - | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||
Common shares issued upon conversion of convertible notes and accrued interest | - | - | - | |||||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
Balance at June 30, 2020 (unaudited) | - | $ | - | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) |
Preferred Stock | ||||||||||||||||||||||||||||||||||||||||||||
Series
B to be Issued | Series C | Common Stock | Common
Stock to be Issued | Additional Paid In | Accumulated | |||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Total | ||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||
Issuance of common shares previously to be issued | - | - | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
Common shares issued upon conversion of convertible notes and accrued interest | - | - | ||||||||||||||||||||||||||||||||||||||||||
Common shares contributed back to the Company and promptly retired | - | - | ( | ) | ( | ) | - | |||||||||||||||||||||||||||||||||||||
Deemed dividend related to warrant price protection | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
Net loss | - | - | - | - | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||
Balance at June 30, 2020 (unaudited) | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
MASSROOTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS
(unaudited)
Six Months Ended June 30, | ||||||||
2021 | 2020 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | $ | ( | ) | ||||
Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
Change in fair value of derivative liabilities | ( | ) | ( | ) | ||||
Change in derivative liability for authorized shares shortfall | ||||||||
Interest and amortization of debt discount | ||||||||
(Gain) loss on conversion of convertible notes payable | ( | ) | ||||||
Gain on settlement of convertible notes payable and accrued interest, warrants and accounts payable in exchange for Series Y preferred shares | ( | ) | ||||||
Gain on settlement of convertible notes payable and accrued interest and cancelation of common shares and warrants for cash | ( | ) | ||||||
Gain on forgiveness of debt | ( | ) | ||||||
Share-based compensation | ||||||||
Changes in operating assets and liabilities: | ||||||||
Prepaid expenses | ||||||||
Accounts payable and accrued expenses | ( | ) | ||||||
Accrued payroll and related expenses | ||||||||
Deferred revenue | ||||||||
Net cash used in operating activities | ( | ) | ( | ) | ||||
Cash flows from financing activities: | ||||||||
Bank overdrafts | ( | ) | ||||||
Proceeds from sale of Series X preferred shares | ||||||||
Proceeds from issuance of convertible notes payable | ||||||||
Proceeds from issuance of non-convertible notes payable | ||||||||
Repayment of non-convertible notes payable | ( | ) | ||||||
Proceeds from advances | ||||||||
Repayments of advances | ( | ) | ||||||
Cash paid in settlement of debt and warrants | ( | ) | ||||||
Net cash provided by financing activities | ||||||||
Net decrease in cash | ( | ) | ( | ) | ||||
Cash, beginning of period | ||||||||
Cash, end of period | $ | $ | ||||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during period for interest | $ | $ | ||||||
Cash paid during period for taxes | $ | $ | ||||||
Supplemental disclosure of non-cash investing and financing activities: | ||||||||
Amortization of discount on preferred stock | $ | $ | ||||||
Common shares issued upon conversion of convertible notes and accrued interest | $ | $ | ||||||
Series Y preferred shares issued as settlement for convertible notes payable, accrued interest and warrants | $ | $ | - | |||||
Issuance of common shares previously to be issued | $ | $ | ||||||
Common shares contributed back to the Company and promptly retired | $ | $ | ||||||
Deemed dividend related to warrant price protection | $ | $ | ||||||
Derivative liability recognized as debt discount on newly issued convertible notes | $ | $ | ||||||
Reclassify accrued interest to convertible notes payable | $ | $ | ||||||
Reduction of derivative liabilities stemming from settlement of convertible notes payable, accrued interest and warrants in exchange for Series Y preferred shares | $ | $ | ||||||
Reduction of derivative liabilities stemming from settlement of convertible notes payable and accrued interest and cancelation of common shares and warrants for cash | $ | $ |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
MASSROOTS, INC.
Notes to Condensed Consolidated Financial Statements
June 30, 2021 (Unaudited)
NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Overview
MassRoots, Inc. (“MassRoots” or the “Company”) is a technology company focused on developing cloud-based solutions to deliver informative content and improve operating efficiencies. The Company was incorporated in the State of Delaware on April 26, 2013.
Our unaudited condensed consolidated financial statements include the accounts of DDDigtal, Inc., Odava, Inc., MassRoots Supply Chain, Inc., and MassRoots Blockchain Technologies, Inc., our wholly-owned subsidiaries.
Basis of Presentation
The interim unaudited condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments and reclassifications and non-recurring adjustments) necessary to present fairly the Company’s results of operations for the three and six months ended June 30, 2021 and 2020, its cash flows for the six months ended June 30, 2021 and 2020, and its financial position as of June 30, 2021 have been made. The results of operations for such interim periods are not necessarily indicative of the operating results to be expected for the full year.
Certain information and disclosures normally included in the notes to the annual consolidated financial statements have been condensed or omitted from these interim unaudited condensed consolidated financial statements. Accordingly, these interim unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 as filed with the SEC on April 16, 2021 (the “Annual Report”). The December 31, 2020 balance sheet is derived from those statements.
NOTE 2 – GOING CONCERN AND MANAGEMENT’S LIQUIDITY PLANS
As
of June 30, 2021, the Company had cash of $
During
the six months ended June 30, 2021, the Company received proceeds of $
The Company’s primary source of operating funds since inception has been cash proceeds from the public and private placements of the Company’s securities, including debt and equity securities, and proceeds from the exercise of warrants and options. The Company has experienced net losses and negative cash flows from operations since inception and expects these conditions to continue for the foreseeable future. The Company’s ability to continue its operations is dependent upon its ability to obtain additional capital through public or private equity offerings, debt financings or other sources; however, financing may not be available to the Company on acceptable terms, or at all. The Company’s failure to raise capital as and when needed could have a negative impact on its financial condition and its ability to pursue its business strategy, and the Company may be forced to curtail or cease operations.
Management’s plans regarding these matters encompass the following actions: 1) obtain funding from new and current investors to alleviate the Company’s working capital deficiency; and 2) implement a plan to increase revenues. The Company’s continued existence is dependent upon its ability to translate its audience into revenues. However, the outcome of management’s plans cannot be determined with any degree of certainty.
6
Accordingly, the accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business for one year from the date the unaudited condensed consolidated financial statements are issued. The carrying amounts of assets and liabilities presented in the unaudited condensed consolidated financial statements do not necessarily purport to represent realizable or settlement values. The unaudited condensed consolidated financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.
In March 2020, the World Health Organization declared COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, and any related adverse public health developments, has adversely affected workforces, customers, economies, and financial markets globally, leading to an economic downturn. It has also disrupted the normal operations of many businesses, including ours. It is not possible for us to predict the duration or magnitude of the adverse results of the outbreak of COVID-19 and its effects on our business including our financial condition, liquidity, or results of operations at this time. Management is actively monitoring the global situation and its impact on the Company’s financial condition, liquidity, operations, customers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects that the COVID-19 outbreak will have on its results of operations, financial condition, or liquidity for fiscal year 2021. As of the date of this Quarterly Report on Form 10-Q, the Company has experienced delays in securing new customers and related revenues and the longer this pandemic continues there may be additional impacts. Furthermore, the COVID-19 outbreak has and may continue to impact the Company’s ability to raise capital.
Although the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have a material adverse effect on the Company’s results of future operations, financial position, liquidity, and capital resources, and those of the third parties on which the Company relies in fiscal year 2021.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of MassRoots, Inc. and its wholly-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include stock-based compensation, fair values relating to derivative liabilities, fair value of payroll tax liabilities, deemed dividends and the valuation allowance related to deferred tax assets. Actual results may differ from these estimates.
Fair Value of Financial Instruments
The Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Subtopic 825-10, “Financial Instruments” (“ASC 825-10”) requires disclosure of the fair value of certain financial instruments. The estimated fair value of certain financial instruments, including cash, accounts payable and accrued liabilities are carried at historical cost basis, which approximates their fair value because of the short-term maturity of these instruments. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the condensed consolidated financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk.
The Company follows ASC 825-10, which permits entities to choose to measure many financial instruments and certain other items at fair value.
7
Cash
For
purposes of the unaudited condensed consolidated statements of cash flows, the Company considers highly liquid investments with an original
maturity of three months or less to be cash equivalents. As of June 30, 2021 and December 31, 2020, the Company had no cash equivalents.
The Company maintains its cash in banks insured by the Federal Deposit Insurance Corporation in accounts that at times may be in excess
of the federally insured limit of $
Property and Equipment
Property and equipment are stated at cost and depreciated using the straight-line method over their estimated useful lives of three to five years. Repair and maintenance costs are expensed as incurred. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition is reflected in earnings.
Accounts Receivable and Allowance for Doubtful Accounts
The Company monitors outstanding receivables based on factors surrounding the credit risk of specific customers, historical trends, and other information. The allowance for doubtful accounts is estimated based on an assessment of the Company’s ability to collect on customer accounts receivable. There is judgment involved with estimating the allowance for doubtful accounts, and if the financial condition of the Company’s customers were to deteriorate, resulting in their inability to make the required payments, the Company may be required to record additional allowances or charges against revenues. The Company writes-off accounts receivable against the allowance when it determines a balance is uncollectible and no longer actively pursues its collection.
Revenue Recognition and Deferred Revenue
Revenues are accounted for under ASC Topic 606, “Revenue From Contracts With Customers” (“ASC 606”). ASC 606 is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASC also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer purchase orders, including significant judgments.
In accordance with ASC 606, the Company recognizes revenue in accordance with that core principle by applying the following:
(i) | Identify the contract(s) with a customer; | |
(ii) | Identify the performance obligation in the contract; | |
(iii) | Determine the transaction price; | |
(iv) | Allocate the transaction price to the performance obligations in the contract; and | |
(v) | Recognize revenue when (or as) the Company satisfies a performance obligation. |
The Company primarily generates revenue by charging businesses to advertise on the Company’s website and social media channels. In cases where clients enter advertising contracts for an extended period of time, the Company recognizes revenue pro rata over the contract term and any unearned revenue is deferred to future periods.
Based on the nature of the Company’s revenue streams, revenues generally do not require significant estimates or judgments. The sales prices are generally fixed at the point of sale and all consideration from contracts is included in the transaction price. The Company’s contracts do not include multiple performance obligations or material variable consideration.
Deferred revenue represents the amount of prepaid advertising fees the Company has received from customers and it is included in current liabilities in the accompanying condensed consolidated balance sheets. Deferred revenue shall be recognized in the future as the advertising services are provided.
8
Advertising
The
Company charges the costs of advertising to expense as incurred. Advertising costs were $
Stock-Based Compensation
Stock-based compensation expense is measured at the grant date fair value of the award and is expensed over the requisite service period. For stock-based awards to employees, non-employees and directors, the Company calculates the fair value of the award on the date of grant using the Black-Scholes option pricing model. Determining the fair value of stock-based awards at the grant date under this model requires judgment, including estimating volatility, employee stock option exercise behaviors and forfeiture rates. The assumptions used in calculating the fair value of stock-based awards represent the Company’s best estimates, but these estimates involve inherent uncertainties and the application of management’s judgment.
Income Taxes
The Company follows ASC Subtopic 740-10, “Income Taxes” (“ASC 740-10”) for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability during each period.
If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change. Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods.
Convertible Instruments
U.S. GAAP requires companies to bifurcate conversion options from their host instruments and account for them as freestanding derivative financial instruments according to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur, and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to this rule is when the host instrument is deemed to be conventional, as that term is described under ASC 480, “Distinguishing Liabilities From Equity.”
When the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption using the effective interest method.
9
Beneficial Conversion Features and Deemed Dividends
The Company records a beneficial conversion feature for preferred stock when, on the date of issuance, the conversion rate is less than the Company’s stock price. The Company also records, when necessary, a contingent beneficial conversion resulting from price protection of the conversion price of preferred stock, based on the change in the intrinsic value of the conversion options embedded in such preferred stock.
The Company records, when necessary, deemed dividends for: (i) warrant price protection, based on the difference between the fair value of the warrants immediately before and after the repricing (inclusive of any full ratchet provisions); (ii) the exchange of preferred shares for convertible notes, based on the amount of the face value of the convertible notes in excess of the carrying value of the preferred shares; (iii) the settlement of warrant provisions, based on the fair value of the shares of common stock issued; and (iv) amortization of discount on preferred stock resulting from recognition of a beneficial conversion feature.
Derivative Financial Instruments
The Company classifies as equity any contracts that: (i) require physical settlement or net-share settlement; or (ii) provide the Company with a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement) providing that such contracts are indexed to the Company’s own stock. The Company classifies as assets or liabilities any contracts that: (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the Company’s control); or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). The Company assesses classification of its common stock purchase warrants and other freestanding derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required.
The Company’s freestanding derivatives consisted of warrants to purchase common stock that were issued in connection with the issuance of debt and the sale of shares of common stock, and of embedded conversion options within convertible notes. The Company evaluated these derivatives to assess their proper classification in the balance sheet as of June 30, 2021 and December 31, 2020 using the applicable classification criteria enumerated under ASC 815, “Derivatives and Hedging.” The Company determined that certain embedded conversion and/or exercise features did not contain fixed settlement provisions. The convertible notes contained a conversion feature such that the Company could not ensure it would have adequate authorized shares to meet all possible conversion demands. As such, the Company is required to record the derivatives which do not have fixed settlement provisions as liabilities and mark to market all such derivatives to fair value at the end of each reporting period. The Company also records derivative liabilities for instruments, including convertible notes, preferred stock, and warrants, in which the Company does not have sufficient authorized shares to cover the conversion of these instruments into shares of common stock.
Long-Lived Assets
The Company reviews its property
and equipment and any identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. The test for impairment is required to be performed by management at least annually. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted operating cash
flow expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Long-lived assets to be disposed of are reported
at the lower of carrying amount or fair value less costs to sell. Intangible assets are stated at cost and reviewed annually to examine
any impairments, usually assuming an estimated useful life of
10
Indefinite Lived Intangibles and Goodwill
The Company accounts for business combinations under the acquisition method of accounting in accordance with ASC 805, “Business Combinations,” where the total purchase price is allocated to the tangible and identified intangible assets acquired and liabilities assumed based on their estimated fair values. The purchase price is allocated using the information currently available, and may be adjusted, up to one year from acquisition date, after obtaining more information regarding, among other things, asset valuations, liabilities assumed and revisions to preliminary estimates. The purchase price in excess of the fair value of the tangible and identified intangible assets acquired less liabilities assumed is recognized as goodwill.
The Company tests indefinite lived intangibles and goodwill for impairment in the fourth quarter of each year and whenever events or circumstances indicate that the carrying amount of the asset exceeds its fair value and may not be recoverable.
Segment Reporting
Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the Chief Executive Officer, or decision-making group, in deciding the method to allocate resources and assess performance. The Company currently has one reportable segment for financial reporting purposes, which represents the Company’s core business.
Net Loss Per Common Share
Net loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share includes the dilution that would occur upon the exercise or conversion of all potentially dilutive securities into common stock using the “treasury stock” and/or “if converted” methods, as applicable. The computation of diluted earnings (loss) per share excludes potentially dilutive securities when their inclusion would be anti-dilutive, or if their exercise prices were greater than the average market price of the common stock during the period.
Potentially dilutive securities excluded from the computation of basic and diluted net loss per share are as follows:
June 30, | June 30, | |||||||
2021 | 2020 | |||||||
Shares of common stock issuable upon conversion of convertible notes | ||||||||
Options to purchase shares of common stock | ||||||||
Warrants to purchase shares of common stock | ||||||||
Shares of common stock issuable upon conversion of preferred stock | ||||||||
Total potentially dilutive shares |
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, which simplifies the guidance on accounting for convertible debt instruments by removing the separation models for: (1) convertible debt with a cash conversion feature; and (2) convertible instruments with a beneficial conversion feature. As a result, the Company will not separately present in equity an embedded conversion feature in such debt. Instead, we will account for a convertible debt instrument wholly as debt, unless certain other conditions are met. We expect the elimination of these models will reduce reported interest expense and increase reported net income for the Company’s convertible instruments falling under the scope of those models before the adoption of ASU 2020-06. Also, ASU 2020-06 requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock method will be no longer available. The provisions of ASU 2020-06 are applicable for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of ASU 2020-06 on its unaudited condensed consolidated financial statements.
11
In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 removes certain disclosure requirements, including the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. ASU 2018-13 also adds disclosure requirements, including changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements, and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments on changes in unrealized gains and losses, and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. ASU 2018-13 became effective for us on January 1, 2020. The adoption of this update did not have a material impact on the Company’s unaudited condensed consolidated financial statements and related disclosures.
There are other various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment as of June 30, 2021 and December 31, 2020 is summarized as follows:
June 30, 2021 | December 31, 2020 | |||||||
Computers | $ | $ | ||||||
Office equipment | ||||||||
Subtotal | ||||||||
Less accumulated depreciation | ( | ) | ( | ) | ||||
Property and equipment, net | $ | $ |
Depreciation expense for the six months ended June 30, 2021 and 2020
was $
NOTE 5 – ADVANCES, NON-CONVERTIBLE NOTES PAYABLE AND PPP NOTE PAYABLE
Advances
During the six months
ended June 30, 2021 and 2020, the Company received aggregate proceeds from non-interest bearing advances of $
Non-Convertible Notes Payable
During the six months ended
June 30, 2021 and 2020, the Company received proceeds from the issuance of non-convertible notes of $
On June 2, 2021, one of the
holders of non-convertible notes entered into an agreement to cancel the entire amount owed to him (including principal of $
On June 4, 2021, one of the
holders of a non-convertible note payable for $
As of June 30, 2021 and December
31, 2020, the Company owed $
12
PPP Note Payable
On May 4, 2020,
NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
As of June 30, 2021 and December 31, 2020, the
Company owed accounts payable and accrued expenses of $
NOTE 7 – ACCRUED PAYROLL AND RELATED EXPENSES
The Company is delinquent in filing its payroll
taxes, primarily related to stock compensation awards in 2016 and 2017, but also including payroll for 2018 through 2021. As of June 30,
2021 and December 31, 2020, the Company owed payroll tax liabilities, including penalties, of $
NOTE 8 – COMMITMENTS AND CONTINGENCIES
From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. Except as set forth below, we are currently not aware of any such legal proceedings or claims that will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.
Power Up Lending Group, Ltd. Complaint
As disclosed in the Company’s Annual Report on Form 10-K filed with the SEC on April 16, 2021, on October 11, 2019, Power Up Lending Group, Ltd. (“Power Up”) filed a complaint against the Company and Isaac Dietrich, an officer and director of the Company, in the Supreme Court of the State of New York, County of Nassau. The complaint alleged, among other things, (i) the occurrence of events of default in certain notes (the “Power Up Notes”) issued by the Company to Power Up, (ii) misrepresentations by the Company including, but not limited to, with respect to the Company’s obligation to timely file its required reports with the SEC and (iii) lost profits as a result of the Company’s failure to convert the Power Up Notes in accordance with the terms thereof.
On April 30, 2021, the Company entered into a
settlement agreement (the “Settlement”) with PowerUp by accepting an offer communicated to the Company via electronic mail.
In accordance with the terms of the Settlement, PowerUp, the judgment creditor of a judgment against the Company and Isaac Dietrich, the
Company’s Chief Executive Officer and director, in the total amount of $
13
Sheppard Mullin’s Demand for Arbitration
On December 1, 2020, Sheppard, Mullin, Richter
& Hampton LLP (“Sheppard Mullin”), the Company’s former securities counsel, filed a demand for arbitration at JAMS
in New York, New York against the Company, alleging the Company’s breach of an engagement agreement dated January 4, 2018, and a
failure of the Company to pay $
Rother Investments’ Petition
On October 28, 2020, Rother Investments, LLC (“Rother
Investments”) filed a complaint in the District Court of 419th Judicial District, Travis County, Texas against the Company, alleging
the Company’s default under a certain promissory note (the “Rother Investments Note”) in payment of the outstanding
principal amount and interest under the Note, as described in the complaint.
Trawick’s Complaint
As previously reported by the Company in its Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 16, 2021, on or about January 25, 2021, Travis Trawick (“Trawick”) filed a complaint (“Trawick’s Lawsuit”) against the Company and Isaac Dietrich, the Company’s Chief Executive Officer and director, in the Circuit Court for the City of Virginia Beach, Virginia (the “Court”), asserting the Company’s failure to remit payments under the certain promissory note, as subsequently amended and modified, and ancillary documents thereto (collectively, the “Note”), and Mr. Dietrich’s failure to fulfill its obligations, as the guarantor, under the Note.
On May 4, 2021, Trawick requested that the Clerk of the Court files for entry an order to dismiss Trawick’s Lawsuit with prejudice.
Iroquois Master Fund
On June 30, 2021, the Company received an e-mail
containing a demand (the “Demand”) for arbitration (the “Arbitration”) at American Arbitration Association in
Denver, Colorado, by Iroquois Master Fund Ltd. (“Iroquois”) against the Company, Isaac Dietrich and Danny Meeks, the Company’s
directors, and Empire Services, Inc. (“Empire”).
Litigation
On July 21, 2021, in response to the Demand, Isaac
Dietrich, Danny Meeks, and Empire, filed a complaint (the “Complaint”) against Iroquois in the United States District Court
of the Southern District of New York alleging that the aforementioned plaintiffs are not parties to the warrant the Demand based on, and
as such, the Demand could not have brought against them. Declaratory relief and injunctive relief were sought in the Complaint. On August
20, 2021, Iroquois submitted an answer with counterclaims stating that Iroquois informed the American Arbitration Association (the arbitral
body overseeing the Arbitration) that it will (i) dismiss the Counterclaim Defendants from the Arbitration without prejudice, (ii) assert
its claims against Isaac Dietrich, Danny Meeks, and Empire the in the action commended by them, and (iii) proceed with the Arbitration
with respect to the Company only. In its answer, Iroquois made allegations substantially similar to the claims made in the Arbitration,
asserted defenses, and requested an award in not less than $
14
NOTE 9 – CONVERTIBLE NOTES PAYABLE
On December 17, 2018,
the Company issued a secured convertible promissory note in the principal amount of $
In connection with the
December 2018 note, the Company also entered into a security agreement (the “Security Agreement”) on the closing date pursuant
to which the Company granted the investor a security interest in the Collateral (as defined in the Security Agreement). On July 16,
2019, the Company received a notice from the noteholder indicating that events of default had occurred and asserting default penalties
of $
On January
25, 2019, the Company issued a convertible promissory note in the principal amount of $
15
From January
to June 2019, the Company issued convertible promissory notes in the aggregate principal amount of $
On
November 13, 2019, the Company issued three convertible promissory notes in the aggregate principal amount of $
On
December 6, 2019,
16
In
December 2019,
From
January to September 2020, the Company issued convertible promissory notes in the aggregate principal amount of $
17
As of June 30, 2021 and
December 31, 2020, the remaining carrying value of the convertible notes was $
Upon the issuance of certain convertible notes, the Company determined that the features associated with the embedded conversion option embedded in the notes, should be accounted for at fair value, as a derivative liability, as the Company cannot determine if a sufficient number of shares would be available to settle all potential future conversion transactions.
The Company does not have enough authorized and unissued shares of common stock to convert all of the convertible promissory notes into shares of common stock. As a result of this authorized shares shortfall, all of the convertible notes payable, including those where the maturity date has not yet been reached, are in default. Accordingly, (i) interest has been accrued at the default interest rate, if applicable, and (ii) the embedded conversion option has been accounted for, at fair value, as a derivative liability (See Note 10).
NOTE 10 – DERIVATIVE LIABILITIES AND FAIR VALUE MEASUREMENTS
Upon the issuance of certain convertible debentures, warrants, and preferred stock, the Company determined that the features associated with the embedded conversion option embedded in the debentures, should be accounted for at fair value, as a derivative liability, as the Company cannot determine if a sufficient number of shares would be available to settle all potential future conversion transactions.
During the six months
ended June 30, 2021, upon issuance of the instruments underlying the derivative liabilities and
upon revaluation (immediately prior to conversion of the underlying instrument), the Company estimated the fair value of the embedded
derivatives using the Black-Scholes Pricing Model based on the following assumptions: (1) dividend yield of
On June 30, 2021, the
Company estimated the fair value of the embedded derivatives of $
During
the year ended December 31, 2020, upon issuance of the instruments underlying the derivative liabilities and upon revaluation (immediately
prior to conversion of the underlying instrument), the Company estimated the fair value of the embedded derivatives using the Black-Scholes
Pricing Model based on the following assumptions: (1) dividend yield of
On December 31, 2020,
the Company estimated the fair value of the embedded derivatives of $
18
The Company adopted the provisions of ASC 825-10. ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of non-performance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:
● | Level 1 – Quoted prices in active markets for identical assets or liabilities. |
● | Level 2 – Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities. |
● | Level 3 – Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities. |
All items required to be recorded or measured on a recurring basis are based upon Level 3 inputs.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.
The Company recognizes its derivative liabilities as Level 3 and values its derivatives using the methods discussed above. While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values using the methods discussed are that of volatility and market price of the underlying common stock of the Company.
As of June 30, 2021 and December 31, 2020, the Company did not have any derivative instruments that were designated as hedges.
Items recorded or measured at fair value on a recurring basis consisted of the following items as of June 30, 2021 and December 31, 2020:
June 30, 2021 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Derivative liabilities | $ | $ | $ | $ | ||||||||||||
December 31, 2020 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
|||||||||||||
Derivative liabilities | $ | $ | $ | $ |
19
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, 2021:
Balance, December 31, 2020 | $ | |||
Transfers out due to conversions of convertible notes, accrued interest and warrants into shares of Series Y preferred stock | ( | ) | ||
Transfers out due to conversions of convertible notes and accrued interest into shares of common stock | ( | ) | ||
Transfers out due to cash payments made pursuant to settlement agreements | ( | ) | ||
Change in derivative liability due to authorized shares shortfall | ||||
Mark to market to June 30, 2021 | ( | ) | ||
Balance, June 30, 2021 | $ | |||
Gain on change in derivative liabilities for the six months ended June 30, 2021 | $ |
Fluctuations in the Company’s stock price are a primary driver for the changes in the derivative valuations during each reporting period. As the stock price increases/(decreases) for each of the related derivative instruments, the value to the holder of the instrument generally increases/(decreases), therefore increasing/(decreasing) the liability on the Company’s balance sheet. Decreases in the conversion price of the Company’s convertible notes are another driver for the changes in the derivative valuations during each reporting period. As the conversion price decreases for each of the related derivative instruments, the value to the holder of the instrument (especially those with full ratchet price protection) generally increases, therefore increasing the liability on the Company’s balance sheet. Additionally, stock price volatility is one of the significant unobservable inputs used in the fair value measurement of each of the Company’s derivative instruments. The simulated fair value of these liabilities is sensitive to changes in the Company’s expected volatility. Increases in expected volatility would generally result in higher fair value measurements. A 10% change in pricing inputs and changes in volatilities and correlation factors would not result in a material change in our Level 3 fair value.
NOTE 11 – STOCKHOLDERS’ DEFICIT
Preferred Stock
Series A
The
Company is authorized to issue
On July 2, 2019, the
Company authorized the issuance of
During the periods presented, there were
Series B
On
June 24, 2019, the Company authorized the issuance of
During
the periods presented, there were
Series C
On
July 16, 2019, the Company authorized the issuance of
As
of June 30, 2021 and December 31, 2020, there were
20
Series X
On
November 23, 2020, the Company authorized the issuance of
From
November 25 to December 23, 2020, the Company issued an aggregate of
As
of June 30, 2021 and December 31, 2020, there were
Series Y
On
December 30, 2020, the Company authorized the issuance of
From
December 23 to December 30, 2020, the Company issued
21
From
January 7 to March 23, 2021, the Company issued
On
March 17, 2021, the Company issued
As
of June 30, 2021 and December 31, 2020, there were
Common Stock
The Company is authorized
to issue
On
January 8, 2020, the Company issued
On March 7, 2020, a stockholder
returned
During
the year ended December 31, 2020, a warrant exercise in 2019, to purchase
During the year ended
December 31, 2020, the Company issued an aggregate of
On January 20, 2021,
the Company issued
22
On
June 2, 2021, the Company issued
On June 4, 2021, an investor
owning
On
June 6, 2021, the Company awarded an aggregate of
As of June 30, 2021 and
December 31, 2020, there were
NOTE 12 – WARRANTS
From January 7 to March 23, 2021, the Company
issued
On June 4, 2021, an investor
owning
On June 4, 2021, an investor
owning warrants to purchase
A summary of the Company’s warrant activity during the six months ended June 30, 2021, is presented below:
Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
Outstanding at December 31, 2020 | $ | $ | ||||||||||||||
Grants | ||||||||||||||||
Exercised | ||||||||||||||||
Expired/Canceled | ( | ) | ||||||||||||||
Outstanding at June 30, 2021 | $ | $ | ||||||||||||||
Exercisable at June 30, 2021 | $ | $ |
Exercise Price | Warrants Outstanding | Weighted Avg. Remaining Life | Warrants Exercisable | |||||||||
$ | ||||||||||||
The aggregate intrinsic value
of outstanding stock warrants was $
23
NOTE 13 – STOCK OPTIONS
Our stockholders approved our 2014 Equity Incentive Plan in June 2014 (the “2014 Plan”), our 2015 Equity Incentive Plan in December 2015 (the “2015 Plan”), our 2016 Equity Incentive Plan in October 2016 (“2016 Plan”), our 2017 Equity Incentive Plan in December 2016 (“2017 Plan” and together with the 2014 Plan, 2015 Plan, 2016 Plan, the “Prior Plans”) and our 2018 Equity Incentive Plan in June 2018 (the “2018 Plan”, and together with the Prior Plans, the “Plans”). The Prior Plans are identical, except for the number of shares reserved for issuance under each. As of September 30, 2020, the Company had granted an aggregate of 64,310,000 securities under the Plans, with 190,000 shares available for future issuances.
The Plans provide for the grant of incentive stock options to our employees and our subsidiaries’ employees, and for the grant of stock options, stock bonus awards, restricted stock awards, performance stock awards and other forms of stock compensation to our employees, including officers, consultants and directors. The Prior Plans also provide that the grant of performance stock awards may be paid out in cash as determined by the committee administering the Prior Plans.
Option valuation models require the input of highly subjective assumptions. The fair value of stock-based payment awards was estimated using the Black-Scholes option pricing model with a volatility figure derived from historical data. The Company accounts for the expected life of options based on the contractual life of the options.
A summary of the Company’s stock option activity during the six months ended June 30, 2021, is presented below:
Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
Outstanding at December 31, 2020 | $ | $ | ||||||||||||||
Grants | ||||||||||||||||
Exercised | ||||||||||||||||
Expired/Canceled | ||||||||||||||||
Outstanding at June 30, 2021 | $ | $ | ||||||||||||||
Exercisable at June 30, 2021 | $ | $ |
Exercise Price | Number of Options | Remaining Life In Years | Number of Options Exercisable | |||||||||
$ | ||||||||||||
The aggregate intrinsic value
of outstanding stock options was $
24
NOTE 14 – RELATED PARTY TRANSACTIONS
During the six months ended
June 30, 2021 and 2020, the Company received aggregate advances of $
During the six months ended
June 30, 2021 and 2020, the Company received aggregate proceeds of $
NOTE 15 – SUBSEQUENT EVENTS
The Company evaluates events that have occurred after the balance sheet date but before the unaudited condensed consolidated financial statements are issued.
From July 1 to August 20, 2021 the Company received aggregate proceeds
of $
25
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with our condensed consolidated financial statements and related notes contained in Part I, Item 1 of this Quarterly Report. Please also refer to the note about forward-looking information for information on such statements contained in this Quarterly Report immediately preceding Part I, Item 1.
Overview
MassRoots, Inc. was formed in April 2013 as a technology platform for the cannabis industry. The Company has recently shifted its focus to developing cloud-based solutions to deliver informative content and improve operating efficiencies. The Company’s long-term strategy has been transformed accordingly, and MassRoots believes this shift could be accretive to shareholder value. Additionally, we plan to monetize our existing social media accounts such as YouTube Channel, which has 273,000 subscribers, through product placements and sponsorships. Management believes that our YouTube Channel has a large and diverse following while our Instagram account is followed by 378,000 users.
Our Strategy
Our primary business objective is to develop revenue generating channels. Currently, we are considering various strategies to achieve such objective including acquisitions, dispositions, mergers, or other business combinations with one or more targets. The management of the Company believes that such approach may be especially relevant in the current state of the marketplace and continues to explore strategic opportunities that would further the business of the Company. A recently executed letter of intent with Empire Services, Inc. (“Empire”) to acquire the entirety of issued and outstanding equity of Empire is the primary focus of the management of the Company at the moment. Further, the Company is currently taking affirmative steps to effect the non-binding provisions of the letter of intent with Empire in the absence of definitive agreement, which is considered the best course of action by the management of the Company.
COVID-19 Pandemic
In March 2020, the World Health Organization declared COVID-19 a global pandemic. This contagious disease outbreak, which has continued to spread, and any related adverse public health developments, has adversely affected workforces, customers, economies, and financial markets globally, leading to an economic downturn. It has also disrupted the normal operations of many businesses, including ours. It is not possible for us to predict the duration or magnitude of the adverse results of the outbreak of COVID-19 and its effects on our business including our financial condition, liquidity, or results of operations at this time. Management is actively monitoring the global situation and its impact on the Company’s financial condition, liquidity, operations, customers, industry, and workforce. Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company is not able to estimate the effects that the COVID-19 outbreak will have on its results of operations, financial condition, or liquidity for fiscal year 2021. As of the date of this Quarterly Report on Form 10-Q, the Company has experienced delays in securing new customers and related revenues and the longer this pandemic continues there may be additional impacts. Furthermore, the COVID-19 outbreak has and may continue to impact the Company’s ability to raise capital.
Although the Company cannot estimate the length or gravity of the impact of the COVID-19 outbreak at this time, if the pandemic continues, it may have a material adverse effect on the Company’s results of future operations, financial position, liquidity, and capital resources, and those of the third parties on which the Company relies in fiscal year 2021.
26
For the Three Months Ended June 30, 2021 and 2020
For the three months ended | ||||||||||||||||
June 30, 2021 | June 30, 2020 | $ Change | % Change | |||||||||||||
Revenue | $ | 79 | $ | - | $ | 79 | - | |||||||||
Operating Expenses | 499,365 | 276,791 | 222,574 | 80.4 | % | |||||||||||
Loss from Operations | (499,286 | ) | (276,791 | ) | (222,495 | ) | 80.4 | % | ||||||||
Other Income (Expense) | 37,942,273 | (79,852,494 | ) | 117,794,767 | (147.5 | )% | ||||||||||
Net Income (Loss) Available to Common Stockholders | $ | 23,782,905 | $ | (80,129,285 | ) | $ | 103,912,190 | (129.6 | )% |
Revenues
For the three months ended June 30, 2021 and 2020, we generated revenues of $79 and $0, respectively, an increase of $79 primarily due to the relaunch of product placements on the Company’s YouTube and social media channels.
Operating Expenses
For the three months ended June 30, 2021 and 2020, our operating expenses were $499,365 and $276,791, respectively, an increase of $222,574. This increase was attributable to an increase in advertising expenses from $0 for the three months ended June 30, 2020 to $4,150 for the same period in 2021, an increase of $4,150. There was a decrease in payroll and related expenses of $13,778 due to reduction in the number of employees, as payroll and related expenses decreased to $79,377 for the three months ended June 30, 2021 from $93,155 for same period in 2020. Other general and administrative expenses increased by $232,202 from $183,636 for the three months ended June 30, 2020, to $415,838 for the three months ended June 30, 2021. This increase was attributable to higher travel and legal costs for the three months ended June 30, 2021 as compared to the same period in 2020.
Loss from Operations
During the three months ended June 30, 2021, we incurred losses of $499,286 from operations, as compared to losses of $276,791 during the same period in 2020, a difference of $222,495, for the reasons stated above.
Other Income (Expense)
For the three months ended June 30, 2021 and 2020, the Company recorded interest expense of $398,011 and $1,063,357, respectively, primarily related to Company’s convertible notes. The Company recorded $0 and a $1,232 loss on the conversion of convertible notes payable for the three months ended June 30, 2021 and 2020, respectively. For the three months ended June 30, 2021 and 2020, the Company recorded a $52,508 loss and a $61,818 gain, respectively, on the change in fair value of derivative liabilities. For the three months ended June 30, 2021 and 2020, the Company recorded $132,821,830 and $78,849,723 in losses, respectively, of the change in the fair value of the derivative liability for the authorized shares shortfall. The Company recorded a $170,085,696 gain on settlement of convertible notes payable and accrued interest, warrants and accounts payable during the three months ended June 30, 2021, as compared to $0 during the same period in 2020. There was a $192,521 gain on the forgiveness of debt for the three months ended June 30, 2021, as compared to $0 during the same period in 2020.
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Net Income (Loss) Available to Common Stockholders
For the three months ended June 30, 2021, we had income available to common stockholders of $23,782,905 as compared to a net loss of $80,129,285 for the same period in 2020, a difference of $103,912,190 for the reasons discussed above.
For the Six Months Ended June 30, 2021 and 2020
For the six months ended | ||||||||||||||||
June 30, 2021 | June 30, 2020 | $ Change | % Change | |||||||||||||
Revenue | $ | 1,606 | $ | - | $ | 1,606 | - | |||||||||
Operating Expenses | 802,640 | 488,119 | 314,521 | 64.4 | % | |||||||||||
Loss from Operations | (801,034 | ) | (488,119 | ) | (312,915 | ) | 64.1 | % | ||||||||
Other Income (Expense) | 12,188,924 | (111,594,062 | ) | 123,782,986 | (110.9 | )% | ||||||||||
Net Income (Loss) Available to Common Stockholders | $ | (23,411,033 | ) | $ | (207,085,114 | ) | $ | 183,674,081 | 88.7 | % |
Revenues
For the six months ended June 30, 2021 and 2020, we generated revenues of $1,606 and $0, respectively, an increase of $1,606 primarily due to the relaunch of product placements on the Company’s YouTube and social media channels.
Operating Expenses
For the six months ended June 30, 2021 and 2020, our operating expenses were $802,640 and $488,119, respectively, an increase of $314,521. This increase was attributable to an increase in advertising expenses from $0 for the six months ended June 30, 2020 to $22,703 for the same period in 2021, an increase of $22,703. There was a decrease in payroll and related expenses of $16,981 due to reduction in the number of employees, as payroll and related expenses decreased to $158,910 for the six months ended June 30, 2021 from $175,891 for same period in 2020. Other general and administrative expenses increased by $308,502 from $312,228 for the six months ended June 30, 2020, to $620,730 for the six months ended June 30, 2021. This increase was attributable to higher travel and legal costs for the six months ended June 30, 2021 as compared to the same period in 2020.
Loss from Operations
During the six months ended June 30, 2021, we incurred losses of $801,034 from operations, as compared to losses of $488,119 during the same period in 2020, a difference of $312,915, for the reasons stated above.
Other Income (Expense)
For the six months ended June 30, 2021 and 2020, the Company recorded interest expense of $968,159 and $2,005,006, respectively, primarily related to Company’s convertible notes. The Company recorded a $880 loss and $882 gain on the conversion of convertible notes payable for the six months ended June 30, 2021 and 2020, respectively. For the six months ended June 30, 2021 and 2020, the Company recorded a $300,885 and a $388,880 gain, respectively, on the change in fair value of derivative liabilities. For the six months ended June 30, 2021 and 2020, the Company recorded $162,275,278 and $109,978,818 loss, respectively, of changes in the fair value of the derivative liability for the authorized shares shortfall. The Company recorded a $174,939,835 gain on settlement of convertible notes payable and accrued interest, warrants and accounts payable during the six months ended June 30, 2021, as compared to $0 during the same period in 2020. There was a $192,521 gain on the forgiveness of debt for the six months ended June 30, 2021, as compared to $0 during the same period in 2020.
Net Income (Loss) Available to Common Stockholders
For the six months ended June 30, 2021, we had net losses available to common stockholders of $23,411,033 as compared to a net loss of $207,085,114 for the same period in 2020, a difference of $183,674,081 for the reasons discussed above.
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Liquidity and Capital Resources
Net cash used in operations for the six months ended June 30, 2021 and 2020 was $385,658 and $492,544, respectively. This $106,886 decrease was primarily caused by an increase in accounts payable and accrued expenses, accrued payroll and related expenses, and prepaid expenses. Net cash used in operations for the six months ended June 30, 2020 was primarily based on the loss for the six months ended June 30, 2020, partially offset by the increases in accounts payable and accrued payroll.
Net cash provided by financing activities for the six months ended June 30, 2021 and 2020 was $385,434 and $492,074, respectively. During the six months ended June 30, 2021, these funds were derived mainly from proceeds related to the issuance of preferred shares and non-convertible notes. During the six months ended June 30, 2020, net cash provided by financing activities was derived from the issuance of convertible notes, offset by repayment of non-convertible notes.
Capital Resources
As of June 30, 2021, the Company had cash of $1,261 and working capital deficit (current liabilities in excess of current assets) of $24,482,427. During the six months ended June 30, 2021, the net loss available to common stockholders was $23,411,033 and net cash used in operating activities was $385,434. These conditions raise substantial doubt about our ability to continue as a going concern for one year from the issuance of the condensed consolidated financial statements. Our primary source of operating funds since inception has been cash proceeds from the public and private placements of our securities, including debt securities, and proceeds from the exercise of warrants and options. We have experienced net losses and negative cash flows from operations since inception and expect these conditions to continue for the foreseeable future. For the foreseeable future, our ability to continue our operations is dependent upon our ability to obtain additional capital through public or private equity offerings, debt financings or other sources; however, financing may not be available to us on acceptable terms, or at all. Our failure to raise capital as and when needed would have a negative impact on our financial condition and our ability to pursue our business strategy and we may be forced to curtail or cease operations.
Management’s plans regarding these matters encompass the following actions: 1) obtain funding from new and current investors to alleviate our working capital deficiency; and 2) implement a plan to generate revenues. Our continued existence is dependent upon our ability to translate our audience into revenues. However, the outcome of our plans cannot be determined with any degree of certainty.
Accordingly, the accompanying condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business for one year from the date the condensed consolidated financial statements are issued. The carrying amounts of assets and liabilities presented in the condensed consolidated financial statements do not necessarily purport to represent realizable or settlement values. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty such as the final settlement amounts of our notes payable and accrued interest.
Off-Balance Sheet Arrangements
As of June 30, 2021, we did not have any off-balance sheet arrangements.
Contractual Obligations
Our contractual obligations are included in our notes to the condensed consolidated financial statements included in Part I, Item I of this Quarterly Report on Form 10-Q. To the extent that funds generated from our operations, together with our existing capital resources, are insufficient to meet future requirements, we will be required to obtain additional funds through equity or debt financings. No assurance can be given that any additional financing will be made available to us or will be available on acceptable terms should such a need arise.
Critical Accounting Policies and Estimates
For a discussion of our accounting policies and related items, please see the notes to the condensed consolidated financial statements, included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
As a “smaller reporting company” we are not required to provide the information required by this Item.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Pursuant to Rules 13a-15(b) and 15-d-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) of the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. The term “disclosure controls and procedures,” as defined under Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based upon such evaluation, the Company’s CEO (the principal executive officer) and CFO (the principal financial officer) concluded that the Company’s disclosure controls and procedures as of June 30, 2021 were not effective.
Due to identified control deficiencies regarding the lack of segregation of duties and the need for a stronger internal control environment, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were ineffective as of the end of the period covered by this report. Specifically, the Company’s controls and procedures were ineffective because the Company did not have an adequate process established to ensure appropriate levels of review of accounting and financial reporting matters, which resulted in the Company’s closing process not identifying all required adjustments and disclosures in a timely fashion. The Company expects that it will need to hire accounting personnel with the requisite knowledge to improve the levels of review of accounting and financial reporting matters. The Company may experience delays in doing so and any such additional employees would require time and training to learn the Company’s business and operating processes and procedures. For the near-term future, until such personnel are in place, this will continue to constitute a material weakness in the Company’s disclosure controls and procedures that could result in material misstatements in the Company’s financial statements not being prevented or detected.
To address the material weaknesses, the Company performed additional analysis and other procedures in an effort to ensure its financial statements included in this Quarterly Report on Form 10-Q have been prepared in accordance with generally accepted accounting principles in the United States. Accordingly, management believes that the financial statements included in this report fairly present in all material respects the Company’s financial condition, results of operations and cash flows for the periods presented.
The Company’s principal executive officer and principal financial officer do not expect that the Company’s disclosure controls and procedures or its internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during its most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As disclosed in Note 8 to the Company’s Condensed Consolidated Financial Statements, the Company is engaged in certain legal matters and there have been no material developments since December 31, 2020 with respect to our legal proceedings, except as described in Note 8. The disclosures set forth in Note 8 relating to certain legal matters are incorporated herein by reference.
ITEM 1A. RISK FACTORS
As a “smaller reporting company,” we are not required to provide the information required by this Item 1A. Please see the Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2020 as filed with the SEC on April 16, 2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On June 2, 2021, the Company issued 1,006,250 shares of the Company’s common stock previously recorded as to be issued as of December 31, 2020.
On June 6, 2021, the Company awarded an aggregate of 2,175,431 fully-vested shares of common stock, having a fair value of $166,855, for services rendered.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company does not have enough authorized and unissued shares of common stock to convert all of the convertible promissory notes into shares of common stock. As a result of this authorized shares shortfall, all of the convertible notes payable, including those where the maturity date has not yet been reached, are in default. Accordingly, (i) interest has been accrued at the default interest rate, if applicable, and (ii) the embedded conversion option has been accounted for, at fair value, as a derivative liability The Company has recorded the full value of the principal, default penalties, and interest as current liabilities, as fully described in “Note 9 - Convertible Notes Payable” in the Company’s notes to the condensed consolidated financial statements included in Part I, Item I of this Quarterly Report on Form 10-Q. The amount of principal in default pursuant to the convertible notes is $3,063,970 as of June 30, 2021.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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ITEM 6. EXHIBITS
(b) Exhibit Index
* | Filed or furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
MASSROOTS, INC. | ||
Date: August 23, 2021 | By: | /s/ Isaac Dietrich |
Isaac Dietrich, Chief Executive Officer (Principal Executive Officer) | ||
Date: August 23, 2021 | By: | /s/ Isaac Dietrich |
Isaac Dietrich, Chief Financial Officer (Principal Financial and Accounting Officer) |
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