10-K
1
f10k2020_massrootsinc.htm
ANNUAL REPORT
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
☒ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
☐TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission File Number: 000-55431
MASSROOTS, INC.
(Exact name of registrant as specified in its charter)
(Address of principal executive offices) (Zip code)
(303) 816-8070
(Registrant’s telephone number, including
area code)
Securities registered pursuant to Section 12(b)
of the Act: None
Securities registered pursuant to Section 12(g)
of the Act: Common Stock, $0.001 par value per share
Indicate by check mark whether the registrant
is a well-known seasoned issuer as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant
has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405
of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.
See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange Act.
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
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or
issued its audit report. ☐
Indicate by check mark whether the registrant
is a shell company (as defined by Rule 12b-2 of the Exchange Act) Yes ☐ No ☒
The aggregate market value of voting and non-voting common equity held
by non-affiliates of the registrant as of June 30, 2020, the last business day of the registrant’s most recently completed second
fiscal quarter, was approximately $1,838,262.
Number of shares of common stock outstanding as of April 14, 2021 was
498,174,656.
Documents Incorporated by Reference
Portions of the Registrant’s
proxy statement for our 2021 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.
MASSROOTS, INC.
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 2020
TABLE OF CONTENTS
Page
PART I 1
Item 1. Business 1
Item 1A. Risk Factors 9
Item 1B. Unresolved Staff Comments 24
Item 2. Properties 24
Item 3. Legal Proceedings 24
Item 4. Mine Safety Disclosures 24
Item 6. Selected Financial Data 25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 31
Item 8. Financial Statements and Supplementary Data 31
Item 9A. Controls and Procedures 32
Item 9B. Other Information 33
PART III 35
Item 10. Directors, Executive Officers and Corporate Governance 35
Item 11. Executive Compensation 35
Item 14. Principal Accounting Fees and Services 35
Item 15. Exhibits and Financial Statement Schedules 36
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FORWARD-LOOKING STATEMENTS
Statements in this Annual Report on Form 10-K
may be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities
Act”) and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”).
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” and elsewhere in this Annual Report on Form 10-K.
You are cautioned not to place undue reliance
on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. 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 Annual Report on
Form 10-K or to reflect the occurrence of unanticipated events, except as required by law.
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PART I
Throughout this Annual Report on Form 10-K, the
“Company,” “MassRoots,” “we,” “us,” and “our” refers to MassRoots, Inc. and
its subsidiaries.
ITEM 1. BUSINESS
Overview
MassRoots, Inc. was formed in April 2013 as a technology platform for
the cannabis industry. In March 2021, we relaunched our website, MassRoots.com, which aims to enable cannabis consumers to find the best
products, connect with other enthusiasts, and deliver fresh content that both delights and informs our audience. Additionally, we plan
to monetize our YouTube Channel, which has 273,000 subscribers, through product placements and sponsorships. Management believes
that our YouTube Channel has one of the largest followings in the regulated cannabis industry while our Instagram account is followed
by 378,000 users.
Background
We were incorporated in the state of Delaware
on April 26, 2013 as a technology platform for the cannabis industry.
Our principal executive office is located at 1560
Broadway, Office 17-105, Denver, Colorado 80202, and our telephone number is (720) 240-9546.
On January 25, 2017, we consummated a reverse
triangular merger (the “Whaxy Merger”) pursuant to which we acquired all of the outstanding common stock of DDDigtal Inc (“DDDigtal”),
a Colorado corporation. Upon closing of the Whaxy Merger, each share of DDDigtal’s common stock was exchanged for such number of
shares of our common stock (or a fraction thereof) based on an exchange ratio equal to approximately 5.273-for-1, such that 1 share of
our common stock was issued for every 5.273 shares of DDDigtal’s common stock. At the closing of the Whaxy Merger, all shares of
common stock of our newly-formed merger subsidiary formed for the sole purpose of effectuating the Whaxy Merger, were converted into and
exchanged for one share of common stock of DDDigtal, and all shares of DDDigtal’s common stock that were outstanding immediately
prior to the closing of the Whaxy Merger were automatically cancelled and retired. Upon the closing of the Whaxy Merger, DDDigtal continued
as our surviving wholly-owned subsidiary, and the merger subsidiary ceased to exist.
On July 13, 2017, we consummated a reverse triangular
merger (the “Odava Merger”) pursuant to which we acquired all of the outstanding common stock of Odava Inc (“Odava”),
a Delaware corporation. Upon closing of the Odava Merger, each share of Odava’s common stock was exchanged for such number of shares
of our common stock (or a fraction thereof), based on an exchange ratio equal to approximately 4.069-for-1, such that 1 share of our common
stock was issued for every 4.069 shares of Odava’s common stock. At the closing of the Odava Merger, all shares of common stock
of our newly-formed merger subsidiary formed for the sole purpose of effectuating the Odava Merger, were converted into and exchanged
for one share of common stock of Odava, and all shares of Odava’s common stock that were outstanding immediately prior to the closing
of the Odava Merger automatically cancelled and retired. Upon the closing of the Odava Merger, Odava continued as our surviving wholly-owned
subsidiary, and the merger subsidiary ceased to exist.
Our Products and Services
Our website, MassRoots.com, which aims to enable
cannabis consumers to find the best products, connect with other enthusiasts, and deliver fresh content that both delights and informs
our audience.
User Growth and Product Distribution Channels
The MassRoots platform is
accessible through desktop and mobile web browsers by navigating to www.massroots.com.
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Blockchain Technologies
MassRoots Blockchain Technologies, Inc. (“MassRoots
Blockchain”) was formed in December 2017 as a wholly-owned subsidiary of the Company to continue the Company’s efforts in
exploring how new technologies may be utilized in the cannabis industry. Initially, we are focusing on blockchain technology for several
reasons, including, but not limited to:
● that it may provide greater transparency to government regulators.
In December 2017, we commenced the re-development
of the MassRoots Business Portal, a platform where dispensaries and other industry participants, such as producers and other ancillary
businesses, will be able to advertise their goods and services. To date, we have used approximately $370,000 for the initial development
of the MassRoots Business Portal, including features that allow for tracking of advertising impressions, enhanced targeting and serving
of advertisements, as well as a program that would be designed to reward audience for providing high quality reviews on cannabis strains
and products. The development and implementation of these any other features, including the possible use of digital instruments, is subject
to additional funding, is currently contemplated to be made within the MassRoots App and platform, and is intended to generate the growth
of Users of the MassRoots platform and stimulate the MassRoots platform’s overall activity.
All initial development has been outsourced to
third party development firms and consultants. Specifically, we have outsourced the following services: software development services,
including, but not limited to, web and mobile development services, blockchain development and integration services, and infrastructure
development, automation, support and management services. As stated in “Risk Factors,” the development of features based upon
the use of blockchain technology is subject to numerous risks and uncertainties, and there can be no assurance as to when, or if, any
such features will be successfully developed, or that if developed, that they will be accepted or adopted. Further, the likelihood of
our development and implementation of features based upon new technology must be considered in light of the problems, expenses, difficulties,
complications and delays frequently encountered in connection with the inception and development of a product or service based upon any
such relatively new and developing technology.
While we intend to devote resources to exploring
the feasibility of developing these or other solutions, there can be no assurances that we will be successful in implementing such solutions,
that any such solutions will be economically viable, or that any of them will result in the generation of User interest, participation
or revenue.
We currently anticipate that we will need to raise
additional funds to continue to explore and develop potential uses and applications of blockchain technologies and uses for our business
and other businesses in the cannabis industry; however, no assurance can be given that additional financing will be available on terms
favorable to us, or at all.
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Market Conditions
MassRoots is poised to take advantage of two rapidly
growing industries: cannabis and mobile technology.
Cannabis Market Growth and Current Trends
On January 4, 2018, Attorney General Jefferson
B. Sessions, III issued a memo which rescinded the Cole Memo (as described below) which was adopted by the Obama administration as a policy
of non-interference with marijuana-friendly state laws.
The Cole Memo
On August 29, 2013, Deputy Attorney General James
Cole issued a memo (the “Cole Memo”) in response to certain states passing measures to regulate the medical and adult-use
of cannabis. In the Cole Memo, the Department of Justice made clear that marijuana remains an illegal drug under the Controlled Substances
Act and that federal prosecutors will continue to aggressively enforce the statute. The Department of Justice identified eight enforcement
areas that federal prosecutors should prioritize. Outside of such enforcement priorities, the federal government has traditionally relied
on state and local authorities to address marijuana activity. The Cole Memo established several basic guidelines by which state-regulated
cannabis businesses could operate to minimize the risk of intervention and enforcement by the Department of Justice. The guidelines focused
on ensuring that cannabis did not cross state lines, keeping dispensaries away from schools and public facilities and strict-enforcement
of state laws by regulatory agencies, among other priorities.
The Sessions Memo
On January 4, 2018, Attorney General Jefferson
B. Sessions, III issued a memo (the “Sessions Memo”) on federal marijuana enforcement policy announcing a return to the rule
of law and the rescission of previous nationwide guidance by the Department of Justice (including, but not limited to, the Cole Memo).
In the memorandum, Attorney General Jefferson Sessions directs all U.S. attorneys to enforce the laws enacted by Congress and to follow
the well-established principles when pursuing prosecutions related to marijuana activities. These principles include weighing all relevant
considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent
effect of criminal prosecution, and the cumulative impact of particular crimes on the community.
Although the Sessions Memo rescinded the Cole
Memo, it is unclear at this time whether the Biden Administration will strongly enforce the federal laws applicable to cannabis or what
types of activities will be targeted for enforcement; however, a significant change in the federal government’s enforcement policy
with respect to current federal laws applicable to cannabis could have a material adverse effect on our business.
Guidance to Banks Relating to the Marijuana Industry
On February 14, 2014, the Department of Justice
and the Department of Treasury issued guidance to banks about how to serve the marijuana industry without running afoul of federal regulations.
Prior to such guidance, dispensaries were forced to operate on a cash basis, presenting significant security and accounting issues. Although
banks have remained reluctant to work with marijuana businesses because of federal prohibition laws, this guidance was a major step in
legitimizing and accepting the cannabis industry on a national level. In addition, the adoption of the Joyce Amendment (formerly known
as the Rohrabacher-Farr Amendment) (as discussed below) indicates some level of support in Congress for medicinal cannabis, even if its
actual effect is still undetermined.
For additional information concerning the Cole
Memo, the Sessions Member, the Joyce Amendment and regulatory conditions, see the section entitled “Business – Government
Regulation.”
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Current States with Laws Permitting the
Medical or Adult Use of Cannabis
Recreational marijuana is
regulated in 15 states and the District of Columbia and medical marijuana is regulated in 33 states and the District of Columbia. In addition,
15 additional states have legalized low-tetrahydrocannabinol (“THC”)/high-cannabidiol (“CBD”) extracts for
select medical conditions. The states which have enacted such laws are listed in the following table:
STATE YEAR PASSED
7. District of Columbia* 2010
* State has enacted laws permitting the adult use of cannabis, in addition to medical use.
Public Support for Regulation of Cannabis
Increasing
A Gallup poll conducted in October 2019 found
that 66% of Americans supported regulating the use of cannabis which indicates an increasing trend over the past decade toward public
support for cannabis.
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Market Conditions that Could Limit Our Business
Cannabis is a Schedule I controlled substance
under Federal law and, as such, there are several factors that could limit our business operations including, but not limited to:
Please see “Government Regulation” below for additional
information.
Government Regulation
Marijuana is a categorized
as a Schedule I controlled substance by the Drug Enforcement Agency and the United States Department of Justice and is illegal to grow,
possess and consume under Federal law. However, 33 states and the District of Columbia have passed laws that permit doctors to recommend
cannabis for medical-use and 11 of those states and the District of Columbia have enacted laws that regulate the personal-use of cannabis
by adults, subject to possession limits. Because doctors are prohibited from prescribing a Schedule I controlled substance, the passage
of medical marijuana laws does not necessarily guarantee the implementation of a regulated, commercial system through which patients can
purchase cannabis products. This has created an unpredictable business-environment for dispensaries and collectives that operate under
certain state laws but in violation of Federal law.
Cole Memo
On August 29, 2013, United States Deputy
Attorney General James Cole issued the Cole Memo to United States attorneys guiding them to prioritize enforcement of Federal law away
from the cannabis industry operating as permitted under certain state laws, so long as:
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● cannabis is not grown, used, or possessed on Federal properties.
The Cole Memo was a guide for United States attorneys
and did not alter in any way the Department of Justice’s authority to enforce Federal law, including Federal laws relating to cannabis,
regardless of state law. As described below, as a result of the issuance of the Sessions Memo by the Department of Justice, on January
4, 2018, the Cole memo was rescinded. Prior to the issuance of the Sessions Memo, we had implemented standard operating procedures and
policies to ensure that we were operating in compliance with the Cole Memo. It is unclear at this time whether the Biden administration
will issue new guidance or strongly enforce the federal laws applicable to cannabis or what types of activities will be targeted for enforcement,
and we cannot provide assurance that our actions were, are or will be in compliance with the Cole Memo, the Sessions Memo or any other
laws or regulations that currently exist or may be amended or adopted in the future.
Pursuant to our currently existing Terms and Conditions:
● Users may only post content that is in compliance with their state’s laws;
● Posting other drugs or substances, including prescription pain pills;
● Posting of any violence or threat of violence;
● Posting of any drugged-driving content; and
● Posting of any copyright-protected content.
We have implemented an aggressive content and
account review program to ensure compliance with our Terms and Conditions. Users have the ability to report any status or account that
is in violation of our Terms and Conditions and we encourage Users to do so as any illegal content jeopardizes the network for all our
Users. When a status or account is reported, the post is automatically removed from the network until further review. A MassRoots employee
then reviews the content within 24 hours and either approves it as in compliance within our Terms and Conditions or permanently deletes
it and bans the User’s account.
In addition, we have implemented geographic restrictions
to restrict new Users to our mobile apps to the District of Columbia and the 33 states in which the use of marijuana is permitted.
Our business plan includes allowing cannabis dispensaries
to advertise on our network, which we believe could be deemed to be aiding and abetting illegal activities, a violation of Federal law.
We continue to evaluate the effects of the Sessions Memo; however, it is unclear at this time whether the Biden administration will issue
new guidance or will strongly enforce the federal laws applicable to cannabis or what types of activities will be targeted for enforcement,
and we cannot provide assurance that we were, are or will be in compliance with the Cole Memo, the Sessions Memo or any other laws or
regulations.
Joyce Amendment (formerly known as the Rohrabacher-Farr
Amendment)
On December 16, 2014, H.R. 83 - Consolidated and
Further Continuing Appropriations Act, 2015 was enacted and included a provision now known as the “Joyce Amendment” which
states:
None of the funds made available in this Act to
the Department of Justice may be used, with respect to the States of Alabama, Alaska, Arizona, California, Colorado, Connecticut, Delaware,
District of Columbia, Florida, Hawaii, Illinois, Iowa, Kentucky, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri,
Montana, Nevada, New Hampshire, New Jersey, New Mexico, Oregon, Rhode Island, South Carolina, Tennessee, Utah, Vermont, Washington, and
Wisconsin, to prevent such states from implementing their own state laws that authorize the use, distribution, possession, or cultivation
of medical marijuana.
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The Joyce Amendment would appear to protect the
right of the states to determine their own laws on medical cannabis use; however, the actual effects of the amendment are still unclear.
The Joyce Amendment did not remove the federal ban on medical cannabis and cannabis remains regulated as a Schedule I controlled substance.
Further, the United States Department of Justice has interpreted the Joyce Amendment as only preventing federal action that prevents states
from creating and implementing cannabis laws - not against the individuals or businesses that actually carry out cannabis laws –
and has continued to sporadically initiate enforcement actions against individuals or businesses participating in the cannabis industry
despite such participation being regulated under state law. As of April 2020, the United States Court of Appeals, Ninth Circuit, has held
in support of the Joyce Amendment and stated on at least one occasion that United States Department of Justice was prohibited from spending
federal appropriations funds for prosecuting individuals engaged in conduct permitted by state law. In addition, no matter what the interpretation
is adopted by the courts, there is no question that the Joyce Amendment does not protect any party not in full compliance with state medicinal
cannabis laws.
The Joyce Amendment represents one of the first
times in recent history that Congress has taken action indicating support of medical cannabis. The Joyce Amendment was renewed by Congress
in 2015, 2016, 2017, 2018, 2019 and 2020 and is in effect until September 30, 2021.
Sessions Memo
On January 4, 2018, Attorney General Jefferson
B. Sessions, III issued a memo on federal marijuana enforcement policy announcing a return to the rule of law and the rescission of previous
nationwide guidance by the Department of Justice (including, but not limited to, the Cole Memo). In the memorandum, Attorney General Jefferson
Sessions directs all U.S. attorneys to enforce the laws enacted by Congress and to follow well-established principles when pursuing prosecutions
related to marijuana activities. These principles include weighing all relevant considerations, including federal law enforcement priorities
set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of
particular crimes on the community. The effect of this memo is to shift federal policy from a hands-off approach adopted by the Obama
administration to permitting federal prosecutors across the country to determine how to prioritize resources to regulate marijuana possession,
distribution and cultivation in states where marijuana use is legal.
While we do not directly harvest or distribute
cannabis today, we still may be deemed to be violating federal law, or aiding and abetting the violation of Federal law and may be irreparably
harmed by a change in enforcement by the federal or state governments.
Although the Sessions Memo rescinded the Cole
Memo, it is unclear at this time whether the Biden administration will issue new guidance or will strongly enforce the federal laws applicable
to cannabis or what types of activities will be targeted for enforcement; however, a significant change in the federal government’s
enforcement policy with respect to current federal laws applicable to cannabis could have a material adverse effect on our business.
Additional Government Regulations
We are subject to general business regulations
and laws as well as Federal and state regulations and laws specifically governing the Internet and e-commerce. These regulations and laws
cover among others, sweepstakes, taxation, tariffs, user privacy, data protection, pricing, content, copyrights, distribution, electronic
contracts and other communications, consumer protection, broadband residential Internet access and the characteristics and quality of
services. Any noncompliance with the foregoing laws and regulations may harm our business and results of operations.
Competitors
We compete with other cannabis information platforms
such as WeedMaps and Leafly, which provide information with respect to dispensary locations, strain information, and news relating to
the cannabis industry.
Recent Developments
Financings and Other Sources of Funding
On January
7, 2020, we issued and sold a convertible note in the principal amount of $55,000 (including a $5,000 original issuance discount) to an
accredited investor which note matures on July 7, 2020.
On
March 5, 2020, we issued and sold a convertible note in the aggregate principal amount of $72,600 (including a $6,600 original issuance
discount) to an accredited investor which note matures on September 5, 2020.
On
March 17, 2020, we issued and sold a convertible note in the aggregate principal amount of $17,600 (including a $1,600 original issuance
discount) to an accredited investor which note matures on September 17, 2020.
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On
April 17, 2020, we issued and sold convertible notes in the aggregate principal amount of $330,000 (including an aggregate of $30,000
original issuance discount) to accredited investors which notes mature on October 17, 2020.
On May 3, 2020, we received a loan in the principal
amount of $50,000 pursuant to the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic Security
Act (the “CARES Act”). The PPP loan matures in May 2022 and bears an interest rate of 1% per annum. The Company has applied for forgiveness of the principal and accrued
interest due under the loan.
On June 26, 2020, we issued and sold a secured
promissory note in the principal amount of $60,000 with 10% annual interest. On the two-year anniversary of the issuance of this note,
June 26, 2022, all principal and interest becomes due and payable.
On July 8, 2020, we issued and sold a promissory
note in the principal amount of $22,911 with 10% annual interest maturing on December 31, 2020.
On July
13, 2020, we issued and sold convertible notes in the aggregate principal amount of $110,000 (including an aggregate of $10,000 original
issuance discount) to accredited investors which notes mature on January 13, 2021.
On August
31, 2020, we issued and sold convertible notes in the aggregate principal amount of $66,000 (including an aggregate of $6,000 original
issuance discount) to accredited investors which notes mature on March 1, 2021.
On September
1, 2020, we issued and sold convertible notes in the aggregate principal amount of $49,500 (including an aggregate of $4,500 original
issuance discount) to accredited investors which notes mature on March 1, 2021.
On November 25, 2020, the Company
entered into a securities purchase agreement with an accredited investor for the sale of 3.3 shares of the Company’s Series X Convertible
Preferred Stock, par value $0.0001 per share, resulting in aggregate proceeds of $66,000. The purchase and issuance of such shares of
Series X Preferred Stock closed on December 1, 2020.
On December 21, 2020, the Company
entered into a securities purchase agreement with an accredited investor for the sale 7.5 shares of the Company’s Series X Convertible
Preferred Stock, par value $0.0001 per share, resulting in aggregate proceeds of $150,000. The purchase and issuance of such shares of
Series X Preferred Stock closed on December 23, 2020.
On December 22, 2020, the Company
entered into a securities purchase agreement with an accredited investor for the sale 5.25 shares of the Company’s Series X Convertible
Preferred Stock, par value $0.0001 per share, resulting in aggregate proceeds of $105,000. The purchase and issuance of such shares of
Series X Preferred Stock closed on December 29, 2020.
Between
December 22 and March 23, 2021, the Company entered into a number of securities exchange agreements with twenty two (22) holders of its
equity and debt securities for the total issuance and sale of 659.605674 shares of the Company’s Series Y Convertible Preferred
Stock, par value $0.001 per share, resulting in aggregate exchange of 14,896,874,671 warrants to purchase common stock of the Company
at $0.0004 per share and the exchange of the promissory notes in the aggregate principal amount and accrued interest totaling $5,947,876.20.
The Purchasers constituted a significant portion of warrantholders and debtholders of the Company. See Item 9B. Other Information.
Termination
of COWA Agreement and Plan of Merger
On
February 12, 2019, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with MassRoots Supply Chain,
Inc., a wholly-owned subsidiary of the Company (“Merger Subsidiary”), COWA Science Corporation, a Delaware corporation (“COWA”),
and Christopher Alameddin, an individual acting solely in his capacity as a stockholder representative pursuant to which Merger Subsidiary
was to be merged with and into COWA with COWA surviving the merger as the wholly-owned subsidiary of the Company. On February 24, 2020,
we terminated the Merger Agreement as a result of the closing conditions set forth in the Merger Agreement not being satisfied.
Intellectual Property
MASSROOTS and TOKE are federally registered trademarks
of MassRoots, ODAVA is a state registered trademark of MassRoots and RETAIL is a state registered trademark of Odava.
Employees and Consultants
As of April 12, 2021, MassRoots has 3 full-time
employees and 1 full-time independent contractor.
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ITEM 1A. RISK FACTORS
An investment in our securities involves a
high degree of risk. This Annual Report on Form 10-K contains the risks applicable to an investment in our securities. The risks and uncertainties
we have described are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem
immaterial may also affect our operations. The occurrence of any of these known or unknown risks might cause you to lose all or part of
your investment in the offered securities.
Risks Relating to Our Business and Industry
We have a limited history upon which an
evaluation of our prospects and future performance can be made and have no history of profitable operations.
We were incorporated in April 2013 and have a
limited operating history and our business is subject to all of the risks inherent in the establishment of a new business enterprise.
Our likelihood of success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered
in connection with development and expansion of a new business enterprise. We may sustain losses in the future as we implement our business
plan. There can be no assurance that we will operate profitably.
Since we have a limited operating history,
it is difficult for potential investors to evaluate our business.
Our limited operating history makes it difficult
for potential investors to evaluate our business or prospective operations. As an early-stage company, we are subject to all the risks
inherent in the initial organization, financing, expenditures, complications and delays inherent in a new business. Investors should evaluate
an investment in us in light of the uncertainties encountered by developing companies in a competitive and evolving environment. Our business
is dependent upon the implementation of our business plan. We may not be successful in implementing such plan and cannot guarantee that,
if implemented, we will ultimately be able to attain profitability.
We will need to obtain additional financing
to fund our operations.
We will need additional capital in the future
to continue to execute our business plan. Therefore, we will be dependent upon additional capital in the form of either debt or equity
to continue our operations. At the present time, we do not have arrangements to raise all of the needed additional capital, and we will
need to identify potential investors and negotiate appropriate arrangements with them. We may not be able to arrange enough investment
within the time the investment is required or that if it is arranged, that it will be on favorable terms. If we cannot obtain the needed
capital, we may not be able to become profitable and may have to curtail or cease our operations. Additional equity financing, if available,
may be dilutive to the holders of our capital stock. Debt financing may involve significant cash payment obligations, covenants and financial
ratios that may restrict our ability to operate and grow our business.
Cannabis remains illegal under Federal law.
Despite the development of a regulated cannabis
industry under the laws of certain states, these state laws regulating medical and adult cannabis use are in conflict with the Federal
Controlled Substances Act, which classifies cannabis as a Schedule I controlled substance and makes cannabis use and possession illegal
on a national level. The United States Supreme Court has ruled that the Federal government has the right to regulate and criminalize cannabis,
even for medical purposes, and thus Federal law criminalizing the use of cannabis preempts state laws that regulate its use. Although
the prior administration determined that it was not an efficient use of resources to direct Federal law enforcement agencies to prosecute
those lawfully abiding by state laws allowing the use and distribution of medical and recreational cannabis, on January 4, 2018, the current
administration issued the Sessions Memo announcing a return to the rule of law and the rescission of previous guidance documents. The
Sessions Memo rescinds the Cole Memo which was adopted by the Obama administration as a policy of non-interference with marijuana-friendly
state laws. The Sessions Memo shifts federal policy from a hands-off approach adopted by the Obama administration to permitting federal
prosecutors across the country to decide how to prioritize resources to regulate marijuana possession, distribution and cultivation in
states where marijuana use is regulated. However, it is unclear at this time whether the Biden administration will issue new guidance
or will strongly enforce the federal laws applicable to cannabis or what types of activities will be targeted for enforcement. A significant
change in the federal government’s enforcement policy with respect to current federal laws applicable to cannabis could have a material
adverse effect on our business. Furthermore, there can be no assurance that federal prosecutors will not prosecute and dedicate resources
to regulate marijuana possession, distribution and cultivation in states where marijuana use is regulated which may cause states to reconsider
their regulation of marijuana which would have a detrimental effect on the marijuana industry. Any such change in state laws based upon
the Sessions Memo and the Federal government’s enforcement of Federal laws could cause significant financial damage to us and our
stockholders.
9
As the possession and use of cannabis is
illegal under the Federal Controlled Substances Act, we may be deemed to be aiding and abetting illegal activities through the services
and data that we provide to government regulators, dispensaries, cultivators and consumers. As a result, we may be subject to enforcement
actions by law enforcement authorities, which would materially and adversely affect our business.
Under Federal law, and more specifically the Federal
Controlled Substances Act, the possession, use, cultivation, and transfer of cannabis is illegal. Our business provides services to customers
that are engaged in the business of possession, use, cultivation, and/or transfer of cannabis. As a result, law enforcement authorities,
in their attempt to regulate the illegal use of cannabis, may seek to bring an action or actions against us, including, but not limited,
to a claim of aiding and abetting another’s criminal activities. The Federal aiding and abetting statute provides that anyone who
“commits an offense against the United States or aids, abets, counsels, commands, induces or procures its commission, is punishable
as a principal.” As a result of such an action, we may be forced to cease operations and our investors could lose their entire investment.
Such an action would have a material negative effect on our business and operations.
Federal enforcement practices could change
with respect to services provided to participants in the cannabis industry, which could adversely impact us. If the Federal government
were to expend its resources on enforcement actions against service providers in the cannabis industry under guidance provided by the
Sessions Memo, such actions could have a material adverse effect on our operations, our customers, or the sales of our products.
It is possible that due to the Sessions Memo and
the continuing uncertainty respecting enforcement of federal cannabis laws that our clients may discontinue the use of our services, our
potential source of customers may be reduced and our revenues may decline. Further, additional government disruption in the cannabis industry
could cause potential customers and users to be reluctant to use and advertise our products, which would be detrimental to the Company.
We cannot predict the impact of the Sessions Memo, whether the Attorney General Merrick Garland will issue new guidance, or his willingness
to enforce federal cannabis laws at this time nor can we predict the nature of any future laws, regulations, interpretations or applications
including the effect of such additional regulations or administrative policies and procedures, when and if promulgated, could have on
our business.
We are subject to legislative uncertainty
that could slow or halt the legalization and use of cannabis, which could negatively affect our business.
Continued development of the cannabis industry
is dependent upon continued legislative authorization of cannabis at the state level, as well as the U.S. government’s continued
non-enforcement of federal cannabis laws against state-law-compliant cannabis businesses. Further, progress, while generally
expected, is not assured. Some industry observers believe that well-funded interests, including businesses in the alcohol beverage and
the pharmaceutical industries, may have a strong economic opposition to the continued legalization of cannabis. The pharmaceutical industry,
for example, is well funded with a strong and experienced lobby that eclipses the funding of the medical cannabis movement. Any inroads
legalization opponents could make in halting the impending cannabis industry could have a detrimental impact on our business. While there
may be ample public support for legislative action, numerous factors impact the legislative process. Any one of these or other factors
could slow or halt use of cannabis, which would negatively impact our business.
Our business depends on continued purchases
by businesses and individuals selling or using cannabis pursuant to state laws in the United States.
Thirty-three states and the District of Columbia
allow their citizens to use medical cannabis, and eleven states and the District of Columbia have regulated the sale of cannabis for adult
use. In addition, several additional states have legalized low-THC/high-CBD extracts for select medical conditions (“CBD States”).
Several CBD States are considering legalizing medical cannabis, and several medical states may extend legalization to adult-use.
The states’ cannabis programs have proliferated
and grown even though the cultivation, sale and possession of cannabis is considered illegal under U.S. federal law. Under the Controlled
Substances Act (“CSA”), cannabis is a Schedule I drug, meaning that the Drug Enforcement Administration recognizes no accepted
medical use for cannabis, and the substance is considered illegal under federal law.
In an effort to provide guidance to U.S. Attorneys’
offices regarding the enforcement priorities associated with cannabis in the United States, the U.S. Department of Justice (the “DOJ”)
has issued a series of memoranda detailing its suggested enforcement approach. During the administration of former President Obama, each
memorandum acknowledged the DOJ’s authority to enforce the CSA in the face of state laws, but noted that the DOJ was more committed
to using its limited investigative and prosecutorial resources to address the most significant threats associated with cannabis in the
most effective, consistent, and rational way.
10
On August 29, 2013, the DOJ issued what came
to be called the Cole Memo which gave U.S. Attorneys the discretion not to prosecute federal cannabis cases that were otherwise compliant
with applicable state law that had legalized medical or adult-use cannabis and that have implemented strong regulatory systems to
control the cultivation, production, and distribution of cannabis. Accordingly, the Cole Memo provided lawful cannabis-related enterprises
a tacit federal go-ahead in states with legal cannabis programs, provided that the state had adopted and was enforcing strict regulations
and oversight of the medical or adult-use cannabis program in accordance with the specific directives of the Cole Memorandum.
On January 4, 2018, Attorney General Jefferson
Sessions issued a memorandum that rescinded previous DOJ guidance on the state-legal cannabis industry, including the Cole Memo.
Attorney General Sessions wrote that the previous guidance on cannabis law enforcement was unnecessary, given the well-established principles
governing federal prosecution that are already in place. As a result, federal prosecutors could and still can use their prosecutorial
discretion to decide whether to prosecute even state-legal adult-use cannabis activities.
In November 2018, Attorney General Sessions resigned and left the DOJ.
As a nominee, Attorney General William Barr testified before the U.S. Senate and wrote to Congress that, as Attorney General, he would
not seek to prosecute cannabis companies that relied on the Cole Memorandum and are complying with state law. Although proposals have
been introduced to Congress in favor of protection state-legal marijuana regulations, as of the date of this Annual Report, no federal
law has been enacted.
Since December 2014, companies that are strictly
complying with state medical cannabis laws have been protected against enforcement for that activity by an amendment (originally
called the Rohrabacher-Blumenauer Amendment, now called the Joyce Amendment) to the Omnibus Spending Bill, which prevents federal prosecutors
from using federal funds to impede the implementation of medical cannabis laws enacted at the state level. Federal courts have interpreted
the provision to bar the DOJ from prosecuting any person or entity in strict compliance with state medical cannabis laws.
While the protection of the Joyce Amendment prevents
prosecutions, it does not make cannabis legal. Accordingly, if the protection expires, prosecutors could prosecute federally illegal activity
that occurred within the statute of limitations even if the Joyce Amendment protection was in place when the illegal activity occurred.
The protection of the Joyce Amendment depends on its continued inclusion in the federal Omnibus Spending Bill, or in some other legislation,
and entities’ strict compliance with the state medical cannabis laws. That protection has been extended through September 30, 2021.
While industry observers expect Congress to extend the protection in future Omnibus Spending Bills, there can be no assurance that it
will do so.
Although several cannabis law reform bills are
pending in the U.S. Congress, passage of any of them and ultimately the President’s support and approval remain uncertain. President
Biden has stated that he would support federal legislation that would defer to states that have legalized cannabis (in other words, if
a state legalized cannabis, cannabis in that state would not be federally illegal after the point at which the state legalized it).
Until the U.S. Government changes the law with
respect to cannabis, and particularly if Congress does not extend the protection of state medical cannabis programs, there is a risk that
federal authorities could enforce current federal cannabis law. An increase in federal enforcement against companies licensed under state
cannabis laws could negatively impact the state cannabis industries and, in turn, our revenues, profits, financial condition, and business
model.
Because our business is dependent, in part, upon continued market
acceptance of cannabis by consumers, any negative trends will adversely affect our business operations.
We are dependent on public support, continued
market acceptance and the proliferation of consumers in the legal cannabis markets. While we believe that the market and opportunity in
the space continue to grow, we cannot predict the future growth rate or size of the market. Any downturns in, or negative outlooks on,
the cannabis industry may adversely affect our business and financial condition.
11
New platform features or changes to existing
platform features could fail to attract new users, retain existing users or generate revenue.
Our business strategy is dependent on our ability
to develop platforms and features to attract new businesses and users, while retaining existing ones. Staffing changes, changes in user
behavior or development of competing platforms may cause Users to switch to alternative platforms or decrease their use of our platform.
There is no guarantee that companies and dispensaries will use these features and we may fail to generate revenue. Additionally, any of
the following events may cause decreased use of our platform:
● Emergence of competing platforms and applications;
● Inability to convince potential companies to join our platform;
● Securities breaches with respect to our data;
● A rise in safety or privacy concerns; and
● An increase in the level of spam or undesired content on the network.
We are highly dependent on the services
of key executives, the loss of whom could materially harm our business and our strategic direction. If we lose key management or significant
personnel, cannot recruit qualified employees, directors, officers, or other personnel or experience increases in our compensation costs,
our business may materially suffer.
We are highly dependent on our management team,
specifically our Chief Executive Officer, Isaac Dietrich. While we have an employment agreement with Isaac Dietrich, such employment agreement
permits Mr. Dietrich to terminate such agreement upon notice. If we lose key employees, our business may suffer. Furthermore, our future
success will also depend in part on the continued service of our key management personnel and our ability to identify, hire, and retain
additional personnel. We do not carry “key-man” life insurance on the lives of our executive officer, employees or advisors.
We experience intense competition for qualified personnel and may be unable to attract and retain the personnel necessary for the development
of our business. Because of this competition, our compensation costs may increase significantly.
Our monetization strategy is dependent on
many factors outside our control.
There is no guarantee that our efforts to monetize
the MassRoots platform will be successful. Furthermore, our competitors may introduce more advanced technologies that deliver a greater
value proposition to cannabis related businesses in the future. In addition, dispensaries may not be able to accept credit or bank cards
due to banking regulations, which could significantly increase the cost and time required for us to generate revenue. All these factors
individually or collectively may preclude us from effectively monetizing our business which would have a material adverse effect on our
financial condition and results of operation.
Changes in Amazon App Store, Apple App Store
or Google Play Store policies could result in our mobile applications being de-listed. In addition, our third party service providers
may decline to provide services due to their policies, or cease to provide services previously provided to us due to a change of policy.
On November 4, 2014, the MassRoots App was
removed from Apple’s iOS App Store due to the Apple App Store review team changing their app enforcement guidelines to prohibit
all social cannabis applications. After negotiation with Apple and the addition of certain restrictions, the MassRoots App returned to
the Apple App Store in February 2015. Although Apple reversed its decision and included our app in the Apple App Store, we cannot provide
any assurance that Apple’s policy will not change in the future. The MassRoots App is currently not available in the App Store due
to financial constraints facing the Company.
The Apple App Store is one of the largest content
distribution channels in the world and management believes that it is the only way to effectively distribute our iOS application to users
who own iPhones and iPads. The Apple App Store review team effectively operates as our iOS App’s regulator; they decide what guidelines
iOS apps must operate under and how to enforce such guidelines. The Apple guidelines related to cannabis-related apps are not published,
enforcement of such guidelines is difficult to predict, and the review and appeal processes are conducted without public oversight. Although
we will continue advocating for a more open and transparent Apple App Store review process that will allow decisions that affect a significant
portion of the United States smartphone owning population to be open to public scrutiny, there can be no assurance that we will be successful
in these efforts.
12
MassRoots, along with other cannabis apps, regularly
encounter issues with the Google Play Store review team in the normal course of business due to Google Play Store’s absence of clear
guidelines regarding cannabis-related apps. In November 2016, the MassRoots App was removed from the Google Play Store due to a compliance