Filing identity and period
The supplied filing is MassRoots, Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2017—not a filing for Greenwave Technology Solutions, Inc. Investors should verify the issuer before relying on this summary. The filing compares the three and nine months ended September 30, 2017 with the corresponding 2016 periods.
Business context
MassRoots described a cannabis-industry technology platform. Following its July 2017 acquisition of Odava, the company emphasized point-of-sale, compliance and loyalty software for cannabis businesses; its platform was available to Oregon dispensaries, with expansion to other states planned. It also acquired DDDigtal in January 2017. The acquisitions added approximately $4.97 million of goodwill.
Key financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $11,516 | $209,003 | $289,130 | $794,621 |
| Operating expenses | $7.53 million | $2.09 million | $27.32 million | $6.80 million |
| Operating loss | ($7.52 million) | ($1.89 million) | ($27.03 million) | ($6.00 million) |
| Net loss | ($7.08 million) | ($3.45 million) | ($26.15 million) | ($8.26 million) |
| Net loss per share, basic and diluted | ($0.07) | ($0.07) | ($0.28) | ($0.17) |
- Revenue fell 95% in Q3 and 64% for the nine-month period. Management attributed the declines primarily to the absence of 420 Rally revenue in 2017.
- Stock-based compensation was $5.51 million in Q3 and $19.88 million for the nine months, driving much of the expense increase. It was a noncash expense.
- Nine-month operating cash use was $7.20 million, versus $2.92 million in 2016. Investing activities used $236,833; financing activities provided $7.33 million. Cash declined $107,168 to $267,322.
- At September 30, cash was $267,322 and working capital deficit was $2,377,272. Current liabilities were $2.66 million, including a $1.51 million derivative liability, $331,342 of convertible notes net of debt discount, and $492,003 due to related parties. The company reported no long-term debt at that date.
- Total assets were $5.80 million, including $4.97 million goodwill; total liabilities were $2.66 million. Stockholders’ equity was $3.15 million, compared with a $1.10 million deficit at December 31, 2016.
Material changes, outlook and risks
The company’s results reflect sharply lower revenue, substantially higher operating costs and losses, and acquisitions financed primarily with stock. Shares issued and outstanding increased from 71.9 million at December 31, 2016 to 111.3 million at September 30, 2017; the filing reported 112.1 million outstanding as of November 10. Stock issued for services accounted for $14.20 million of equity value in the first nine months. Potential dilution also included options, warrants and convertible debt.
Management stated that the company lacked sufficient cash to fund operations, expected to need at least $2.5 million over the next quarter, and would require additional financing. The filing says these conditions raise substantial doubt about the company’s ability to continue as a going concern; there is no assurance that financing or planned sales growth will materialize. Management’s stated plans were to seek investor funding and generate sales; the filing provides no specific revenue or profitability guidance.
August 2017 financing included $1.045 million principal of six-month secured convertible notes, with $942,500 net proceeds, and warrants. The notes are secured by company assets and have conversion-price provisions that may increase dilution. The company also reported $420,000 of proceeds from agreements for future tokens, recorded as amounts due to related parties; subsequent token agreements added $125,000. No public token sale had occurred as of the filing, and the company gave no assurance one would occur.
Other notable items include a $986,058 nine-month gain from remeasuring derivative liabilities, which reduced reported losses but was not operating revenue; and a $75,000 gain on the sale of its Flowhub investment. Derivative valuations use Level 3 inputs, including stock price and volatility assumptions. Management concluded disclosure controls were not effective as of September 30, 2017. The filing reported no legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the issuer: the supplied 10-Q is for MassRoots, Inc., not Greenwave Technology Solutions, Inc.
- Assess near-term funding needs, access to capital, and the going-concern uncertainty.
- Review the secured convertible notes, related-party balances, token agreements and their repayment or conversion terms.
- Evaluate dilution from issued shares, stock compensation, options, warrants and convertible securities.
- Verify the revenue outlook and execution of the compliance-software expansion beyond Oregon.
- Reconcile financing cash flow: the cash flow statement reports $7,329,841, while MD&A reports $7,429,841 for the nine months ended September 30, 2017.
- Consider the ineffective disclosure controls and the sensitivity of Level 3 derivative valuations to assumptions.