The storms MassRoots weathered in 2017 have set the marijuana tech firm adrift in a $44 million sea of red.

A review of MassRoots Inc.’s annual filing made Tuesday with the U.S. Securities and Exchange Commission provides a portrait of a negative-net-worth company that is burning through cash, missing IRS payments and SEC reporting deadlines, handing out stock-based compensation like candy, and operating with no external sources of liquidity.

The Denver-based firm closed out 2017 with a reported net loss of $44 million on revenue of under $320,000, according to the filing. More than $22 million of those losses were the value of stock-based compensation to former employees, board members and business consultants.

“We do not believe MassRoots has sufficient capital to become cash-flow positive from operations,” company officials wrote in the filing. “We expect to need to raise additional funds to continue to fund operations.”

The company operates with a “going concern” qualification, meaning its independent accounting firm has expressed substantial doubt about the company’s ability to continue.

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Those concerns were echoed by finance and accounting experts interviewed by The Cannabist.

“This company presents an extremely high risk to anyone who would invest in it,” Lynn Turner, former chief accountant with the SEC, said.

While the ballooning of operating expenses for the year included higher costs in the areas of advertising, payroll, payroll taxes, travel and legal, the bulk of the expenses came from non-cash, typically one-time expenses. Those included nearly $3.8 million in write-offs for past acquisitions, $7 million in the loss of derivative liability and more than $22.1 million in stock-based compensation issued to former employees, board members and business consultants.

In 2016, a year in which MassRoots posted a net loss of $18 million and revenue of $701,581, those non-cash expenses totaled $8 million.

High amounts of stock-based compensation aren’t terribly uncommon for technology companies that are short of cash, said Maclyn Clouse, a finance professor in the University of Denver’s Daniels College of Business. When those options are exercised, the company could see an inflow of cash — but the company runs the risk of the market price exceeding the option price and a further dilution of the company’s stock, he said.

Shares of MassRoots (OTCQB: MSRT) closed at 29 cents on Tuesday.

“When you take those (non-cash items) out, it’s not as bad,” Clouse said. “But the bottom line is, the bottom line is still bad.”

A screenshot of the MassRoots homepage.

MassRoots spent nearly $8 million in cash on operations, up from $6.2 million the year before, and finished the year with $1.2 million in cash on hand — after raising upward of $9.1 million from activities such as stock and warrant sales.

As of Dec. 31, 2017, MassRoots’ accumulated deficit was nearly $74.3 million and its total stockholders’ deficit was nearly $11.4 million — indicating a negative net worth situation in which total liabilities exceed the company’s assets.

Additionally, the company missed SEC reporting filing deadlines for the annual report and blew through more than deadlines to file insider transactions in 2017, according to the filing. Company officials did, however, note weaknesses in their internal accounting controls.

MassRoots also owes $1.6 million in payroll tax liabilities, including interest and penalties, to federal taxing authorities. Those should be settled by June 30, company officials said.

MassRoots’ financial health is headed in the wrong direction, Clouse said.

“This is just a pretty bad business model, and it just happens to be a bad business model in the cannabis industry,” he said.

That is exemplified in the latest revenue figures, he said.

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The slump in revenue was attributed to failures in transforming MassRoots’ dispensary finder service into the company’s main money maker, company officials said in the filing. The firm’s dispensary finder business model aims to make the technology “free for dispensaries to use with the goal of getting them to upgrade to premium features, which did not materialize.”

MassRoots’ current executives attribute that misstep to the company’s previous management team, which was in place during the fourth quarter of last year.

MassRoots’ board of directors fired founder and CEO Isaac Dietrich in October 2017 and sued him weeks later. Dietrich then launched a preliminary proxy battle, was later reinstated as CEO, installed a new board and dropped the lawsuit.

In a letter to shareholders Tuesday, Dietrich outlined plans for future growth, notably the role played by the company’s foray into blockchain:

  • A revamped business portal for dispensaries to connect with and have data and analytics on cannabis consumers.
  • A near-term goal to have 1,000 dispensaries and ancillary businesses such as vaporizer companies paying MassRoots between $420 to $1,000 per month by the end of 2018.
  • Introducing a “digital instrument” issued by the company’s MassRoots Blockchain Technologies Inc. subsidiary.
  • The aim of the digital instrument will be used initially to incentivize “encouraging key behaviors” for users of MassRoots’ app, including leaving high-quality reviews of cannabis strains.
  • The digital instrument may one day be used by businesses to develop consumer loyalty programs

“I think the next couple of weeks are going to be very interesting,” Dietrich told The Cannabist.

The product launches, which should occur in the coming weeks and months, will put MassRoots on a stable financial footing, Dietrich said. He added that, with an additional $3 million raised in equity financing during the first quarter of 2018, the company has its strongest cash position since its founding in 2013.

The moves may be too little, too late for MassRoots, DU professor Clouse said. Based on what he’s seeing in the 10-K, the company is on its last leg, he said.

“Ultimately, you’ve got to be operationally profitable, or you’re not going to survive,” he said.

Dietrich said he’s used to such doubts and insisted the company’s future is bright.

“I think this year we are poised to take advantage of the record growth that we’re seeing in California and Nevada,” he said. “It sets us up well … I think five years from now, MassRoots has the potential to be the leading technology company in a multibillion-dollar industry.”

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