UNITED STATES

SECURITIES AND EXCHANGE COMMISSION 

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2020

 

OR

 

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

 

For the transition period from ___________to ____________

 

Commission File Number 000-55431

 

 

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

 

Delaware   46-2612944

(State or other jurisdiction of

incorporation or organization)

  (I.R.S. Employer
Identification No.)

 

1560 Broadway, Office 17-105, Denver, CO   80202
(Address of principal executive offices)   (Zip code)

 

(720) 240-9546

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

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 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
Non-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 December 16, 2020, there were 493,726,405 shares of the registrant’s common stock issued and outstanding.

 

 

 

 

 

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION  
  ITEM 1. Financial Statements  
    Condensed Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019 1
    Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited) 2
    Condensed Consolidated Statements of Stockholders’ Deficit for the Three and Nine Months Ended September 30, 2020 and 2019 (unaudited) 3
    Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019 (unaudited) 5
    Notes to Condensed Consolidated Financial Statements (unaudited) 6
  ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 21
  ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 25
  ITEM 4. Controls and Procedures 25
       
PART II. OTHER INFORMATION 26
  ITEM 1. Legal Proceedings 26
  ITEM 1A. Risk Factors 26
  ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
  ITEM 3. Defaults Upon Senior Securities 26
  ITEM 4. Mine Safety Disclosures 26
  ITEM 5. Other Information 26
  ITEM 6. Exhibits 30
  SIGNATURES 31

 

-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-

 

 

MASSROOTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    September 30,     December 31,  
    2020     2019  
    (Unaudited)        
ASSETS            
Current assets:            
Cash   $ 650     $ 1,120  
Prepaid expenses     -       1,975  
Total current assets     650       3,095  
                 
Total assets   $ 650     $ 3,095  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
Current liabilities:                
Bank overdrafts   $ 71     $ 13,749  
Accounts payable and accrued expenses     8,169,332       5,455,063  
Accrued payroll and related expenses     3,818,230       3,724,050  
Advances     337,500       337,500  
Non-convertible notes payable, current portion     154,020       165,750  
Derivative liabilities     63,588,991       20,236,870  
Convertible notes payable, net of debt discount of $203,570 and $380,431, respectively     7,723,636       6,939,039  
Total current liabilities     83,791,780       36,872,021  
                 
Non-convertible notes payable     110,000       -  
Total liabilities     83,901,780       36,872,021  
                 
Commitments and contingencies (See Note 8)                
                 
Stockholders’ deficit:                
Preferred stock - Series C, $0.001 par value, 1,000 shares authorized; 1,000 shares issued and outstanding     1       1  
Common stock, $0.001par value, 500,000,000 shares authorized; 493,726,405 and 384,266,948 shares issued and outstanding, respectively     493,727       384,267  
Common stock to be issued, 907,499,814 and 944,659,814 shares, respectively     907,500       944,660  
Additional paid in capital     246,665,759       151,364,371  
Accumulated deficit     (331,968,117 )     (189,562,225 )
Total stockholders’ deficit     (83,901,130 )     (36,868,926 )
                 
Total liabilities and stockholders’ deficit   $ 650     $ 3,095  

 

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
September 30,
    Nine Months Ended
September 30,
 
    2020     2019     2020     2019  
                         
Revenues   $ 2,316     $ 909     $ 2,316     $ 23,658  
                                 
Operating Expenses:                                
Cost of revenues     150       -       150       3,530  
Advertising     43,020       2,967       43,020       39,332  
Payroll and related expense     63,879       152,809       239,770       495,069  
Stock-based compensation     -       25,500       -       212,700  
Amortization of software costs     -       12,849       -       38,549  
Impairment of software costs     -       196,315       -       196,315  
Allowance for uncollectible advances to COWA Science Corporation (“COWA”)     -       157,500       -       360,500  
Other general and administrative expenses     101,189       574,677       413,417       1,538,126  
Total Operating Expenses     208,238       1,122,617       696,357       2,884,121  
                                 
Loss From Operations     (205,922 )     (1,121,708 )     (694,041 )     (2,860,463 )
                                 
Other Income (Expense):                                
Interest expense     (1,602,204 )     (1,546,805 )     (3,607,210 )     (2,136,983 )
Preferred stock issuance costs     -       (5,585,594 )     -       (5,585,594 )
Change in derivative liability for authorized shares shortfall     66,572,635       (15,050,821 )     (43,406,183 )     (15,050,821 )
Change in fair value of derivative liabilities     (85,287 )     94,534       303,593       61,635  
Impairment on investment     -       (91,929 )     -       (91,929 )
Gain (loss) on conversion of convertible notes     -       (248,022 )     882       (674,099 )
Total Other Income (Expense)     64,885,144       (22,428,637 )     (46,708,918 )     (23,477,791 )
                                 
Net Income (Loss) Before Income Taxes     64,679,222       (23,550,345 )     (47,402,959 )     (26,338,254 )
                                 
Provision for Income Taxes (Benefit)     -       -       -       -  
                                 
Net Income (Loss)     64,679,222       (23,550,345 )     (47,402,959 )     (26,338,254 )
                                 
Deemed dividend from warrant price protection     -       (24,126,726 )     (95,002,933 )     (27,935,469 )
Contingent beneficial conversion feature on Preferred Shares issuance     -       (39,746,515 )     -       (39,746,515 )
Deemed dividend for issuance of common shares to settle warrant provision     -       -       -       (437,400 )
                                 
Net Income (Loss) Available to Common Stockholders   $ 64,679,222     $ (87,423,586 )   $ (142,405,892 )   $ (94,457,638 )
                                 
Net income (loss) per common share:                                
Basic   $ 0.05     $ (0.13 )   $ (0.10 )   $ (0.28 )
Diluted   $ -     $ (0.13 )   $ (0.10 )   $ (0.28 )
                                 
Weighted average common shares outstanding:                                
Basic     1,401,226,219       650,391,047       1,387,478,585       337,350,454  
Diluted     40,198,748,273       650,391,047       1,387,478,585       337,350,454  

 

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

 

2

 

 

MASSROOTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

UNAUDITED

 

    Preferred Stock                                            
    Series B to be Issued     Series C     Common Stock     Common Stock to be Issued     Additional Paid     Accumulated        
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     In Capital     Deficit     Total  
                                                                   
Balance at June 30, 2020     -     $ -       1,000     $ 1       493,726,405     $ 493,727       907,499,814     $ 907,500     $ 246,665,759     $ (396,647,339 )   $ (148,580,352 )
                                                                                         
Net income     -       -       -       -       -       -       -       -       -       64,679,222       64,679,222  
                                                                                         
Balance at September 30, 2020     -     $ -       1,000     $ 1       493,726,405     $ 493,727       907,499,814     $ 907,500     $ 246,665,759     $ (331,968,117 )   $ (83,901,130 )
                                                                                         
    Preferred Stock                                            
    Series B to be Issued     Series C     Common Stock     Common Stock to be Issued     Additional Paid     Accumulated        
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     In Capital     Deficit     Total  
                                                                   
Balance at June 30, 2019     160     $ -       -     $ -       203,414,654     $ 203,415       1,126,250     $ 1,126     $ 79,700,759     $ (87,938,181 )   $ (8,032,881 )
                                                                                         
Issuance of preferred shares for cash     356       1       -       -       -       -       -       -       444,999       -       445,000  
                                                                                         
Conversion of Series A Convertible Preferred Stock to common shares     -       -       -       -       80,000,000       80,000       903,823,564       903,824       2,153,424       -       3,137,248  
                                                                                         
Common shares issued upon conversion of convertible notes and accrued interest     -       -       -       -       64,629,200       64,630       -       -       487,393       -       552,023  
                                                                                         
Common shares issued for services     -       -       -       -       -       -       2,550,000       2,550       22,950       -       25,500  
                                                                                         
Common shares issued to settle a true-up provision     -       -       -       -       5,553,191       5,553       -       -       16,660       -       22,213  
                                                                                         
Contingent beneficial conversion feature on Preferred Shares issuance     -       -       -       -       -       -       -       -       42,121,906       (39,617,731 )     2,504,175  
                                                                                         
Deemed dividend related to warrant price protection     -       -       -       -       -       -       -       -       24,126,726       (24,126,726 )     -  
                                                                                         
Net loss     -       -       -       -       -       -       -       -       -       (23,550,345 )     (23,550,345 )
                                                                                         
Balance at September 30, 2019     516     $ 1       -     $ -       353,597,045     $ 353,598       907,499,814     $ 907,500     $ 149,074,817     $ (175,232,983 )   $ (24,897,067 )

 

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

 

3

 

 

MASSROOTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020 AND 2019

UNAUDITED

 

    Preferred Stock                                            
    Series B to be Issued     Series C     Common Stock     Common Stock to be Issued     Additional Paid     Accumulated        
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     In Capital     Deficit     Total  
                                                                   
Balance at December 31, 2019     -     $ -       1,000     $ 1       384,266,948     $ 384,267       944,659,814     $ 944,660     $ 151,364,371     $ (189,562,225 )   $ (36,868,926 )
                                                                                         
Issuance of common shares previously to be issued     -       -       -       -       37,160,000       37,160       (37,160,000 )     (37,160 )     -       -       -  
                                                                                         
Common shares issued upon conversion of convertible notes and accrued interest     -       -       -       -       72,368,457       72,369       -       -       298,386       -       370,755  
                                                                                         
Common shares contributed back to the Company and promptly retired     -       -       -       -       (69,000 )     (69 )     -       -       69       -       -  
                                                                                         
Deemed dividend related to warrant price protection     -       -       -       -       -       -       -       -       95,002,933       (95,002,933 )     -  
                                                                                         
Net loss     -       -       -       -       -       -       -       -       -       (47,402,959 )     (47,402,959 )
                                                                                         
Balance at September 30, 2020     -     $ -       1,000     $ 1       493,726,405     $ 493,727       907,499,814     $ 907,500     $ 246,665,759     $ (331,968,117 )   $ (83,901,130 )
                                                                                         
    Preferred Stock                                            
    Series B to be Issued     Series C     Common Stock     Common Stock to be Issued     Additional Paid     Accumulated        
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     In Capital     Deficit     Total  
                                                                   
Balance at December 31, 2018     -     $ -       -     $ -       168,706,472     $ 168,707       80,000     $ 80     $ 73,770,195     $ (80,775,348 )   $ (6,836,366 )
                                                                                         
Issuance of common shares previously to be issued     -       -       -       -       80,000       80       (80,000 )     (80 )     -       -       -  
                                                                                         
Sale of Series B Convertible Preferred Stock and warrants     516       1       -       -       -       -       -       -       644,999       -       645,000  
                                                                                         
Conversion of Series A Convertible Preferred Stock to common shares     -       -       -       -       80,000,000       80,000       903,823,564       903,824       2,153,423       -       3,137,247  
                                                                                         
Common shares issued as origination shares     -       -       -       -       1,250,000       1,250       -       -       140,083       -       141,333  
                                                                                         
Common shares issued upon conversion of convertible notes and accrued interest     -       -       -       -       80,504,561       80,505       -       -       1,417,262       -       1,497,767  
                                                                                         
Common shares issued upon exercise of warrants for cash     -       -       -       -       1,555,160       1,555       1,126,250       1,126       170,269       -       172,950  
                                                                                         
Common shares issued in settlement of a warrant provision     -       -       -       -       9,000,000       9,000       -       -       428,400       (437,397 )     3  
                                                                                         
Common shares issued upon cashless exercise of warrants     -       -       -       -       3,997,661       3,998       -       -       (3,998 )     -       -  
                                                                                         
Common shares issued for services     -       -       -       -       2,950,000       2,950       2,550,000       2,550       193,200       -       198,700  
                                                                                         
Options issued for services     -       -       -       -       -       -       -       -       14,000       -       14,000  
                                                                                         
Common shares issued to settle a true-up provision     -       -       -       -       5,553,191       5,553       -       -       16,660       -       22,213  
                                                                                         
Contingent beneficial conversion feature on Preferred Shares issuance     -       -       -       -       -       -       -       -       42,194,855       (39,746,515 )     2,448,340  
                                                                                         
Deemed dividend related to warrant price protection     -       -       -       -       -       -       -       -       27,935,469       (27,935,469 )     -  
                                                                                         
Net loss     -       -       -       -       -       -       -       -       -       (26,338,254 )     (26,338,254 )
                                                                                         
Balance at September 30, 2019     516     $ 1       -     $ -       353,597,045     $ 353,598       907,499,814     $ 907,500     $ 149,074,817     $ (175,232,983 )   $ (24,897,067 )

 

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

 

4

 

 

MASSROOTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASHFLOWS

UNAUDITED

 

    Nine Months Ended September 30,  
    2020     2019  
Cash flows from operating activities:            
Net loss   $ (47,402,959 )   $ (26,338,254 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Change in fair value of derivative liabilities     (303,593 )     (61,635 )
Change in derivative liability for authorized shares shortfall     43,406,183       15,050,821  
Depreciation and amortization     -       42,111  
Interest and amortization of debt discount     3,607,210       2,136,983  
(Gain) loss on conversion of convertible notes payable     (882 )     674,099  
Stock-based compensation     -       212,700  
Allowance for advance given to COWA     -       360,500  
Impairment on investment     -       65,000  
Loss on sale of investment in Canna Regs     -       91,929  
Impairment loss on software costs     -       196,315  
Preferred stock issuance costs     -       5,585,594  
Security deposit written off     -       36,000  
Changes in operating assets and liabilities:                
Accounts receivable     -       (167 )
Prepaid expenses     1,975       (2,340 )
Advance given to COWA     -       (370,500 )
Accounts payable and accrued expenses     (119,176 )     497,323  
Accrued payroll and related expenses     94,180       434,309  
Net cash used in operating activities     (717,062 )     (1,389,212 )
                 
Cash flows from investing activities:                
Proceeds from sale of Reg Tech and High Times     -       90,983  
Net cash provided by investing activities     -       90,983  
                 
Cash flows from financing activities:                
Bank overdrafts     (13,678 )     -  
Proceeds from sale of Series B preferred shares and warrants     -       645,000  
Proceeds from exercise of warrants     -       172,950  
Proceeds from issuance of convertible notes payable     637,000       350,000  
Proceeds from issuance of non-convertible notes payable     132,911       176,000  
Repayment of non-convertible notes payable     (39,641 )     -  
Repayments of advances     -       (72,650 )
Net cash provided by financing activities     716,592       1,271,300  
                 
Net decrease in cash     (470 )     (26,929 )
                 
Cash, beginning of period     1,120       29,568  
                 
Cash, end of period   $ 650     $ 2,639  
                 
                 
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:                
Issuance of common shares previously to be issued   $ 37,160     $ -  
Common shares issued upon conversion of convertible notes and accrued interest   $ 370,755     $ 823,668  
Common shares contributed back to the Company and promptly retired   $ 69     $ -  
Deemed dividend related to warrant price protection   $ 95,002,933     $ 27,935,469  
Derivative liability recognized as debt discount on newly issued convertible notes   $ 528,076     $ -  
Common shares issued upon cashless exercise of warrants   $ -     $ 3,998  
Common shares issued in settlement of a warrant provision   $ -     $ 437,400  
Common stock issued for Series A Preferred Stock conversions   $ -     $ 3,137,248  
Contingent beneficial conversion feature on Preferred Shares issuance   $ -     $ 39,746,515  

 

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

5

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION

 

Overview

 

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

 

Our 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 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 nine months ended September 30, 2020 and 2019, its cash flows for the nine months ended September 30, 2020 and 2019, and its financial position as of September 30, 2020 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 condensed consolidated financial statements. Accordingly, these interim 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, 2019 as filed with the SEC on July 16, 2020 (the “Annual Report”). The December 31, 2019 balance sheet is derived from those statements.

 

NOTE 2 – GOING CONCERN AND MANAGEMENT’S LIQUIDITY PLANS

 

As of September 30, 2020, the Company had cash of $650 and a working capital deficit (current liabilities in excess of current assets) of $83,791,130. During the nine months ended September 30, 2020, the net loss available to common stockholders was $142,405,892 and net cash used in operating activities was $717,062. These conditions raise substantial doubt about the Company’s ability to continue as a going concern for one year from the issuance of the unaudited condensed consolidated financial statements.

 

During the nine months ended September 30, 2020, the Company received proceeds of $637,000 and $132,911 from the issuance of convertible notes and non-convertible notes, respectively. The Company does not have sufficient cash to fund operations for the next fiscal year.

 

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

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

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 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 2020. 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 2020.

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Principles of Consolidation

 

The 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

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

Cash

 

For purposes of the 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 September 30, 2020 and December 31, 2019, 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 $250,000 per bank. The Company minimizes this risk by placing its cash deposits with major financial institutions. At September 30, 2020 and December 31, 2019, the uninsured balances amounted to $0.

 

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

 

The Company recognizes revenue when services are realized or realizable and earned, less estimated future doubtful accounts.

 

The Company’s revenues are accounted for under ASC Topic 606, “Revenue From Contracts With Customers” (“ASC 606”) and generally do not require significant estimates or judgments based on the nature of the Company’s revenue streams. 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.

 

In accordance with ASC 606, the Company recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. 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 only recognizes revenue for services provided during that quarter and defers the remaining unearned revenue to future periods.

 

8

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

Advertising

 

The Company charges the costs of advertising to expense as incurred. Advertising costs were $43,020 and $39,332 for the nine months ended September 30, 2020 and 2019, respectively.

 

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

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

Deemed Dividends and Beneficial Conversion Features

 

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; and (iii) the settlement of warrant provisions, based on the fair value of the common shares issued. The Company also records, when necessary, a contingent beneficial conversion resulting from price protection of the conversion price of Series A Preferred Stock, based on the change in the intrinsic value of the conversion options embedded in such preferred stock.

 

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 common shares, and of embedded conversion options within convertible notes. The Company evaluated these derivatives to assess their proper classification in the balance sheet as of September 30, 2020 and December 31, 2019 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 was 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 three to five years. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings.

 

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.

 

10

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

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.

 

Reclassifications

 

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

  

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 condensed consolidated financial statements.

 

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 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 September 30, 2020 and December 31, 2019 is summarized as follows:

 

    September 30,
2020
    December 31,
2019
 
Computers   $ 6,366     $ 6,366  
Office equipment     17,621       17,621  
Subtotal     23,987       23,987  
Less accumulated depreciation     (23,987 )     (23,987 )
Property and equipment, net   $ -     $ -  

 

Depreciation expense for the three months ended September 30, 2020 and 2019 was $0 and $1,078, respectively.

 

Depreciation expense for the nine months ended September 30, 2020 and 2019 was $0 and $3,549, respectively.

 

11

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

NOTE 5 – ADVANCES AND NON-CONVERTIBLE NOTES PAYABLE

 

During the nine months ended September 30, 2020 and 2019, the Company received aggregate proceeds from advances of $0 and $0 and repaid an aggregate of $0 and $72,650, respectively, of advances. The advances were primarily for Simple Agreements for Future Tokens, entered into with accredited investors issued pursuant to an exemption from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(a)(2) thereof and/or Regulation D thereunder in 2017 and 2018. As of September 30, 2020 and December 31, 2019, the Company owed $337,500 and $337,500 in principal and $10,500 and $10,500 in accrued interest, respectively.

  

During the nine months ended September 30, 2020 and 2019, the Company received proceeds from the issuance of non-convertible notes of $132,911 and $176,000 and repaid an aggregate of $39,641 and $0, respectively, of non-convertible notes. The non-convertible notes have maturity dates ranging from March 18, 2019 to June 26, 2022 and accrue interest at rates ranging from 0% to 36% per annum. As of September 30, 2020 and December 31, 2019, the Company owed $264,020 and $165,750 in principal and $259,428 and $158,143 in accrued interest, respectively.

 

NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

As of September 30, 2020 and December 31, 2019, the Company owed accounts payable and accrued expenses of $8,169,332 and $5,455,063, respectively. These are primarily comprised of payments to vendors, accrued interest on debt, and accrued legal bills.

 

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, 2019, and 2020. As of September 30, 2020 and December 31, 2019, the Company owed payroll tax liabilities, including penalties, of $3,818,230 and $3,724,050, respectively, to federal and state taxing authorities. The actual liability may be higher or lower due to interest or penalties assessed by federal and state taxing authorities. The Company expects to settle these liabilities by March 31, 2021.

 

NOTE 8 – COMMITMENTS AND CONTINGENCIES

 

In the ordinary course of business, the Company is occasionally involved in lawsuits incidental to its business, including litigation related to its convertible notes. Although it is difficult to predict the ultimate outcome of these cases, management believes that any ultimate liability would not have a material adverse effect on the Company’s condensed consolidated financial condition or results of operations. However, any unforeseen unfavorable development in any of these cases could have a material adverse effect on the Company’s condensed consolidated financial condition. The Company records the potential effects on operations or cash flows in the period in which such effects are probable and reasonably estimable.

 

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 alleges, 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. In addition, the complaint alleges, among other things, that Mr. Dietrich took affirmative steps to deliberately cause the Company to breach its financial obligations. As a result of the foregoing, Power Up has requested: (i) the greater of $312,000 and the “parity value” as such term is defined in the Power Up Notes together with $2,000 per day until the Company issues shares upon conversion of the Power Up Notes together with applicable interest thereon; (ii) $165,000 as a result of the misrepresentations; (iii) an amount of lost profits to be determined by the court, but in no event less than $312,000; (iv) $312,000 as against Mr. Dietrich; (v) an award for reasonable legal fees and costs of litigation; (vi) a judgment awarding specific performance under the Power Up Notes; and (vii) the costs and disbursement of the action, pre-judgment interest, default interest and such other further relief as the court deems proper. On August 24, 2020, the Supreme Court of the State of New York, County of Nassau adjourned a hearing on Power Up\s motion for default judgment with respect to the complaint filed by Power Up on October 11, 2019 against the Company and Mr. Dietrich until September 14, 2020. On September 14, 2020, Power-Up filed a motion for leave to enter a default judgment against the Company and Mr. Dietrich, alleging that the defendants failed to appear and did not establish a meritorious defense to the claims made or a reasonable excuse for the delay in interposing their answer. As of September 30, 2020, the Company has recorded $131,174 in principal and $233,124 of accrued interest and penalties for the Power Up Notes as current liabilities.

 

12

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

NOTE 9 – CONVERTIBLE NOTES PAYABLE

 

On July 5, 2018, the Company issued secured convertible notes to certain accredited investors in the aggregate principal amount of $1,650,000. The notes matured on January 5, 2019 and accrued no interest. Net proceeds received by the Company were $1,492,500 after deduction of legal and other fees. During 2019, the remaining principal amount of $390,000 and accrued interest of $22,831 were converted into shares of the Company’s common stock.

 

In connection with the issuance of the July 2018 notes, the Company and the investors also entered into a security agreement pursuant to which the notes are secured by all of the assets of the Company held as of July 5, 2018 and acquired thereafter. The Company also issued five-year warrants to purchase an aggregate of 6,600,000 shares of Company’s common stock with an initial exercise price of $0.25. The warrants contain certain anti-dilutive provisions.

  

On December 17, 2018, the Company issued a secured convertible promissory note in the principal amount of $2,225,000 (including an original issuance discount of $225,000) that matured on December 17, 2019 and bears interest at a rate of 8% per annum (which increased to 22% on July 16, 2019 upon the occurrence of an event of default). The note is secured by the Security Agreement (as defined below). The investor has the right to convert the Outstanding Balance (as defined in the note) of the note at any time into shares of common stock of the Company at a conversion price of $0.35 per share, subject to adjustment. Commencing on June 17, 2019, the investor has the right to redeem all or any portion of the note; provided, however, the investor may not request redemption in an amount that exceeds $350,000 during any single calendar month; provided, further however, upon the occurrence of an event of default, the redemption amount in any calendar month may exceed $350,000. Payments on redemption amounts may be made in cash, by converting the redemption amount into shares of the Company’s common stock at a conversion price of the lesser of: (a) $0.35 per share, subject to adjustment; and (b) the Market Price (as defined in the note), or a combination thereof. Upon the occurrence of an event of default, the investor may accelerate the note pursuant to which the Outstanding Balance will become immediately due and payable in cash at the Mandatory Default Amount (as defined in the note). The Company is prohibited from effecting a conversion of the note to the extent that, as a result of such conversion, the investor, together with its affiliates, would beneficially own more than 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the note, which beneficial ownership limitation may be increased by the investor up to, but not exceeding, 9.99%.

 

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 $761,330. During the year ended December 31, 2019, the noteholder converted $345,000 of principal into an aggregate of 53,522,295 shares of common stock. During the nine months ended September 30, 2020, the noteholder converted $37,000 of principal into an aggregate of 31,109,551 shares of common stock. As of September 30, 2020 and December 31, 2019, the remaining carrying value of the note was $1,843,000 and $1,880,000, respectively, net of debt discount of $0. As of September 30, 2020 and December 31, 2019, accrued interest payable of $1,659,676 and $1,327,110, respectively, was outstanding on the note.

 

13

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

From January to June 2019, the Company issued convertible promissory notes in the aggregate principal amount of $389,000 (including aggregate original issuance discount of $39,000) that matured at dates ranging from July 15, 2019 to June 6, 2020 and accruing interest at rates ranging from 5% to 12% per annum. The investors have the right to convert the Outstanding Balance  (as defined in the notes) of the notes at any time into shares of common stock of the Company at a conversion price of $0.075 per share, subject to adjustment. Upon maturity, payment may be made in cash, by converting the redemption amount into shares of the Company’s common stock at a conversion price of the lesser of: (a) $0.075 per share, subject to adjustment; and (b) the Market Price (as defined in the notes), or a combination thereof. Upon the occurrence of an event of default, the investors  may accelerate the note pursuant to which the Outstanding Balance will become immediately due and payable in cash at the Mandatory Default Amount (as defined in the notes). The Company is prohibited from effecting a conversion of any note to the extent that, as a result of such conversion, the investor, together with its affiliates, would beneficially own more than 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the note, which beneficial ownership limitation may be increased by the investor up to, but not exceeding, 9.99%. In January 2020, one of the promissory notes was amended whereby the conversion price for $9,202 which is a portion of the principal amount of the note was amended to $0.0004 per share.   The amendment was deemed a debt modification and accounted for accordingly. During the year ended December 31, 2019, the noteholders converted $31,180 of principal and $8,000 of accrued interest into an aggregate of 10,000,000 shares of common stock. During the nine months ended September 30, 2020, one of the holders converted $24,826 of principal into an aggregate of 35,005,850 shares of common stock. As of September 30, 2020 and December 31, 2019, the remaining carrying value of the notes was $332,994 and $247,746, net of debt discount of $0 and $110,074, respectively. As of September 30, 2020 and December 31, 2019, accrued interest payable of $1,282,188 and $456,900, respectively, was outstanding on the notes.

 

On November 13, 2019, the Company issued convertible promissory notes in the aggregate principal amount of $108,900, having an aggregate original issuance discount of $9,900, resulting in cash proceeds of $99,000. The notes matured on May 13, 2020 and accrue interest at a rate of 12% per annum. The investors have the right to convert the Outstanding Balance  (as defined in the notes) of the notes at any time into shares of common stock of the Company at a conversion price of $0.01 per share, subject to adjustment. In the event of default, the conversion price shall be 60% of the average of the three lowest closing bid prices of the Company’s common stock during the 20 days prior to the conversion date. The Company is prohibited from effecting a conversion of any note to the extent that, as a result of such conversion, the investor, together with its affiliates, would beneficially own more than 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the note, which beneficial ownership limitation may be increased if the Market Capitalization (as defined in the notes) falls below $2,500,000, but not exceeding, 9.99%. As of September 30, 2020 and December 31, 2019, the remaining carrying value of the notes was $108,900 and $14,871, net of debt discount of $0 and $94,029, respectively. As of September 30, 2020 and December 31, 2019, accrued interest payable of $140,798 and $48,789, respectively, was outstanding on the notes.

 

On December 6, 2019, the Company issued convertible promissory notes in the aggregate principal amount of $110,000, having an aggregate original issuance discount of $10,000, resulting in cash proceeds of $100,000. The notes matured on June 6, 2020 and accrue interest at a rate of 12% per annum. The investors have the right to convert the Outstanding Balance (as defined in the notes)  of the notes at any time into shares of common stock of the Company at a conversion price of $0.01 per share, subject to adjustment. In the event of default, the conversion price shall be 60% of the average of the three lowest closing bid prices of the Company’s common stock during the 20 days prior to the conversion date. The Company is prohibited from effecting a conversion of any note to the extent that, as a result of such conversion, the investor, together with its affiliates, would beneficially own more than 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the note, which beneficial ownership limitation may be increased if the Market Capitalization (as defined in the notes) falls below $2,500,000, but not exceeding, 9.99%. As of September 30, 2020 and December 31, 2019, the remaining carrying value of the notes was $110,000 and $15,027, net of debt discount of $0 and $94,973, respectively. As of September 30, 2020 and December 31, 2019, accrued interest payable of $103,613 and $38,904, respectively, was outstanding on the notes.

 

14

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

In December 2019, the Company and the holders of all of the outstanding Series A and Series B Preferred Shares (the “Preferred Shares”) entered into Exchange Agreements whereby 2,800 Series A Preferred Shares and 1,126 Series B Preferred Shares were canceled in exchange for the issuance of an aggregate of $3,500,000 and $1,548,250 of convertible promissory notes, respectively. The notes matured at dates ranging from December 24, 2019 to May 18, 2020 and accrue interest at a rate of 12% per annum. The investors have the right to convert the Outstanding Balance  (as defined in the notes) of the notes at any time into shares of common stock of the Company at a conversion price of $0.005 per share, subject to adjustment. In the event of default, the Outstanding Balance shall immediately increase to 130% of the Outstanding Balance and a penalty of $100 per day shall accrue until the default is remedied. For a period of two years from the issuance date, in the event the Company issues or sells any additional common shares or common stock equivalents at a price less than the Conversion Price (as defined in the notes) then in effect (a “Dilutive Issuance”), the Conversion Price of the notes shall be reduced to the Dilutive Issuance Price and the number of shares issuable upon conversion shall be increased on a full ratchet basis. The Company is prohibited from effecting a conversion of any note to the extent that, as a result of such conversion, the investor, together with its affiliates, would beneficially own more than 9.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the note.  During the year ended December 31, 2019, the noteholders converted $185,500 of principal and $300 of accrued interest into an aggregate of 30,669,903 shares of common stock and 37,160,000 shares of common stock to be issued. During the nine months ended September 30, 2020, the noteholders converted $31,137 of principal and $128 of accrued interest into an aggregate of 6,253,056 shares of common stock. As of September 30, 2020 and December 31, 2019, the remaining carrying value of the notes was $4,831,613 and $4,781,395, net of debt discount of $0 and $81,355, respectively. As of September 30, 2020 and December 31, 2019, accrued interest payable of $2,375,264 and $1,583,795, respectively, was outstanding on the notes.

 

From January to September 2020, the Company issued convertible promissory notes in the aggregate principal amount of $700,700, having an aggregate original issuance discount of $63,700, resulting in cash proceeds of $637,000. The notes mature from July 2020 to March 2021 and accrue interest at a rate of 12% per annum. During the first 180 days the notes are outstanding, the Company shall have the right to prepay the notes for an amount equal to 120% (during the first 90 days) or 135% (during the subsequent 90 days) of the Outstanding Balance (as defined in the notes) being prepaid. The investors have the right to convert the Outstanding Balance of the notes at any time into shares of common stock of the Company at a conversion price of $0.01 per share, subject to adjustment. In the event of default, the conversion price shall be 60% of the average of the three lowest closing bid prices of the Company’s common stock during the 20 days prior to the conversion date. Notwithstanding the foregoing, upon the occurrence of an event of default, the conversion price for the April 2020 notes, having an aggregate original principal amount of $330,000, shall not be less than $0.001. The Company is prohibited from effecting a conversion of any note to the extent that, as a result of such conversion, the investor, together with its affiliates, would beneficially own more than 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the note, which beneficial ownership limitation may be increased if the Market Capitalization (as defined in the notes) falls below $2,500,000, but not exceeding, 9.99%. As of September 30, 2020, the remaining carrying value of the notes was $497,129, net of debt discount of $203,571. As of September 30, 2020, accrued interest payable of $373,256 was outstanding on the notes.

 

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 common shares to convert all of the convertible promissory notes into common shares. 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

 

The Company does not have enough authorized and unissued common shares to convert all of its outstanding convertible promissory notes into common shares. As a result of this authorized shares shortfall, the embedded conversion feature in all of the Company’s outstanding convertible notes payable and convertible preferred shares as well as the Company’s outstanding warrants have been accounted for as derivative liabilities, at fair value, as the Company cannot determine if a sufficient number of shares would be available to settle all potential future conversion transactions.

 

During the nine months ended September 30, 2020, upon issuance of the instruments underlying the derivative liabilities and upon revaluation (immediately prior to conversion), 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 0%, (2) expected volatility of 119.33% to 126.80%, (3) risk-free interest rate of 0.10% to 1.56%, and (4) expected life of 0.08 to 0.5 years.

 

15

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

On September 30, 2020, the Company estimated the fair value of the embedded derivatives of $63,588,991 using the Black-Scholes Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 125.94%, (3) risk-free interest rate of 0.05% to 0.13%, and (4) expected life of 0.05 to 2.34 years.

  

During the year ended December 31, 2019, upon issuance of the instruments underlying the derivative liabilities and upon revaluation (immediately prior to conversion), 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 0%, (2) expected volatility of 110.59% to 119.18%, (3) risk-free interest rate of 1.48% to 2.33%, and (4) expected life of 0.01 to 3.0 years.

 

On December 31, 2019, the Company estimated the fair value of the embedded derivatives of $20,236,870 using the Black-Scholes Pricing Model based on the following assumptions: (1) dividend yield of 0%, (2) expected volatility of 119.18%, (3) risk-free interest rate of 1.48% to 1.62%, and (4) expected life of 0.01 to 3.09 years.

 

ASC 820 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. An asset’s or liability’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 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 below. While the Company believes that its valuation methods are appropriate and consistent with other market participants, it recognizes that the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. The primary assumptions that would significantly affect the fair values using the methods discussed are that of volatility and market price of the underlying common stock of the Company.

 

At September 30, 2020 and December 31, 2019, the Company did not have any derivative instruments that were designated as hedges.

 

16

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

Items recorded or measured at fair value on a recurring basis in the accompanying condensed consolidated financial statements consisted of the following items as of September 30, 2020 and December 31, 2019:

 

    September 30, 
2020
    Quoted Prices 
in Active 
Markets for 
Identical Assets
(Level 1)
    Significant 
Other 
Observable 
Inputs 
(Level 2)
    Significant 
Unobservable 
Inputs 
(Level 3)
 
Derivative liabilities   $ 63,588,991     $              -     $                 -     $ 63,588,991  

 

    December 31,
2019
    Quoted Prices 
in Active 
Markets for 
Identical Assets
(Level 1)
    Significant 
Other 
Observable 
Inputs 
(Level 2)
    Significant 
Unobservable
Inputs 
(Level 3)
 
Derivative liabilities   $ 20,236,870     $          -     $            -     $ 20,236,870  

 

The following table provides a summary of changes in fair value of the Company’s Level 3 financial liabilities for the nine months ended September 30, 2020: 

 

Balance, December 31, 2019   $ 20,236,870  
Transfers in due to issuance of convertible notes and warrants with embedded conversion and reset provisions     528,076  
Transfers out due to conversions of convertible notes and accrued interest into common shares     (278,545 )
Change in derivative liability due to authorized shares shortfall     43,406,183  
Mark to market to September 30, 2020     (303,593 )
Balance, September 30, 2020   $ 63,588,991  
         
Gain on change in derivative liabilities for the nine months ended September 30, 2020   $ 303,593  

 

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

 

The Company is authorized to issue 10,000,000 shares of blank check preferred stock, par value $0.001 per share.

 

On July 2, 2019, the Company authorized the issuance of 6,000 Series A Preferred Stock, par value $0.001 per share. The Series A Preferred Stock has a $1,250 stated value and is convertible into shares of common stock at $0.05 per share, subject to certain adjustments. The Certificate of Designation for the Series A Preferred Stock was filed on July 9, 2019.

 

As of September 30, 2020 and December 31, 2019, there were 0 shares of Series A Preferred Stock outstanding.

 

On June 24, 2019, the Company authorized the issuance of 2,000 shares of Series B Preferred Stock, par value $0.001 per share. The Series B Preferred Stock has a $1,250 stated value and is convertible into shares of common stock at $0.05 per share, subjected to certain adjustments. The Certificate of Designation for the Series B Preferred Stock was filed on July 9, 2019.

 

17

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

As of September 30, 2020 and December 31, 2019, there were 0 shares of Series B Preferred Stock outstanding.

  

On July 16, 2019, the Company authorized the issuance of 1,000 shares of Series C Preferred Stock, par value $0.001 per share. The 1,000 Series C preferred shares automatically convert into an aggregate of 1,000,000 shares of common stock upon the Company listing on a national exchange or upon a Change in Control (as defined in the Series C Certificate of Designation). The Certificate of Designation for the Series C Preferred Stock was filed on July 19, 2019, and a Certificate of Correction to the Certificate of Designation was filed on June 24, 2020.

  

As of September 30, 2020 and December 31, 2019, there were 1,000 shares of Series C Preferred Stock outstanding.

 

Common Stock

 

The Company is authorized to issue 500,000,000 shares of common stock, par value $0.001 per share. As of September 30, 2020 and December 31, 2019, there were 493,726,405 and 384,266,948 shares of common stock issued and outstanding, respectively.

 

The following common stock transactions were recorded during the nine months ended September 30, 2020:

 

On January 8, 2020, the Company issued 37,160,000 shares of the Company’s common stock previously recorded as to be issued as of December 31, 2019. 

 

On March 7, 2020, a stockholder returned 69,000 shares of the Company’s common stock back to the Company. The shares were immediately retired. Accordingly, common stock was decreased by the par value of the common shares contributed of $69 with a corresponding increase in additional paid in capital.

  

During the nine months ended September 30, 2020, the Company issued an aggregate of 72,368,457 shares of its common stock, having an aggregate fair value of $370,755, upon the conversion of convertible notes with a principal amount of $92,964 and accrued interest of $128, which resulted in the elimination of $278,545 of derivative liabilities and an aggregate net gain on conversion of convertible notes of $882.  Accordingly, common stock was increased by the par value of the common shares issued of $72,369 and additional paid in capital was increased by $298,386.

 

NOTE 12 – WARRANTS

  

A summary of the Company’s warrant activity during the nine months ended September 30, 2020, is presented below:

 

    Shares     Weighted-
Average
Exercise
Price
    Weighted-
Average
Remaining
Contractual
Term
    Aggregate
Intrinsic
Value
 
Outstanding at December 31, 2019     3,342,376,365     $ 0.00265       2.96     $ 8,791,956  
Grants     13,819,650,911       0.00040                  
Exercised     -       -                  
Expired/Canceled     (325,000 )     0.73077                  
Outstanding at September 30, 2020     17,161,702,276     $ 0.00050       2.21     $ 27,439,900  
Exercisable at September 30, 2020     17,161,702,276     $ 0.00050       2.21     $ 27,439,900  

 

Exercise Price   Warrants
Outstanding
    Weighted Avg.
Remaining
Life
    Warrants
Exercisable
 
$0.0001 – 0.25     17,161,137,274       2.21       17,161,137,274  
0.26 – 0.50     465,002       0.93       465,002  
0.76 – 1.00     100,000       0.29       100,000  
      17,161,702,276       2.21       17,161,702,276  

 

18

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

The aggregate intrinsic value of outstanding stock warrants was $27,439,900, based on warrants with an exercise price less than the Company’s stock price of $0.002 as of September 30, 2020, which would have been received by the warrant holders had those holders exercised the warrants as of that date.

 

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.

 

The fair value of all options that vested during the nine months ended September 30, 2020 and 2019 was $0 and $14,000, respectively. Unrecognized compensation expense of $0 at September 30, 2020 will be expensed in future periods.

 

A summary of the Company’s stock option activity during the nine months ended September 30, 2020, is presented below:

 

    Shares     Weighted-
Average
Exercise
Price
    Weighted-
Average
Remaining
Contractual
Term
    Aggregate
Intrinsic
Value
 
Outstanding at December 31, 2019     27,621,765     $ 0.49       7.49     $          -  
Grants     -                          
Exercised     -                          
Expired/Canceled     -                          
Outstanding at September 30, 2020     27,621,765     $ 0.49       6.74     $ -  
Exercisable at September 30, 2020     27,621,765     $ 0.49       6.74     $ -  

 

Exercise Price   Number of
Options
    Remaining Life
In Years
    Number of Options
Exercisable
 
$0.01 – 0.25     13,306,786       7.51       13,306,786  
0.26 – 0.50     1,939,631       6.51       1,939,631  
0.51 – 0.75     1,820,112       5.93       1,820,112  
0.76 – 1.00     9,926,072       5.96       9,926,072  
1.01 – 2.00     629,164       5.85       629,164  
      27,621,765       6.74       27,621,765  

  

19

 

 

MASSROOTS, INC.

Notes to Condensed Consolidated Financial Statements

September 30, 2020 (Unaudited)

 

The aggregate intrinsic value of outstanding stock options was $0, based on options with an exercise price less than the Company’s stock price of $0.0020 as of September 30, 2020, which would have been received by the option holders had those option holders exercised their options as of that date.

 

NOTE 14 – EARNINGS (LOSS) PER SHARE

 

Basic earnings (loss) per share data for each period presented is computed using the weighted average number of shares of common stock outstanding during each such period. Diluted earnings (loss) per share data is computed using the weighted average number of common and dilutive common equivalent shares outstanding during each period. Dilutive common-equivalent shares consist of: (i) shares that would be issued upon the exercise of stock options and warrants, computed using the treasury stock method, and (ii) shares issuable upon conversion of convertible notes. The Company calculated the potential diluted earnings per share in accordance with ASC 260, as follows:

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2020     2019     2020     2019  
                         
Numerator:                                
Net income (loss) (numerator for basic and diluted earnings (loss) per share)   $ 64,679,222     $ (23,550,345 )   $ (47,402,959 )   $ (26,338,254 )
                                 
Weighted average shares outstanding (denominator for basic earnings (loss) per share)     1,401,226,219       650,391,047       1,387,478,585       337,350,454  
                                 
Effects of dilutive securities:                                
Assumed exercise of warrants, treasury stock method     15,058,062,718       -       -       -  
Assumed conversion of convertible notes     23,739,459,336       -       -       -  
Weighted average dilutive potential common shares     38,797,522,054       -       -       -  
                                 
Denominator for diluted earnings (loss) per share - weighted average shares and assumed potential common shares     40,198,748,273       650,391,047       1,387,478,585       337,350,454  
                                 
Basic earnings per share   $ 0.05     $ (0.04 )   $ (0.03 )   $ (0.08 )
                                 
Diluted earnings per share   $ -     $ (0.04 )   $ (0.03 )   $ (0.08 )

 

The following securities were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive:

 

    September 30,     September 30,  
    2020     2019  
Common shares issuable upon conversion of convertible notes     -       1,456,478,815  
Options to purchase common shares     27,621,765       27,621,765  
Warrants to purchase common shares     12,015,002       2,517,052,238  
Common shares issuable upon conversion of preferred stock     1,000,000       1,131,613,184  
Total potentially dilutive shares     40,636,767       5,132,766,002  

 

NOTE 15 – SUBSEQUENT EVENTS

 

The Company evaluates events that have occurred after the balance sheet date but before the condensed consolidated financial statements are issued.

 

On September 14, 2020, Power-Up filed a motion for leave to enter a default judgment against the Company and Isaac Dietrich, an officer and director of the Company, in connection with the Power Up Notes, alleging that the defendants failed to appear and did not establish a meritorious defense to the claims made or a reasonable excuse for the delay in interposing their answer. On November 19, 2020, Power Up’s motion to enter a default judgment was granted.

 

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 newly-created 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. 

 

20

 

 

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.

 

COVID-19 Pandemic

 

On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus, COVID-19 originating in Wuhan, China (and the risks to the international community as the virus spread globally beyond its point of origin). In March 2020, the WHO classified the COVID-19 outbreak as a pandemic, based on the rapid increase in exposure globally.

 

The full impact of the COVID-19 outbreak continues to evolve as of the date of this Quarterly Report on Form 10-Q. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. 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 2020.

 

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 2020.

 

Overview

 

MassRoots, Inc. was formed in April 2013 and over the past seven years has partnered with numerous cannabis-related brands to advertise products to its broad following across its website, MassRoots.com, and social media accounts. Management believes that our YouTube Channel has one of the largest followings in the regulated cannabis industry with more than 265,000 subscribers while our Instagram account is followed by 387,000 users. Additionally, MassRoots has 920,000 opt-in email subscribers, and 172,500 followers on our verified Twitter account.

  

For much of our history, MassRoots has focused on building a technology platform for the cannabis industry. As part of our marketing strategy, we garnered a significant following across web, social media, and email channels that was highly successful at driving users to our platform.

 

While our long-term goal remains building a technology platform for the cannabis industry, we believe it will likely take significant capital to do so. Therefore, we believe it is in the best interests of our shareholders to focus on monetizing our existing media channels over the coming months with the goal of generating positive cash-flows from operations.

 

We are focused on monetizing our audience through product placements, display ads, and daily deals.

 

Competitors

 

We compete with other cannabis platforms such as WeedMaps and Leafly, which provide news and other information related to the cannabis industry. We believe our primary competitive advantage is the community and audience we have established, along with the data we have cultivated on key cannabis markets.

 

The Company’s financial statements have been presented on the basis that it is a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. In order to generate meaningful revenues, our technologies must be fully developed, gain market recognition and acceptance and develop a critical level of successful sales and product installations. In addition, management believes that the successful growth and operation of our business is dependent upon our ability to obtain adequate sources of funding through equity or debt financing to adequately support research and development efforts, protect intellectual property, form relationships with strategic partners and provide for working capital and general corporate purposes. There can be no assurance that the Company will be successful in achieving its plans as set forth above.

Our costs include employee salaries and benefits, compensation paid to consultants, materials and supplies for product development and commercialization activities, and administration, travel, legal and accounting expenses, sales and marketing costs, general and administrative expenses, and other costs associated with an early stage, publicly-traded technology company. We currently have 3 full-time employees. Because using third party expertise and resources is more efficient than maintaining full time resources, we also expect to incur consulting expenses related to technology development and some administrative, sales and legal functions commensurate with our current levels.

 

21

 

 

The amount that we spend for any specific purpose may vary significantly from quarter to quarter, and could depend on a number of factors including, but not limited to, the pace of progress of our commercialization and development efforts, actual needs with respect to product testing, development and research, market conditions, and changes in or revisions to our sales and marketing strategies.

 

Research, development, and commercial acceptance of new technologies are, by their nature, unpredictable. Although we undertake development and commercialization efforts with reasonable diligence, there can be no assurance that the net proceeds from our securities offerings will be sufficient to enable us to develop our technology to the extent needed to create future sales to sustain operations. If the net proceeds from these offerings are insufficient for this purpose, we will consider other options to continue our path to commercialization, including, but not limited to, additional financing through follow-on equity offerings, debt financing, co-development agreements, sale or licensing of developed intellectual or other property, or other alternatives.

 

We cannot assure that our technologies will be accepted, that we will ever earn revenues sufficient to support our operations, or that we will ever be profitable. Furthermore, we have no committed source of financing and we cannot assure that we will be able to raise money as and when we need it to continue our operations. If we cannot raise funds as and when we need them, we may be required to scale back our development plans by reducing expenditures for employees, consultants, business development and marketing efforts or to otherwise severely curtail, or even to cease, our operations. 

 

For the Three Months Ended September 30, 2020 and 2019

 

    For the three months ended  
    Sept 30,
2020
    Sept 30,
2019
    $
Change
    %
Change
 
Revenue   $ 2,316     $ 909     $ 1,407       154.7 %
                                 
Operating Expenses     208,238       1,122,617       (914,379 )     (81.4 )%
                                 
Loss from Operations     (205,922 )     (1,121,708 )     915,786       (81.6 )%
                                 
Other Income (Expense)     64,885,144       (22,428,637 )     87,313,781       389.3 %
                                 
Net Income (Loss) Available to Common Stockholders   $ 64,679,222     $ (23,550,345 )   $ 88,229,567       374.6 %

  

Revenues

 

For the three months ended September 30, 2020 and 2019, we generated revenues of $2,316 and $909, respectively, an increase of $1,407 primarily due to the relaunch of product placements on the Company’s YouTube channel.

 

Operating Expenses

 

For the three months ended September 30, 2020 and 2019, our operating expenses were $208,238 and $1,122,617, respectively, a decrease of $914,379. This decrease was attributable to a decrease in payroll and related expenses of $88,930 due to reduction in the number of employees, as payroll and related expenses decreased to $63,879 for the three months ended September 30, 2020 from $152,809 for same period in 2019. Advertising increased to $43,020 for the three months ended September 30, 2020 from $2,967 for the same period in 2019, an increase of $40,053. For the three months ended September 30, 2020 and 2019, the Company recorded amortization of software costs of $0 and $12,849, respectively, a decrease of $12,849. This is primarily a result of the Company not incurring any software development costs. Other general and administrative expenses decreased by $473,488 from $574,677 for the three months ended September 30, 2019, to $101,189 for the three months ended September 30, 2020. This reduction was attributable to lower overhead costs for office expenses, legal fees, rent expense and contractor services for the three months ended September 30, 2020 as compared to the same period in 2019. 

 

Loss from Operations

   

During the three months ended September 30, 2020, we incurred losses of $205,922 from operations, as compared to losses of $1,121,708 during the same period in 2019, a difference of $915,786, for the reasons stated above.

 

Other Income (Expense)

 

For the three months ended September 30, 2020 and 2019, the Company recorded interest expense of $1,602,204 and $1,546,805, respectively, primarily related to Company’s convertible notes. The Company recorded a $0 loss and $248,022 loss on the conversion of convertible notes payable for the three months ended September 30, 2020 and 2019, respectively. For the three months ended September 30, 2020 and 2019, the Company recorded a $66,572,635 gain and a $15,050,821 loss, respectively, on the change in fair value of derivative liabilities for the authorized share shortfall. For the three months ended September 30, 2020 and 2019, the Company recorded $85,287 loss and $94,534 gain, respectively, of changes in the fair value of the derivative liability for the authorized shares shortfall.

 

Net Income (Loss) Available to Common Stockholders

 

For the three months ended September 30, 2020, we had net income of $64,679,222, as compared to a net loss of $23,550,345 for the same period in 2019, an increase of $88,229,567 for the reasons discussed above.

 

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For the Nine Months Ended September 30, 2020 and 2019

 

    For the nine months ended  
    Sept 30,
2020
    Sept 30,
2019
    $
Change
    %
Change
 
Revenue   $ 2,316     $ 23,658     $ (21,342 )     (90.2 )%
                                 
Operating Expenses     696,357       2,884,121       (2,187,764 )     (75.9 )%
                                 
Loss from Operations     (694,041 )     (2,860,463 )     2,166,422       75.7 %
                                 
Other Income (Expense)     (46,708,918 )     (23,477,791 )     (23,231,127 )     98.9 %
                                 

Net Loss Available to Common Stockholders

  $ (142,405,892 )   $ (94,457,638 )   $ (47,948,254 )     50.8 %

 

Revenues

 

For the nine months ended September 30, 2020 and 2019, we generated revenues of $2,316 and $23,658, respectively, a decrease of $21,342 primarily due to service interruptions to both the Company’s website and production of content.

 

Operating Expenses

 

For the nine months ended September 30, 2020 and 2019, our operating expenses were $696,357 and $2,884,121, respectively, a decrease of $2,187,764. This decrease was attributable to a decrease in stock-based compensation of $212,700 from $212,700 for the nine months ended September 30, 2019 to $0 for the same period in 2020. There was a decrease in payroll and related expenses of $255,299 due to reduction in the number of employees as payroll and related expenses decreased to $239,770 for the nine months ended September 30, 2020 from $495,069 for same period in 2019. Advertising expense increased to $43,020 for the nine months ended September 30, 2020 from $39,332 for the same period in 2019, an increase of $3,688. For the nine months ended September 30, 2020 and 2019, the Company recorded amortization of software costs of $0 and $38,549, respectively, a decrease of $38,549. This is primarily a result of the Company not incurring any software development costs. Other general and administrative expenses decreased by $1,124,709 from $1,538,126 for the nine months ended September 30, 2019 to $413,417 for the nine months ended September 30, 2020. This reduction was attributable to lower overhead costs for office expenses, legal fees, rent expense and contractor services for the nine months ended September 30, 2020 as compared to the same period in 2019. 

 

Loss from Operations

  

During the nine months ended September 30, 2020, we incurred losses of $694,041 from operations, as compared to losses of $2,860,463 during the same period in 2019, a difference of $2,166,422, for the reasons stated above.

 

Other Income (Expense)

 

For the nine months ended September 30, 2020 and 2019, the Company recorded interest expense of $3,607,210 and $2,136,983, respectively, primarily related to Company’s convertible notes. The Company recorded a gain of $882 and a loss of $674,099 on the conversion of convertible notes payable for the nine months ended September 30, 2020 and 2019, respectively. For the nine months ended September 30, 2020 and 2019, the Company recorded gains of $303,593 and $61,635, respectively, of the change in fair value of derivative liabilities. For the nine months ended September 30, 2020 and 2019, the Company recorded $43,406,183 and $15,050,821, respectively, of changes in the fair value of the derivative liability for the authorized shares shortfall.

 

23

 

 

Net Loss Available to Common Stockholders

 

For the nine months ended September 30, 2020 and 2019, we had net losses of $142,405,892 and $94,457,638, respectively, an increase of $47,948,254 for the reasons discussed above.

 

Liquidity and Capital Resources

 

Net cash used in operations for the nine months ended September 30, 2020 and 2019 was $717,062 and $1,389,212, respectively. This $672,150 decrease was primarily caused by a decrease in stock-based compensation (non-cash items), an increase in interest and amortization of debt discount, and a decrease in accounts payable and accrued expenses.  Net cash used in operations for the nine months ended September 30, 2019 was primarily based on the utilization of $370,500 in advances to COWA Science Corporation, net of repayments, and the loss for the nine months ended September 30, 2019, partially offset by the increase in stock-based compensation (non-cash item), along with increases in accounts payable and accrued payroll. 

 

Net cash provided by investing activities for the nine months ended September 30, 2020 and 2019 was $0 and $90,983, respectively.

 

Net cash provided by financing activities for the nine months ended September 30, 2020 and 2019 was $716,592 and $1,271,300, respectively. During the nine months ended September 30, 2020, these funds were derived mainly from proceeds related to the issuance of convertible and non-convertible notes. During the nine months ended September 30, 2019, net cash provided by financing activities was derived from the issuance of convertible notes, advances, sales of preferred shares, and exercise of warrants. 

 

Capital Resources

 

As of September 30, 2020, the Company had cash of $650 and working capital deficit (current liabilities in excess of current assets) of $83,791,130. During the nine months ended September 30, 2020, net cash used in operating activities was $717,062. 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.

 

Off-Balance Sheet Arrangements

 

As of September 30, 2020, we did not have any off-balance sheet arrangements.

 

24

 

 

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.

 

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 September 30, 2020 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.

 

25

 

 

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

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 previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the SEC on July 16, 2020, our Quarterly Reports on Form 10-Q, for the quarters ended June 30, 2020 and March 31, 2020, as filed with the SEC on September 4, 2020, and as otherwise set forth herein, 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.

 

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 alleges, 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. In addition, the complaint alleges, among other things, that Mr. Dietrich took affirmative steps to deliberately cause the Company to breach its financial obligations. As a result of the foregoing, Power Up has requested: (i) the greater of $312,000 and the “parity value” as such term is defined in the Power Up Notes together with $2,000 per day until the Company issues shares upon conversion of the Power Up Notes together with applicable interest thereon; (ii) $165,000 as a result of the misrepresentations; (iii) an amount of lost profits to be determined by the court, but in no event less than $312,000; (iv) $312,000 as against Mr. Dietrich; (v) an award for reasonable legal fees and costs of litigation; (vi) a judgment awarding specific performance under the Power Up Notes; and (vii) the costs and disbursement of the action, pre-judgment interest, default interest and such other further relief as the court deems proper. On August 24, 2020, the Supreme Court of the State of New York, County of Nassau adjourned a hearing on Power Up\s motion for default judgment with respect to the complaint filed by Power Up on October 11, 2019 against the Company and Mr. Dietrich until September 14, 2020. On September 14, 2020, Power-Up filed a motion for leave to enter a default judgment against the Company and Mr. Dietrich, alleging that the defendants failed to appear and did not establish a meritorious defense to the claims made or a reasonable excuse for the delay in interposing their answer.

 

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, 2019 as filed with the SEC on July 16, 2020

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

The Company does not have enough authorized and unissued common shares to convert all of the convertible promissory notes into common shares. 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 $7,927,206.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

The information set forth below is included herein for the purpose of providing the disclosure required under “Item 1.01 – Entry into a Material Definitive Agreement.” of Form 8-K.

 

On November 25, 2020, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with an accredited investor (the “Purchaser”) for the sale of 3.3 shares of the Company’s newly-created Series X Convertible Preferred Stock, par value $0.0001 per share (the “Series X Preferred Stock”), resulting in aggregate proceeds of $66,000. The purchase and issuance of such shares of Series X Preferred Stock closed on December 1, 2020 (the “Initial Closing Date”).

 

26 

 

 

The Company may hold one or more subsequent closings to sell up to an additional 96.7 shares of Series X Preferred Stock pursuant to securities purchase agreements substantially in the form of the Purchase Agreement (the “Financing”). Each investor in any subsequent closing will be required to represent that, at the time of the applicable closing, it (i) has a substantive, pre-existing relationship with the Company and (ii) did not independently contact the Company as a result of general solicitation, any press release or any other public disclosure disclosing the material terms of the Financing.

 

The Purchase Agreement contains certain customary representations, warranties, and covenants for transactions of this type including, but not limited to, the below:

 

Participation in Future Financing. The Purchase Agreement provides for participation by the Purchaser in Subsequent Financings (as defined below) pursuant to the Series X COD (as defined below). 

 

Moratorium on Subsequent Equity Sales. Subject to certain exceptions, until 120 days after the Initial Closing Date, neither the Company nor any of its subsidiaries will issue, enter into any agreement to issue, or announce the issuance or proposed issuance of any shares of the Company’s common stock (“Common Stock”) or any securities of the Company or its subsidiaries which would entitle the holder thereof to acquire at any time Common Stock (“Common Stock Equivalents”).

 

Moratorium on Certain Transactions. Subject to certain exceptions, until the date that is the eighteenth (18) month anniversary of the Initial Closing Date, the Company will not, without the consent of the holders of a majority of the outstanding Series X Preferred Stock, enter into any Variable Rate Transaction (as defined in the Purchase Agreement).

 

Most Favored Nation. Subject to certain exceptions, until the earlier of (i) the date that is the eighteenth (18) month anniversary of the Initial Closing Date or (ii) such time as the Purchaser does not hold any Series X Preferred Stock (or Common Stock issued pursuant to the conversion of the Series X Preferred Stock), in the event that the Company issues or sells any Common Stock or Common Stock Equivalents, if the Purchaser then holding Series X Preferred Stock (or Common Stock issued pursuant to the conversion of the Series X Preferred Stock) purchased under a Purchase Agreement reasonably believes that any of the terms and conditions appurtenant to such issuance or sale are more favorable to such investors than the terms and conditions granted to the Purchaser pursuant to the Purchase Agreement, upon notice to the Company by the Purchaser, the Company shall amend the terms of the Purchase Agreement so as to give the Purchaser the benefit of such more favorable terms or conditions.

 

Amendment to Certificate of Incorporation. Pursuant to the Purchase Agreement, within forty-five (45) days of the Initial Closing Date, the Company shall file with the SEC a preliminary proxy statement in accordance with Regulation 14A promulgated under the Exchange Act, notifying the Company’s stockholders of a special meeting to amend the Company’s Certificate of Incorporation to increase the Company’s authorized shares of Common Stock.

 

Each share of Series X Preferred Stock is convertible into such number of shares of the Company’s Common Stock as determined by dividing (i) the Series X Conversion Amount by (ii) the Series X Conversion Price. The “Series X Conversion Amount” means, with respect to each share of Series X Preferred Stock, as of the applicable date of determination, the sum of (1) $20,000 per share of Series X Preferred Stock, subject to adjustment (the “Series X Stated Value”), plus (2) with respect to each share of Series X Preferred Stock, all dividends, whether declared or not, on such share of Series X Preferred Stock (the “Series X Additional Amount”). The “Series X Conversion Price” means $0.002, subject to adjustment. Subject to limited exceptions, a holder of Series X Preferred Stock will not have the right to convert any portion of the Series X Preferred Stock to the extent that, after giving effect to the conversion, the holder, together with its affiliates, would beneficially own in excess of 4.99% (subject to adjustment to up to 9.99% solely at the holder’s discretion upon 61 days’ prior notice to the Company) of the number of shares of Common Stock outstanding immediately after giving effect to its conversion.. Until the filing and effectiveness of an amendment to the Company’s Certificate of Incorporation to increase the number of shares of the Company’s Common Stock that the Company is authorized to issue with the Secretary of State of the State of Delaware, the Series X Preferred Stock will not be convertible for any reason.

 

27 

 

 

The foregoing description of the Purchase Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the form of Purchase Agreement, a copy of which is attached hereto as Exhibit 10.3 and is incorporated herein by reference.

 

The information set forth below is included herein for the purpose of providing the disclosure required under “Item 3.02 – Unregistered Sales of Equity Securities.” and “Item 5.03 – Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year.” of Form 8-K.

 

Reference is made to the disclosures set forth above for the purpose of providing the disclosure required under “Item 1.01 – Entry into a Material Definitive Agreement.” of Form 8-K, which are hereby incorporated herein by reference.

 

33,000,000 shares of Common Stock are issuable upon the conversion of the Series X Preferred Stock sold pursuant to the Purchase Agreement in accordance with and subject to the limitations contained in the Series X COD.

 

The shares of Series X Preferred Stock have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), and were offered and issued in reliance on the exemption from the registration requirements under the Securities Act afforded by Section 4(a)(2) of the Securities Act, based on the fact that the Investor is an “accredited investor,” as such term is defined in Rule 501 of Regulation D, in a transaction not involving a public offering.

 

The information set forth below is included herein for the purpose of providing the disclosure required under “Item 3.03 – Material Modification to Rights of Security Holders.” of Form 8-K.

 

In connection with the Financing, on November 23, 2020, the Company filed the Certificate of Designations, Preferences and Rights of the Series X Convertible Preferred Stock (the “Series X COD”) with the Delaware Secretary of State.

 

Pursuant to the Series X COD, 100 shares of the Company’s blank check preferred stock have been designated as “Series X Preferred Stock.” The Series X Preferred Stock have the following rights, preferences, powers, privileges and restrictions, qualifications and limitations:

 

Dividends. The holders of Series X Preferred Stock shall have no dividend rights except as may be declared by the Company’s board of directors.

 

Ranking. The Series X Preferred Stock rank senior to the Company’s Common Stock and preferred stock with respect to the payment of dividends and distributions of the assets of the Company upon liquidation, dissolution or winding up of the Company.

 

Voting. Except as otherwise required by law, or as provided in the section entitled “Protective Provisions,” shares of Series X Preferred Stock are not entitled to vote on any matter. As to all matters for which voting by class is specifically required by law, each outstanding share of Series X Preferred Stock is entitled to one vote.

 

Protective Provisions. Except where the vote or written consent of the holders of a greater number of shares is required by law, without first obtaining the affirmative vote or the written consent of a majority of the outstanding Series X Preferred Stock, including the Required Holder (as defined in the Series X COD), the Company will not: (a) amend or repeal any provision of, or add any provision to, its Certificate of Incorporation or bylaws, or file any certificate of designations or articles of amendment of any series of shares of preferred stock, if such action would adversely alter or change in any respect the preferences, rights, privileges or powers, or restrictions provided for the benefit, of the Series X Preferred Stock; (b) increase or decrease (other than by conversion) the authorized number of Series X Preferred Stock; (c) create or authorize (by reclassification or otherwise) any new class or series of shares that has a preference over or is on a parity with the Series X Preferred Stock with respect to dividends or the distribution of assets on the liquidation, dissolution or winding up of the Company; (d) pay dividends or make any other distribution on any shares of any capital stock of the Company junior in rank to the Series X Preferred Stock; (e) issue any Series X Preferred Stock other than as provided in the Series X COD; or (f) circumvent a right of the Series X Preferred Stock.

 

28 

 

 

Participation in Future Financing. Except for certain exempt issuances, from the Initial Closing Date until the eighteen (18) month anniversary of the Initial Closing Date, upon any issuance by the Company of Common Stock or Common Stock Equivalents for cash consideration, indebtedness or a combination of such in a transaction exempt from registration under the Securities Act (a “Subsequent Financing”), the holders of the Series X Preferred Stock will have the right to participate in an amount equal to an aggregate of thirty percent (30%) of the Subsequent Financing on the same terms, conditions and price provided for in the Subsequent Financing. In addition, the Purchaser has the right to exchange the Series X Preferred Stock as consideration in a Subsequent Financing.

 

Redemption. Upon receipt of a conversion notice for Series X Preferred Stock from a holder, the Company shall have the right (but not the obligation) to redeem all or part of the Series X Preferred Stock which the holder is seeking to convert at a price per share equal to the product of 125% of the (1) Series X Stated Value plus (2) the Series X Additional Amount.

 

Purchase Rights If at any time the Company grants, issues or sells any options, convertible securities or rights to purchase stock, warrants, securities or other property pro rata to all or substantially all of the record holders of any class of Common Stock (the “Purchase Rights”), then each holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such holder could have acquired if such holder had held the number of shares of Common Stock acquirable upon complete conversion of all the Series X Preferred Stock (without taking into account any limitations or restrictions on the convertibility of the Series X Preferred Stock) held by such holder immediately prior to the date on which a record is taken for the grant, issuance or sale of such Purchase Rights.

 

Price Protection. Except for certain exempt issuances, in the event the Company issues or sells any securities, including options or convertible securities (or amends any outstanding securities of the Company), at an effective price of, or with an exercise or conversion price of less than the Series X Conversion Price, then upon such issuance or sale, the Series X Conversion Price shall be reduced to the sale price or the exercise or conversion price of the securities issued or sold.

 

The foregoing description of the Series X COD is not complete and is qualified in its entirety by reference to the full text of the Series X COD, a copy of which is attached hereto as Exhibit 3.2 and is incorporated herein by reference.

 

The information set forth below is included herein for the purpose of providing the disclosure required under “Item 8.01 – Other Events.” of Form 8-K.

 

On September 14, 2020, Power-Up filed a motion for leave to enter a default judgment against the Company and Isaac Dietrich, an officer and director of the Company, in connection with certain defaults of the Power Up Notes, alleging that the defendants failed to appear and did not establish a meritorious defense to the claims made or a reasonable excuse for the delay in interposing their answer. On November 19, 2020, Power Up’s motion to enter a default judgment was granted.

 

29 

 

 

ITEM 6. EXHIBITS

 

(b) Exhibit Index

 

No.   Description of Exhibit 
3.1*   Certificate of Designations, Preferences and Rights of the Series X Convertible Preferred Stock.
10.1*#   Form of Series X Securities Purchase Agreement.
31.1*   Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*   Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*   XBRL Instance Document
101.SCH*   XBRL Taxonomy Extension Schema Document
101.CAL*   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*   XBRL Taxonomy Extension Label Linkbase Document
101.PRE*   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith.
**

Furnished herewith.

# Schedules, exhibits and similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. the Company hereby undertakes to furnish copies of such omitted materials supplementally upon request by the SEC.

30 

 

 

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: December 18, 2020 By: /s/ Isaac Dietrich
    Isaac Dietrich, Chief Executive Officer
(Principal Executive Officer)
     
Date: December 18, 2020 By: /s/ Jesus Quintero
    Jesus Quintero, Chief Financial Officer
(Principal Financial and Accounting Officer)

 

 

31

 

 

Exhibit 3.1

 

CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS OF THE
SERIES X CONVERTIBLE PREFERRED STOCK OF
MASSROOTS, INC.

 

The undersigned, Isaac Dietrich, President and Chief Executive Officer of MassRoots, Inc. (the “Corporation”), a Delaware corporation, hereby does certify:

 

That pursuant to the authority expressly conferred upon the Board of Directors of the Corporation by the Corporation’s Second Amended and Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”), the Board of Directors on November 23, 2020, adopted the following resolution determining it desirable and in the best interests of the Corporation and its stockholders for the Corporation to create a series of One Hundred (100) shares of preferred stock designated as “Series X Convertible Preferred Stock”, none of which shares have been issued.

 

RESOLVED, that the Board of Directors designates the Series X Convertible Preferred Stock and the number of shares constituting such series, and fixes the rights, powers, preferences, privileges and restrictions relating to such series in addition to any set forth in the Certificate of Incorporation as follows:

 

TERMS OF SERIES X CONVERTIBLE PREFERRED STOCK

 

1. Certain Defined Terms. For purposes of this Certificate of Designations, the following terms shall have the following meanings:

 

(a) “1934 Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder.

 

(b) “Additional Amount” means, as of the applicable date of determination, with respect to each share of Series X, all dividends, whether declared or not, on such share of Series X.

 

(c) “Affiliate” means, with respect to any Person, any other Person that directly or indirectly controls, is controlled by, or is under common control with, such Person, it being understood for purposes of this definition that “control” of a Person means the power directly or indirectly either to vote 10% or more of the stock having ordinary voting power for the election of directors of such Person or direct or cause the direction of the management and policies of such Person whether by contract or otherwise.

 

(d) “Authorized Failure Shares” shall have the meaning given to it in Section 12 hereto.

 

(e) “Authorized Share Allocation” shall have the meaning given to it in Section 12 hereto.

 

(f) “Authorized Share Failure” shall have the meaning given to it in Section 12 hereto.

 

(g) “Business Day” means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States or any day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close.

 

(h) “Buy-In Price” shall have the meaning given to it in Section 5 hereto.

 

(i) “Certificate of Designations” means this Certificate Of Designations, Preferences and Rights of the Series X Convertible Preferred Stock of the Corporation.

 

(j) “Closing Sale Price” means, for any security as of any date, (i) the last closing price for such security on the Principal Market, as reported by Bloomberg, or, (2) if the foregoing does not apply, the lowest reported sale price for such date on the Principal Market, or (3) fair market value as determined by the Board of Directors of the Corporation.

 

 

 

 

(k) “Common Stock” means (i) the Corporation’s shares of common stock, $0.001 par value per share, and (ii) any capital stock into which such common stock shall have been changed or any share capital resulting from a reclassification of such common stock.

 

(l) Common Stock Equivalents” means any securities of the Corporation or its Subsidiaries which would entitle the holder thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.

 

(m) Common Stock Increase” shall have the meaning given to it in Section 5 hereto.

 

(n) “Conversion Amount” shall have the meaning given to it in Section 5 hereto.

 

(o) “Conversion Date” shall have the meaning given to it in Section 5 hereto.

 

(p) “Conversion Failure” shall have the meaning given to it in Section 5 hereto.

 

(q) “Conversion Notice” shall have the meaning given to it in Section 5 hereto.

 

(r) “Conversion Price” shall have the meaning given to it in Section 5 hereto.

 

(s) “Conversion Rate” shall have the meaning given to it in Section 5 hereto.

 

(t) “Convertible Securities” means any stock or other security (other than Options) that is at any time and under any circumstances, directly or indirectly, convertible into, exercisable or exchangeable for, or which otherwise entitles the holder thereof to acquire, any shares of Common Stock.

 

(u) “Corporate Event” shall have the meaning given to it in Section 7 hereto.

 

(v) “Corporation” shall have the meaning given to it in the preamble hereto.

 

(w) “Dispute Submission Deadline” shall have the meaning given to it in Section 22 hereto.

 

(x) “Distributions” shall have the meaning given to it in Section 14 hereto.

 

(y) “DGCL” means Delaware General Corporation Law.

 

(z) “DTC” shall have the meaning given to it in Section 5 hereto.

 

(aa) “Excess Shares” shall have the meaning given to it in Section 5 hereto.

 

(bb) “Exempt Issuance” shall mean any sale or issuance by the Corporation of its Common Stock or securities convertible into, exercisable for or exchangeable for Common Stock in connection with (i) a strategic merger, acquisition, consolidation or purchase of the securities or assets of a corporation or other entity (or any division or business unit thereof), (ii) the Corporation’s issuance of securities in connection with strategic supply, sale or license agreements and other partnering arrangements so long as such issuances are not for the purpose of raising capital, (iii) the Corporation’s issuance of Common Stock or securities convertible into, exercisable for or exchangeable for, Common Stock to employees, officers, directors, consultants and advisors under an equity incentive plan adopted by a majority of the members of the Board of Directors of the Corporation; (iv) securities issued upon the exercise or exchange of or conversion of any Convertible Securities or Options issued and outstanding on the Initial Issuance Date in exchange for other securities existing as of the Initial Issuance Date; (v) the conversion or exercise of any of the Corporation’s securities which are outstanding (and have not been amended after) on the date of this Certificate of Designation; or (vi) the Series X and securities issuable upon the exchange of or conversion of any securities issued hereunder.

 

(cc) “Fundamental Transaction” shall have the meaning given to it in Section 7.

 

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(dd) “Holder” or “Holders” means a holder of Series X.

 

(ee) “Initial Issuance Date” means the date the first share of Series X is issued to any Holder hereof.

 

(ff) “Junior Stock” shall have the meaning given to it in Section 3 hereto.

 

(gg) “Liquidation Event” means, whether in a single transaction or series of transactions, the voluntary or involuntary liquidation, dissolution or winding up of the Corporation or such Subsidiaries the assets of which constitute all or substantially all of the assets of the business of the Corporation and its Subsidiaries, taken as a whole.

 

(hh) “Liquidation Funds” shall have the meaning given to it in Section 13 hereto.

 

(ii) “Maximum Percentage” shall have the meaning given to it in Section 5 hereto.

 

(jj) “Options” means any rights, warrants or options to subscribe for or purchase shares of Common Stock or Convertible Securities.

 

(kk) “Parity Stock” shall have the meaning given to it in Section 3 hereto.

 

(ll) “Person” means an individual, a limited liability company, a partnership, a joint venture, a corporation, a trust, an unincorporated organization, any other entity or a government or any department or agency thereof.

 

(mm) “Principal Market” means The New York Stock Exchange, the NYSE American, the Nasdaq Global Select Market, the Nasdaq Global Market, the Nasdaq Capital Market, OTCPink, OTCQB, or OTCQX and any successor markets thereto.

 

(nn) “Purchase Rights” shall have the meaning given to it in Section 7 hereto.

 

(oo) “Register” shall have the meaning given to it in Section 5 hereto.

 

(pp) “Registered Series X” shall have the meaning given to it in Section 5 hereto.

 

(qq) “Reported Outstanding Share Number” shall have the meaning given to it in Section 5 hereto.

 

(rr) “Required Dispute Documentation” shall have the meaning given to it in Section 22 hereto.

 

(ss) “Required Holder” shall have the meaning given to it in Section 3 hereto.

 

(tt) “Required Reserve Amount” shall have the meaning given to it in Section 12 hereto.

 

(uu) “SEC” means the Securities and Exchange Commission or the successor thereto.

 

(vv) “Securities Purchase Agreements” means those certain Securities Purchase Agreements by and among the Corporation and the holders of Series X, effective as of the Initial Issuance Date, as may be amended from time in accordance with the terms thereof.

 

(ww) “Senior Preferred Stock” shall have the meaning given to it in Section 3 hereto.

 

(xx) “Series X” shall have the meaning given to it in Section 2 hereto.

 

(yy) “Series X Certificates” shall have the meaning given to it in Section 5 hereto.

 

(zz) “Share Delivery Deadline” shall have the meaning given to it in Section 5 hereto.

 

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(aaa) “Stated Value” shall mean $20,000 per share of Series X, subject to adjustment for stock splits, stock dividends, recapitalizations, reorganizations, reclassifications, combinations, subdivisions or other similar events occurring after the Initial Issuance Date with respect to the Series X (including any adjustment for a Triggering Event).

 

(bbb) “Subsidiary” when used with respect to any Person, means any corporation or other organization, whether incorporated or unincorporated, of which (A) at least a majority of the securities or other interests having by their terms ordinary voting power to elect a majority of the board of directors or others performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such Person (through ownership of securities, by contract or otherwise) or (B) such Person or any subsidiary of such Person is a general partner of any general partnership or a manager of any limited liability company.

 

(ccc) “Trading Day” means any day on which the Common Stock is eligible to be traded on the Principal Market or securities market on which the Common Stock is then traded, provided that “Trading Day” shall not include any day on which the Common Stock is scheduled to trade on such exchange or market for less than 4.5 hours or any day that the Common Stock is suspended from trading during the final hour of trading on such exchange or market (or if such exchange or market does not designate in advance the closing time of trading on such exchange or market, then during the hour ending at 4:00 p.m., Eastern time) unless such day is otherwise designated as a Trading Day in writing by the Holder.

 

(ddd) “Transaction Documents” means the Securities Purchase Agreements, this Certificate of Designations, and each of the other agreements and instruments entered into or delivered by the Corporation in connection with the transactions contemplated by the Securities Purchase Agreements, all as may be amended from time to time in accordance with the terms thereof.

 

(eee) “Transfer Agent” means Pacific Stock Transfer Company.

 

(fff) “Triggering Event” shall have the meaning given to it in Section 6 hereto.

 

(ggg) “Triggering Event Conversion Amount” means 125% of the then Stated Value and Additional Amount, if any.

 

2. Designation and Number of Shares. There shall hereby be created and established a series of preferred stock of the Corporation designated as “Series X Convertible Preferred Stock” (the “Series X”). The authorized number of Series X shall be One Hundred (100) shares. Each share of Series X shall have a par value of $0.0001.

 

3. Ranking. Until such time as the Holders of at least a majority of the outstanding Series X, which shall include Cavalry Fund I LP (the “Required Holder”), expressly consent to the creation of a series of capital stock in parity with the Series X (“Parity Stock”) or Senior Preferred Stock (as defined below) in accordance with Section 15, the Series X shall rank senior with respect to the preferences as to dividends, distributions and payments upon the liquidation, dissolution and winding up of the Corporation, and all other shares of capital stock of the Corporation, including all other outstanding series of shares of preferred stock as of the filing date of this Certificate of Designation, shall be junior in rank to all Series X with respect to the preferences as to dividends, distributions and payments upon the liquidation, dissolution and winding up of the Corporation (such junior stock is referred to herein collectively as “Junior Stock”). The rights of all such Junior Stock shall be subject to the rights, powers, preferences and privileges of the Series X. Without limiting any other provision of this Certificate of Designations, without the prior express consent of the Required Holder, the Corporation shall not hereafter authorize or issue any additional series or other shares of capital stock that is (i) of senior rank to the Series X in respect of the preferences as to dividends, distributions and payments upon the liquidation, dissolution and winding up of the Corporation (collectively, the “Senior Preferred Stock”), or (ii) Parity Stock. Except as provided for herein, in the event of the merger or consolidation of the Corporation into another corporation, the Series X shall maintain their relative rights, powers, designations, privileges and preferences provided for herein for a period of at least two (2) years following such merger or consolidation.

 

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4. Redemption at Option of the Corporation. Upon receipt of a Conversion Notice, the Corporation shall have the right (but not the obligation) to redeem all or part of the Series X (which the applicable Series X Holder is seeking to convert) at a price per share equal to the product of 125% of the (1) Stated Value plus (2) the Additional Amount (“Corporation Redemption Price”). In the event the Corporation decides to exercise the redemption right, within one (1) Trading Day, the Corporation shall deliver written notice to the applicable Holder of such Series X that such Series X will be redeemed (the “Corporation Redemption Notice”) on the date that is three (3) trading days following the date of the Corporation Redemption Notice (such date, the “Corporation Redemption Date”). On the Corporation Redemption Date, the Corporation shall redeem the shares specified in such request by paying in cash therefor a sum per share equal to the Corporation Redemption Price. In no event shall a Corporation Redemption Notice be given if the Corporation may not lawfully redeem its capital stock. On or before the Corporation Redemption Date, the Corporation Redemption Price for such shares shall be paid by wire transfer of immediately available funds to an account designated in writing by the applicable Holder.

 

5. Conversion. At any time after (i) the Initial Issuance Date, and (ii) the filing and effectiveness of an amendment to the Corporation’s Certificate of Incorporation to increase the number of shares of the Corporation’s Common Stock that the Corporation is authorized to issue with the Secretary of State of the State of Delaware (the “Common Stock Increase”), each share of Series X shall be convertible into validly issued, fully paid and non-assessable shares of Common Stock, on the terms and conditions set forth in this Section 5. For the avoidance of doubt, no conversion of Series X into Common Stock shall be effected before the Initial Issuance Date and the Common Stock Increase.

 

(a) Holder’s Conversion Right. Subject to the provisions of Section 5(d), at any time or times on or after the Initial Issuance Date and the Common Stock Increase, each Holder shall be entitled to convert any portion of the outstanding Series X held by such Holder into validly issued, fully paid and non-assessable shares of Common Stock in accordance with Section 5(c) at the Conversion Rate. The Corporation shall not issue any fraction of a share of Common Stock upon any conversion. If the issuance would result in the issuance of a fraction of a share of Common Stock, the Corporation shall, in its sole discretion, round such fraction of a share of Common Stock up to the nearest whole share or pay to the Holder a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Conversion Price. The Corporation shall pay any and all transfer, stamp, issuance and similar taxes, costs and expenses (including fees and expenses of the Transfer Agent that may be payable with respect to the issuance and delivery of Common Stock upon conversion of any Conversion Amount provided that the Corporation shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such conversion shares upon conversion in a name other than that of the Holder of such shares of Series X and the Corporation shall not be required to issue or deliver such conversion shares unless or until the Person or Persons requesting the issuance thereof shall have paid to the Corporation the amount of such tax or shall have established to the satisfaction of the Corporation that such tax has been paid.  .

 

(b) Conversion Rate. The number of shares of Common Stock issuable upon conversion of any share of Series X pursuant to Section 5(a) shall be determined by dividing (x) the Conversion Amount of such share of Series X by (y) the Conversion Price (the “Conversion Rate”):

 

(i) “Conversion Amount” means, with respect to each share of Series X, as of the applicable date of determination, the sum of (1) the Stated Value thereof plus (2) the Additional Amount thereon.

 

(ii) “Conversion Price” means, with respect to each share of Series X, as of any Conversion Date or other date of determination, $0.002.

 

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(c) Mechanics of Conversion. The conversion of each share of Series X shall be conducted in the following manner:

 

(i) Optional Conversion. To convert a share of Series X into shares of Common Stock on any date after the Initial Issuance Date and the Common Stock Increase (a “Conversion Date”), a Holder shall deliver, via electronic mail or otherwise, for receipt on or prior to 11:59 p.m., Eastern time, on such date, a copy of an executed notice of conversion of the share(s) of Series X subject to such conversion in the form attached hereto as Exhibit I (the “Conversion Notice”) to the Corporation. If required by Section 5(c)(iii), within three (3) Trading Days following a conversion of any such Series X as aforesaid, such Holder shall surrender to a nationally recognized overnight delivery service for delivery to the Corporation the original certificates representing the Series X (the “Series X Certificates”) so converted as aforesaid (or an indemnification undertaking with respect to the Series X in the case of its loss, theft or destruction as contemplated by Section 16). On or before the first (1st) Trading Day following the date of receipt of a valid Conversion Notice, the Corporation shall transmit by electronic mail an acknowledgment of confirmation, in the form attached hereto as Exhibit II, of receipt of such Conversion Notice to such Holder and the Corporation’s Transfer Agent, which confirmation shall constitute an instruction to the Transfer Agent to process such Conversion Notice in accordance with the terms herein. On or before the second Trading (2nd) Day following the date of receipt of a valid Conversion Notice (or such earlier date as required pursuant to the 1934 Act or other applicable law, rule, or regulation, including the rules of the Principal Market or other customary applicable policy for the settlement of a trade initiated on the applicable Conversion Date of such shares of Common Stock issuable pursuant to such Conversion Notice) (the “Share Delivery Deadline”), the Corporation shall (1) provided that the Transfer Agent is participating in The Depository Trust Corporation’s (“DTC”) Fast Automated Securities Transfer Program, credit such aggregate number of shares of Common Stock to which such Holder shall be entitled to such Holder’s or its designee’s balance account with DTC through its Deposit/Withdrawal at Custodian system, or (2) if the Transfer Agent is not participating in the DTC Fast Automated Securities Transfer Program, issue and deliver (via reputable overnight courier) to the address as specified in such Conversion Notice, a certificate, registered in the name of such Holder or its designee, for the number of shares of Common Stock to which such Holder shall be entitled. If the number of Series X represented by the Series X Certificate(s) submitted for conversion pursuant to Section 5(c)(i) is greater than the number of Series X being converted, then the Corporation shall, as soon as practicable and in no event later than two (2) Trading Days after receipt of the Series X Certificate(s) and at its own expense, issue and deliver to such Holder (or its designee) a new Series X Certificate (in accordance with Section 16(d)) representing the number of Series X not converted. The Person or Persons entitled to receive the shares of Common Stock issuable upon a conversion of Series X shall be treated for all purposes as the record holder or holders of such shares of Common Stock on the Conversion Date.

 

(ii) Corporation’s Failure to Timely Convert. If the Corporation shall fail, for any reason or for no reason, on or prior to the applicable Share Delivery Deadline, to issue to such Holder a certificate for the number of shares of Common Stock to which such Holder is entitled and register such shares of Common Stock on the Corporation’s share register or to credit such Holder’s or its designee’s balance account with DTC for such number of shares of Common Stock to which such Holder is entitled upon such Holder’s conversion of any Conversion Amount (as the case may be) (a “Conversion Failure”), then, in addition to all other remedies available to such Holder, (X) the Corporation shall pay in cash to such Holder on each day after the Share Delivery Deadline and during such Conversion Failure an amount equal to 2% of the product of (A) the sum of the number of shares of Common Stock not issued to such Holder on or prior to the Share Delivery Deadline and to which such Holder is entitled, multiplied by (B) the closing price of the Common Stock on the applicable Conversion Date and ending on the applicable Share Delivery Deadline, and (Y) such Holder, upon written notice to the Corporation, may void its Conversion Notice with respect to, and retain or have returned, as the case may be, all, or any portion, of such Series X that has not been converted pursuant to such Conversion Notice; provided that the voiding of a Conversion Notice shall not affect the Corporation’s obligations to make any payments which have accrued prior to the date of such notice pursuant to this Section 5(c)(ii) or otherwise. In addition to the foregoing, if on or prior to the Share Delivery Deadline the Transfer Agent is not participating in the DTC Fast Automated Securities Transfer Program, the Corporation shall fail to issue and deliver to such Holder (or its designee) a certificate and register such shares of Common Stock on the Corporation’s share register or, if the Transfer Agent is participating in the DTC Fast Automated Securities Transfer Program, the Transfer Agent shall fail to credit the balance account of such Holder or such Holder’s designee with DTC for the number of shares of Common Stock to which such Holder is entitled upon such Holder’s exercise hereunder or pursuant to the Corporation’s obligation pursuant to clause (II) below and if on or after such Share Delivery Deadline such Holder purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by such Holder of all or any portion of the number of shares of Common Stock, or a sale of a number of shares of Common Stock equal to all or any portion of the number of shares of Common Stock, issuable upon such conversion that such Holder so is entitled to receive from the Corporation, then, in addition to all other remedies available to such Holder, the Corporation shall, within two (2)Trading Days after receipt of such Holder’s request and in such Holder’s discretion, either: (I) pay cash to such Holder in an amount equal to such Holder’s total purchase price (including brokerage commissions and other out-of-pocket expenses, if any) for the shares of Common Stock so purchased (including by any other Person in respect, or on behalf, of such Holder) (the “Buy-In Price”), at which point the Corporation’s obligation to so issue and deliver such certificate or credit such Holder’s balance account with DTC for the number of shares of Common Stock to which such Holder is entitled upon such Holder’s conversion hereunder (as the case may be) (and to issue such shares of Common Stock) shall terminate, or (II) promptly honor its obligation to so issue and deliver to such Holder a certificate or certificates representing such shares of Common Stock or credit such Holder’s balance account with DTC for the number of shares of Common Stock to which such Holder is entitled upon such Holder’s conversion hereunder (as the case may be) and pay cash to such Holder in an amount equal to the excess (if any) of the Buy-In Price over the product of (x) such number of shares of Common Stock to which such Holder is entitled multiplied by (y) the lowest Closing Sale Price of the Common Stock on any Trading Day during the period commencing on the date of the applicable Conversion Notice and ending on the date of such issuance and payment under this clause (ii).

 

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(iii) Registration; Book-Entry. The Corporation shall maintain a register (the “Register”) for the recordation of the names and addresses of the Holders of each share of Series X and the Stated Value of the Series X (the “Registered Series X”). The entries in the Register shall be conclusive and binding for all purposes absent manifest error. The Corporation and each Holder of the Series X shall treat each Person whose name is recorded in the Register as the owner of a share of Series X for all purposes (including the right to receive payments and dividends hereunder) notwithstanding notice to the contrary. A registered share of Series X may be assigned, transferred or sold only by registration of such assignment or sale on the Register. Upon its receipt of a written request to assign, transfer or sell one or more Registered Series X by such Holder thereof, the Corporation shall record the information contained therein in the Register and issue one or more new shares of Series X in the same aggregate Stated Value as the Stated Value of the surrendered Series X to the designated assignee or transferee pursuant to Section 17, provided that if the Corporation does not so record an assignment, transfer or sale (as the case may be) of such Series X shares within two (2) Trading Days of such a request, then the Register shall be automatically deemed updated to reflect such assignment, transfer or sale (as the case may be). Notwithstanding anything to the contrary set forth in this Section 5, following conversion of any Series X in accordance with the terms hereof, the applicable Holder shall not be required to physically surrender such Series X to the Corporation unless (A) the full or remaining number of Series X shares represented by the applicable Series X Certificate are being converted (in which event such certificate(s) shall be delivered to the Corporation as contemplated by this Section 5(c)(iii)) or (B) such Holder has provided the Corporation with prior written notice (which notice may be included in a Conversion Notice) requesting reissuance of Series X upon physical surrender of the applicable Series X Certificate. Each Holder and the Corporation shall maintain records showing the Stated Value and dividends converted and/or paid (as the case may be) and the dates of such conversions and/or payments (as the case may be) or shall use such other method, reasonably satisfactory to such Holder and the Corporation, so as not to require physical surrender of a Series X Certificate upon conversion. If the Corporation does not update the Register to record such Stated Value and dividends converted and/or paid (as the case may be) and the dates of such conversions and/or payments (as the case may be) within two (2) Trading Days of such occurrence, then the Register shall be automatically deemed updated to reflect such occurrence. In the event of any dispute or discrepancy, such records of such Holder establishing the number of Series X to which the record holder is entitled shall be controlling and determinative in the absence of manifest error. A Holder and any transferee or assignee, by acceptance of a certificate, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of any Series X, the number of Series X represented by such certificate may be less than the number of Series X stated on the face thereof. Each Series X Certificate shall bear the following legend:

 

ANY TRANSFEREE OR ASSIGNEE OF THIS CERTIFICATE SHOULD CAREFULLY REVIEW THE TERMS OF THE CORPORATION’S CERTIFICATE OF DESIGNATIONS RELATING TO THE SHARES OF SERIES X CONVERTIBLE PREFERRED STOCK REPRESENTED BY THIS CERTIFICATE. THE NUMBER OF SHARES OF SERIES X CONVERTIBLE PREFERRED STOCK REPRESENTED BY THIS CERTIFICATE MAY BE LESS THAN THE NUMBER OF SHARES OF SERIES X CONVERTIBLE PREFERRED STOCK STATED ON THE FACE HEREOF

 

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(iv) Pro Rata Conversion; Disputes. In the event that the Corporation receives a valid Conversion Notice from more than one Holder for the same Conversion Date and the Corporation can convert some, but not all, of such Series X submitted for conversion, the Corporation shall convert from each Holder electing to have Series X converted on such date a pro rata amount of such Holder’s Series X submitted for conversion on such date based on the number of Series X submitted for conversion on such date by such Holder relative to the aggregate number of Series X submitted for conversion on such date. In the event of a dispute as to the number of shares of Common Stock issuable to a Holder in connection with a conversion of Series X, the Corporation shall issue to such Holder the number of shares of Common Stock not in dispute and resolve such dispute in accordance with Section 22.

 

(d) Limitation on Beneficial Ownership. The Corporation shall not effect the conversion of any of the Series X held by a Holder, and such Holder shall not have the right to convert any of the Series X held by such Holder pursuant to the terms and conditions of this Certificate of Designations and any such conversion shall be null and void and treated as if never made, to the extent that after giving effect to such conversion, such Holder (together with such Holder’s Affiliates) would beneficially own in excess of 4.99% (the “Maximum Percentage”) of the shares of Common Stock outstanding immediately after giving effect to such conversion (which provision may be increased to a maximum of 9.99% by such Holder by written notice from such Holder to the Corporation, which notice shall be effective 61 calendar days after the date of such notice). For purposes of the foregoing sentence, the aggregate number of shares of Common Stock beneficially owned by such Holder shall include the number of shares of Common Stock held by such Holder plus the number of shares of Common Stock issuable upon conversion of the Series X with respect to which the determination of such sentence is being made, but shall exclude shares of Common Stock which would be issuable upon (A) conversion of the remaining, nonconverted Series X beneficially owned by such Holder and (B) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Corporation (including any Convertible Securities and Options) beneficially owned by such Holder subject to a limitation on conversion or exercise analogous to the limitation contained in this Section 5(d). For purposes of this Section 5(d), beneficial ownership shall be calculated in accordance with Section 13(d) of the 1934 Act and the rules thereunder. For purposes of determining the number of outstanding shares of Common Stock a Holder may acquire upon the conversion of such Series X without exceeding the Maximum Percentage, such Holder may rely on the number of outstanding shares of Common Stock as reflected in (x) the Corporation’s most recent Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K or other public filing with the SEC, as the case may be, (y) a more recent public announcement by the Corporation or (z) any other written notice by the Corporation or the Transfer Agent, if any, setting forth the number of shares of Common Stock outstanding (the “Reported Outstanding Share Number”). Notwithstanding the preceding, the Holder may rely on the Transfer Agent’s records if the Reported Outstanding Share Number is different than what the Corporation reports. If the Corporation receives a Conversion Notice from a Holder at a time when the actual number of outstanding shares of Common Stock is less than the Reported Outstanding Share Number, the Corporation shall notify such Holder in writing of the number of shares of Common Stock then outstanding and, to the extent that such Conversion Notice would otherwise cause such Holder’s beneficial ownership, as determined pursuant to this Section 5(d), to exceed the Maximum Percentage, such Holder must notify the Corporation of a reduced number of shares of Common Stock to be purchased pursuant to such Conversion Notice. For any reason at any time, upon the written or oral request of any Holder, the Corporation shall within one (1) Trading Day confirm orally and in writing or by electronic mail to such Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Corporation, including such Series X, by such Holder since the date as of which the Reported Outstanding Share Number was reported. In the event that the issuance of shares of Common Stock to a Holder upon conversion of such Series X results in such Holder being deemed to beneficially own, in the aggregate, more than the Maximum Percentage of the number of outstanding shares of Common Stock (as determined under Section 13(d) of the 1934 Act), the number of shares so issued by which such Holder’s beneficial ownership exceeds the Maximum Percentage (the “Excess Shares”) shall be deemed null and void and shall be cancelled ab initio, and such Holder shall not have the power to vote or to transfer the Excess Shares. For purposes of clarity, the shares of Common Stock issuable to a Holder pursuant to the terms of this Certificate of Designations in excess of the Maximum Percentage shall not be deemed to be beneficially owned by such Holder for any purpose including for purposes of Section 13(d) or Rule 16a-1(a)(1) of the 1934 Act. No prior inability to convert such Series X pursuant to this paragraph shall have any effect on the applicability of the provisions of this paragraph with respect to any subsequent determination of convertibility. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 5(d) to the extent necessary to correct this paragraph (or any portion of this paragraph) which may be defective or inconsistent with the intended beneficial ownership limitation contained in this Section 5(d) or to make changes or supplements necessary or desirable to properly give effect to such limitation. The provisions of this Section 5(d) shall be of no further force or effect if the Holder participates in a subsequent transaction with the Corporation which results in the Holder beneficially owning in excess of 4.99% of the number of shares of the Common Stock outstanding which shall include securities convertible into Common Stock which do not contain a beneficial ownership limitation. To ensure compliance with this restriction, each Holder will be deemed to represent to the Corporation each time it delivers a Conversion Notice that such Conversion Notice has not violated the restrictions set forth in this Section 5(d) and the Corporation shall have no obligation to verify or confirm the accuracy of such determination. The limitations contained in this Section 5(d) shall apply to a successor holder of Series X.

 

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(e) Triggering Event Conversion. Subject to Section 5(d) and provided that the Common Stock Increase has been effected, at any time during the period commencing on the date of the occurrence of a Triggering Event and ending on the date of the cure of such Triggering Event, a Holder may, at such Holder’s option, by delivery of a valid Conversion Notice to the Corporation to convert all, or any number of Series X (such Conversion Amount of the Series X to be converted pursuant to this Section 5(e), the “Triggering Event Conversion Amount”) into shares of Common Stock at the Conversion Price. For the avoidance of doubt, no Conversion Notice shall be valid and no conversion of Series X into Common Stock shall be effected, regardless of the occurrence of a Triggering Event, before the Common Stock Increase.

 

6. Triggering Events.

 

(a) Triggering Event. Each of the following events shall constitute a “Triggering Event”:

 

(i) the Corporation does not meet the current public information requirements under Rule 144 in respect of the shares of Common Stock issuable upon conversion of the Series X;

 

(ii) the Corporation ceases to be subject to the periodic reporting provisions of the 1934 Act.

 

(iii) the suspension from trading or failure of the Common Stock to be trading or listed (as applicable) on a Principal Market for a period of ten (10) consecutive Trading Days;

 

(iv) the Corporation’s written notice to any holder of Series X, including, without limitation, by way of public announcement or through any of its agents, at any time, of its intention not to comply, as required, with a request for conversion of any Series X into shares of Common Stock that is requested in accordance with the provisions of this Certificate of Designations, other than pursuant to Section 5(d) hereof;

 

(v) at any time following the tenth (10th) consecutive day that a Holder’s Authorized Share Allocation is less than 100% of the number of shares of Common Stock that such Holder would be entitled to receive upon a conversion, in full, of all of the Series X then held by such Holder (without regard to any limitations on conversion set forth in this Certificate of Designations);

 

(vi) the Corporation’s failure to pay to any Holder any dividend on any dividend date declared by the Board or any other amount when and as due under this Certificate of Designation, or any other Transaction Document, except, in the case of a failure to pay dividends when and as due, in each such case only if such failure remains uncured for a period of at least ten (10)consecutive Trading Days;

 

(vii) the Corporation either (A) fails to cure a Conversion Failure by delivery of the required number of shares of Common Stock within two (2) Trading Days after the applicable Conversion Date on two (2) or more occasions or (B) fails to remove any restrictive legend on any certificate or any shares of Common Stock issued to such Holder upon conversion of any Series X or as and when required by this Certificate of Designations unless otherwise then prohibited by applicable federal securities laws, and any such failure to remove the legend remains uncured for at least five (5) consecutive Trading Days;

 

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(viii) bankruptcy, insolvency, reorganization or liquidation proceedings or other proceedings for the relief of debtors shall be instituted by or against the Corporation or any Subsidiary which shall not be dismissed within sixty (60) days of their initiation;

 

(ix) the commencement by the Corporation or any Subsidiary of a voluntary case or proceeding under any applicable federal, state or foreign bankruptcy, insolvency, reorganization or other similar law or of any other case or proceeding to be adjudicated a bankrupt or insolvent, or the consent by it to the entry of a decree, order, judgment or other similar document in respect of the Corporation or any Subsidiary in an involuntary case or proceeding under any applicable federal, state or foreign bankruptcy, insolvency, reorganization or other similar law or to the commencement of any bankruptcy or insolvency case or proceeding against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable federal, state or foreign law, or the consent by it to the filing of such petition or to the appointment of or taking possession by a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Corporation or any Subsidiary or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the execution of a composition of debts, or the occurrence of any other similar federal, state or foreign proceeding, the taking of corporate action by the Corporation or any Subsidiary in furtherance of any such action or the taking of any action by any Person to commence a Uniform Commercial Code foreclosure sale or any other similar action under federal, state or foreign law;

 

(x) the entry by a court of (i) a decree, order, judgment or other similar document in respect of the Corporation or any Subsidiary of an involuntary case or proceeding under any applicable federal, state or foreign bankruptcy, insolvency, reorganization or other similar law or (ii) a decree, order, judgment or other similar document adjudging the Corporation or any Subsidiary as bankrupt or insolvent, or approving as properly filed a petition seeking liquidation, reorganization, arrangement, adjustment or composition of or in respect of the Corporation or any Subsidiary under any applicable federal, state or foreign law or (iii) a decree, order, judgment or other similar document appointing a custodian, receiver, liquidator, assignee, trustee, sequestrator or other similar official of the Corporation or any Subsidiary or of any substantial part of its property, or ordering the winding up or liquidation of its affairs;

 

(xi) except for the lawsuit filed by Power Up Lending Group, Ltd. against the Corporation and Isaac Dietrich in the Supreme Court of the State of New York, County of Nassau, a final judgment or judgments for the payment of money in excess of $50,000 are rendered against the Corporation and/or any of its Subsidiaries and which judgments are not, within ten (10) days after the entry thereof, bonded, discharged, settled or stayed pending appeal, or are not discharged within thirty (30) days after the expiration of such stay;

 

(xii) other than as specifically set forth in another clause of Section 6(a), the Corporation or any Subsidiary breaches any representation or warranty in any material respect (other than representations or warranties subject to material adverse effect or materiality, which may not be breached in any respect) or any covenant or other term or condition of any Transaction Document, except, in the case of a breach of a covenant or other term or condition that is curable, only if such breach remains uncured for a period of five (5) consecutive Trading Days;

 

(xiii) failing to comply in any material respect with the reporting requirements of the 1934 Act (including, but not limited to, becoming delinquent in its filings);

 

(xiv) providing material non-public information to a Holder of Series X without their prior written consent;

 

(xv) any change in the Corporation’s Transfer Agent; or

 

(xvi) a false or inaccurate certification (including a false or inaccurate deemed certification) by the Corporation as to whether any Triggering Event has occurred.

 

(b) Notice of a Triggering Event. Upon the occurrence of a Triggering Event with respect to the Series X, the Corporation shall within three (3) Trading Days deliver written notice thereof via facsimile, electronic mail or overnight courier (with next day delivery specified) to each Holder.

 

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7. Rights Upon Issuance of Purchase Rights and Other Corporate Events.

 

(a) Purchase Rights. In addition to any adjustments pursuant to Section 8 and 9 below, if at any time the Corporation grants, issues or sells any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property pro rata to all or substantially all of the record holders of any class of Common Stock (the “Purchase Rights”), then each Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which such Holder could have acquired if such Holder had held the number of shares of Common Stock acquirable upon complete conversion of all the Series X (without taking into account any limitations or restrictions on the convertibility of the Series X) held by such Holder immediately prior to the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that such Holder’s right to participate in any such Purchase Right would result in such Holder exceeding the Maximum Percentage, then such Holder shall not be entitled to participate in such Purchase Right to the extent of the Maximum Percentage (and shall not be entitled to beneficial ownership of such shares of Common Stock as a result of such Purchase Right (and beneficial ownership) to the extent of any such excess) and such Purchase Right to such extent shall be held in abeyance for such Holder until such time or times, if ever, as its right thereto would not result in such Holder exceeding the Maximum Percentage), at which time or times such Holder shall be granted such right (and any Purchase Right granted, issued or sold on such initial Purchase Right or on any subsequent Purchase Right to be held similarly in abeyance) to the same extent as if there had been no such limitation.

 

(b) Other Corporate Events. In addition to and not in substitution for any other rights hereunder, prior to the consummation of any Fundamental Transaction pursuant to which holders of shares of Common Stock are entitled to receive securities or other assets with respect to or in exchange for shares of Common Stock (a “Corporate Event”), the Corporation shall make appropriate provision to insure that each Holder will thereafter have the right to receive upon a conversion of all the Series X held by such Holder (i) in addition to the shares of Common Stock receivable upon such conversion, such securities or other assets to which such Holder would have been entitled with respect to such shares of Common Stock had such shares of Common Stock been held by such Holder upon the consummation of such Corporate Event (without taking into account any limitations or restrictions on the convertibility of the Series X contained in this Certificate of Designations) or (ii) in lieu of the shares of Common Stock otherwise receivable upon such conversion, such securities or other assets received by the holders of shares of Common Stock in connection with the consummation of such Corporate Event in such amounts as such Holder would have been entitled to receive had the Series X held by such Holder initially been issued with conversion rights for the form of such consideration (as opposed to shares of Common Stock) at a conversion rate for such consideration commensurate with the Conversion Rate. The provision made pursuant to the preceding sentence shall be in a form and substance satisfactory to the Holder. The provisions of this Section 7 shall apply similarly and equally to successive Corporate Events and shall be applied without regard to any limitations on the conversion of the Series X contained in this Certificate of Designations. “Fundamental Transaction” means the occurrence of the Corporation (i) directly or indirectly, including through subsidiaries, Affiliates or otherwise, in one or more related transactions, (A) consolidating or merging with or into (whether or not the Corporation is the surviving corporation) another Person, (B) selling, assigning, transferring, conveying or otherwise disposing of all or substantially all of the properties or assets of the Corporation or any of its “significant subsidiaries” (as defined in Rule 1-02 of Regulation S-X) to one or more Persons, (C) making, or allowing one or more Persons to make, or allowing the Corporation to be subject to or have its Common Stock be subject to or party to one or more Persons making, a purchase, tender or exchange offer that is accepted by the holders of at least either (x) 50% of the outstanding shares of Common Stock, (y) 50% of the outstanding shares of Common Stock calculated as if any shares of Common Stock held by all Persons making or party to, or affiliated with any Persons making or party to, such purchase, tender or exchange offer were not outstanding; or (z) such number of shares of Common Stock such that all Persons making or party to, or affiliated with any Person making or party to, such purchase, tender or exchange offer, become collectively the beneficial owners (as defined in Rule 13d-3 under the 1934 Act) of at least 50% of the outstanding shares of Common Stock, (D) consummating a stock or share purchase agreement or other business combination (including a reorganization, recapitalization, spin-off or scheme of arrangement) with one or more Persons whereby all such Persons, individually or in the aggregate, acquire, either (x) at least 50% of the outstanding shares of Common Stock, (y) at least 50% of the outstanding shares of Common Stock calculated as if any shares of Common Stock held by all the Persons making or party to, or affiliated with any Persons making or party to, such stock purchase agreement or other business combination were not outstanding; or (z) such number of shares of Common Stock such that the Persons become collectively the beneficial owners (as defined in Rule 13d-3 under the 1934 Act) of at least 50% of the outstanding shares of Common Stock, or (E) reorganize, recapitalize or reclassify its Common Stock.

 

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8. Price Protection. Except for any Exempt Issuance, in the event the Corporation issues or sells any securities including Options or Convertible Securities (or amends any outstanding securities of the Corporation), at an effective price of, or with an exercise or conversion price of less than the Conversion Price, then upon such issuance or sale, the Conversion Price shall be reduced to the sale price or the exercise or conversion price of the securities issued or sold. In case any shares of Common Stock, Convertible Securities or Options are issued in connection with the issue or sale of other securities of the Corporation, together comprising one integrated transaction, each share of Common Stock underlying any such Convertible Securities or Options shall be deemed to be one additional share of Common Stock for the purposes of determining the effective price of the non-Exempt Issuance.

 

9. Adjustment of Conversion Price upon Subdivision or Combination of Common Stock. If the Corporation at any time on or after the Initial Issuance Date subdivides (by any stock split, stock dividend, recapitalization or other similar transaction) one or more classes of its outstanding shares of Common Stock into a greater number of shares, the Conversion Price in effect immediately prior to such subdivision will be proportionately reduced. If the Corporation at any time on or after the Initial Issuance Date combines (by any reverse split, recapitalization or other similar transaction) one or more classes of its outstanding shares of Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such combination will be proportionately increased. Any adjustment pursuant to this Section 9 shall become effective immediately after the effective date of such subdivision or combination. If any event requiring an adjustment under this Section 9 occurs during the period that a Conversion Price is calculated hereunder, then the calculation of such Conversion Price shall be adjusted appropriately to reflect such event.

 

10. Participation in Future Financing.

 

(a) From the date hereof until the date that is the eighteen (18) month anniversary of the Initial Issuance Date, upon any issuance by the Corporation of Common Stock or Common Stock Equivalents for cash consideration, indebtedness or a combination of such in a transaction exempt from registration under the Securities Act (a “Subsequent Financing”), the Holders of the Series X shall have the right to participate in an amount equal to an aggregate of thirty percent (30%) of the Subsequent Financing (the “Participation Maximum”) on the same terms, conditions and price provided for in the Subsequent Financing. At least five (5) Trading Days prior to the closing of the Subsequent Financing, the Corporation shall deliver to each Holder a written notice of its intention to effect a Subsequent Financing (“Pre-Notice”), which Pre-Notice shall ask such Holder if it wants to review the details of such financing (such additional notice, a “Subsequent Financing Notice”). Upon the request of a Holder, for a Subsequent Financing Notice, the Corporation shall promptly, but no later than two (2) Trading Days after such request, deliver a Subsequent Financing Notice to such Holder. The Subsequent Financing Notice shall describe in reasonable detail the proposed terms of such Subsequent Financing, the amount of proceeds intended to be raised thereunder and the Person or Persons through or with whom such Subsequent Financing is proposed to be effected and shall include a term sheet or similar document relating thereto as an attachment.

 

(b) Any Holder desiring to participate in such Subsequent Financing must provide written notice to the Corporation by not later than 5:30 p.m. (New York City time) on the fifth Trading Day after such Holders have received the Subsequent Financing Notice that such Holder is willing to participate in the Subsequent Financing, the amount of such Holder’s participation, and representing and warranting that such Holder has such funds ready, willing, and available for investment on the terms set forth in the Subsequent Financing Notice. If the Corporation receives no such notice from a Holder as of such fifth Trading Day, such Holder shall be deemed to have notified the Corporation that it does not elect to participate.

 

(c) If by 5:30 p.m. (New York City time) on the fifth Trading Day after all of the Holders have received the Pre-Notice, the Corporation receives responses to a Subsequent Financing Notice from Holders seeking to purchase more than the aggregate amount of the Participation Maximum, each such Holder shall have the right to purchase its Pro Rata Portion (as defined below) of the Participation Maximum. “Pro Rata Portion” means the ratio of (x) the amount of Series X issued on the Initial Issuance Date to the Holder participating under this Section 10 and (y) the sum of the aggregate amount of Series X issued on the Initial Issuance Date to all Holders participating under this Section 10.

 

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(d) The Corporation must provide the Holders with a second Subsequent Financing Notice, and the Holders will again have the right of participation set forth above in this Section 10, if the Subsequent Financing subject to the initial Subsequent Financing Notice is not consummated for any reason on the terms set forth in such Subsequent Financing Notice within thirty (30) Trading Days after the date of the initial Subsequent Financing Notice.

 

(e) The Corporation and each Holder agree that if any Holder elects to participate in the Subsequent Financing, the transaction documents related to the Subsequent Financing shall not include any term or provision whereby such Holder shall be required to agree to any restrictions on trading as to any of the securities held by it or be required to consent to any amendment to or termination of, or grant any waiver, release or the like under or in connection with, this Agreement, without the prior written consent of such Holder.

 

(f) Notwithstanding anything to the contrary in this Section 10 and unless otherwise agreed to by such Holder, the Corporation shall either confirm in writing to such Holder that the transaction with respect to the Subsequent Financing has been abandoned or shall publicly disclose its intention to issue the securities in the Subsequent Financing, in either case in such a manner such that such Holder will not be in possession of any material, non-public information, by the tenth (10th) Business Day following delivery of the Subsequent Financing Notice. If by such tenth (10th) Business Day, no public disclosure regarding a transaction with respect to the Subsequent Financing has been made, and no notice regarding the abandonment of such transaction has been received by such Holder, such transaction shall be deemed to have been abandoned and such Holder shall not be deemed to be in possession of any material, non-public information with respect to the Corporation or any of its Subsidiaries.

 

(g) Notwithstanding the foregoing, this Section 10 shall not apply in respect of (i) the issuance of shares of the Corporation’s Series Y Convertible Preferred Stock, (ii) an Exempt Issuance, or (iii) a public offering registered with the SEC.

 

11. Noncircumvention. The Corporation hereby covenants and agrees that the Corporation will not, by amendment of its Certificate of Incorporation, bylaws or through any reorganization, transfer of assets, consolidation, merger, scheme of arrangement, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Certificate of Designations, and will at all times in good faith carry out all the provisions of this Certificate of Designations and take all action as may be required to protect the rights of the Holders. Without limiting the generality of the foregoing or any other provision of this Certificate of Designations, the Corporation (a) shall not increase the par value of any shares of Common Stock receivable upon the conversion of any Series X above the Conversion Price then in effect, (b) shall take all such actions as may be necessary or appropriate in order that the Corporation may validly and legally issue fully paid and non-assessable shares of Common Stock upon the conversion of Series X and (c) shall, so long as any Series X are outstanding, and upon the filing of an amendment to the Corporation’s Certificate of Incorporation to increase the number of shares of the Corporation’s Common Stock that the Corporation is authorized to issue with the Secretary of State of the State of Delaware, take all action necessary to reserve and keep available out of its authorized and unissued shares of Common Stock, solely for the purpose of effecting the conversion of the Series X, two (2) times the maximum number of shares of Common Stock as shall from time to time be necessary to effect the conversion of the Series X then outstanding (without regard to any limitations on conversion contained herein).

 

12. Authorized Shares.

 

(a) Reservation. So long as any Series X remain outstanding, and upon the effectiveness of the Common Stock Increase, the Corporation shall at all times reserve at least two (2) times the number of shares of Common Stock as shall from time to time be necessary to effect the conversion of all of the Series X then outstanding (without regard to any limitations on conversions) (the “Required Reserve Amount”). The Required Reserve Amount (including each increase in the number of shares so reserved) shall be allocated pro rata among the Holders based on the number of the Series X held by each Holder (the “Authorized Share Allocation”). In the event that a Holder shall sell or otherwise transfer any of such Holder’s Series X, each transferee shall be allocated a pro rata portion of such Holder’s Authorized Share Allocation. If the Required Reserve Amount is not met at such time, any shares of Common Stock reserved and allocated to any Person which ceases to hold any Series X shall be allocated to the remaining Holders of Series X, pro rata based on the number of the Series X then held by the Holders.

 

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(b) Insufficient Authorized Shares. If, notwithstanding Section 12(a) and not in limitation thereof, beginning ninety (90) days from the Initial Issuance Date, while any of the Series X remain outstanding the Corporation does not have a sufficient number of authorized and unreserved shares of Common Stock to satisfy its obligation to reserve for issuance upon conversion of the Series X at least a number of shares of Common Stock equal to the Required Reserve Amount (an “Authorized Share Failure”), then the Corporation shall immediately take all action necessary to increase the Corporation’s authorized shares of Common Stock to an amount sufficient to allow the Corporation to reserve the Required Reserve Amount for the Series X then outstanding. Without limiting the generality of the foregoing sentence, as soon as practicable after the date of the occurrence of an Authorized Share Failure, but in no event later than one hundred and twenty (120) days after the occurrence of such Authorized Share Failure, the Corporation shall use its best efforts to hold a meeting of its stockholders for the approval of an increase in the number of authorized shares of Common Stock. In connection with such meeting, the Corporation shall provide each stockholder with a proxy statement and shall use its best efforts to solicit its stockholders’ approval of such increase in authorized shares of Common Stock and to cause its Board of Directors to recommend to the stockholders that they approve such proposal. In lieu of a meeting of stockholders, the Corporation may effect such action by written consent in accordance with Section 14(c) of the 1934 Act. Except as provided in the first sentence of Section 11(a), in the event that the Corporation is prohibited from issuing shares of Common Stock to a Holder upon any conversion due to the failure by the Corporation to have sufficient shares of Common Stock available out of the authorized but unissued shares of Common Stock (such unavailable number of shares of Common Stock, the “Authorized Failure Shares”), in lieu of delivering such Authorized Failure Shares to such Holder, the Corporation shall pay cash in exchange for the redemption of such portion of the Conversion Amount convertible into such Authorized Failure Shares at a price equal to the sum of (i) the product of (x) such number of Authorized Failure Shares and (y) the average of the Closing Sale Price of the Common Stock based upon the five (5) Trading Days during the period commencing on the date such Holder delivers the applicable Conversion Notice with respect to such Authorized Failure Shares to the Corporation and ending on the date of such issuance under this Section 12(b). Nothing contained in this Section shall limit any obligations of the Corporation under any provision of the Transaction Documents.

 

13. Liquidation, Dissolution, Winding-Up. In the event of a Liquidation Event, the Holders shall be entitled to receive in cash out of the assets of the Corporation, whether from capital or from earnings available for distribution to its stockholders (the “Liquidation Funds”), before any amount shall be paid to the holders of any of shares of Junior Stock, but pari passu with any Parity Stock then outstanding, an amount per share of Series X equal to the greater of (A) the Conversion Amount thereof on the date of such payment or (B) the amount per share such Holder would receive if such Holder converted such Series X into Common Stock immediately prior to the date of such payment, provided that if the Liquidation Funds are insufficient to pay the full amount due to the Holders and holders of shares of Parity Stock, then each Holder and each holder of Parity Stock shall receive a percentage of the Liquidation Funds equal to the full amount of Liquidation Funds payable to such Holder and such holder of Parity Stock as a liquidation preference, in accordance with their respective certificate of designations (or equivalent), as a percentage of the full amount of Liquidation Funds payable to all holders of Series X and all holders of shares of Parity Stock. To the extent necessary, the Corporation shall cause such actions to be taken by each of its Subsidiaries so as to enable, to the maximum extent permitted by law, the proceeds of a Liquidation Event to be distributed to the Holders in accordance with this Section 13. All the preferential amounts to be paid to the Holders under this Section 13 shall be paid or set apart for payment before the payment or setting apart for payment of any amount for, or the distribution of any Liquidation Funds of the Corporation to the holders of shares of Junior Stock in connection with a Liquidation Event as to which this Section 13 applies.

 

14. Distribution of Assets. In addition to any adjustments pursuant to Section 8 and 9, if the Corporation shall declare or make any dividend or other distributions of its assets (or rights to acquire its assets) to any or all holders of shares of Common Stock, by way of return of capital or otherwise (including any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (the “Distributions”), then each Holder, as holders of Series X, will be entitled to such Distributions as if such Holder had held the number of shares of Common Stock acquirable upon complete conversion of the Series X (without taking into account any limitations or restrictions on the conversion of the Series X) immediately prior to the date on which a record is taken for such Distribution or, if no such record is taken, the date as of which the record holders of Common Stock are to be determined for such Distributions (provided, however, that to the extent that such Holder’s right to participate in any such Distribution would result in such Holder exceeding the Maximum Percentage, then such Holder shall not be entitled to participate in such Distribution to the extent of the Maximum Percentage (and shall not be entitled to beneficial ownership of such shares of Common Stock as a result of such Distribution (and beneficial ownership) to the extent of any such excess) and the portion of such Distribution shall be held in abeyance for such Holder until such time or times as its right thereto would not result in such Holder exceeding the Maximum Percentage, at which time or times, if any, such Holder shall be granted such rights (and any rights under this Section 14 on such initial rights or on any subsequent such rights to be held similarly in abeyance) to the same extent as if there had been no such limitation).

 

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15. Voting.

 

(a) No Right to Vote with Common Stock. Except as provided in Section 15(b), the Series X shall not be entitled to vote on any matter except as required by the DGCL. As to all matters for which voting by class is specifically required by the DGCL, each outstanding share of Series X shall be entitled to one vote.

 

(b) Protective Provisions. In addition to any other rights provided by law, except where the vote or written consent of the holders of a greater number of shares is required by law, without first obtaining the affirmative vote at a meeting duly called for such purpose, or the written consent without a meeting, of a majority of the outstanding Series X, including the Required Holder, voting together as a single class, the Corporation shall not: (a) amend or repeal any provision of, or add any provision to, its Certificate of Incorporation or bylaws, or file any certificate of designations or articles of amendment of any series of shares of preferred stock, if such action would adversely alter or change in any respect the preferences, rights, privileges or powers, or restrictions provided for the benefit, of the Series X, regardless of whether any such action shall be by means of amendment to the Certificate of Incorporation or by merger, consolidation or otherwise; (b) increase or decrease (other than by conversion) the authorized number of Series X; (c) without limiting any provision of Section 2, create or authorize (by reclassification or otherwise) any new class or series of shares that has a preference over or is on a parity with the Series X with respect to dividends or the distribution of assets on the liquidation, dissolution or winding up of the Corporation; (d) pay dividends or make any other distribution on any shares of any capital stock of the Corporation junior in rank to the Series X; (e) issue any Series X other than as provided in Section 2; or (f) without limiting any provision of Section 8 and 9, whether or not prohibited by the terms of the Series X, circumvent a right of the Series X.

 

16. Transfer of Series X. A Holder may transfer some or all of its Series X without the consent of the Corporation subject to compliance with securities laws.

 

17. Reissuance of Preferred Certificates.

 

(a) Transfer. If any Series X are to be transferred, the applicable Holder shall surrender the applicable Series X Certificate to the Corporation, whereupon the Corporation will forthwith issue and deliver upon the order of such Holder a new Series X Certificate (in accordance with Section 17(d)), registered as such Holder may request, representing the outstanding number of Series X being transferred by such Holder and, if less than the entire outstanding number of Series X is being transferred, a new Series X Certificate (in accordance with Section 17(d)) to such Holder representing the outstanding number of Series X not being transferred. Such Holder and any assignee, by acceptance of the Series X Certificate, acknowledge and agree that, by reason of the provisions of Section 5(c)(i) following conversion of any of the Series X, the outstanding number of Series X represented by the Series X may be less than the number of Series X stated on the face of the Series X Certificate.

 

(b) Lost, Stolen or Mutilated Series X Certificate. Upon receipt by the Corporation of evidence reasonably satisfactory to the Corporation of the loss, theft, destruction or mutilation of a Series X Certificate (as to which a written certification and the indemnification contemplated below shall suffice as such evidence), and, in the case of loss, theft or destruction, of any indemnification undertaking by the applicable Holder to the Corporation in customary and reasonable form without the requirement to post a bond or other security and, in the case of mutilation, upon surrender and cancellation of such Series X Certificate, the Corporation shall execute and deliver to such Holder a new Series X Certificate (in accordance with Section 17(d)) representing the applicable outstanding number of Series X.

 

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(c) Series X Certificate Exchangeable for Different Denominations. Each Series X Certificate is exchangeable, upon the surrender hereof by the applicable Holder at the principal office of the Corporation, for a new Series X Certificate or Series X Certificate(s) (in accordance with Section 17(d)) representing in the aggregate the outstanding number of the Series X in the original Series X Certificate, and each such new certificate will represent such portion of such outstanding number of Series X from the original Series X Certificate as is designated by such Holder at the time of such surrender.

 

(d) Issuance of New Series X Certificate. Whenever the Corporation is required to issue a new Series X Certificate pursuant to the terms of this Certificate of Designations, such new Series X Certificate (i) shall represent, as indicated on the face of such Series X Certificate, the number of Series X remaining outstanding (or in the case of a new Series X Certificate being issued pursuant to Section 17(a) or Section 17(c), the number of Series X designated by such Holder which, when added to the number of Series X represented by the other new Series X Certificates issued in connection with such issuance, does not exceed the number of Series X remaining outstanding under the original Series X Certificate immediately prior to such issuance of new Series X Certificate), and (ii) shall have an issuance date, as indicated on the face of such new Series X Certificate, which is the same as the issuance date of the original Series X Certificate.

 

(e) Book Entry. If the Corporation’s Transfer Agent issues the Series X in book entry format, all provisions of this Certificate of Designations as to delivery of Series X certificates shall be disregarded, and the Transfer Agent shall make entries in the stock transfer records in connection with conversions and transfers, as appropriate.

 

18. Remedies, Characterizations, Other Obligations, Breaches and Injunctive Relief. The remedies provided in this Certificate of Designations shall be cumulative and in addition to all other remedies available under this Certificate of Designations and any of the other Transaction Documents, at law or in equity (including a decree of specific performance and/or other injunctive relief), and nothing herein shall limit any Holder’s right to pursue actual and consequential damages for any failure by the Corporation to comply with the terms of this Certificate of Designations. The Corporation covenants to each Holder that there shall be no characterization concerning this instrument other than as expressly provided herein. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to be received by a Holder and shall not, except as expressly provided herein, be subject to any other obligation of the Corporation (or the performance thereof). The Corporation acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holders and that the remedy at law for any such breach may be inadequate. The Corporation therefore agrees that, in the event of any such breach or threatened breach, each Holder shall be entitled, in addition to all other available remedies, to specific performance and/or temporary, preliminary and permanent injunctive or other equitable relief from any court of competent jurisdiction in any such case without the necessity of proving actual damages and without posting a bond or other security. The Corporation shall provide all information and documentation to a Holder that is requested by such Holder to enable such Holder to confirm the Corporation’s compliance with the terms and conditions of this Certificate of Designations.

 

19. Attorneys’ Fees.

 

(a) If (i) any shares of Series X are placed in the hands of an attorney to enforce the provisions of this Certificate of Designations or (ii) there occurs any bankruptcy, reorganization, receivership of the Corporation or other proceedings affecting Corporation creditors’ rights and involving a claim under this Certificate of Designations, then the Corporation shall pay the costs incurred by such Holder for such collection, enforcement or action or in connection with such bankruptcy, reorganization, receivership or other proceeding, including attorneys’ fees and disbursements.

 

(b) In addition to the obligations under Section 19(a), in connection with the removal of restrictive legends from shares of Series X, the Corporation shall pay the reasonable attorney’s fees of counsel to any Holder in any amount not to exceed $750 per opinion of counsel. Such payment(s) shall be made within one (1) Trading Day after receipt of a Conversion Notice or other notice from a Holder.

 

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20. Construction; Headings. This Certificate of Designations shall be deemed to be jointly drafted by the Corporation and the Holders and shall not be construed against any such Person as the drafter hereof. The headings of this Certificate of Designations are for convenience of reference and shall not form part of, or affect the interpretation of, this Certificate of Designations. Unless the context clearly indicates otherwise, each pronoun herein shall be deemed to include the masculine, feminine, neuter, singular and plural forms thereof. The terms “including,” “includes,” “include” and words of like import shall be construed broadly as if followed by the words “without limitation.” The terms “herein,” “hereunder,” “hereof” and words of like import refer to this entire Certificate of Designations instead of just the provision in which they are found. Unless expressly indicated otherwise, all section references are to sections of this Certificate of Designations.

 

21. Failure or Indulgence Not Waiver. No failure or delay on the part of a Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. No waiver shall be effective unless it is in writing and signed by an authorized representative of the waiving party. Notwithstanding the foregoing, nothing contained in this Section 21 shall permit any waiver of any provision of Section 19.

 

22. Dispute Resolution.

 

(a) In the case of a dispute relating to the Closing Sale Price, a Conversion Price or a fair market value or the arithmetic calculation of a Conversion Rate, (including a dispute relating to the determination of any of the foregoing), the Corporation or the applicable Holder (as the case may be) shall submit the dispute to the other party via electronic mail (A) if by the Corporation, within two (2) Trading Days after the occurrence of the circumstances giving rise to such dispute or (B) if by such Holder at any time after such Holder learned of the circumstances giving rise to such dispute. If such Holder and the Corporation are unable to promptly resolve such dispute relating to such Closing Sale Price, such Conversion Price or such fair market value, or the arithmetic calculation of such Conversion Rate, at any time after the second (2nd) Trading Day following such initial notice by the Corporation or such Holder (as the case may be) of such dispute to the Corporation or such Holder (as the case may be), then such Holder may, at its sole option, select an independent, reputable investment bank to resolve such dispute.

 

(b) Such Holder and the Corporation shall each deliver to such investment bank (A) a copy of the initial dispute submission so delivered in accordance with the first sentence of this Section 22(a) and (B) written documentation supporting its position with respect to such dispute, in each case, no later than 5:00 p.m. (Eastern time) by the fifth (5th) Trading Day immediately following the date on which such Holder selected such investment bank (the “Dispute Submission Deadline”) (the documents referred to in the immediately preceding clauses (A) and (B) are collectively referred to herein as the “Required Dispute Documentation”) (it being understood and agreed that if either such Holder or the Corporation fails to so deliver all of the Required Dispute Documentation by the Dispute Submission Deadline, then the party who fails to so submit all of the Required Dispute Documentation shall no longer be entitled to (and hereby waives its right to) deliver or submit any written documentation or other support to such investment bank with respect to such dispute and such investment bank shall resolve such dispute based solely on the Required Dispute Documentation that was delivered to such investment bank prior to the Dispute Submission Deadline). Unless otherwise agreed to in writing by both the Corporation and such Holder or otherwise requested by such investment bank, neither the Corporation nor such Holder shall be entitled to deliver or submit any written documentation or other support to such investment bank in connection with such dispute (other than the Required Dispute Documentation).

 

(c) The Corporation and such Holder shall cause such investment bank to determine the resolution of such dispute and notify the Corporation and such Holder of such resolution no later than ten (10) Trading Days immediately following the Dispute Submission Deadline. The fees and expenses of such investment bank shall be borne solely by the Corporation, and such investment bank’s resolution of such dispute shall be final and binding upon all parties absent manifest error.

 

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23. Notices. The Corporation shall provide each Holder of Series X with prompt written notice of all actions taken pursuant to the terms of this Certificate of Designations, including in reasonable detail a description of such action and the reason therefor. Whenever notice is required to be given under this Certificate of Designation, unless otherwise provided herein, such notice must be in writing and shall be given in accordance with Section 5.4 of the Securities Purchase Agreements or in accordance with any other instructions provided by the Holder to the Corporation. The Corporation shall provide each Holder with prompt written notice of all actions taken pursuant to this Certificate of Designations, including in reasonable detail a description of such action and the reason therefore. Without limiting the generality of the foregoing, the Corporation shall give written notice to each Holder (i) immediately upon any adjustment of the Conversion Price, setting forth in reasonable detail, and certifying, the calculation of such adjustment and (ii) at least fifteen (15) days prior to the date on which the Corporation closes its books or takes a record (A) with respect to any dividend or distribution upon the Common Stock, (B) with respect to any grant, issuances, or sales of any Options, Convertible Securities or rights to purchase stock, warrants, securities or other property to holders of shares of Common Stock or (C) for determining rights to vote with respect to any Fundamental Transaction, dissolution or liquidation, provided in each case that such information shall be made known to the public prior to or in conjunction with such notice being provided to such Holder. All notices shall be by email or recognized overnight delivery service, next Trading Day delivery using the addresses of the Corporation as provided to the Holders and the addresses of any Holder as provided by such Holder to the Corporation. The Corporation and the Holders may change their addresses by notice by the Corporation to all Holders or any Holder to the Corporation.

 

24. Governing Law; Exclusive Jurisdiction. This Certificate of Designations shall be construed and enforced in accordance with, and all questions concerning the construction, validity, interpretation and performance of this Certificate of Designations shall be governed by, the internal laws of the State of Delaware, without giving effect to any choice of law or conflict of law provision or rule (whether of the State of Delaware or any other jurisdictions) that would cause the application of the laws of any jurisdictions other than the State of Delaware. Except as otherwise required by this Certificate of Designations, the Corporation hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in New York County, New York, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is brought in an inconvenient forum or that the venue of such suit, action or proceeding is improper. Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law. Nothing contained herein (i) shall be deemed or operate to preclude any Holder from bringing suit or taking other legal action against the Corporation in any other jurisdiction to collect on the Corporation’s obligations to such Holder, or to enforce a judgment or other court ruling in favor of such Holder or (ii) shall limit, or shall be deemed or construed to limit, any provision of Section 21. The Corporation and each Holder hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Certificate of Designations or the transactions contemplated hereby. 

 

25. Severability. If any provision of this Certificate of Designations is prohibited by law or otherwise determined to be invalid or unenforceable by a court of competent jurisdiction, the provision that would otherwise be prohibited, invalid or unenforceable shall be deemed amended to apply to the broadest extent that it would be valid and enforceable, and the invalidity or unenforceability of such provision shall not affect the validity of the remaining provisions of this Certificate of Designations so long as this Certificate of Designations as so modified continues to express, without material change, the original intentions of the parties as to the subject matter hereof and the prohibited nature, invalidity or unenforceability of the provision(s) in question does not substantially impair the respective expectations or reciprocal obligations of the parties or the practical realization of the benefits that would otherwise be conferred upon the parties. The parties will endeavor in good faith negotiations to replace the prohibited, invalid or unenforceable provision(s) with a valid provision(s), the effect of which comes as close as possible to that of the prohibited, invalid or unenforceable provision(s).

 

26. Amendment. This Certificate of Designations or any provision hereof (other than Section 5(d)) may be modified or amended or the provisions hereof waived with the written consent of the Corporation and the Holders of a majority of the Series X then outstanding, which must include the Required Holder as long as Required Holder (or any of its Affiliates) owns at least five percent (5%) of the Series X issued as of the date of the amendment. No waiver shall be effective unless it is in writing and signed by an authorized representative of the waiving party.

 

* * * * *

 

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IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designations of Series X Convertible Preferred Stock of MassRoots, Inc. to be signed by its Chief Executive Officer on this 23rd day of November, 2020.

 

  MASSROOTS, INC.
     
  By: /s/ Isaac Dietrich
    Isaac Dietrich, Chief Executive Officer

 

 

 

 

EXHIBIT I

 

MASSROOTS, INC.

CONVERSION NOTICE

 

Reference is made to the Certificate of Designations, Preferences and Rights of the Series X Convertible Preferred Stock of MassRoots, Inc. (the “Certificate of Designations”). In accordance with and pursuant to the Certificate of Designations, the undersigned hereby elects to convert the number of shares of Series X Convertible Preferred Stock, $0.0001 par value per share (the “Series X”), of MassRoots, Inc., a Delaware corporation (the “Corporation”), indicated below into shares of common stock, $0.001 par value per share (the “Common Stock”), of the Corporation, as of the date specified below. This Conversion Notice shall not be valid until the Common Stock Increase has been accepted by the Secretary of State of the State of Delaware and is effective.

 

Date of Conversion:  

 

Aggregate number of Series X to be converted  
   
Aggregate Stated Value of such Series X to be converted:  
   
Aggregate accrued and unpaid dividends and accrued with respect to such Series X and such aggregate dividends to be converted:  
   
AGGREGATE CONVERSION AMOUNT TO BE CONVERTED:  

 

Please confirm the following information:

 

Conversion Price:  

 

Number of shares of Common Stock to be issued:  

 

Please issue the Common Stock into which the applicable Series X are being converted to Holder, or for its benefit, as follows:

 

  Check here if requesting delivery as a certificate to the following name and to the following address:

 

Issue to:  
   
   

 

  Check here if requesting delivery by Deposit/Withdrawal at Custodian as follows:

 

DTC Participant:  

 

DTC Number:  
Account Number:  

 

 

Exhibit I-1

 

 

 

Date: _____________ __, ___  
   
   
Name of Registered Holder  

 

By:    
  Name:  
  Title:  
     
  Tax ID: __________________________  
  Facsimile: ________________________  
E-mail Address:  

 

 

Exhibit I-2

 

 

 

EXHIBIT II

 

ACKNOWLEDGMENT

 

The Corporation hereby acknowledges this Conversion Notice and hereby directs _________________ to issue the above indicated number of shares of Common Stock in accordance with the Transfer Agent Instructions dated _____________, 20__ from the Corporation and acknowledged and agreed to by ________________________.

 

  MASSROOTS, INC.
     
  By:  
    Name:
    Title:

 

 

Exhibit II

 

 

Exhibit 10.1

 

SECURITIES PURCHASE AGREEMENT*

 

* Schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K and will be provided on a supplemental basis to the Securities and Exchange Commission upon request.

 

This Securities Purchase Agreement (this “Agreement”) is dated as of ________________, 2020, between MassRoots, Inc., a Delaware corporation (the “Company”), and ___________ (the “Purchaser”).

 

WHEREAS, the Company has authorized a new series of convertible preferred stock of the Company designated as Series X Convertible Preferred Stock (the “Preferred Shares”), the terms of which are set forth in the certificate of designation for such series of preferred stock (the “Certificate of Designation”) in the form attached hereto as Exhibit A, which Preferred Shares shall be convertible upon an increase to the Company’s authorized shares of common stock (the “Authorized Shares”) into the Company’s common stock, par value $0.001 per share (the “Common Stock”), in accordance with the terms of the Certificate of Designation;

 

WHEREAS, the Company is seeking to raise a maximum of $2 million (the “Maximum”) in capital in an offering of Preferred Shares to investors (including the Purchaser) (the “Offering”); and

 

WHEREAS, subject to the terms and conditions set forth in this Agreement and pursuant to an exemption from the registration requirements of Section 5 of the Securities Act contained in Section 4(a)(2) thereof and/or Rule 506(b) thereunder, the Company desires to issue and sell to the Purchaser, and the Purchaser desires to purchase from the Company, the Preferred Shares in the Offering as more fully described in this Agreement.

 

NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the Company and the Purchaser agree as follows:

 

ARTICLE I.
DEFINITIONS

 

1.1 Definitions. In addition to the words and terms defined elsewhere in this Agreement, for all purposes of this Agreement, the following terms have the meanings set forth in this Section 1.1:

 

Acquiring Person” shall have the meaning ascribed to such term in Section 4.5.

 

Action” shall have the meaning ascribed to such term in Section 3.1(j).

 

Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person as such terms are used in and construed under Rule 405 under the Securities Act.

 

Authorized Amendment” shall have the meaning ascribed to such term in Section 3.1(f).

 

Board of Directors” means the board of directors of the Company.

 

Business Day” means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States or any day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close.

 

Certificates” means the stock certificates evidencing the Preferred Shares which the Purchaser is purchasing hereunder registered in the name of such Purchaser.

 

Closing” means a closing of the purchase and sale of the Preferred Shares pursuant to Section 2.1(a).

 

Closing Date” means the Trading Day on which all of the Transaction Documents have been executed and delivered by the applicable parties thereto, and all conditions precedent to (i) the Purchaser’s obligations to pay the Subscription Amount and (ii) the Company’s obligations to deliver the Preferred Shares to be issued and sold, in each case, have been satisfied or waived.

 

 

 

  

Common Stock” means the common stock of the Company, par value $0.001 per share, and any other class of securities into which such securities may hereafter be reclassified or changed.

 

Common Stock Equivalents” means any securities of the Company or the Subsidiaries which would entitle the holder thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.

 

Company Counsel” means Mitchell Silberberg & Knupp LLP.

 

Escrow Agent” means Nason, Yeager, Gerson, Harris & Fumero, P.A.

 

Escrow Agreement” means the escrow agreement, in the form of Exhibit B.

 

Evaluation Date” shall have the meaning ascribed to such term in Section 3.1(s).

 

Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.

 

Exempt Issuance” has the meaning ascribed to it in the Certificate of Designation.

 

FCPA” means the Foreign Corrupt Practices Act of 1977, as amended.

 

GAAP” shall have the meaning ascribed to such term in Section 3.1(h).

 

Indebtedness” shall have the meaning ascribed to such term in Section 3.1(aa).

 

Initial Closing” shall mean the first Closing of this offering.

 

Initial Closing Date” shall mean the first Closing Date of this offering.

 

Intellectual Property” means all of the following in any jurisdiction throughout the world: (a) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all U.S. and foreign patents, patent applications, and patent disclosures, together with all reissuances, continuations, continuations-in-part, revisions, extensions, and reexaminations thereof, (b) all trademarks, service marks, brand names, certification marks, trade dress, logos, trade names, domain names, assumed names and corporate names, together with all colorable imitations thereof, and including all goodwill associated therewith, and all applications, registrations, and renewals in connection therewith, (c) all copyrights, and all applications, registrations, and renewals in connection therewith, (d) all trade secrets under applicable state laws and the common law and know-how (including formulas, techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information, and business and marketing plans and proposals), (e) all computer software (including source code, object code, diagrams, data and related documentation), and (f) all copies and tangible embodiments of the foregoing (in whatever form or medium).

 

Intellectual Property Agreement” has the meaning set forth in Section 3.1(p).

 

Liens” means a lien, charge, pledge, security interest, encumbrance, right of first refusal, preemptive right or other restriction.

 

Material Adverse Effect” shall have the meaning assigned to such term in Section 3.1(b).

 

Material Permits” shall have the meaning ascribed to such term in Section 3.1(n).

 

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Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.

 

Pre-Notice” shall have the meaning ascribed to it in the Certificate of Designation

 

Proceeding” means an action, claim, suit, investigation or proceeding (including, without limitation, an informal investigation or partial proceeding, such as a deposition), whether commenced or threatened.

 

Purchaser Party” shall have the meaning ascribed to such term in Section 4.8.

 

Regulation FD” means Regulation FD promulgated by the SEC pursuant to the Exchange Act, as such Regulation may be amended or interpreted from time to time, or any similar rule or regulation hereafter adopted by the SEC having substantially the same purpose and effect as such Regulation.

 

Required Approvals” shall have the meaning ascribed to such term in Section 3.1(e).

 

Rule 144” means Rule 144 promulgated by the SEC pursuant to the Securities Act, as such Rule may be amended or interpreted from time to time, or any similar rule or regulation hereafter adopted by the SEC having substantially the same purpose and effect as such Rule.

 

SEC” means the United States Securities and Exchange Commission.

 

SEC Reports” shall have the meaning ascribed to such term in Section 3.1(h).

 

Securities” means the Preferred Shares and the Shares.

 

Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.

 

Shares” means the Common Stock issuable upon conversion of the Preferred Shares.

 

Short Sales” means all “short sales” as defined in Rule 200 of Regulation SHO under the Exchange Act (but shall not be deemed to include the location and/or reservation of borrowable shares of Common Stock). 

 

Subscription Amount” means, as to the Purchaser, the aggregate amount to be paid for the Preferred Shares purchased hereunder as specified below the Purchaser’s name on the signature page of this Agreement and next to the heading “Subscription Amount,” in United States dollars and in immediately available funds.

 

Subsequent Financing” shall have the meaning ascribed to such term in the Certificate of Designation.

 

Subsequent Financing Notice” shall have the meaning ascribed to such term in the Certificate of Designation.

 

Subsidiary” means with respect to any entity at any date, any direct or indirect corporation, limited or general partnership, limited liability company, trust, estate, association, joint venture or other business entity of which (A) more than 50% of (i) the outstanding capital stock having (in the absence of contingencies) ordinary voting power to elect a majority of the board of directors or other managing body of such entity, (ii) in the case of a partnership or limited liability company, the interest in the capital or profits of such partnership or limited liability company or (iii) in the case of a trust, estate, association, joint venture or other entity, the beneficial interest in such trust, estate, association or other entity business is, at the time of determination, owned or controlled directly or indirectly through one or more intermediaries, by such entity, or (B) is under the actual control of the Company.

 

Trading Day” means a day on which the principal Trading Market is open for trading.

 

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Trading Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the NYSE America, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange, the OTCQB, the OTCQX, or the OTC Pink Marketplace (or any successors to any of the foregoing).

 

Transaction Documents” means this Agreement, the Certificate of Designation and any other documents or agreements executed in connection with the transactions contemplated hereunder.

 

Transfer Agent” means Pacific Stock Transfer Company, and any successor transfer agent of the Company.

 

Variable Rate Transaction” shall have the meaning ascribed to such term in Section 4.12.

 

VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg L.P. (based on a Trading Day from 9:30 a.m. (New York City time) to 4:02 p.m. (New York City time)), (b) if prices for the Common Stock are then reported on the OTC Pink Marketplace maintained by the OTC Markets Group, Inc. (or a similar organization or agency succeeding to its functions of reporting prices), the volume weighted average price of the Common Stock on the first such facility (or a similar organization or agency succeeding to its functions of reporting prices), or (c) in all other cases, the fair market value of a share of Common Stock as determined by the Board of Directors of the Company.

 

ARTICLE II.
PURCHASE AND SALE

 

2.1 Closing. On the Closing Date, upon the terms and subject to the conditions set forth herein, substantially concurrent with the execution and delivery of this Agreement by the parties hereto, the Company agrees to sell, and the Purchaser agrees to purchase the number of Preferred Shares, as is set forth opposite such Purchaser’s name on the Purchaser’s signature page at a price of $20,000 per Preferred Share. The Purchaser shall deliver to the Escrow Agent, via wire transfer immediately available funds equal to such Purchaser’s Subscription Amount as set forth on the signature page hereto executed by the Purchaser, and the Company and the Purchaser shall deliver the other items set forth in Section 2.2 deliverable at the Closing. Upon satisfaction of the covenants and conditions set forth in Sections 2.2 and 2.3, the Closing shall occur at the offices of Company Counsel or such other location as the parties shall mutually agree. After the Initial Closing, the Company will have additional Closings until the Maximum is raised. In no event will the Company raise more than the Maximum from the sale of the Preferred Shares.

 

2.2 Deliveries.

 

(a) On or prior to the Closing Date, the Company shall deliver or cause to be delivered to the Escrow Agent on behalf of the Purchaser the following:

 

(i) this Agreement duly executed by the Company;

 

(ii) Transfer Agent report evidencing that the Preferred Shares were issued (in book-entry form) registered in the name of the Purchaser;

 

(iii) the Escrow Agreement duly executed by the Company;

 

(iv) a reservation letter executed by the Company’s Transfer Agent and the Company in the form attached as Exhibit C; and

 

(v) a Board Consent approving the issuance of the Preferred Shares and the execution of the Transaction Documents on behalf of the Company.

 

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(b) On or prior to the Closing Date, the Purchaser shall deliver or cause to be delivered to the Escrow Agent the following:

 

(i) this Agreement duly executed by the Purchaser;

 

(ii) the Purchaser’s Subscription Amount by wire transfer to the Escrow Agent; and

 

(iii)  the Escrow Agreement duly executed by such Purchaser.

 

2.3 Closing Conditions.

 

(a) The obligations of the Company hereunder in connection with the applicable Closing are subject to the following conditions being met:

 

(i) the accuracy in all material respects (or, to the extent representations or warranties are qualified by materiality or Material Adverse Effect, in all respects) on the Closing Date of the representations and warranties of the Purchaser contained herein (unless as of a specific date therein in which case they shall be accurate as of such date);

 

(ii) all obligations, covenants and agreements of the Purchaser required to be performed at or prior to the Closing Date shall have been performed;

 

(iii) the delivery by the Purchaser of the items set forth in Section 2.2(b) of this Agreement;

 

(b) The respective obligations of the Purchaser hereunder in connection with the applicable Closing are subject to the following conditions being met:

 

(i) the accuracy in all material respects (or, to the extent representations or warranties are qualified by materiality or Material Adverse Effect, in all respects) when made and on the Closing Date of the representations and warranties of the Company contained herein (unless as of a specific date therein);

 

(ii) all obligations, covenants and agreements of the Company required to be performed at or prior to the Closing Date shall have been performed;

 

(iii) the delivery by the Company of the items set forth in Section 2.2(a) of this Agreement;

 

(iv) there shall have been no Material Adverse Effect with respect to the Company since the date hereof;

 

(v) from the date hereof to the Closing Date trading in the Common Stock shall not have been suspended by the SEC or the Company’s principal Trading Market, and, at any time prior to the Closing Date, trading in securities generally as reported by Bloomberg L.P. shall not have been suspended or limited, or minimum prices shall not have been established on securities whose trades are reported by such service, or on any Trading Market, nor shall a banking moratorium have been declared either by the United States or New York State authorities nor shall there have occurred any material outbreak or escalation of hostilities or other national or international calamity of such magnitude in its effect on, or any material adverse change in, any financial market which, in each case, in the reasonable judgment of the Purchaser, makes it impracticable or inadvisable to purchase the Preferred Shares at the applicable Closing;

 

(vi) the Certificate of Designation shall have been filed with the Secretary of State of Delaware and it shall be effective on or prior to the Closing Date.

 

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ARTICLE III.
REPRESENTATIONS AND WARRANTIES

 

3.1 Representations and Warranties of the Company. The Company hereby makes the following representations and warranties to the Purchaser as of the date hereof:

 

(a) Subsidiaries. All of the direct and indirect subsidiaries of the Company are set forth in the SEC Reports. The Company owns, directly or indirectly, all of the capital stock or other equity interests of each Subsidiary free and clear of any Liens, and all of the issued and outstanding shares of capital stock of each Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and similar rights to subscribe for or purchase securities. If the Company has no subsidiaries, all other references to the Subsidiaries or any of them in the Transaction Documents shall be disregarded. The Subsidiaries are listed on Schedule 3.1(a).

 

(b) Organization and Qualification. The Company and each of the Subsidiaries is an entity duly incorporated or otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, with the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted. Neither the Company nor any Subsidiary is in violation nor default of any of the provisions of its respective certificate or articles of incorporation, bylaws or other organizational or charter documents. Each of the Company and the Subsidiaries is duly qualified to conduct business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not have or reasonably be expected to result in: (i) a material adverse effect on the legality, validity or enforceability of any Transaction Document, (ii) a material adverse effect on the results of operations, assets, business, prospects or condition (financial or otherwise) of the Company and the Subsidiaries, taken as a whole, or (iii) a material adverse effect on the Company’s ability to perform in any material respect on a timely basis its obligations under any Transaction Document (any of (i), (ii) or (iii), a “Material Adverse Effect”) and no Proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or curtail such power and authority or qualification.

 

(c) Authorization; Enforcement. The Company has the requisite corporate power and authority to enter into this Agreement and, following the increase to the Authorized Shares in accordance with the Authorized Amendment (as defined below), to consummate the transactions contemplated by this Agreement and each of the other Transaction Documents and otherwise to carry out its obligations hereunder and thereunder. The execution and delivery of this Agreement and each of the other Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary action on the part of the Company and no further action is required by the Company, the Board of Directors or the Company’s stockholders in connection herewith or therewith other than in connection with the Required Approvals. Subject to obtaining the Required Approvals, this Agreement and each other Transaction Document to which it is a party has been (or upon delivery will have been) duly executed by the Company and, when delivered in accordance with the terms hereof and thereof, will constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.

 

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(d) No Conflicts. Except as set forth in Schedule 3.1(d), the execution, delivery and performance by the Company of this Agreement and the other Transaction Documents to which it is a party, the issuance and sale of the Securities and the consummation by it of the transactions contemplated hereby and thereby do not and will not (i) subject to the Required Approvals, conflict with or violate any provision of the Company’s or any Subsidiary’s certificate of incorporation, bylaws or other organizational or charter documents, or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, result in the creation of any Lien upon any of the properties or assets of the Company or any Subsidiary, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing a Company or Subsidiary debt or otherwise) or other understanding to which the Company or any Subsidiary is a party or by which any property or asset of the Company or any Subsidiary is bound or affected, or (iii) subject to the Required Approvals, conflict with or result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company or a Subsidiary is subject (including federal and state securities laws and regulations), or by which any property or asset of the Company or a Subsidiary is bound or affected; except in the case of each of clauses (ii) and (iii), such as could not have or reasonably be expected to result in a Material Adverse Effect.

 

(e) Filings, Consents and Approvals. Except as set forth on Schedule 3.1(e), the Company is not required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other Person in connection with the execution, delivery and performance by the Company of the Transaction Documents, other than: (i) the filings required pursuant to Section 4.4 of this Agreement, (ii) application(s) to each applicable Trading Market for the listing of the Shares for trading thereon in the time and manner required thereby, (iii) such filings as are required to be made under applicable state securities laws and (iv) the consent of the necessary Persons listed on Schedule 3.1(g) (each of (i) thorough (iv) are the “Required Approvals”).

 

(f) Issuance of the Securities. The Preferred Shares are duly authorized and, when issued and paid for in accordance with the applicable Transaction Documents, will be duly and validly issued, fully paid and nonassessable, free and clear of all Liens imposed by the Company. Subject to filing of an amendment (the “Authorized Amendment”) to the Company’s certificate of incorporation with the Secretary of State of the State of Delaware to increase the Company’s authorized Common Stock (with a simultaneous reverse stock split), the Shares, when issued upon conversion of the Preferred Shares in accordance with the Certificate of Designation, will be validly issued, fully paid and nonassessable, free and clear of all Liens imposed by the Company. Within two trading days after the filing of the Authorized Amendment, the Company shall reserve from its duly authorized capital stock a number of shares of Common Stock issuable pursuant to the Preferred Shares equal to the amount set forth in Section 4.9.

 

(g) Capitalization. Except as set forth in the SEC Reports, the capitalization of the Company is as set forth in Schedule 3.1(g). The Company has not issued any capital stock since its most recently filed periodic report under the Exchange Act, other than pursuant to the exercise of employee stock awards under the Company’s equity incentive plans, the issuance of shares of Common Stock to employees pursuant to the Company’s employee stock purchase plans, and pursuant to the conversion and/or exercise of Common Stock Equivalents outstanding as of the date of the most recently filed periodic report under the Exchange Act. No Person has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by the Transaction Documents. Except as set forth in the SEC Reports, as a result of the purchase and sale of the Preferred Shares, or as set forth on Schedule 3.1(g), there are no outstanding options, warrants, scrip rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exercisable or exchangeable for, or giving any Person any right to subscribe for or acquire, any shares of Common Stock or the capital stock of any Subsidiary, or contracts, commitments, understandings or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock, Common Stock Equivalents, or capital stock of any Subsidiary. The issuance and sale of the Securities will not obligate the Company or any Subsidiary to issue shares of Common Stock or other securities to any Person (other than the Purchaser) and will not result in a right of any holder of Company securities to adjust the exercise, conversion, exchange or reset price under any of such securities. Except as set forth on Schedule 3.1(g), there are no outstanding securities or instruments of the Company or any Subsidiary that contain any redemption or similar provisions, and there are no contracts, commitments, understandings or arrangements by which the Company or any Subsidiary is or may become bound to redeem a security of the Company or such Subsidiary. The Company does not have any stock appreciation rights or “phantom stock” plans or agreements or any similar plan or agreement. All of the outstanding shares of capital stock of the Company are duly authorized, validly issued, fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, and none of such outstanding shares was issued in violation of any preemptive rights or similar rights to subscribe for or purchase securities. Subject to receipt of consent from the Persons listed on Schedule 3.1(g), no further approval or authorization of any stockholder, the Board of Directors, or others is required for the issuance and sale of the Preferred Shares. There are no stockholders agreements, voting agreements or other similar agreements with respect to the Company’s capital stock to which the Company is a party or, to the knowledge of the Company, between or among any of the Company’s stockholders.

 

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(h) SEC Reports; Financial Statements. Except as set forth on Schedule 3.1(h), the Company has filed all reports, schedules, forms, statements and other documents required to be filed by the Company under the Securities Act and the Exchange Act, including pursuant to Section 13(a) or 15(d) thereof, for the two years preceding the date hereof (or such shorter period as the Company was required by law or regulation to file such material) (the foregoing materials, including the exhibits thereto and documents incorporated by reference therein, being collectively referred to herein as the “SEC Reports”). As of their respective dates, the SEC Reports complied in all material respects with the requirements of the Securities Act and the Exchange Act, as applicable, and none of the SEC Reports, when filed, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The financial statements of the Company included in the SEC Reports comply in all material respects with applicable accounting requirements and the rules and regulations of the SEC with respect thereto as in effect at the time of filing. Except as set forth on Schedule 3.1(h), such financial statements have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis during the periods involved (“GAAP”), except as may be otherwise specified in such financial statements or the notes thereto and except that unaudited financial statements may not contain all footnotes required by GAAP, and fairly present in all material respects the financial position of the Company and its consolidated Subsidiaries as of and for the dates thereof and the results of operations and cash flows for the periods then ended, subject, in the case of unaudited statements, to normal, immaterial, year-end audit adjustments.

 

(i) Material Changes; Undisclosed Events, Liabilities or Developments. Except as set forth on Schedule 3.1(i), since the date of the latest audited financial statements included within the SEC Reports, except as specifically disclosed in a subsequent SEC Report filed prior to the date hereof, (i) there has been no event, occurrence or development that has had or that could reasonably be expected to result in a Material Adverse Effect, (ii) the Company has not incurred any liabilities (contingent or otherwise) other than (A) trade payables and accrued expenses incurred in the ordinary course of business consistent with past practice and (B) liabilities not required to be reflected in the Company’s financial statements pursuant to GAAP or disclosed in filings made with the SEC, (iii) the Company has not altered its method of accounting, (iv) the Company has not declared or made any dividend or distribution of cash or other property to its stockholders or purchased, redeemed or made any agreements to purchase or redeem any shares of its capital stock and (v) the Company has not issued any equity securities to any officer, director or Affiliate, except pursuant to existing Company equity incentive plans. The Company does not have pending before the SEC any request for confidential treatment of information. Except for the issuance of the Preferred Shares contemplated by this Agreement or as set forth on Schedule 3.1(i), no event, liability, fact, circumstance, occurrence or development has occurred or exists or is reasonably expected to occur or exist with respect to the Company or its Subsidiaries or their respective businesses, prospects, properties, operations, assets or financial condition that would be required to be disclosed by the Company under applicable securities laws at the time this representation is made or deemed made that has not been publicly disclosed at least one Trading Day prior to the date that this representation is made.

 

(j) Litigation. Except as set forth on the SEC Reports, there is no action, suit, inquiry, notice of violation, proceeding or investigation, inquiry or other similar proceeding of any federal or state government unit pending or, to the knowledge of the Company, threatened against or affecting the Company, any Subsidiary or any of their respective properties before or by any court, arbitrator, governmental or administrative agency or regulatory authority (federal, state, county, local or foreign) (collectively, an “Action”) which (i) adversely affects or challenges the legality, validity or enforceability of any of the Transaction Documents or the issuance of the Securities or (ii) could, if there were an unfavorable decision, have or reasonably be expected to result in a Material Adverse Effect. The Company has no reason to believe that an Action will be filed against it in the future. Neither the Company nor any Subsidiary, nor any director or officer thereof, is or has been the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty. There has not been, and to the knowledge of the Company, there is not pending or contemplated, any investigation by the SEC involving the Company or any current or former director or officer of the Company. The SEC has not issued any stop order or other order suspending the effectiveness of any registration statement filed by the Company or any Subsidiary under the Exchange Act or the Securities Act, and the Company has no reason to believe it will do so in the future.

 

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(k) Labor Relations. No labor dispute exists or, to the knowledge of the Company, is imminent with respect to any of the employees of the Company, which could reasonably be expected to result in a Material Adverse Effect. None of the Company’s or its Subsidiaries’ employees is a member of a union that relates to such employee’s relationship with the Company or such Subsidiary, and neither the Company nor any of its Subsidiaries is a party to a collective bargaining agreement, and the Company and its Subsidiaries believe that their relationships with their employees are good. To the knowledge of the Company, no effort is underway to unionize or organize the employees of the Company or any Subsidiary. To the knowledge of the Company, no executive officer of the Company or any Subsidiary, is, or is now expected to be, in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement or non-competition agreement, or any other contract or agreement or any restrictive covenant in favor of any third party, and the continued employment of each such executive officer does not subject the Company or any of its Subsidiaries to any liability with respect to any of the foregoing matters. The Company and its Subsidiaries are in compliance with all U.S. federal, state, local and foreign laws and regulations relating to employment and employment practices, terms and conditions of employment and wages and hours, except where the failure to be in compliance could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. There is no workmen’s compensation liability matter, employment-related charge, complaint, grievance, investigation, inquiry or obligation of any kind pending, or to the Company’s knowledge, threatened, relating to an alleged violation or breach by the Company or its Subsidiaries of any law, regulation or contract that could, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.

 

(l) Compliance. Except as set forth on Schedule 3.1(l), neither the Company nor any Subsidiary: (i) is in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by the Company or any Subsidiary under), nor has the Company or any Subsidiary received notice of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation has been waived), (ii) is in violation of any judgment, decree or order of any court, arbitrator or other governmental authority or (iii) is or has been in violation of any statute, rule, ordinance or regulation of any governmental authority, including without limitation all foreign, federal, state and local laws relating to taxes, environmental protection, occupational health and safety, product quality and safety and employment and labor matters, except in each case as could not have or reasonably be expected to result in a Material Adverse Effect.

 

(m) Environmental Laws. The Company and its Subsidiaries (i) are in compliance with all federal, state, local and foreign laws relating to pollution or protection of human health or the environment (including ambient air, surface water, groundwater, land surface or subsurface strata), including laws relating to emissions, discharges, releases or threatened releases of chemicals, pollutants, contaminants, or toxic or hazardous substances or wastes (collectively, “Hazardous Materials”) into the environment, or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials, as well as all authorizations, codes, decrees, demands, or demand letters, injunctions, judgments, licenses, notices or notice letters, orders, permits, plans or regulations, issued, entered, promulgated or approved thereunder (“Environmental Laws”); (ii) have received all permits licenses or other approvals required of them under applicable Environmental Laws to conduct their respective businesses; and (iii) are in compliance with all terms and conditions of any such permit, license or approval where in each clause (i), (ii) and (iii), the failure to so comply could be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect.

 

(n) Regulatory Permits. The Company and the Subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct their respective businesses as described in the SEC Reports, except where the failure to possess such permits could not reasonably be expected to result in a Material Adverse Effect (“Material Permits”), and neither the Company nor any Subsidiary has received any notice of proceedings relating to the revocation or modification of any Material Permit.

 

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(o) Title to Assets. The Company and the Subsidiaries have good and marketable title in fee simple to all real property owned by them and good and marketable title in all personal property owned by them that is material to the business of the Company and the Subsidiaries, in each case free and clear of all Liens, except for (i) Liens as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and the Subsidiaries, and (ii) Liens for the payment of federal, state or other taxes, for which appropriate reserves have been made therefor in accordance with GAAP and, the payment of which is neither delinquent nor subject to penalties. Any real property and facilities held under lease by the Company and the Subsidiaries are held by them under valid, subsisting and enforceable leases with which the Company and the Subsidiaries are in compliance.

 

(p) Intellectual Property.

 

(i) The Company owns or possesses or has the right to use pursuant to a valid and enforceable written license, sublicense, agreement, or permission all Intellectual Property necessary for the operation of the business of the Company as presently conducted.

 

(ii) The Intellectual Property does not interfere with, infringe upon, misappropriate, or otherwise come into conflict with, any Intellectual Property rights of third parties, and the Company has no knowledge that facts exist which indicate a likelihood of the foregoing. The Company has not received any charge, complaint, claim, demand, or notice alleging any such interference, infringement, misappropriation, or conflict (including any claim that the Company must license or refrain from using any Intellectual Property rights of any third party). To the knowledge of the Company, no third party has interfered with, infringed upon, misappropriated, or otherwise come into conflict with, any Intellectual Property rights of the Company.

 

(iii) The Company has no pending patent applications or applications for registration with respect to any Intellectual Property. Schedule 3.1(p) identifies each license, sublicense, agreement, or other permission that the Company has granted to any third party with respect to any of such Intellectual Property (together with any exceptions). The Company has delivered to the Purchaser correct and complete copies of all such licenses, sublicenses, agreements, and permissions (as amended to date) (“Intellectual Property Agreements”). Schedule 3.1(p) also identifies each registered and unregistered trademark, service mark, trade name, corporate name, URLs or Internet domain name used by the Company in connection with its business and which is not licensed from a third party. With respect to each item of Intellectual Property required to be identified in Schedule 3.1(p):

 

  (A) The Company owns and possesses all right, title, and interest in and to the item, free and clear of any Lien, license, or other restriction or limitation regarding use or disclosure;

 

  (B) The item is not subject to any outstanding injunction, judgment, order, decree, ruling, or charge;

 

  (C) No Action, claim, or demand is pending or, to the knowledge of the Company, is threatened that challenges the legality, validity, enforceability, use, or ownership by the Company; and

 

  (D) The Company has not agreed to indemnify any Person for or against any interference, infringement, misappropriation, or other conflict with respect to the item.

 

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(iv) Schedule 3.1(p)(iv) identifies each item of Intellectual Property that any third party owns and that the Company uses pursuant to license, sublicense, agreement, or permission, excluding off-the-shelf software purchased or licensed by the Company (each, a “Licensed Intellectual Property Agreement”). With respect to each Licensed Intellectual Property Agreement:

 

  (A) The Licensed Intellectual Property Agreement is legal, valid, binding, enforceable, and in full force and effect;

 

  (B) No party to such Licensed Intellectual Property Agreement is in breach or default, and no event has occurred that with notice or lapse of time would constitute a breach or default or permit termination, modification, or acceleration thereunder, which as to any such breach, default or event could have a Material Adverse Effect on the Company;

 

  (C) No party to such Licensed Intellectual Property Agreement has repudiated any provision thereof;

 

  (D) Except as set forth in such Licensed Intellectual Property Agreement, the Company has not received written or verbal notice or otherwise has knowledge that the underlying item of Intellectual Property is subject to any outstanding injunction, judgment, order, decree, ruling, or charge; and

 

  (E) Except as set forth on Schedule 3.1(p)(iv), the Company has not granted any sublicense or similar right with respect to the license, sublicense, agreement, or permission.

 

(v) The Company has complied with and is presently in compliance with all foreign, federal, state, local, governmental (including, but not limited to, the Federal Trade Commission and State Attorneys General), administrative, or regulatory laws, regulations, guidelines, and rules applicable to any personal identifiable information.

 

(vi) Each Person who participated in the creation, conception, invention or development of the Intellectual Property currently used in the business of the Company (each, a “Developer”) which is not licensed from third parties has executed one or more agreements containing industry standard confidentiality, work for hire and assignment provisions, whereby the Developer has assigned to the Company all copyrights, patent rights, Intellectual Property rights and other rights in the Intellectual Property, including all rights in the Intellectual Property that existed prior to the assignment of rights by such Person to the Company.

 

(vii) Each Developer has signed a perpetual non-disclosure agreement with the Company.

 

(q) Insurance. The Company and the Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which the Company and the Subsidiaries are engaged. Neither the Company nor any Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business without a significant increase in cost.

 

(r) Transactions With Affiliates and Employees. Except as set forth in the SEC Reports or as a result of the transactions contemplated hereby, none of the officers or directors of the Company or any Subsidiary and, to the knowledge of the Company, none of the employees of the Company or any Subsidiary is presently a party to any transaction with the Company or any Subsidiary (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, providing for the borrowing of money from or lending of money to or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee, stockholder, member or partner, in each case in excess of $120,000 other than for (i) payment of salary or consulting fees for services rendered, (ii) reimbursement for expenses incurred on behalf of the Company and (iii) other employee benefits, including stock award agreements under any equity incentive plan of the Company.

 

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(s) Sarbanes-Oxley; Internal Accounting Controls. Except as disclosed in the SEC Reports, the Company and the Subsidiaries are in compliance with any and all applicable requirements of the Sarbanes-Oxley Act of 2002 that are effective as of the date hereof, and any and all applicable rules and regulations promulgated by the SEC thereunder that are effective as of the date hereof and as of the Closing Date. The Company and the Subsidiaries maintain a system of internal accounting controls as set forth in the SEC Reports. The Company’s certifying officers have evaluated the effectiveness of the disclosure controls and procedures of the Company and the Subsidiaries as of the end of the period covered by the most recently filed periodic report under the Exchange Act (such date, the “Evaluation Date”). The Company presented in its most recently filed periodic report under the Exchange Act the conclusions of the certifying officers about the effectiveness of the disclosure controls and procedures based on their evaluations as of the Evaluation Date. Since the Evaluation Date, there have been no changes in the internal control over financial reporting (as such term is defined in the Exchange Act) of the Company and its Subsidiaries that have materially affected, or is reasonably likely to materially affect, the internal control over financial reporting of the Company and its Subsidiaries.

 

(t) Certain Fees. No brokerage or finder’s fees or commissions are or will be payable by the Company or any Subsidiary to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the transactions contemplated by the Transaction Documents. The Purchaser shall have no obligation with respect to any fees or with respect to any claims made by or on behalf of other Persons for fees of a type contemplated in this Section that may be due in connection with the transactions contemplated by the Transaction Documents.

 

(u) Investment Company. The Company is not, and is not an Affiliate of, and immediately after receipt of payment for the Preferred Shares, will not be or be an Affiliate of, an “investment company” within the meaning of the Investment Company Act of 1940, as amended. The Company shall conduct its business in a manner so that it will not become an “investment company” subject to registration under the Investment Company Act of 1940, as amended.

 

(v) Registration Rights. Except as set forth on Schedule 3.1(v), no Person has any right to cause the Company or any Subsidiary to effect the registration under the Securities Act of any securities of the Company or any Subsidiary.

 

(w) Listing and Maintenance Requirements. The Common Stock is registered pursuant to Section 12(b) or 12(g) of the Exchange Act, and the Company has taken no action designed to, or which to its knowledge is likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act nor has the Company received any notification that the SEC is contemplating terminating such registration. The Company has not, in the 12 months preceding the date hereof, received notice from any Trading Market on which the Common Stock is or has been listed or quoted to the effect that the Company is not in compliance with the listing or maintenance requirements of such Trading Market. The Company is, and has no reason to believe that it will not in the foreseeable future continue to be, in compliance with all such listing and maintenance requirements. The Common Stock is currently eligible for electronic transfer through the Depository Trust Company or another established clearing corporation and the Company is current in payment of the fees to the Depository Trust Company (or such other established clearing corporation) in connection with such electronic transfer.

 

(x) Application of Takeover Protections. The Company and the Board of Directors have taken all necessary action, if any, in order to render inapplicable any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or other similar anti-takeover provision under the Company’s certificate of incorporation (or similar charter documents) or the laws of its state of incorporation that is or could become applicable to the Purchaser as a result of the Purchaser and the Company fulfilling their obligations or exercising their rights under the Transaction Documents, including without limitation as a result of the Company’s issuance of the Preferred Shares and the Purchaser’s ownership of the Securities.

 

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(y) Disclosure. Except with respect to the material terms and conditions of the transactions contemplated by the Transaction Documents, the Company confirms that neither it nor any other Person acting on its behalf has provided the Purchaser or its agent or counsel with any information that it believes constitutes or might constitute material, non-public information. The Company understands and confirms that the Purchaser will rely on the foregoing representation in effecting transactions in securities of the Company. All of the disclosure furnished by or on behalf of the Company to the Purchaser regarding the Company and its Subsidiaries, their respective businesses and the transactions contemplated hereby, including the schedules to this Agreement (the “Disclosure Schedules”), is true and correct and does not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. The press releases disseminated by the Company during the twelve months preceding the date of this Agreement do not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made and when made, not misleading. The Company acknowledges and agrees that no Purchaser makes or has made any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in Section 3.2 hereof.

 

(z) No Integrated Offering. Assuming the accuracy of the Purchaser’s representations and warranties set forth in Section 3.2, neither the Company, nor any of its Affiliates, nor any Person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would cause this offering of the Preferred Shares to be integrated with prior offerings by the Company for purposes of any applicable stockholder approval provisions of any Trading Market on which any of the securities of the Company are listed or designated.

 

(aa) Solvency. Based on the consolidated financial condition of the Company as of the Closing Date, after giving effect to the receipt by the Company of the proceeds from the sale of the Preferred Shares hereunder, (i) the fair saleable value of the Company’s assets exceeds the amount that will be required to be paid on or in respect of the Company’s existing debts and other liabilities (including known contingent liabilities) as they mature, (ii) the Company’s assets do not constitute unreasonably small capital to carry on its business as now conducted and as proposed to be conducted including its capital needs taking into account the particular capital requirements of the business conducted by the Company, consolidated and projected capital requirements and capital availability thereof, and (iii) the current cash flow of the Company, together with the proceeds the Company would receive, were it to liquidate all of its assets, after taking into account all anticipated uses of the cash, would be sufficient to pay all amounts on or in respect of its liabilities when such amounts are required to be paid. The Company does not intend to incur debts beyond its ability to pay such debts as they mature (taking into account the timing and amounts of cash to be payable on or in respect of its debt). The Company has no knowledge of any facts or circumstances which lead it to believe that it will file for reorganization or liquidation under the bankruptcy or reorganization laws of any jurisdiction within one year from the Closing Date. The SEC Reports and Schedule 3.1(aa) set forth as of the date hereof all outstanding secured and unsecured Indebtedness of the Company or any Subsidiary, or for which the Company or any Subsidiary has commitments. For the purposes of this Agreement, “Indebtedness” means (x) any liabilities for borrowed money or amounts owed in excess of $10,000 (other than trade accounts payable incurred in the ordinary course of business), (y) all guaranties, endorsements and other contingent obligations in respect of indebtedness of others, whether or not the same are or should be reflected in the Company’s consolidated balance sheet (or the notes thereto), except guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business; and (z) the present value of any lease payments in excess of $10,000 due under leases required to be capitalized in accordance with GAAP. Except as set forth in Schedule 3.1(aa), neither the Company nor any Subsidiary is in default with respect to any Indebtedness.

 

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(bb) Tax Status. Except for matters that would not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect, the Company and its Subsidiaries each (i) has made or filed all United States federal, state and local income and all foreign income and franchise tax returns, reports and declarations required by any jurisdiction to which it is subject, (ii) has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations and (iii) has set aside on its books provision reasonably adequate for the payment of all material taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company or of any Subsidiary know of no basis for any such claim.

 

(cc) Foreign Corrupt Practices. Neither the Company nor any Subsidiary, nor to the knowledge of the Company or any Subsidiary, any agent or other person acting on behalf of the Company or any Subsidiary, has (i) directly or indirectly, used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to any foreign or domestic political parties or campaigns from corporate funds, (iii) failed to disclose fully any contribution made by the Company or any Subsidiary (or made by any person acting on its behalf of which the Company is aware) which is in violation of law, or (iv) violated any provision of FCPA.

 

(dd) Accountants. The Company’s accounting firm is set forth in the SEC Reports. To the knowledge and belief of the Company, such accounting firm (i) is a registered public accounting firm as required by the Exchange Act and (ii) has expressed its opinion with respect to the financial statements included in the Company’s Annual Report for the fiscal year ended December 31, 2019.

 

(ee) Acknowledgment Regarding Purchaser’s Purchase of Preferred Shares. The Company acknowledges and agrees that the Purchaser is acting solely in the capacity of an arm’s length purchaser with respect to the Transaction Documents and the transactions contemplated thereby. The Company further acknowledges that no Purchaser is acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated thereby and any advice given by any Purchaser or any of their respective representatives or agents in connection with the Transaction Documents and the transactions contemplated thereby is merely incidental to the Purchaser’s purchase of the Preferred Shares. The Company further represents to the Purchaser that the Company’s decision to enter into this Agreement and the other Transaction Documents has been based solely on the independent evaluation of the transactions contemplated hereby by the Company and its representatives.

 

(ff) Acknowledgement Regarding Purchaser’s Trading Activity. Notwithstanding anything in this Agreement or elsewhere to the contrary (except for Sections 3.2(f) and 4.13 hereof), it is understood and acknowledged by the Company that: (i) the Purchaser has not been asked by the Company to agree, nor has the Purchaser agreed, to desist from purchasing or selling, long and/or short, securities of the Company, or “derivative” securities based on securities issued by the Company or to hold the Securities for any specified term; (ii) past or future open market or other transactions by any Purchaser, specifically including, without limitation, Short Sales or “derivative” transactions, before or after the closing of this or future private placement transactions, may negatively impact the market price of the Company’s publicly-traded securities; (iii) any Purchaser, and counter-parties in “derivative” transactions to which the Purchaser is a party, directly or indirectly, presently may have a “short” position in the Common Stock, and (iv) the Purchaser shall not be deemed to have any affiliation with or control over any arm’s length counter-party in any “derivative” transaction. The Company further understands and acknowledges that (y) the Purchaser may engage in hedging activities at various times during the period that the Securities are outstanding, and (z) such hedging activities (if any) could reduce the value of the existing stockholders’ equity interests in the Company at and after the time that the hedging activities are being conducted.  The Company acknowledges that such aforementioned hedging activities do not constitute a breach of any of the Transaction Documents.

 

(gg) Regulation M Compliance.  The Company has not, and to its knowledge no one acting on its behalf has, (i) taken, directly or indirectly, any action designed to cause or to result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of any of the Securities, (ii) sold, bid for, purchased, or, paid any compensation for soliciting purchases of, any of the Securities, or (iii) paid or agreed to pay to any Person any compensation for soliciting another to purchase any other securities of the Company.

 

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(hh) Private Placement. Assuming the accuracy of the Purchaser’s representations and warranties set forth in Section 3.2, no registration under the Securities Act is required for the offer and sale of the Securities.

 

(ii) No General Solicitation. Neither the Company nor any person acting on behalf of the Company has offered or sold any of the Securities by any form of general solicitation or general advertising. The Company has offered the Preferred Shares for sale only to the Purchaser and certain other “accredited investors” within the meaning of Rule 501 under the Securities Act.

 

(jj) No Disqualification Events.  With respect to the Preferred Shares to be offered and sold hereunder in reliance on Rule 506(b) under the Securities Act, none of the Company, any of its predecessors, any affiliated issuer, any director, executive officer, other officer of the Company participating in the offering hereunder, any beneficial owner of 20% or more of the Company’s outstanding voting equity securities, calculated on the basis of voting power, nor any promoter (as that term is defined in Rule 405 under the Securities Act) connected with the Company in any capacity at the time of sale, nor any Person, including a placement agent, who will receive a commission or fees for soliciting purchasers (each, an “Issuer Covered Person” and, together, “Issuer Covered Persons”) is subject to any of the “Bad Actor” disqualifications described in Rule 506(d)(1)(i) to (viii) under the Securities Act (a “Disqualification Event”), except for a Disqualification Event covered by Rule 506(d)(2) or (d)(3). The Company has exercised reasonable care to determine whether any Issuer Covered Person is subject to a Disqualification Event. The Company has complied, to the extent applicable, with its disclosure obligations under Rule 506(e), and has furnished to the Purchaser a copy of any disclosures provided thereunder.

 

(kk) Notice of Disqualification Events. The Company will notify the Purchaser in writing, prior to the Closing Date of (i) any Disqualification Event relating to any Issuer Covered Person and (ii) any event that would, with the passage of time, reasonably be expected to become a Disqualification Event relating to any Issuer Covered Person, in each case of which it is aware.

 

(ll) Office of Foreign Assets Control. Neither the Company nor any Subsidiary nor, to the Company's knowledge, any director, officer, agent, employee or affiliate of the Company or any Subsidiary is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“OFAC”).

 

(mm) U.S. Real Property Holding Corporation. The Company is not and has never been a U.S. real property holding corporation within the meaning of Section 897 of the Internal Revenue Code of 1986, as amended, and the Company shall so certify upon Purchaser’s request.

 

(nn) Bank Holding Company Act. Neither the Company nor any of its Subsidiaries or Affiliates is subject to the Bank Holding Company Act of 1956, as amended (the “BHCA”) and to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Neither the Company nor any of its Subsidiaries or Affiliates owns or controls, directly or indirectly, five percent (5%) or more of the outstanding shares of any class of voting securities or twenty-five percent or more of the total equity of a bank or any entity that is subject to the BHCA and to regulation by the Federal Reserve. Neither the Company nor any of its Subsidiaries or Affiliates exercises a controlling influence over the management or policies of a bank or any entity that is subject to the BHCA and to regulation by the Federal Reserve.

 

(oo) Money Laundering. The operations of the Company and its Subsidiaries are and have been conducted at all times in compliance with applicable financial record-keeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, applicable money laundering statutes and applicable rules and regulations thereunder (collectively, the “Money Laundering Laws”), and no Action or Proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any Subsidiary with respect to the Money Laundering Laws is pending or, to the knowledge of the Company or any Subsidiary, threatened.

 

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(pp) Increase of Authorized Shares. Within 45 days of the Initial Closing Date, the Company shall file with the SEC a preliminary proxy statement (the “Original Filing”) in accordance with Regulation 14A promulgated under the Exchange Act notifying the Company’s stockholders of a special meeting to amend the Company’s Certificate of Incorporation to increase the number of Authorized Shares from 510,000,000 shares to 960,000,000 shares. The Company shall use its commercially reasonable efforts to file any amendment to the Original Filing, if required, within 5 Business Days following the receipt of comments from the SEC to the Original Filing, and shall use its commercially reasonable efforts to file a definitive proxy statement within 2 Business Days following the Commission’s notification that it has no further comments to the Original Filing, as it may have been amended.

 

3.2 Representations and Warranties of the Purchaser. The Purchaser, for itself and for no other Purchaser, hereby represents and warrants as of the date hereof and as of the Closing Date to the Company as follows (unless as of a specific date therein):

 

(a) Organization; Authority. The Purchaser is either an individual or an entity duly incorporated or formed, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation with full right, corporate, partnership, limited liability company or similar power and authority to enter into and to consummate the transactions contemplated by this Agreement and otherwise to carry out its obligations hereunder and thereunder. The execution and delivery of this Agreement and performance by the Purchaser of the transactions contemplated by this Agreement have been duly authorized by all necessary corporate, partnership, limited liability company or similar action, as applicable, on the part of the Purchaser. Each Transaction Document to which it is a party has been duly executed by the Purchaser, and when delivered by the Purchaser in accordance with the terms hereof, will constitute the valid and legally binding obligation of the Purchaser, enforceable against it in accordance with its terms, except: (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.

 

(b) Understandings or Arrangements. The Purchaser is acquiring the Preferred Shares as principal for its own account and has no direct or indirect arrangement or understandings with any other persons to distribute or regarding the distribution of such Preferred Shares (this representation and warranty not limiting the Purchaser’s right to sell the Securities in compliance with applicable federal and state securities laws). The Purchaser is acquiring the Preferred Shares hereunder in the ordinary course of its business. The Purchaser understands that the Securities are “restricted securities” and have not been registered under the Securities Act or any applicable state securities law and is acquiring such Preferred Shares as principal for its own account and not with a view to or for distributing or reselling such Securities or any part thereof in violation of the Securities Act or any applicable state securities law, has no present intention of distributing any of such Securities in violation of the Securities Act or any applicable state securities law and has no direct or indirect arrangement or understandings with any other persons to distribute or regarding the distribution of such Securities in violation of the Securities Act or any applicable state securities law (this representation and warranty not limiting the Purchaser’s right to sell such Securities in compliance with applicable federal and state securities laws).

 

(c) Purchaser Status. At the time the Purchaser was offered the Preferred Shares, it was, and as of the date hereof it is, an accredited investor within the meaning of Rule 501 under the Securities Act. No Purchaser is subject to any of the “Bad Actor” disqualifications described in Rule 506(d)(1)(i) to (viii) under the Securities Act, except for a Disqualification Event covered by Rule 506(d)(2) or (d)(3).

 

(d) Experience of the Purchaser. The Purchaser, either alone or together with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Preferred Shares, and has so evaluated the merits and risks of such investment. The Purchaser is able to bear the economic risk of an investment in the Preferred Shares and, at the present time, is able to afford a complete loss of such investment.

 

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(e) Access to Information. The Purchaser acknowledges that it has had the opportunity to review the Transaction Documents (including all exhibits and schedules thereto) and the SEC Reports and has been afforded, subject to Regulation FD, (i) the opportunity to ask such questions as it has deemed necessary of, and to receive answers from, representatives of the Company concerning the terms and conditions of the offering of the Preferred Shares and the merits and risks of investing in the Preferred Shares; (ii) access to information about the Company and its financial condition, results of operations, business, properties, management and prospects sufficient to enable it to evaluate its investment; and (iii) the opportunity to obtain such additional information that the Company possesses or can acquire without unreasonable effort or expense that is necessary to make an informed investment decision with respect to the investment.  The Purchaser acknowledges and agrees that neither the Company nor anyone else has provided the Purchaser with any information or advice with respect to the Preferred Shares nor is such information or advice necessary or desired.

 

(f) Certain Transactions and Confidentiality. Other than consummating the transactions contemplated hereunder, the Purchaser has not, nor has any Person acting on behalf of or pursuant to any understanding with the Purchaser, directly or indirectly executed any purchases or sales, including Short Sales, of the securities of the Company during the period commencing as of the time that the Purchaser first received a term sheet (written or oral) from the Company or any other Person representing the Company setting forth the material terms of the transactions contemplated hereunder and ending immediately prior to the execution hereof. Notwithstanding the foregoing, in the case of a Purchaser that is a multi-managed investment vehicle whereby separate portfolio managers manage separate portions of the Purchaser’s assets and the portfolio managers have no direct knowledge of the investment decisions made by the portfolio managers managing other portions of the Purchaser’s assets, the representation set forth above shall only apply with respect to the portion of assets managed by the portfolio manager that made the investment decision to purchase the Preferred Shares covered by this Agreement. Other than to other Persons party to this Agreement or to the Purchaser’s representatives, including, without limitation, its officers, directors, partners, legal and other advisors, employees, agents and Affiliates, the Purchaser has maintained the confidentiality of all disclosures made to it in connection with this transaction (including the existence and terms of this transaction). Notwithstanding the foregoing, for avoidance of doubt, nothing contained herein shall constitute a representation or warranty, or preclude any actions, with respect to the identification of the availability of, or securing of, available shares to borrow in order to effect Short Sales or similar transactions in the future.

 

(g) Limitations on Conversion. The Purchaser understands that the Preferred Shares shall not be convertible into Common Stock for any reason until the increase to the Authorized Amendment is effected.

 

The Company acknowledges and agrees that the representations contained in this Section 3.2 shall not modify, amend or affect the Purchaser’s right to rely on the Company’s representations and warranties contained in this Agreement or any representations and warranties contained in any other Transaction Document or any other document or instrument executed and/or delivered in connection with this Agreement or the consummation of the transaction contemplated hereby.

 

ARTICLE IV.
OTHER AGREEMENTS OF THE PARTIES

 

4.1 Removal of Legends.

 

(a) The Securities may only be disposed of in compliance with state and federal securities laws. In connection with any transfer of Securities other than pursuant to an effective registration statement or Rule 144, to the Company or to an Affiliate of a Purchaser or in connection with a pledge as contemplated in Section 4.1(b), the Company at its sole cost may require the transferor thereof to provide to the Company an opinion of counsel selected by the transferor and reasonably acceptable to the Company, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration under the Securities Act.

 

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(b) The Purchaser agrees to the imprinting, so long as is required by this Section 4.1, of a legend on any of the Securities in the following form:

 

NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT WITH A REGISTERED BROKER-DEALER OR OTHER LOAN WITH A FINANCIAL INSTITUTION THAT IS AN “ACCREDITED INVESTOR” AS DEFINED IN RULE 501(a) UNDER THE SECURITIES ACT OR OTHER LOAN SECURED BY SUCH SECURITIES.

 

The Company acknowledges and agrees that a Purchaser may from time to time pledge pursuant to a bona fide margin agreement with a registered broker-dealer or grant a security interest in some or all of the Securities to a financial institution that is an “accredited investor” as defined in Rule 501(a) under the Securities Act and who agrees to be bound by the provisions of this Agreement and, if required under the terms of such arrangement, the Purchaser may transfer pledged or secured Securities to the pledgees or secured parties. Such a pledge or transfer would not be subject to approval of the Company and no legal opinion of legal counsel of the pledgee, secured party or pledgor shall be required in connection therewith. Further, no notice shall be required of such pledge. At the appropriate Purchaser’s expense, the Company will execute and deliver such reasonable documentation as a pledgee or secured party of Securities may reasonably request in connection with a pledge or transfer of the Securities.

 

(c) Certificates evidencing the Securities shall not contain any legend (including the legend set forth in Section 4.1(b) hereof): (i) while a registration statement covering the resale of such securities is effective under the Securities Act, (ii) following any sale of such Securities pursuant to Rule 144, (iii) if such Securities are eligible for sale under Rule 144, without the requirement for the Company to be in compliance with the current public information required under Rule 144 as to such Securities and without volume or manner-of-sale restrictions, or (iv) if such legend is not required under applicable requirements of the Securities Act (including Section 4(a)(1), judicial interpretations and pronouncements issued by the staff of the SEC) (the “Effective Date”). The Company shall, at its expense, cause its counsel to issue a legal opinion to the Transfer Agent promptly after the Effective Date if required by the Transfer Agent to effect the removal of the legend hereunder. If all or any portion of Preferred Shares are converted at a time when there is an effective registration statement to cover the resale of the Shares, or if such Shares may be sold under Rule 144 and the Company is then in compliance with the current public information required under Rule 144, or if the Shares may be sold under Rule 144 without the requirement for the Company to be in compliance with the current public information required under Rule 144 as to such Shares and without volume or manner-of-sale restrictions or if such legend is not otherwise required under applicable requirements of the Securities Act (including Section 4(a)(1), judicial interpretations and pronouncements issued by the staff of the SEC) then such Shares shall be issued or reissued free of all legends. The Company agrees that following the effective date of any registration statement or at such time as such legend is no longer required under this Section 4.1(c), it will, no later than two Trading Days following the delivery by a Purchaser to the Company or the Transfer Agent of a certificate representing restricted Shares, issued with a restrictive legend, deliver or cause to be delivered to the Purchaser a certificate representing such Shares that is free from all restrictive and other legends. The Company may not make any notation on its records or give instructions to the Transfer Agent that enlarge the restrictions on transfer set forth in this Section 4.1. Certificates for Shares subject to legend removal hereunder shall be transmitted by the Transfer Agent to the Purchaser by crediting the account of the Purchaser’s prime broker with the Depository Trust Company system as directed by the Purchaser.

 

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(d) In the event a Purchaser shall request delivery of unlegended shares as described in this Section 4.1 and the Company is required to deliver such unlegended shares, (i) it shall pay all fees and expenses associated with or required by the legend removal and/or transfer including but not limited to legal fees, transfer agent fees and overnight delivery charges and taxes, if any, imposed by any applicable government upon the issuance of Common Stock; and (ii) the Company may not refuse to deliver unlegended shares based on any claim that the Purchaser or anyone associated or affiliated with the Purchaser has not complied with Purchaser’s obligations under the Transaction Documents, or for any other reason, unless, an injunction or temporary restraining order from a court, on notice, restraining and or enjoining delivery of such unlegended shares shall have been sought and obtained by the Company and the Company has posted a surety bond for the benefit of the Purchaser in the amount of the greater of (i) 15% of the amount of the aggregate purchase price of the Shares which is subject to the injunction or temporary restraining order, or (ii) the VWAP of the Common Stock on the Trading Day before the issue date of the injunction multiplied by the number of unlegended shares to be subject to the injunction, which bond shall remain in effect until the completion of the litigation of the dispute and the proceeds of which shall be payable to the Purchaser to the extent Purchaser obtains judgment in Purchaser’s favor.

 

4.2 Furnishing of Information.

 

(a) Until no Purchaser owns Securities, the Company covenants to timely file (or obtain extensions in respect thereof and file within the applicable grace period) all reports required to be filed by the Company after the date hereof pursuant to the Exchange Act even if the Company is not then subject to the reporting requirements of the Exchange Act.

 

(b) At any time during the period commencing from the six month anniversary of the date hereof and ending at such time as all Shares may be sold without the requirement for the Company to be in compliance with Rule 144(c)(1) and otherwise without restriction or limitation pursuant to Rule 144, if the Company (i) shall fail for any reason to satisfy the current public information requirement under Rule 144(c) for a period of more than 30 consecutive days or (ii) has ever been an issuer described in Rule 144(i)(1)(i) or becomes an issuer in the future, and the Company shall fail to satisfy any condition set forth in Rule 144(i)(2) for a period of more than 30 consecutive days (a “Public Information Failure”) then, in addition to the Purchaser’s other available remedies, the Company shall pay to a Purchaser, in cash, as partial liquidated damages and not as a penalty, by reason of any such delay in or reduction of its ability to sell the Shares, an amount in cash equal to 2% of the Purchaser’s Subscription Amount on the day of a Public Information Failure and on every 30th day (pro-rated for periods totaling less than thirty days) thereafter until the earlier of (a) the date such Public Information Failure is cured and (b) such time that such public information is no longer required  for the Purchaser to transfer the Shares pursuant to Rule 144. The payments to which a Purchaser shall be entitled pursuant to this Section 4.2(b) are referred to herein as “Public Information Failure Payments.”  Public Information Failure Payments shall be paid on the earlier of (i) the last day of the calendar month during which such Public Information Failure Payments are incurred and (ii) the second Business Day after the event or failure giving rise to the Public Information Failure Payments is cured.  In the event the Company fails to make Public Information Failure Payments in a timely manner, such Public Information Failure Payments shall bear interest at the rate of 1.5% per month (prorated for partial months) until paid in full. Nothing herein shall limit the Purchaser’s right to pursue actual damages for the Public Information Failure, and the Purchaser shall have the right to pursue all remedies available to it at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief.

 

(c) Notwithstanding anything else in this Agreement or any other Transaction Document, the Company’s delay in filing a Form 10-Q for the period ended September 30, 2020 shall not constitute a breach of this Agreement or any other Transaction Document, nor any provision hereunder or thereunder, nor will it constitute a “Triggering Event” under the Certificate of Designation, so long as the Company files its Form 10-Q for the period ended September 30, 2020 on or before December 31, 2020.