Prepping for MassRoots’ Shareholder Conference Call

It has been a couple of months since MassRoots (OTCQB: MSRT) became a publicly-traded company. Since that time, the company has struggled to see its share price break above the original offering price, which is not a unique phenomenon.

Next Tuesday, July 21, 2015, MassRoots will report its second quarter results through June and will host a conference call afterwards for investors. As a primer we wanted to check in with how MassRoots has been navigating user growth and financial progress, as well as how its industry activism is shaping the company’s branding and corporate image. They are all in their own way key to the company’s future, and by consequence the market capitalization of MSRT.

 

User Growth, Path to Monetization

The company is still showing massive user growth, which for a social media company is inherently more important than revenues or profits. On July 9, MassRoots reported that it had reached 420,000 users—a self-referential target to be sure, but that is also more than 50% user growth just since our last report in the beginning of April. That’s fast, and for the immediate future does not suggest that a plateau is about to be reached.

User growth is the key to the castle—show it and grow it, and you’re in. But show any deceleration in the growth, and the stock price will suffer unless you are already monetizing that user base.

MassRoots has done minimal to zero monetization, and CEO Isaac Dietrich has openly stated that he has no immediate desire to do so until the company reaches 1 million users. Per this letter on the company’s investor relations page, Dietrich talks about the network effect and how it has been leveraged by companies like Uber and Facebook (NASDAQ: FB):

“We believe the single most important thing for MassRoots is continuing to rapidly expand our user-base … giving us the ability to expand its functionality and immediately deploy it to hundreds of thousands of people.

Much like Uber is the dominant taxi app and Tinder is the main dating app, we believe the cannabis industry will have one pre-eminent app with the vast majority of the market share. Network effects, not any patent or technology, will be the primary barrier to entry. We are working tirelessly to make MassRoots that application.”

While the network effect may have strong precedent in its favor as a business strategy, a serious question remains as to how much ad money is actually out there to be spent. Cannabis is a very young industry, and while there is certainly some dispensary advertising at the local and state level in Colorado and Washington, there are no national campaigns that would dare touch cannabis yet.

So for now, bowing down to the logic of the network effect is not only a distinct strategy, it may also be a necessity. While MassRoots states that there is no direct competition in the social-media-for-cannabis space, the company has noted that it is already competing with megasites like Leafly and Weedmaps for limited dispensary ad budgets.

 

Capital Needs Unabated

MassRoots continues to rely solely on doling out shares and/or future equity for cash. There are no credit lines, and the company reported less than $1,000 in revenue in the first quarter ending in March. Meanwhile, the company reported a net loss of $550k as SG&A costs swelled to over $680k. Per the SEC filing, MassRoots said in May that it would need $2.5 million in cash just to sustain operations in the next fiscal year.

According to the latest public comments by Dietrich, MassRoots hopes to hit the 1 million user mark early in 2016. This would be within the fiscal window described above, so if the company sticks to its aforementioned goal of monetizing once it reaches 1 million users, then the $2.5 million figure could be enough to carry the company over the “finish line” of generating revenues.

MassRoots just this week closed a private placement for over $1 million in cash proceeds, placed through members of the ArcView Group. This helps to grow the coffers while outstanding equity warrants figure to fill the remaining fiscal year needs.

The key assumption becomes that once MassRoots is in full monetization mode, it will be able to cover its operating expenses with revenue. It is impossible to project what the company’s quarterly expense outlook will be 9 or 12 months from now. We figure them to be less than the $500-$600k/quarter level we’re seeing now, but social media networks do have increasing technology costs as they scale.

The reason we lay all this out there is because any cash, including the $2.5m for the next year, will dilute ownership of current stockholders. If the full set of in-the-money warrants already issued to raise cash were exercised, the share count would grow over 10%. This is certainly not uncommon—it’s about as rare as sand at the beach to the tech community—but it bears watching by investors.

 

Activism

We noted in our pre-IPO coverage that the company was going to forge its own path when it came to activism. This should not be surprising given Mr. Dietrich’s background in political campaigning and admitted passion for the pulpit when it comes to important issues in the cannabis movement.

Besides the high-profile spat with Apple over the inclusion of the MassRoots app in Apple’s App Store, MassRoots has recently called out TechCrunch over a perceived discriminatory action, and the company seems to fully accept, if not relish, its role as a baton carrier for the desires of its user base. Given that the user base is overwhelmingly millennials who love cannabis, it is not surprising who the company is advocating for, and the tone it takes in its approach.

The stock market is not generally kind to activism for its own sake, but the market can be amenable to activism that helps grow a brand or identify a company in a way that makes it appear indispensable. Indispensability usually leads to revenue and profits down the road.

 

We’ll Be Listening

The key items we would like to hear management talk about on the conference call are the progress being made on the API’s for business, any changes to the user growth projections, and the company’s thoughts on the role it can play in the 2016 election cycle—just a crucial, vital stop on the road to cannabis liberalization.

 

*Author holds no shares of any companies mentioned in this, or any of his articles. All opinions stated here are for informational purposes only. Investors should do their own due diligence before investing in any industry, especially in high-risk areas like cannabis.

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