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MassRoots (MSRT), the Yelp of Cannabis, Moves into Point of Sale Solutions for Dispensaries

07-25-2017


OTC:MSRT
NASDAQ:GWPH
TSX:NSP.V

MassRoots (OTC:MSRT), a company whose name sounds more like a Massachusetts grassroots political organization, is actually a content provider of cannabis information and a social network. It is considered the “Yelp of cannabis” and has a mobile phone app that is used to rate types of cannabis and the outlets that provide it. While there is no dearth of marijuana-oriented social media platforms, there are few available in which to invest. MassRoots is actually a public company trading under the ticker MSRT. It became a public company in October 2016, at that time raising $5 million. It has had unique regulatory issues due to the nature of its content and its conflict with federal law that considers the sale of marijuana illegal. However cannabis has been legalized by a number of states, though some for only medical use. This legal conflict had in the past caused the company’s app from distribution via the Apple iOS App store. Back in November 2014 Apple banned the App, but was restored in February of 2015 due to an outcry from users. Conflict with federal law has also prevented the company from uplisting to NASDAQ from the OTCQB regardless of meeting financial and price listing requirements. Since the stock trades under a dollar, it has not met the minimum price requirement at any rate, although shareholders have already authorized a reverse stock split. 

The company has reached a market value of $50 million despite only booking $135,000 in revenues in the March 31, 2017 quarter and losing $7.4 million. Revenues have been generated almost entirely from advertising. Shareholders no doubt have high expectations for the company’s business model as states move to legalize marijuana throughout the US. Currently to eligible to contribute content to the app, users need to be both over 21, and residents of states other than Indiana, Utah, Wyoming, South Dakota, Nebraska, Kansas, Oklahoma, Texas, Iowa, Missouri, Louisiana, Wisconsin, Indiana, Kentucky, Virginia, West Virginia, Tennessee, North and South Carolinas, Mississippi, Alabama, or Georgia-- a total of 22 states. As of June 2017, 29 states and the District of Columbia have passed laws allowing some degree of medical use of cannabis, while eight of those states and the District of Columbia have also legalized the adult recreational use of cannabis. 

According to a March 2017 Marist poll, 14% of adults in the US are regular (at least once a month) users of marijuana equating to 35 million people. These people would be the most likely users of MassRoots information. 52% of regular users were found to be Millennials. While these 35 million users total a small target market, it is rapidly growing. ArcView Market Research estimated that sales of legal marijuana in North America were $6.7 billion in 2016 and grew 30% from 2015. When using the Yelp comparison note that  restaurant revenues are projected to be $799 billion for 2017 in the US alone. ArcView estimates growth of 25% per year in legal cannabis sales until 2021. Marist found that 83% of Americans surveyed believe in legalization of medical marijuana, while only 49% approve of the legalization of recreational marijuana. ArcView also predicts an additional 14 states will legalize the recreational use of cannabis for adults and two states will legalize medical usage within the next five years. 

Seeking to expand revenue opportunities and capitalize on being an early mover in the cannabis industry, MassRoots has been expanding its product offerings through acquisition. On July 13, 2017, MassRoots closed the acquisition of Odava, paying $1.75 million in stock and $35,000 in cash. There have been no financials released on Odava, but it claims to have dozens of dispensaries as customers and we believe there should be some revenue and probably losses contributed by the acquisition. Odava is a Portland Oregon-based start up currently selling point of sale and compliance solutions to dispensaries in Oregon, Alaska and Colorado with plans to expand to other states including California. Competitors for Odava include Colorado-based Flowhub, California-based Green Bits, Viridian Sciences, MJ Freeway, BioTrackTHC, Trellis, and Oregon-based OMMPOS among others.

Odava offers two main products: one for retailers and one for growers. Both integrate with each other. For dispensaries it offers a SaaS solution called “RETAIL.” It is an iPad-based system that provides:

• A complete state-of-the-art POS system to handle transactions via cash or debit. 
• 24/7 customer support
• A system that provides compliance with current state current recreational and medical marijuana laws in Oregon, Alaska and Colorado included tax payments and required regulatory reporting.  
• Online menus and ordering capability
• Off line order entry
• Reporting dashboard gives information on sales as well as customer profiles.
• Pricing is $0.10 per transaction with 250 transactions per month free plus a $1500 setup fee per location
• Kiosks start at $1,000 and include an iPad, a cash till, receipt and label printers, and optional hand scanners. Integrated scale support is coming soon.

Odava’s second product is called “GROW” and it is an inventory control and tracking system for cannabis producers. It also works with and iPad and has a Bluetooth RFID reader for tracking product from seed stage until it is sold. It has a reporting dashboard, and integrates with banking systems for money transfer. It of course integrates with Odava RETAIL system and provides complete compliance with local state rules and regulations.

On July 24, 2017 MassRoots announced it has closed a $1.2 million private placement of common stock and warrants to be used to fund expansion of Odava’s platform to California. Odava has been integrated into Franwell’s METRC system, which was recently awarded the contract for California’s cannabis regulatory reporting system. It is expected that 1,000 new dispensaries will to be subject to California state regulations for the first time, creating opportunity for Odava to penetrate this state. In California, licensing to grow, test, distribute, and sell marijuana for recreational use is required by law to begin January 2, 2018. It is believed that there may be 20,000 marijuana growers who will want licenses. 

There are a number of other publically traded cannabis related companies and in January 2015 a North American Marijuana Index was created. There are 36 stocks in this index and to be included companies must achieve a quarterly average Trading Score of 20, which equates to a minimum market capitalization of $30 million, daily trading volume of $400k and share price of $0.10. Companies with at least $5 million of revenues over the prior year are exempt from the above trading requirements. The North American Marijuana Index is broken down into two country sub-indices: the U.S. and Canadian Marijuana Indexes.

The largest company in the index is $2.9 billion UK-based GW Pharmaceuticals (NASDAQ:GWPH), a biopharmaceutical company engaged in discovering, developing, and commercializing cannabinoid prescription medicines using botanical extracts derived from the cannabis plant. It generated $13.3 million in revenue in 2016 and lost $82.2 million. The smallest is $14 million market cap Naturally Splendid Enterprises (TSX:NSP.V) based in Canada and traded in Toronto. It develops, produces, commercializes, sells, and licenses hemp-derived foods, Omega foods, nutritional food enhancers, and related products in North America and Asia. In Q1 2017 it sold $469,000 in product and lost $753,000. While the cannabis market continues to grow, intense competition, capital investment, difficulty in valuation, and regulatory and legal hurdles make this a tricky yet promising area for any investor.

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