Medical marijuana executive withdraws suit vs Chicago law firm over bungled deal, tax liability
Dan Churney Aug. 26, 2015, 12:27pm

A lawsuit brought by a Prospect Heights developer and entrepreneur in Cook County Circuit Court, claiming his financial interest in a medical marijuana consulting company may go to pot because a Loop law firm allegedly bungled a merger between the marijuana company and two other corporations, has been dismissed.

Anthony J. Baroud filed a two-count malpractice suit Aug. 20 against Pedersen & Houpt. Baroud is a director and chief development officer for Denver-based American Cannabis Company, Inc. The company offers consulting and management services, as well as products, for regulated marijuana cultivators and retailers. Pedersen & Houpt, which was established in 1957, advertises itself as providing clients with “sophisticated and efficient legal commercial and litigation services.”

According to an order dated Dec. 14, Cook County Judge Eileen O'Neil Burke accepted Baroud's voluntary dismissal of the case, without prejudice.

The judge's order does not explain why Baroud requested dismissal of his case.

In the original complaint, Baroud said he, Corey Hollister and three other men retained Pedersen & Houpt in March 2014 to represent them in a reverse merger, in which two private corporations – Hollister & Blacksmith and Cube Root – would merge with a publicly traded company, Brazilian International Media, Inc. The stock of the private companies was to be converted into Brazilian International shares, with Brazilian International changing its name to American Cannabis Corporation, which would then be a public company.

As part of the restructuring, Pedersen & Houpt drafted a Share Exchange Agreement in April 2014, in which Hollister & Blacksmith would issue shares of its common stock to Baroud and his two partners in Cube Root for their shares of Cube Root. In this way, the restructuring would qualify as a reorganization and tax-free exchange under the Internal Revenue Code.

However, on April 17, Pedersen & Houpt revised the terms of the proposed transaction to remove the Share Exchange Agreement, thus eliminating the tax-free exchange for Baroud. The new arrangement called for Hollister & Blacksmith to issue 1,500 shares of stock to Baroud, which would be deemed taxable income. Baroud said he believes the terms were revised at the suggestion of Corey Hollister, of Hollister & Blacksmith.

Baroud said he followed Pedersen’s legal advice and agreed to the new deal in May 2014, without Pedersen telling him he would, in consequence, be receiving an “enormous increase in stock-based compensation and substantially increasing his income tax liability, thus dramatically decreasing the value of the transaction” to him.

Baroud said the estimated tax liability is at least $500,000 on either his 2014 or 2015 tax return. He further said he was put in the unfavorable position of either taking a big hit on his income tax or surrendering his Hollister & Blacksmith shares. Further, the arrangement could decrease Baroud’s leverage in any dispute with American Cannabis Company over his employment.

Baroud said he is losing out, because, if the Share Exchange Agreement had been left in place, he would have been free to sell his shares on the open market.

Baroud is alleging Pedersen & Houpt failed him by not pointing out the possible conflict of interest between him and Corey Hollister, if not others involved in the deal, and for not suggesting he seek advice from an independent lawyer with greater expertise in income tax law.

If Pedersen was out of its depth, as Baroud’s complaint alleges, the firm should have told him the “legal work that it was performing had risen to a level of complexity that exceeded the skills and experience of the attorneys to whom Pedersen delegated this legal work.”

Baroud is maintaining Pedersen & Houpt did not comply with its ethical duties or adhere to the “required standard of care” for lawyers and breached its fiduciary duty.

Baroud had said the damages he suffered would be proven at trial, but would exceed $75,000.

Baroud was represented by the Carmen D. Caruso Law Firm of Chicago.

Investment Agreement with Tangiers Global, LLC

On August 4, 2016, we entered into an amended and restated investment agreement with Tangiers Global, LLC, a Wyoming limited liability company (“Tangiers”). Pursuant to the terms of the investment agreement, Tangiers committed to purchase up to $5,000,000 of our common stock over a period of up to 36 months. From time to time during the 36 month period commencing from the effectiveness of the registration statement, we may deliver a put notice to Tangiers which states the dollar amount that we intend to sell to Tangiers on a date specified in the put notice. The maximum investment amount per notice must be no more than 200% of the average daily trading dollar volume of our common stock for the eight (8) consecutive trading days immediately prior to date of the applicable put notice and such amount must not exceed an accumulative amount of $250,000. The minimum put amount is $5,000. The purchase price per share to be paid by Tangiers will be the 80% of the of the average of the two lowest closing bid prices of the Common Stock during the pricing period applicable to the put notice, provided, however, an additional 10% will be added to the discount of each put if (i) we are not DWAC eligible and (ii) an additional 15% will be added to the discount of each put if we are under DTC “chill” status on the applicable date of the put notice.

In connection with the investment agreement with Tangiers, we also entered into a registration rights agreement with Tangiers, pursuant to which we agreed to use our best efforts to, within 30 days of August 4, 2016, file with the Securities and Exchange Commission a registration statement, covering the resale of 5,829,842 shares of our common stock underlying the investment agreement with Tangiers.

Good afternoon, thank you all for joining MassRoots’ second quarter earnings call. My name is Isaac Dietrich, and I currently serve as MassRoots’ Chief Executive Officer. Before we begin, we’d like to state that this call does not constitute an offer to sell or a solicitation of an offer to buy securities or assets of MassRoots, Inc.

This presentation includes certain statements, estimates and projections provided by MassRoots with respect to anticipated future performance. Such statements, estimates and projections constitute forward looking statements within the meaning of federal securities laws. These forward looking statements are subject to known and unknown risks, which may cause actual results to be materially different from those contemplated by the forward-looking statements.

The recipient of this information is cautioned not to place undue reliance on forward-looking statements. No representations or warranties are made as to the accuracy of such forward looking statements or whether any of the projections included herein will be realized.

MassRoots does not expect to update or otherwise revise this presentation. I’ve prepared some brief remarks covering MassRoots’ revenue growth, Business Model, user growth and Product Development; but the majority of this call will be spent answering questions from you, our shareholders. Questions may be submitted via email to IR@MassRoots.com.

Now on to the call. I’m pleased to report MassRoots generated $492,000 in revenue during the second quarter of 2016, more than all previous quarters in our corporate history combined. This took our cumulative year-to-date revenue to $585,000, of which approximately $325,000 was generated from our core product of digital advertising.

As a digital product, MassRoots is able to scale rapidly with minimal additional cost – the only marginal expense associated with gaining additional users is an increase in server activity. For MassRoots’ main revenue generators, digital advertising and a dispensary locator, the only marginal cost is the credit card processing fee. We believe that as its model continues to mature, we will be able to generate significant revenue with negligible cost of goods sold.

We believe that MassRoots can reach cash-flow positive from its current user base and web traffic. The problem over the past year hasn’t been users– MassRoots sees more eyeballs than many other cannabis websites and apps – the problem has been our products have lacked the core functionality to connect users with the dispensaries and products for which they are looking. We believe that our dispensary finder is a solid first step in fixing this deficiency. With the core functionality now in place, we aim to rapidly iterate and expand on its functionality to include menus with live pricing, product pages with reviews, and top search result placement for paid advertisers. We believe that each of these features will create new revenue streams for our business – Weedmaps reportedly generated over $20 million in revenue in 2015 off of such features.

Revamped MassRoots for Business Portal

We originally introduced MassRoots for Business in early 2015 as an online portal for businesses to schedule posts and view analytics; while useful for businesses, it did not have the features or capacity to scale to millions of dollars in revenue.

When fully developed, the revamped MassRoots for Business portal will consolidate many online marketing functions for cannabis-related business in one central platform. We expect businesses will be able to schedule posts on MassRoots, Facebook and Twitter, purchase advertising on both MassRoots owned-properties as well as third party digital properties, and view actionable, real-time data from MassRoots and third party sources in easy-to-read formats. We believe this will serve as a solid foundation for future business-related features as we prepare to integrate dispensary point-of-sale data later this year.

As of June 30, 2016, we had total currently assets of $147,000 and total current liabilities of $1.7 million – which is not a great balance sheet. Subsequent to the close of the quarter, we have closed $1.6 million in a registered offering at $0.50/share with $0.90 warrants, which puts us within striking distance of being able to fully repay our debts and rebuild our assets.

Expense Reductions

During the six months ending June 30, 2016, we incurred general and administrative expenses of $4,701,000. That is a lot of money. Now $293,956 of that was for common stock issued for services and $1,330,984 was for options issued for services, which slightly dilutes the company’s shares, but doesn’t take cash of the business. So let’s look at the remaining $3,076,000 – there’s about $250,000 in one-time investment banking fees, there’s $293,000 in cost of goods sold primarily for the one-time event the 420 rally, there’s about $557,000 in advertising that we can significantly reduce because we’ve built a great brand that can grow organically, so there’s about $1,976,000 in other expenses, or about $329,000 per month.

During July 2016, the Company eliminated $54,000 in monthly expenses by terminating relationships with certain vendors, reducing headcount from 33 to 24 full-time employees, and utilizing new technological tools to achieve better results with fewer resources. As many of these contracts and agreements had 30, 60 or 90-day termination clauses, we expect these expense reductions not to be fully reflected until the fourth quarter of 2016. Reductions in staff were concentrated on the content, account services, and sales teams, while the team focused on our core product – development – remains fully intact. Even as MassRoots continues to scale its user base and revenues, we do not expect a significant increase in the size of our team as we plan to automate as many processes as possible in a self-service platform for our clients. Like other leaders in the technology field, our plan is to scale through automation and technology, not by increasing our staff and overhead. We believe these expense reductions could result in significant savings for the Company, currently estimated to be approximately $648,000 annually. MassRoots’ management will continue to review for unnecessary expenses on a weekly basis and believe the Company can reach cash-flow positive on a monthly basis by the end of 2016.

The Team

MassRoots has 24 full-time employees working out of headquarters in downtown Denver, Colorado. The majority of these employees are engineers and designers focused on developing new features for the MassRoots platform. We believe that over the long run, a small, talented and close knit team of A will outperform larger teams of B and C. We believe we have found talented individuals at every level – sales representatives who outperform expectations, managers who make architectural decisions that will prevent costly and time-consuming blunders, and engineers developing new features that have the potential to provide significant long term returns.

One of MassRoots’ top priorities in 2016 has been recruiting and retaining some of the top talent in the cannabis and technology industries. In June 2016, we hired Lance Galey as MassRoots’ Chief Technology Officer. Previously, Mr. Galey served as Chief Software Architect of Cloud Services for Autodesk and Vice President and Principle Architect at Salesforce, where he led the architecture and development of numerous core infrastructure and platform services underlying a large portfolio of Salesforce SaaS applications. In 2013, he was selected as the executive MVP for the technology division of Salesforce.com.

State and National Brand Business Model

While MassRoots’ consumer-facing network launched in July 2013, we did not start generating advertising revenue until we crossed a half million users in mid-August 2015. Our clients have primarily been ancillary businesses marketing their products to cannabis consumers through endorsed posts on MassRoots, sponsored content on our blog, and mentions in our email newsletter. It is not necessary for a user to join MassRoots in order for us to generate revenue from them – we are finding that many people will visit our website, join our email newsletter, or view a dispensary’s profile without registering for our MassRoots network.

During the second quarter of 2016, we signed advertising contracts with a total value of $259,450 with 32 of the leading cannabis brands in the industry. As many of these contracts were for 3, 6 or 12-month campaigns, only a portion of the value was realized during the second quarter of 2016, and the rest will be realized over the coming quarters, building a solid foundation on which we can expand.

While the vast majority of MassRoots’ advertising revenue to date has come from brands within the cannabis industry, we have started to see significant interest from mainstream brands and advertising agencies looking to market to cannabis consumers. Uber and Fusion, a division of Univision, became the first mainstream brands to advertise with MassRoots and have opened the doors for other major brands to evaluate the space. We believe that as the regulated cannabis market continues to expand, mainstream brands and advertising agencies will begin to allocate portions of multi-million advertising budgets towards outreach to the millions of cannabis consumers in the United States – especially food, lighter and agricultural brands. We are positioning MassRoots to be one of the first companies to receive these budget allocations.

Local Store Business Model

Up until the beta launch of our dispensary finder in August 2016, we didn’t really have a product for local dispensaries or stores, limiting our market. We now have over 175 dispensary locations paying for a basic listing. With the core functionality now in place, we aim to rapidly iterate and expand on its functionality to include menus with live pricing, product pages with reviews, and top search result placement for paid advertisers. We believe that each of these features will create new revenue streams for our business – with Weedmaps reportedly generating over $20 million in revenue last year off of them.

2016 Elections

MassRoots believes the 2016 elections have the potential to significantly increase the size and scope of the regulated cannabis industry. According to the Marijuana Policy Project, campaigns in Maine, Nevada, Arizona, California, Michigan, Florida, and Massachusetts are expected to succeed in placing initiatives on their states’ ballots for this year’s election.

Historically-speaking, the demographic make-up of the electorate during presidential election years tends to be younger and more diverse than in off-year elections, groups that are generally more supportive of the legalization of cannabis. We believe a number of the state initiatives on this year’s ballot stand a significant chance of becoming law. A 2016 ArcView Market Research Report projects the regulated cannabis industry could grow to $10 billion by 2018 as a result of this year’s elections.

Our business model is designed to benefit from this trend. When a new state passes a medical or recreational cannabis law, we are able to start registering users and businesses in that state with minimal marginal cost. Because MassRoots is not involved in the production or sale of cannabis, we do not have to build outgrow operations, open retail stores, or have a significant physical presence in the state in order to generate revenue. At the same time, MassRoots’ financial model is not tied to the success of a particular location or brand – we believe we will have a significant percentage of all dispensaries and brands on our platform, making MassRoots a play on the industry as a whole.

Sitting at the intersection of healthcare on the medical cannabis side and a vice industry on the recreational cannabis side, we believe the cannabis industry can continue to grow in any economic climate.

MassRoots to Release Second Quarter 2016 Earnings Report and Host Shareholder Conference Call on August 17, 2016

PR Newswire

DENVER, Aug. 16, 2016

DENVER, Aug. 16, 2016 /PRNewswire/ -- MassRoots (OTCQB: MSRT), one of the largest and most active technology platforms for cannabis consumers, will post its financial results for the second quarter ended June 30, 2016, after market close on Wednesday, August 17, 2016. At that time, MassRoots will file its 10-Q with the Securities and Exchange Commission and post a short advisory release containing a link to our quarterly report. Shortly thereafter, MassRoots management will be hosting a shareholder conference call to discuss the Company's business results and outlook.

What: MassRoots Q2 2016 Financial Results and Q&A Conference Call
Date: Wednesday, August 17, 2016
Time: 4:30pm Eastern Daylight Time
Dial-in Number: 1-302-202-1108
Conference Code: 931611

Questions for MassRoots' management may be submitted prior to and during the call to IR@MassRoots.com. A recording of the conference call will be posted to Corporate.MassRoots.com within two hours of the call concluding.

About MassRoots

MassRoots is one of the largest and most active technology platforms for cannabis consumers, businesses and activists with over 900,000 registered users. It is proud to be affiliated with the leading organizations in the cannabis industry, including the ArcView Group and National Cannabis Industry Association. MassRoots has been covered by Fox Business, CNBC, Fortune, Denver Post, and The Financial Times. For more information, please visit MassRoots.com/Investors.



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SOURCE MassRoots