Massroots (Ticker Symbol: MSRT) is a social media platform where users can share their cannabis experience, meet like-minded people in their area, and stay up to date with local dispensaries and businesses. On February 5th 2016, Massroots announced they had 775,000 users on its network with the anticipation of reaching 1 million users by 4/20.
The purpose of this blog post is to inform readers on the positives and negatives of Massroots and what to watch for before making an investment decision.
Tight Knit User Base
In November of 2014, Massroots was gaining traction on the Apples’ App Store and Apple did not want to be associated with cannabis and decided to remove Massroots from the App Store. By January 2015, over 10,000 users sent emails to Apple asking for the App to be reinstated into the App Store. As these people banded together, their plea to get the app back in the App Store received coverage from major media outlets like Fortune, The Wall Street Journal, and BuzzFeed helping their cause. By February 2015, Apple elected to reinstate Massroots back into the App Store. This is just one instance that demonstrates how impactful Massroots is to the lives of its community of users.
While Instagram and Facebook are the behemoths of the social media industry, they have been on a rampage eradicating cannabis pages from their platforms. With the largest social media outlets refusing to host cannabis pages, this has made Massroots the only place where the cannabis community can openly communicate without the fear of their page being taken down. With Massroots being one of the only social media platforms in the cannabis space, this will force cannabis companies to spend more of their marketing budget on their platform.
Industry Relationships & Critical Investments
In August 2015, Massroots began monetizing their platform and have major brands already on their platform such as Pax, Native Roots, O.pen Vape, and Dixie Elixirs.
Massroots has been acquiring talented individuals with excellent pedigrees to their team and Board of Directors. Back in December 2015, Massroots announced that Terrence Fitch had joined Massroots’ Board of Directors. Terrence has 23 years of marketing, sales and media experience and served 21 years at Coca-Cola Enterprises, where he served as Vice President and General Manager of the Western Region from 2004 to 2013. In February 2016, Massroots hired Jeremiah Marquis as VP of Sales and Business Development. Jeremiah was an early employee at WeddingWire, the largest and most trusted online marketplace connecting merchants with engaged couples and party planners. “When we first started talking with Jeremiah last October, what immediately stood out was how applicable his experience was to MassRoots. WeddingWire has tens of thousands of advertisers worldwide, ranging from local florists to national hotel chains – very similar to how MassRoots has both local dispensaries and national cannabis brands looking to reach our audience,” stated MassRoots CEO Isaac Dietrich.
Massroots made a strategic investment in Flowhub, a seed to sale and point-of-sale company. Flowhub enables Massroots to understand the consumption behavior of their users so they can push notifications, deals, and recommend products to their user base to ensure advertisers are maximizing their ROI on their advertising budget. Below is the 4-step plan between Massroots & Flowhub.
Massroots also laid out they way they plan to monetize their partnership and core business. In Massroots’ December Investor Presentation they said they had 58% of dispensaries in Colorado on their platform. With this large % of dispensaries on the network this provides Flowhub with many warm leads to convert to clients who will in turn provide Massroots with more customer data as more and more dispensaries adopt Flowhub’s software. A current issue in the industry is the lack of real time dispensary menus. This causes medical and recreational users headaches as they see dispensaries carry a certain strain but when they arrive they are told the strain sold out. With Flowhub, Massroots will be capable of posting real time menus on their platform enabling consumers to see inventory levels and eventually be able to order ahead/get their order delivered.
These added features and critical hires will continue to make Massroots the go to app in the cannabis industry and much more than a photo album of cannabis.
Lack of Profitability
Massroots just began monetizing their platform in August of 2015. In their last quarterly report ending September 30th 2015, Massroots reported revenue of $60k with a loss of $1.9 million in operating cash flow. As mentioned above, Massroots only had 6 weeks of the quarter where they generated revenue. Massroots ended the quarter with $345k and with them burning ~$1.9 million in the last quarter, even with a significant revenue increase they would still need to raise capital to continue operations. As expected in November of 2015, Massroots closed on $1 million through an equity raise. While the $1 million was desperately needed, we see Massroots having to raise more capital to make it to their quarter ending March 2016. Due to their revenue growth, the sequential capital requirements will be lessened but investors should expect more dilution in the not to distant future.
Since their September quarter, Massroots announced in a PR that they were growing revenue approximately 20% month over month. On December 5th 2015, Massroots released an Investor Deck claiming to have revenue to date of $200k. We can deduce that they generated ~$140k in revenue in 9 weeks for the quarter ended December 31st 2016.
Massroots’ Fully Diluted Share Count is High
From Massroots’ December Investor Deck they stated to have 46.7 million shares outstanding and their fully diluted share count is 59 million. As one can see below, many of the options have exercise prices significantly below the current stock price. While the exercise of these options will inject cash into the company, the low exercise prices are detrimental to existing shareholders.
Massroots is an interesting investment opportunity that Phyto Partners remains neutral on at this juncture. While we see some positive catalysts that can propel the stock higher, we remain concerned about the long-term liquidity situation with the company. Analyzing their balance sheet more capital will be needed to make it to June 2016 & beyond and we believe investors should not rush to buy stock on the open market until those issues are put to rest. Also, investors haven’t seen a full quarter of the transition to monetize their platform. We think it’s prudent for investors to see how the quarter ending December 31st, 2015 before forming an opinion. While the revenue growth will most likely be substantial, it’s imperative for investors to look for a significant reduction in the company’s burn rate.
Based on comps in the industry, Massroots doesn’t look too expensive but those other companies listed are generating free cash flow thus in turn giving these companies a substantial premium. We expect 2016 to be a monumental year for the company as they try to lower their burn and get close/achieve being cash flows positive. As we gain more knowledge about Massroots’ business operations we will continue to monitor the company for the next few quarters before we elect to place a firm buy or sell recommendation. Phyto Partners is keeping Massroots on their watch list and we think investors should do so as well.