Mass Roots

10/31/2016

Mass Roots

Ticker MSRT
Price: $ 0.85
52-Wk High $1.76
52-Wk Low $0.38
Shares Out 51M
Market Cap $38M
Source: Yahoo, Google, Bloomberg

Investment Highlights:

MassRoots is one of the largest and most active technology platforms for cannabis consumers and businesses with over 900,000 registered users. It's "Yelp for Cannabis" mobile applications aim to connect its passionate community with the best products and dispensaries in their neighborhoods.

We believe Massroots is worth over $100 million at least versus the $38 million current market capitalization considering the business has 900,000 users. Weedmaps was valued at $300 million with only 750,000 users. Leafly was valued at $425 million with only 1 million users.

Key Takeaways:

End Market Opportunity.
The legal marijuana market is a booming industry that is experiencing record growth. States continue to expand both medical and adult use in the US. According to ArcView Market Research, the US. cannabis market was $5.7 billion in 2015 and is expected to reach $7.2 billion at the end of 2016. By 2020 the market is estimated to reach over $23 billion with a compound annual growth rate of 32%. We need to highlight that the massive regulatory overhang of
the federal ban for the cannabis industry is a material risk factor, which raises a reason for our readers to be cautious regarding their investments in the industry.

Revenue Outlook.
For six months ended June2016, MassRoots generated $585,000 in revenue primarily through digital advertising for dispensaries andcannabis brands in Colorado and California. The company expects to be able to scale its annual revenues to millions of dollars as additional states regulate the production and sale of cannabis.

New members of management team.
The company's leadership is well regarded. The management team, board as well as designers and engineers hail from leading companies such as: Salesforce, Microsoft, Skype, Motorola, Target, Barracuda, Blizzard Entertainment, The Walt Disney Company, Snapchat, Mashable, Coca Cola, and more. MassRoots' team is extremely qualified with the tools to build upon a great business in a thriving industry. Most recently, the company added a new CTO from Salesforce and a new board member from Mashable.

Recent $5 million financing completed:
This occurred just this month October 2016. The fact that the equity was raised demonstrated strong commitment from investors to the company. It also highlights the bright outlook the market sees for the company heading into this year's voting cycle.

Advertising Revenue:
This revenue stream was launched in August 2015. The problem out there is that cannabis companies can't advertise on Facebook or Google, and the "enthusiast" cannabis demographic is incredibly hard to target. MassRoots provides a self-service advertising portal that enables cannabis-related businesses to reach cannabis enthusiasts through MassRoots, social platforms, and cannabis-related websites. The advertising packages offered range from $2,000 per month to $25,000 per month. Advertisers can list on the company's blog, it's Facebook page, or through other forms.

Data Sales:
Another angle to the business is quickly developing, data sales. Dispensaries don't know what to stock their shelves with. Growers don't know what to produce. New companies entering the space don't know where to spend R&D. MassRoots has a business dashboard featuring MassRoots' proprietary product data in easy-to-use, actionable formats. We suspect customers are going to love soon being able to pinpoint what product is best for back pain versus nausea and so on. Moreover, robust product level data is a key stair step for the company to move into other arenas long term, such as facilitating commerce between users and dispensaries, after all MassRoots is tracking all the inventory, with opportunities for loyalty programs as well.

User Growth:
In only a short period of time, MassRoots has grown its user base from nothing to over 900,000. The company adds approximately 30,000 users per month primarily through organic growth. The massive community of the world's top cannabis enthusiasts collectively engage over 300,000 times per day on the network. Average daily mobile users is 1,750,000. The website gets about 200,000 unique visitors per day. We are told the platform could handle 1 billion users tomorrow, if they came. The company has 10-15% of the addressable market in Colorado. Ohio is coming online next year and the company is eager to expand. Customer acquisition costs have been around $0.80 but are now lower. Revenue per user is targeted to soon be running around $1.00.

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Flowhub Investment:
In May 2015, the company invested in Flowhub. Flowhub is building a dispensary point of sale system. Since formally launching in June 2016, Flowhub has facilitated more than 250,000 transactions across dozens of dispensaries in Colorado and Oregon. Through its point-of sale and grow management software, Flowhub automates and streamlines business operations for cannabis dispensaries and cultivators. MassRoots believes Flowhub is at a critical inflection point, poised to scale from dozens of dispensary locations using its platform now to hundreds of locations by the end of the year. Within the next few months, the company believes a significant percentage of all transactions occurring in the regulated cannabis industry will occur on the MassRoots/Flowhub platform. In our view, we really like the company's effort to expand upon the legacy advertising revenue into other forms of more recurring revenue.

Valuation:
By focusing on community-driven reviews rather than static information, MassRoots believes it will enable users to find the best products in the shortest amount of time. MassRoots' recurring usage and the ability to push additional services as features rather than standalone apps presents a superior value proposition to users than both WeedMaps and Leafly. WeedMaps a dispensary locator founded in 2007. It has 750,000 users (as of April 2015), a valuation of $300 million (as of June 2014) and $25 million estimated revenue for 2016 (as of April 2015). Leafy a strain resource guide founded in 2010. It has 1 million users (as of October 2015), a valuation of $425 million (Privateer Holding company of Leafly raised in April 2015) and $16 million estimated revenue for 2016.

Execution:
We spoke to CEO Isaac Dietrich. One impressive fact was how he has been nimble and willing to make changes to drive results. For instance, the company now has 3 sales reps. A new sales director will be starting soon. The sales force is paid a 10% commission. Gross margins are 93%. The sales force model is critical to monetizing the company's assets. Though it just isn't so easy. 8 months ago the company had now sales force. Then the time came to try to ramp revenue and headcount was increased to 33. Though as always in business not everything works out as planned. Dietrich had to lead an effort to reduce staff to 19. He wisely kept the engineering team the same size and scaled down other areas. He cut several hundred thousand dollars per month out of the budget. The sales force situation described above is now concentrated on top performers and repeating best practices that are behind the results. We think all of the above describes a savy entrepreneur in Dietric. With Ohio about to roll-out 1,000 to 1,5000 dispensaries next year and the country-wide legalization unfolding, we want management personal just like Dietrich at the helm who are taking big risks and course correcting along the way.

Legal Map:
Below is our tracker of where cannabis is legalized, where cannabis is legalized for recreational use, and where there are now laws legalizing cannabis. The following states will be voting this year to further advance their laws: California, Nevada, Maine, Arizona, Massachusetts, Florida, Arkansas, and Montana.

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