In April 2015, MassRoots (OTC: MSRT) began trading with great fanfare. The company had a novel idea to create a large cannabis-focused social network and had gone public in a shareholder-friendly way via the S-1 process (rather than through a more typical reverse-merger). The company reported 275,000 users of its app at that time, up from fewer than 20,000 at the beginning of 2014, and it had 16 full-time employees.

Many investors who saw MSRT as a way to capitalize on cannabis legalization were left holding the bag, with the stock now down 75% from the closing price on its first day of trading.

Fewer than three years later, the company has seen its stock price plunge. The company’s founder and CEO, Isaac Dietrich, was ousted by the Board of Directors in October. Employee head count dropped to four. A lawsuit and a proxy battle ensued, and yesterday Dietrich reclaimed the company as the sitting directors and CEO all resigned. Leafly contributor Peter Hecht laid out the whole saga in his investigative feature published yesterday.

Many investors who saw MSRT as a way to capitalize on cannabis legalization were left holding the bag, with the stock now down 75% from the closing price on its first day of trading.

What happened? In a nutshell, MassRoots never lived up to its expectations and was hurt by poor decisions made by management. While the collapse in the stock price may have surprised many, there were plenty of signs of trouble.

1. They Never Generated Material Sales

MassRoots was expensive when it began trading in 2015, with 41.18 million shares (and 55.54 million including options and convertible notes), giving it a valuation of over $50 million in its early days despite generating minimal revenue.

The story that it told investors was that it would quickly monetize on par with Weedmaps and Leafly, but that never happened. 2016 sales of $701,581, up from $213,963 in 2015, were overwhelmed by an operating loss of $18 million.

Despite the promise of monetization, sales in the first three quarters of 2017 declined 64% to $289,000. Q3 sales were just $11,516, and it is unlikely that Q4 sales will be much different.

2. Growth Slowed

MassRoots prided itself on the size of its user base, a number that really wasn’t that meaningful compared to other metrics, like active users (which it never shared) or measures of engagement.

Describing the user base by the number of installations seriously overstated the actual number of users. Growth was already slowing when the company called out the app’s temporary removal from the Google Play Store. In any event, the company quit sharing this data in April 2017, just saying that it was greater than one million and likely masking continued slow growth.

3. Focus Shifted

One of the biggest red flags at MassRoots was when the company got into the events business in 2016.

Specifically, it borrowed money to fund the 420 Rally in Denver, partnering with Santino Walter Productions. That ended up being a complete disaster, with the event canceled due to a snowstorm. To me, this looked like an attempt to pump up revenues, but it was beyond the core business.

4. Insiders Bailed

While it hasn’t been widely reported, all of the co-founders of MassRoots bolted and were free to sell stock (and did so). One has to look at SEC filings to piece it together, but, by the end of 2016, Hyler Fortier, Tyler Knight, and Stewart Fortier were no longer officers of the company or had resigned from the Board of Directors. (During an interview with Leafly yesterday, reinstated CEO Isaac Dietrich said Knight and both Fortiers were still connected to the company.)

In early 2016, the three reported holdings of 11.9 million shares. In early 2017, the trio reported holding 10.56 million shares.

Another example of an early bail: CFO Robert Pullar, who joined the company at the end of 2016 and then suddenly departed on August 28, 2017.

5. Reliance on Risky Financing

MassRoots had always raised capital by selling shares and not borrowing on egregious terms, so it was disappointing to see them fund the 420 Rally fiasco with convertible notes. That deal blew up on them badly, pushing the stock to an all-time low in September 2016, as the note holders converted the debt into shares after the company defaulted on repayment.

At the time, Dietrich assured me that he had learned his lesson and would not take such risk again, yet he did so in August 2017, raising $950,000 by selling $1.045 million of convertible debt along with warrants at $0.50.

6. Ran Out of Money

It was no surprise that Dietrich had to rely upon dangerous debt financing again, as the company was burning through cash and had run out of sources.

Historically, the company had relied upon warrants to be exercised, meaning that owners of these securities would buy stock from the company at a price below the trading price and then sell the shares into the market. With the price having fallen below $0.90, where the majority of the outstanding warrants had exercise prices, this avenue was closed.

Through Q2, the company had used a stunning $5.2 million to fund its operations, up from $2.1 million in the first half of 2016. It ended Q2 with only $31,247 in cash but owed $359,651 within the next year. Any investor who took the time to read the 10-Q filing should have seen the writing on the wall.

7. A Desperate Deal

The final nail in the coffin for MassRoots was a deal that I publicly described as desperate. In late August 2017, MassRoots announced that it would pay $12 million in stock for CannaRegs, with the stock sitting near an all-time low.

I suggested that the company was no longer able to fund itself; in my view, the amount of stock it was giving away was too high.

Conclusion: Early Promise, Poor Execution

MassRoots has a tough road ahead, in my view. Until the company raises capital, it is not likely to be able to move forward. As of September 30th, it had $267,322 in cash but owes over $1 million over the next year with no visible means of generating cash flow from its operations. Additionally, the convertible notes could weigh heavily on the stock price when they become due in February 2018.

I believe that there are many lessons in the failure of MassRoots, including the importance of paying close attention to the financials and downplaying the hype. The lack of material revenue, slowing growth, a shift in focus, the exit of insiders, risky financing deals, weak financials, and a desperate deal were all signals that all was not well for MSRT.

Bottom line: MassRoots had early promise for investors, but the execution was very poor. Investors had plenty of signs that the company’s future wasn’t rosy. The company’s survival is now in question.

Next up: Companies leveraged to cannabis extraction. Talk with you in two weeks.

Public disclosure: As an owner of New Cannabis Ventures, Alan works with several publicly-traded and privately held cannabis companies, as he discloses here. In the event he mentions a company that is a client, he will disclose it in the article as well.

Alan Brochstein, The Cannabis Capitalist Alan Brochstein, CFA, covers the cannabis industry full time from Houston, running 420 Investor, a subscription-based service for those interested in publicly-traded cannabis stocks, and New Cannabis Ventures, a news and information platform that highlights promising companies and influential investors in the cannabis industry. Before focusing on the cannabis industry in 2013, Alan worked as an independent equity research analyst following two decades as a portfolio manager, trader, and analyst. View Alan Brochstein, The Cannabis Capitalist's articles