EDGAR 10-K Filing

Company CIK: 1398137
Filing Year: 2021
Filename: 1398137_10-K_2021_0001493152-21-008664.json

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ITEM 1. BUSINESS
ITEM 1. DESCRIPTION OF BUSINESS.
This Report contains summaries of the material terms of various agreements executed in connection with the transactions described herein. The summaries of these agreements are subject to, and are qualified in their entirety by reference to, these agreements, all of which are incorporated herein by reference.
Overview of Business
We are focused on the research, design, development and manufacturing of advanced, energy efficient indoor horticulture lighting, plant nutrient products, and ancillary equipment. Our vision is to apply the latest advances in high efficiency lighting and controls technology as well as effective manufacturing techniques to deliver highly differentiated lighting and nutrient products with clear benefits at competitive prices to the greenhouse and indoor horticulture markets.
Our subsidiary, Solis Tek, Inc., a California corporation, was formed in June of 2010. Its operations consist of designing, developing and sourcing of a line of Solis Tek Digital Ballasts intended for use in high intensity lighting systems used for horticulture. An electrical ballast is a device intended to limit the amount of current in an electric circuit. A familiar and widely used example is the inductive ballast used in fluorescent lamps, which limits the current through the tube, which would otherwise rise to destructive levels due to the tube’s negative resistance characteristic. Since the commencement of operations, our product line has evolved from digital ballasts to a line of lighting products including a line of specialty ballasts ranging from 400 watts to 1,000 watts with various features, our Lamp Products, a line of reflectors, high intensity lighting accessories and a new line of LED lighting technologies.
Indoor Lighting Industry
Light and plant growth
Light is essential for plant growth. Natural sunlight is the cheapest source available, but for horticulture it is not always attainable in sufficient quantities due to weather and other climate challenges. Therefore, the uses of artificial or alternative light sources have become very common in order to increase production and quality predominantly in indoor or greenhouse environments. Plants have a completely different sensitivity to light spectrum than humans. Every plant has their own sensitivity and receptivity for colors and intensity of light. Using these alternate light sources for plants, effective light recipes are essential to obtain the optimal results in plant production.
Grow lights
A grow light or plant light is an artificial light source, generally an electric light, designed to stimulate plant growth by emitting an electromagnetic spectrum appropriate for photosynthesis. Grow lights are used in applications where there is either no naturally occurring light, or where supplemental light is required. For example, in the winter months when the available hours of daylight may be insufficient for the desired plant growth, lights are used to extend the time the plants receive light.
Grow lights either attempt to provide a light spectrum similar to that of the sun, or to provide a spectrum that is more tailored to the needs of the plants being cultivated. Outdoor conditions are mimicked with varying color, temperatures and spectral outputs from the grow light, as well as varying the lumen output (intensity) and PAR output of the lamps. Depending on the type of plant being cultivated, the stage of cultivation (e.g., the germination/vegetative phase or the flowering/fruiting phase), and the photoperiod required by the plants, specific ranges of spectrum, luminous efficacy and color temperature are desirable for use with specific plants and time periods.
Specially designed artificial light sources can improve diverse growth parameters. These all depends on several factors, like crop, environmental circumstances, light recipe and many more. The following is a list of benefits that can be achieved with specially designed artificial lighting:
● Increased production and yield
● Increased aromatic flavor and higher potency
● Shortening of the total growth cycle
● Better plant uniformity
● Better space utility
● Improved plant quality
● Energy savings
● Better germination rate
● Higher multiplication factor
● Higher survival rate in rooting
● Improved/controlled stretching process
● Accelerated hardening phase
Hydroponics
The great majority of our customers are retailers that specialize in hydroponics and sell our products to hydroponic enclosed farm and grower operators. Hydroponics is a method of growing plants in mineral nutrient solutions, in water, without soil. Terrestrial plants may be grown with their roots in the mineral nutrient solution only or in an inert medium, such as polite, gravel, expanded clay pebbles or coconut husks.
Some of the reasons why hydroponics is being adapted around the world for plant production are the following:
● No soil is needed for hydroponics.
● The water stays in the system and can be reused - thus, a lower water requirement.
● It is possible to control the nutrition levels in their entirety; thus, lower nutrition requirements.
● No nutrition pollution is released into the environment because of the controlled system.
● Stable and high yields.
● Pests and diseases are easier to get rid of than in soil because of the container’s mobility.
● Ease of harvesting.
● No pesticide damage.
Our Business Strategy
Due to the expected increase in the number of States where the use of cannabis, both for medical and recreational use is being legalized, we intend to take advantage of what we believe is our premium brand image within the cannabis farming and growing community. We believe that as participation in the cannabis farming industry grows, in order to supply increasing demand caused by legalization, our Solis Tek brand equipment will be sought out by existing and new cannabis farms and commercial businesses. Our strategy is to maintain and increase our market share by expanding our marketing efforts and by introducing new and improved lighting technology to help the industry become more efficient. In addition, we market and sell a line of plant nutrients and fertilizers to help expand our market reach and maximize our revenue potential.
Products
We sell our products primarily to retailers in the United States and international markets who specialize in hydroponic horticulture. Currently, we have approximately 500 retail stores in the United States as well as various ecommerce websites that sell our products. We have four full time sales employees and three wholesale distributors who cover U.S., Canada, Spain and the United Kingdom for both retail customers as well as commercial growers in cannabis legal states and countries.
We believe that almost all of the end users that use our products are using the equipment for the growing of cannabis. However, our products can be, and are used for, the hydroponic and indoor growing of other horticultural products, such as hothouse vegetables, decorative plant nurseries, indoor aquariums, and industrial painting facilities. We intend to continue to expand and improve our products for use in as many applications as possible and to market our products to the entire indoor horticultural industry as well as other industrial applications that require artificial lighting.
Plant Nutrients and Fertilizers
We have developed “Terpenez™” which is a proprietary product formulated from all organic botanical extracts and is designed to assist plants with processes associated with oil and resin production. Terpenez is all natural and has organic inputs aimed at enhancing the aromatics of cannabis cultivation.
Terpenez, the first product in our launch into the approximately $32 billion nutrient/additive sector of the greenhouse and growing business, leads a new class of horticultural products aimed at enhancing the cannabis aromatic experience and intensity. It does not contain cannabis derived terpenes within, instead it is made from the finest natural components available and is specifically formulated to assist the cannabis plant with processes associated with oil and resin production and naturally enhances the cannabis plant’s terpene profile.
The formula provides essential oil-bearing plants with both precursors (i.e., metabolic building blocks, trace elements, etc.) and readily available bio-identical plant compounds aiming to increase overall essential oil production and intensity. It is the first product of its kind to deliver plant nutrients to cannabis cultivating customers with a fully plant derived 0-0-0 (Nitrogen, Phosphate, and Potassium free) product. Independent bioanalytical testing laboratory analysis was conducted and determined the level of heavy metals to be below the EPA’s detection limit.
Terpenez is used to increase the value of cannabis crops through the intensification of oil production, which has results in a significant improvement in flavor and aroma. Terpenez is unique to our family of products in that it is intended for daily use as a nutrient additive to the cannabis grow. Terpenez is currently available in four profiles Terpenez “Original”, Terpenez “Berry”, Terpenez “Citrus” and Terpenez “Pine/Earth”, and is offered to our retail hydroponic stores and online retailers throughout the USA and Europe.
LED Technology
In 2018, Solis Tek Digital Lighting launched its propriety LED (light emitting diode) lighting solution called the B9. LED lighting supports sustainable design in several ways. It uses less energy than most other types of lamps, produces less heat, lasts longer (which means less frequent replacement and therefore reduced waste), is mercury-free, and is housed in special semi-conductor “chips” designed for easier configuration, disassembly, and recycling.
In our ongoing research and development program, we have designed and are developing our next generation of high intensity lighting. Our LED technology, unlike other LED lighting sources, uses an advanced UV (Ultra Violet) diode phosphor combination to make our high intensity LED based lighting systems. Our LED systems should be available in the same light spectrums as our current HID lamps. Our design will emit lighting equivalent to the high-pressure sodium spectrum and ultra-violet spectrums and eliminate the inadequacies of current LED offerings to the horticultural industry i.e.: a) low intensity; b) lack of proper spectrum for particular plants; and c) longevity. Our LED “chips” will provide, from one LED, a full spectrum of light that mimics sunlight, as compared to other LED manufacturers of LEDs who provide arrays of several color specific LEDs in an attempt to cover the full light spectrum.
LED lighting produces significantly less heat than conventional HID and HPS lamps, so growers can control their greenhouse climate more accurately. Less heat also means more effective use of light, for example by increasing light levels, extending lighting periods, or by using LED light in greenhouses on warmer days without having to ventilate. Less heat also means you can place the light source closer to plants, reducing light loss.
Digital Lighting Controller
The Solis Tek Digital Lighting Controller is a temperature monitoring control system which was specifically designed for commercial cultivation. A single controller can run up to 300 lights with 150 lights per zone and contains such features integrated temperature sensors, custom sunrise and sunset modes, data log tracking, and cloud cover simulation. The controller has been rigorously tested in multiple garden environments and has been specifically designed for both commercial grows and large gardens. The data log tracks garden activity and events with options to run up to two independent light zones, each with their own customized sunrise, sunset, and cloud modes. The controller includes high temperature auto-dim and shut off prevention systems to prevent systems overheating.
Ballasts
Ballasts provide the proper starting voltage, operating voltage and current to the lamp to initiate and sustain its arc. High Intensity Discharge (HID) lamps have negative resistance, which causes them to draw an increasing amount of current; hence, they require a current-limiting device. The ballast provides the following functions:
It provides starting voltage and, in some cases, ignition pulses. All ballasts must provide some specific minimum voltage to ignite the lamp. In the case of pulse start lamps, an additional high voltage pulse is needed to ionize the gases within the lamp. These pulses are superimposed near the peak starting voltage waveform; it regulates the lamp’s current and power. The ballast limits the current through the lamp once it has started. The ballast’s current is set to a level that delivers the proper power to the lamp. In addition, the ballast regulates the lamp’s current through the range of typical line voltage variations, thereby keeping the lamp’s power fairly stable to maximize the lamp’s life and performance and; it provides appropriate sustaining voltage and current wave shape to achieve the lamp’s rated life. The ballast provides sufficient voltage to sustain the lamp as it ages. Solis Tek ballasts come in a variety of voltage settings to conform to the consumer needs.
Solis Tek Digital Ballasts were designed to work with our exclusive “Ignition Control” sequential lamp ignition, and “SenseSmart”, self- diagnostic safety systems. Solis Tek Digital Ballasts are software based, that makes our ballasts more versatile and enables us to incorporate special features such as sequential ballast ignition technology and SenseSmart technologies that ignites metal halide lamps one at a time based on load stability. Ignition Control is a main feature of our ballasts that comes as a standard feature in all of our ballasts. The exclusive Ignition Control assures that no matter how many lamps are contained in a lighting array attached to one power source, only one lamp will turn on at a predetermined time. This technology (not a randomized ignition startup) detects the voltage and amperage frequencies of the electrical circuit and ignites an array of metal halide or sodium lamps when the load for each lamp is most stable. The use of our technology prevents surges and spikes in electrical environment in which an array of ballasts operates and also prevents the overloading of circuit breakers.
Our SenseSmart self-diagnosing system feature enables our ballasts to internally safety check for over/under voltage, overheating, open circuits, short circuits and more. SenseSmart will recognize an unsafe condition and take pre-determined actions to alleviate the safety issue.
We offer a line of remote ballasts that include: 1000W 120/240V with remote control and timer, 1000W 240V only, and 1000W 277V.
Digital Lamps
Metal halide lamps are a type of HID (High Intensity Discharge) lamp; mercury vapor and high-pressure sodium lamps are also HID lamps. Light is generated by creating an arc between the two electrodes located inside the inner arc tube. The inner arc tube is typically made of quartz, and this is a very harsh environment, with high temperatures approaching 1000°C and pressures of 3 or 4 atmospheres. To start a metal halide lamp, a high starting voltage is applied to the lamp’s electrodes to ionize the gas before current can flow and start the lamp.
Solis Tek Digital Lamps are designed to be specifically tuned and matched with Solis Tek Digital Ballasts. Our lamps feature color enhanced full balanced spectrums, prolonged lamp life, less depreciation of lumen output over time, and precise gas combinations for increased blues, reds, and ultra violet output. Our Lamps emit a full spectrum of light tuned specifically for particular types of plants. As well, our lamps provide ample Ultra Violet light that plants thrive upon. We have designed our lamps using special low iron glass envelopes so as to prevent the blockage of the full spectrum of light that our lamps are designed to provide. Using Solis Tek lamps, growers can expect superior photo-chemical reactions, proper UV balance, advanced HID lamp designed especially for plant growth, plant quality, and plant yield.
We offer a select variety of light color spectrums in High Pressure Sodium (HPS).
Marketing
We currently market our products directly and through distributors, to hydroponic retailers through direct contacts, on-line email advertising, social media, trade magazine advertising, trade show promotions, and cross-promotional offerings. Approximately less than 2% of our revenues were derived from non-U.S. sources in each of 2020 and 2019.
Manufacturing and Supply
All of our current lighting products are manufactured to our specifications in China. We have four independent lighting manufacturer and suppliers of our ballast, lamp and LED products. We continue to evaluate and upgrade our China manufacturing specifications and relationships and believe that the prices charged by these suppliers are industry-wide competitive.
Our reliance upon manufacturers and suppliers located in China, subjects us to various political, economic, and other risks and uncertainties inherent in importing products from this country, including among other risks, export/import duties, quotas and embargoes; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; and political conditions and governmental regulations. There can be no assurance that if there were an interruption of our supply lines from China, that we would be able to quickly find replacement suppliers of our products domestically, or from other countries, and even if we found replacement suppliers, that we would be able to obtain the products at the quality and prices we currently pay which is why our founders continue to develop alternate relationships in China light and ballast manufacturing.
Our Terpenez nutrient products are formulated in our facility in Upland, CA under the strictest of manufacturing protocols. We intend to develop additional nutrient lines using local state-of-the-art processing labs in southern California under our proprietary formulations. Given the regulatory environment and intense scrutiny and testing required by both State and Federal agencies, we believe staying the course with natural, organic, and heavy-metal free ingredients will allow Zelda to provide substantial growth and opportunity within the industry.
Intellectual Property
We own a number of trademarks and rely on a combination of copyright and trade secrets as well as confidentiality procedures and contractual provisions to protect our proprietary technology and our brand. We rely on copyright laws to protect copy on our web site, www.solis-tek.com, and all marketing materials.
We own the trademark for our proprietary product “Terpenez”.
From time to time, we may encounter disputes over rights and obligations concerning intellectual property. Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property rights could harm our business, our brand and reputation, or our ability to compete. Also, protecting our intellectual property rights could be costly and time consuming.
Competition
Our Lighting Products currently face competition from traditional lighting fixture companies, lamp manufacturers and from non-traditional companies focused on LED lighting systems including fixtures and lamps. Lighting companies such as Acuity Brands, Inc., the Cooper Lighting division of Eaton Corporation plc, General Electric Company, Hubbell Incorporated, Philips, OSRAM, Gavita, Nanolux, Sunlight Supply and Hydrofarm are the main competitors in this market. Increasingly, however, other companies (i.e., start-ups) are beginning to emerge in the LED lighting markets in which we compete. We compete on the basis of product features, quality, product availability and price.
Our LED lighting products compete against traditional lighting products using incandescent, fluorescent, halogen, ceramic metal halide or other lighting technology. Our LED lighting products compete against traditional lighting products based upon superior energy savings, extended life, improved lighting quality and lower total cost of ownership. Also, our LED lighting products have a reduced impact on the environment as compared to fluorescent and compact fluorescent technologies that contain mercury.
We will also compete with LED-based products from traditional and non-traditional lamp and fixture companies, some of which are customers for our LED chips and LED components. Our products compete on the basis of color quality and consistency, superior light output, reduced energy consumption, brand and lower total cost of ownership. Within the Zelda nutrient product line, the Terpenez product is unique in its product class. The formula provides essential oil-bearing plants with both precursors (i.e. metabolic building blocks, trace elements, etc.) and readily available bio-identical plant compounds aiming to increase overall essential oil production and intensity. It is the first product of its kind to deliver plant nutrients to cannabis cultivating customers with a fully plant derived 0-0-0 (Nitrogen, Phosphate, and Potassium free) product. Independent bioanalytical testing laboratory analysis was conducted and determined the level of heavy metals to be below the EPA’s detection limit (BDL). Terpenez is used to increase the value of cannabis crops through the intensification of oil production, which has results in a significant improvement in flavor and aroma. With other nutrient lines, products that provide plant growth, and insect and pest protection, are marketed through a plethora of local and regional brands with literally scores of names and claims of value and productivity- none of which compete head on with Terpenez whose lab tested and grower proven track record is beyond compare.
Employees
As of December 31, 2020, we had five full-time employees, employed by us in various capacities, including one executive officer, two sales representatives, one administrative personnel, and one warehouse/nutrient production associate. In addition, from time to time, we employ temporary personnel to meet the business needs. None of our employees are represented by a collective bargaining agreement, and we believe that our relations with our employees are good.
Corporate Information
We were incorporated on March 2, 2007 under the laws of the State of Nevada as Cinjet Inc. On September 1, 2015, we changed our name to Solis Tek Inc. Effective September 25, 2018, we changed our name to Generation Alpha, Inc. Our website address is www.genalphainc.com. The information on our website is not part of this annual report. We have included our website address as a factual reference and do not intend for it to be an active link to our website.

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS.
You should carefully consider the following risk factors, as well as the other information in this report, before deciding whether to purchase, hold or sell shares of our common stock. The occurrence of any of the following risks could harm our business, financial condition, results of operations and/or growth prospects or cause our actual results to differ materially from those contained in forward-looking statements we have made in this report and those we may make from time to time. You should consider all of the factors described as well as the other information in our financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” when evaluating our business. If any of the following risks actually occurs, our business, financial condition, results of operations and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock would likely decline and you may lose all or part of your investments. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.
RISKS RELATED TO OUR FINANCIAL POSITION AND NEED FOR ADDITIONAL CAPITAL
We have incurred significant net losses and cannot assure you that we will achieve or maintain profitable operations, and our auditors have issued a “going concern” audit opinion.
Our net losses were $571,000 and $7,894,000 for the years ended December 31, 2020 and 2019, respectively. As of December 31, 2020, we had stockholders’ deficit of $8,736,000. We will need to raise additional working capital to continue our normal and planned operations. We will need to generate and sustain significant revenue levels in future periods in order to become profitable, and, even if we do, we may not be able to maintain or increase our level of profitability. We anticipate that our operating expenses will increase in the foreseeable future as we undertake increased technology and production efforts to support our business and increase our marketing and sales efforts to drive an increase in the number of customers and clients utilizing our services. In addition, as a public company, we will incur significant accounting, legal and other expenses that we did not incur as a private company. These expenditures will make it necessary for us to continue to raise additional working capital and make it harder for us to achieve and maintain profitability. Our efforts to grow our business may be costlier than we expect, and we may not be able to generate sufficient revenue to offset our higher operating expenses. If we are forced to reduce our expenses, our growth strategy could be compromised. We may incur significant losses in the future for a number of reasons, including unforeseen expenses, difficulties, complications and delays and other unknown events. Accordingly, substantial doubt exists about our ability to continue as a going concern and we cannot assure you that we will achieve sustainable operating profits as we continue to expand our infrastructure, restructure our balance sheet, further develop our marketing efforts, and otherwise implement our growth initiatives.
Our independent auditors have indicated in their report on our December 31, 2020 consolidated financial statements that there is substantial doubt about our ability to continue as a going concern. A “going concern” opinion indicates that the financial statements have been prepared assuming we will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result if we do not continue as a going concern. Therefore, you should not rely on our consolidated balance sheet as an indication of the amount of proceeds that would be available to satisfy claims of creditors, and potentially be available for distribution to stockholders, in the event of liquidation.
We must raise additional working capital.
At the present time, our ability to continue as a going concern is dependent upon raising capital from financing transactions. To stay in business, we will need to raise additional working capital through public or private sales of our equity securities, debt financing or short-term loans, or a combination of the foregoing. In the event that such financing is not procured, we may be forced to curtail our growth plans. There can be no assurance that we will be able to raise sufficient additional working capital financing from the sale of additional securities when needed to sustain our operations on acceptable terms, or at all. If such financing is not available on satisfactory terms or is not available at all, we may be required to delay, scale back or eliminate the development of business opportunities and our operations and our financial condition may be materially adversely affected. Debt financing, if obtained, may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring additional debt and could increase our expenses and require that our assets be provided as a security for such debt. Debt financing would also be required to be repaid regardless of our operating results. Equity financing, if obtained, could result in dilution to our then existing stockholders.
RISKS RELATED TO OUR COMPANY AND OUR BUSINESS
We depend on the development of the cannabis industry.
Over the past several years, the cannabis industry has grown significantly as a result of an increase of deregulation at a state level. Our revenues depend greatly on the expenditures made by companies within the cannabis industry. In some instances, companies in these industries are reliant on their ability to raise capital in order to fund their operations. Accordingly, economic factors and industry trends that affect our clients in these industries also affect our business. If companies in these industries were to reduce the number of research and development projects they conduct or outsource, our business could be materially adversely affected.
Our business is dependent on state laws pertaining to the cannabis industry.
The Federal Controlled Substances Act, or CSA, classifies cannabis as a Schedule I controlled substance and makes cannabis use and possession illegal on a national level. The United States Supreme Court has ruled that it is the Federal Government that has the right to regulate and criminalize cannabis, even for medical purposes, and thus federal law criminalizing the use of cannabis preempts state laws that legalize its use. As of the date of this Annual Report, thirty-three (33) states and the District of Columbia allow their residents to use medical cannabis, of which eleven (11) states and the District of Columbia have legalized the recreational use of cannabis. While some states have either approved ballot measures or approved legislation to legalize cannabis for adult recreational use, continued expansion of such ‘recreational use’ is not well defined at this time and any continued development of the cannabis industry will be dependent upon continued new legislative authorization of cannabis at the state, and perhaps the federal level. Any number of events or occurrences could slow or halt progress all together in this space. While progress within the cannabis industry channel is currently encouraging, growth is not assured. While there appears to be ample public support for favorable legislative action, numerous factors may impact or negatively affect the legislative process(s) within the various states we have business interests in. Any one of these factors could slow or halt use of cannabis, which would negatively impact our business up to possibly causing us to discontinue operations as a whole.
The cannabis industry faces significant opposition, and any negative trends will adversely affect our business operations.
We are substantially dependent on the continued market acceptance, and the proliferation of consumers, of medical and recreational cannabis. We believe that with further legalization, cannabis will become more accepted, resulting in a growth in consumer demand. However, we cannot predict the future growth rate or future market potential, and any negative outlook on the cannabis industry may adversely affect our business operations.
Large, well-funded business sectors may have strong economic reasons to oppose the development of the cannabis industry. For example, medical cannabis may adversely impact the existing market for the current “cannabis pill” sold by mainstream pharmaceutical companies. Should cannabis displace other drugs or products, the medical cannabis industry could face a material threat from the pharmaceutical industry, which is well-funded and possesses a strong and experienced lobby. Any inroads the pharmaceutical or any other potentially displaced, industry or sector could make in halting or impeding the cannabis industry could have a detrimental impact on our business.
Competition in our industry is intense.
There are many competitors in the cannabis industry, including many who offer similar products and services as those offered by us. There can be no guarantee that in the future other companies won’t enter this arena by developing services that are in direct competition with us or any acquired subsidiary. We anticipate the presence as well as entry of other companies in this market space and acknowledge that we may not be able to establish or if established, maintain a competitive advantage. Some of these companies may have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, sales and marketing resources. This may allow them to respond more quickly than us to market opportunities. It may also allow them to devote greater resources to the marketing, promotion and sale of their products and or services. These competitors may also adopt more aggressive pricing policies and make more attractive offers to existing and potential customers, employees, strategic partners, distribution channels and advertisers. Increased competition is likely to result in price reductions, reduced gross margins and a potential loss of market share.
We may elect from time to time to make changes to our pricing, service, hiring and marketing decisions that could increase our expenses, affect our revenues and impact our financial results.
Because our expense levels in any given quarter are based, in part, on management’s expectations regarding future revenues, if revenues are below expectations, the effect on our operating results may be magnified by our inability to adjust spending in a timely manner to compensate for a shortfall in revenues. The extent to which expenses are not subsequently followed by increased revenues would harm our operating results and could seriously impair our business.
If we are unable to generate sufficient cash flow from operations or are unable to obtain additional equity or debt financing, to meet our working capital requirements, we may have to curtail our business operations sharply or cease business altogether.
Defects or disruptions in the delivery of our service could diminish demand, decrease market acceptance or decrease customer satisfaction of our service and subject us to substantial liability.
We may, from time to time, find defects in our products service may be detected in the future. Any defects with our products could hurt our reputation and may damage our customers’ businesses. If that occurs, customers could elect not to renew, or delay or withhold payment to us, we could lose future sales, or, customers may make warranty or other claims against us, which could result in an increase in our provision for doubtful accounts, an increase in collection cycles for accounts receivable or the expense and risk of litigation.
Our operating results may fluctuate significantly based on customer acceptance of our products. As a result, period-to-period comparisons of our results of operations are unlikely to provide a good indication of our future performance.
Management expects that we will experience substantial variations in our net sales and operating results from quarter to quarter due to customer acceptance of our products. If customers do not accept our products, our sales and revenues will decline, resulting in a reduction in our operating income.
Customer interest for our products could also be impacted by the timing of our introduction of new products. If our competitors introduce new products around the same time that we issue new products, and if such competing products are superior to our own, customers’ desire for our products could decrease, resulting in a decrease in our sales and revenues. To the extent that we introduce new products and customers decide not to migrate to our new products from our older products, our revenues could be negatively impacted due to the loss of revenue from those customers. In the event that our newer products do not sell as well as our older products, we could also experience a reduction in our revenues and operating income.
As a result of fluctuations in our revenue and operating expenses that may occur, management believes that period-to-period comparisons of our results of operations are unlikely to provide a good indication of our future performance.
If we do not successfully generate additional products and services, or if such products and services are developed but not successfully commercialized, we could lose revenue opportunities.
Our future success depends, in part, on our ability to expand our product offerings. To that end we have engaged in the process of identifying new product opportunities to provide additional products to our customers. The process of identifying and commercializing new products is complex and uncertain, and if we fail to accurately predict customers’ changing needs and emerging technological trends our business could be harmed. We may have to commit significant resources to commercializing new products before knowing whether our investments will result in products the market will accept. Furthermore, we may not execute successfully on commercializing those products because of errors in product planning or timing, technical hurdles that we fail to overcome in a timely fashion, or a lack of appropriate resources. This could result in competitors providing those solutions before we do and a reduction in net sales and earnings.
The success of new products depends on several factors, including proper new product definition, timely completion and introduction of these products, differentiation of new products from those of our competitors, and market acceptance of these products. There can be no assurance that we will successfully identify new product opportunities, develop and bring new products to market in a timely manner, or achieve market acceptance of our products or that products and technologies developed by others will not render our products or technologies obsolete or non-competitive.
Our future success depends on our ability to grow and expand our customer base. Our failure to achieve such growth or expansion could materially harm our business.
To date, our revenue growth has been derived primarily from the sale of our products. Our success and the planned growth and expansion of our business depend on us achieving greater and broader acceptance of our products, expanding our customer base and successfully moving into providing management services. There can be no assurance that customers will purchase our products, that we will continue to expand our customer base or that we will successfully be able to provide management services to other companies in the cannabis space. If we are unable to effectively market or expand our product offerings, we will be unable to grow and expand our business or implement our business strategy. This could materially impair our ability to increase sales and revenue and materially and adversely affect our margins.
Our ability to grow our business may depend on developing a positive brand reputation and member loyalty.
Establishing and maintaining a positive brand reputation and nurturing customer loyalty is critical to attracting new customers. We expect to expend reasonable but limited resources to develop, maintain and enhance our brand in the near future. In addition, nurturing customer loyalty will depend on our ability to provide high-quality products which we may not do successfully. If we are unable to maintain and enhance our brand reputation and customer loyalty, our ability to attract new marketplace participants will be harmed.
RISKS RELATED TO MANUFACTURING AND OUR RELIANCE ON THIRD PARTIES
Our manufacturing is concentrated with two key manufacturers, and if our relationship with either or both of them terminates or is otherwise impaired, we would likely experience increased costs, disruptions in the manufacture and shipment of our products and a material loss of net sales.
We have no long-term contracts with our manufacturers and as a result, our manufacturers could cease to provide products to us with no notice. Four of our manufacturers, which are all located in China, together accounted for approximately 96% of our cost of goods sold in 2020 and 2019 for our lighting products. Each of these manufacturers is the sole source supplier for the products that it produces. We purchase from these two manufacturers on a purchase order basis with orders generally filled between 90 and 120 days after our purchase order is placed. A loss of either or both of these manufacturers or other key manufacturers would result in delayed deliveries to our retailers and distributors, would adversely impact our net sales and may require the establishment of new manufacturing relationships. Our manufacturers had closed down their facilities earlier during the COVID-19 pandemic, but have resumed operations, although the lead time from product order increased from approximately 45-60 days to 90-120 days. Additionally, we cannot be certain that we will not experience operational difficulties with our manufacturers, including reductions in the availability of production capacity, errors in complying with product specifications, insufficient quality control, failures to meet production deadlines, increases in manufacturing costs and increased lead times.
Risk of reliance on suppliers and manufacturers in China for production of our lighting related products.
All of our products are imported from and manufactured in China. For this reason, a major change in the political, economic and/or legal environment, or a natural disaster or health outbreak (such as COVID-19) in China or another center of production, could have an impact on our ability to supply products.
We may be adversely affected by the financial condition of our retailers and distributors.
Some of our retailers and distributors have experienced financial difficulties in the past. A retailer or distributor experiencing such difficulties will generally not purchase and sell as many of our products as it would under normal circumstances and may cancel orders. In addition, a retailer or distributor experiencing financial difficulties generally increases our exposure to uncollectible receivables. We extend credit to our retailers and distributors based on our assessment of their financial condition, generally without requiring collateral. While such credit losses have historically been within our reserves, we cannot assure you that this will continue to be the case. Financial difficulties on the part of our retailers or distributors could have a material adverse effect on our results of operations and financial condition.
Any shortage of raw materials or components could impair our ability to ship orders of our products in a cost-efficient manner or could cause us to miss the delivery requirements of our retailers or distributors, which could harm our business.
The ability of our manufacturers to supply our products is dependent, in part, upon the availability of raw materials and certain components. Our manufacturers may experience shortages in the availability of raw materials or components, which could result in delayed delivery of products to us or in increased costs to us. Any shortage of raw materials or components or inability to control costs associated with manufacturing could increase the costs for our products or impair our ability to ship orders in a timely cost-efficient manner. As a result, we could experience cancellation of orders, refusal to accept deliveries or a reduction in our prices and margins, any of which could harm our financial performance and results of operations.
RISKS RELATED TO INTELLECTUAL PROPERTY
Our inability to effectively protect our intellectual property would adversely affect our ability to compete effectively, our revenue, our financial condition and our results of operations.
We may be unable to obtain intellectual property rights to effectively protect our technology. Our ability to compete effectively may be affected by the nature and breadth of our intellectual property rights. While we intend to defend against any threats to our intellectual property rights, there can be no assurance that any such actions will adequately protect our interests. If we are unable to secure intellectual property rights to effectively protect our technology, our revenue and earnings, financial condition, or results of operations would be adversely affected.
We may in the future be sued by third parties for alleged infringement of their proprietary rights.
The lighting industry are characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. We may receive in the future communications from third parties claiming that we have infringed the intellectual property rights of others. We may in the future be, sued by third parties for alleged infringement of their proprietary rights. Our technologies may not be able to withstand any third-party claims against their use. The outcome of any litigation is inherently uncertain. Any intellectual property claims, whether with or without merit, could be time-consuming and expensive to resolve, could divert management attention from executing our business plan and could require us to change our technology, change our business practices and/or pay monetary damages or enter into short- or long-term royalty or licensing agreements which may not be available in the future at the same terms or at all. In addition, many of our subscription agreements require us to indemnify our customers for third-party intellectual property infringement claims, which would increase the cost to us of an adverse ruling on such a claim. Any adverse determination related to intellectual property claims or litigation could prevent us from offering our service to others or could otherwise adversely affect our operating results or cash flows or both in a particular quarter.
RISKS RELATED TO EMPLOYEES, MANAGING OUR GROWTH AND OTHER LEGAL MATTERS
We are dependent on our CEO, and her loss could harm our business and prevent us from implementing our business plan in a timely manner.
Our success depends substantially upon the continued services of our sole executive officer, Tiffany Davis, our Chief Executive Officer. We do not maintain a key person life insurance policy on our Chief Executive Officer. The loss of the services of Ms. Davis would have a material adverse effect on our growth, revenues, and prospective business. The loss of any of our personnel, or the inability to attract and retain qualified personnel, may significantly delay or prevent the achievement of our research, development or business objectives and could materially adversely affect our business, financial condition and results of operations.
Any employment agreement we enter into will not ensure the retention of the employee who is a party to the agreement. In addition, we have only limited ability to prevent former employees from competing with us. Furthermore, our future success will also depend in part on the continued service of our key management personnel and our ability to identify, hire, and retain additional personnel. We experience intense competition for qualified personnel and may be unable to attract and retain the personnel necessary for the development of our business. Moreover, competition for personnel with the technical skills that we seek is extremely high and is likely to remain high. Because of this competition, our compensation costs may increase significantly.
We will be required to attract and retain top quality talent to compete in the marketplace.
We believe our future growth and success will depend in part on our ability to attract and retain highly skilled managerial, product development, sales and marketing, and finance personnel. There can be no assurance of success in attracting and retaining such personnel. Shortages in qualified personnel could limit our ability to increase sales of existing products and launch new product and service offerings.
Our inability to effectively manage our growth could harm our business and materially and adversely affect our operating results and financial condition.
Our strategy envisions growing our business. We plan to expand our product, sales, administrative and marketing organizations. Any growth in or expansion of our business is likely to continue to place a strain on our management and administrative resources, infrastructure and systems. As with other growing businesses, we expect that we will need to further refine and expand our business development capabilities, our systems and processes and our access to financing sources. We also will need to hire, train, supervise and manage new employees. These processes are time consuming and expensive, will increase management responsibilities and will divert management attention. We cannot assure you that we will be able to:
● expand our products offerings effectively or efficiently or in a timely manner;
● allocate our human resources optimally;
● meet our capital needs;
● identify and hire qualified employees or retain valued employees; or
● incorporate effectively the components of any business or product line that we may acquire in our effort to achieve growth.
Our inability or failure to manage our growth and expansion effectively could harm our business and materially and adversely affect our operating results and financial condition.
Supporting a growing customer base could strain our personnel and corporate infrastructure, and if we are unable to scale our operations and increase productivity, we may not be able to successfully implement our business plan.
Our current management and human resources infrastructure is comprised of only one executive officer and one administrative person. Our success will depend, in part, upon the ability of our Management to manage our proposed business effectively. To do so, we will need to hire, train and manage new employees as needed. To manage the expected domestic growth of our operations and personnel, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. If we fail to successfully scale our operations and increase productivity, we will be unable to execute our business plan.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2020, we had aggregate U.S. federal net operating loss, or NOL, carryforwards of approximately $14.1 million. Our U.S. federal NOLs generated in taxable years ending prior to 2018 could expire unused. Under the Tax Cuts and Jobs Act, as modified by the CARES Act, U.S. federal NOLs incurred in taxable years beginning after December 31, 2017 may be carried forward indefinitely, but the deductibility of such U.S. federal NOLs in tax years beginning after December 31, 2017 is generally limited to 80% of taxable income. It is uncertain if and to what extent various states will conform to the Tax Cuts and Jobs Act or the CARES Act.
In addition, under Sections 382 and 383 of the Code and corresponding provisions of state law, if a corporation undergoes an “ownership change,” which is generally defined as a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change NOL carryforwards and other pre-change tax attributes (such as research tax credits) to offset its post-change income may be limited. It is possible that we have experienced one or more ownership changes in the past. In addition, we may also experience ownership changes in the future as a result of subsequent shifts in our stock ownership some of which may be outside of our control. As a result, if we earn net taxable income, our ability to use our pre-ownership change NOL carryforwards to offset U.S. federal taxable income may be subject to limitations, which could potentially result in increased future tax liability to us. In addition, at the state level, there may be periods during which the use of NOLs is suspended or otherwise limited, which could accelerate or permanently increase state taxes owed.
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
Our officers, directors and principal shareholders will own a controlling interest in our voting stock and investors will not have any voice in our management.
As of March 31, 2021, our officers, directors and principal shareholders, in the aggregate, beneficially own or control the votes of approximately 73.5% of our outstanding common stock. As a result, these stockholders, acting together, will have the ability to control substantially all matters submitted to our stockholders for approval, including:
● election of our board of directors;
● removal of any of our directors;
● amendment of our articles of incorporation or bylaws; and
● adoption of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination involving us.
As a result of their ownership and positions, our directors, executive officers and principal shareholders collectively are able to influence all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, sales of significant amounts of shares held by our directors, executive officers or principal shareholders, or the prospect of these sales, could adversely affect the market price of our common stock. Management’s stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our stock price.
We may raise capital through the sale of our securities in either private placements or a public offering, which offerings would dilute the ownership of existing shareholders.
If our operations require additional capital in the future, we may sell additional share of our common stock and/or securities convertible into or exchangeable or exercisable for shares of our common stock. Such offerings may be in private placements or a public offering. If we conduct such additional offerings, existing stockholders would experience dilution of their ownership of the Company.
You may experience dilution of your ownership interests because of the future issuance of additional shares of our common or preferred stock or other securities that are convertible into or exercisable for our common or preferred stock.
In the future, we may issue our authorized but previously unissued equity securities, resulting in the dilution of the ownership interests of our present stockholders. We are authorized to issue an aggregate of 100,000,000 shares of common stock and 20,000,000 shares of “blank check” preferred stock. We may issue additional shares of our common stock or other securities that are convertible into or exercisable for our common stock in connection with hiring or retaining employees, future acquisitions, future sales of our securities for capital raising purposes, or for other business purposes. The future issuance of any such additional shares of our common stock may create downward pressure on the trading price of the common stock. We will likely need to raise additional capital in the near future to meet our working capital needs, and there can be no assurance that we will not be required to issue additional shares, warrants or other convertible securities in the future in conjunction with these capital raising efforts, including at a price (or exercise or conversion prices) that could be below the price an investor paid for stock.
You may have difficulty trading and obtaining quotations for our common stock.
Our common stock is not actively traded, and the bid and asked prices for our common stock on the OTCQB Market may fluctuate widely. It is anticipated that there will remain a limited trading market for the common stock on the OTCQB. The lack of an active market may impair your ability to obtain accurate quotations of the price of our common stock, or sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital by selling shares of capital stock and may impair our ability to acquire other companies by using common stock as consideration.
There is minimal active liquid trading market for our common stock.
Our common stock is quoted on the OTCQB. However, there is relatively small active trading market in our common stock, and we cannot give an assurance that a more active trading market will develop. If a more active market for our common stock develops, there is a significant risk that our stock price may fluctuate dramatically in the future in response to any of the following factors, some of which are beyond our control, such as:
● Actual or anticipated variations in our operating results (including whether we have achieved our key business targets, and/or earnings estimates) and prospects;
● Announcements of technological innovations by us or our competitors;
● Announcements by us or our competitors of significant acquisitions, business achievements, strategic partnerships, joint ventures, or capital commitments;
● Additions or departures of key personnel;
● Introduction of new services by us or our competitors;
● Sales of our common stock or other securities in the open market (particularly if overall trading volume is not high);
● General market conditions and broader political and economic conditions;
● Actual or anticipated monetization’s of our patents; and
● Other events or factors, many of which are beyond our control.
The rights of the holders of common stock may be impaired by the potential issuance of preferred stock.
Our articles of incorporation give our board of directors the right to create new series of preferred stock. As a result, the board of directors may, without stockholder approval, issue preferred stock with voting, dividend, conversion, liquidation or other rights which could adversely affect the voting power and equity interest of the holders of common stock. Preferred stock, which could be issued with the right to more than one vote per share, could be utilized as a method of discouraging, delaying or preventing a change of control. The possible impact on takeover attempts could adversely affect the price of our common stock. Although we have no present intention to issue any shares of preferred stock or to create a series of preferred stock, we may issue such shares in the future.
Our common stock is subject to the “Penny Stock” rules of the SEC and the trading market in our securities will be limited, which makes transactions in our common stock cumbersome and may reduce the value of an investment in our common stock.
Rule 15g-9 under the Exchange Act establishes the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require: (a) that a broker or dealer approve a person’s account for transactions in penny stocks; and (b) the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
In order to approve a person’s account for transactions in penny stocks, the broker or dealer must: (a) obtain financial information and investment experience objectives of the person and (b) make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form: (a) sets forth the basis on which the broker or dealer made the suitability determination; and (b) confirms that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Generally, brokers may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our common stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker or dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
FINRA sales practice requirements may also limit a shareholder’s ability to buy and sell our stock.
In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
GENERAL RISK FACTORS
The novel coronavirus (COVID-19) pandemic, efforts to mitigate or disrupt the pandemic and the related weak, or weakening of, economic or other negative conditions, have impacted our business, and could result in a material adverse effect on our operations, liquidity, financial condition and financial results.
During March 2020, the World Health Organization declared the rapidly growing coronavirus outbreak to be a global pandemic. The COVID-19 pandemic has significantly impacted health and economic conditions throughout the United States. As the pandemic continues to grow, consumer fear about becoming ill with the virus and recommendations and/or mandates from federal, state and local authorities to avoid large gatherings of people or self-quarantine have increased. We currently believe we are an “essential” business under relevant federal, state and local mandates. If the classification of what is an “essential” business changes or other government regulations are adopted, we may be required to severely curtail operations, which would significantly and adversely impact our sales and revenue. Also, if we do not respond appropriately to the pandemic, or if customers do not perceive our response to be adequate, we could suffer damage to our reputation and our brand, which could adversely affect our business in the future.
COVID-19 has also impacted our supply chain for products we sell, particularly those products that are sourced from China, which primarily relate to our lighting units. Our manufacturers had closed down their facilities earlier during the COVID-19 pandemic, but have resumed operations, although the lead time from product order increased from approximately 45-60 days to 90-120 days. In addition, as a result of a backlog of products being produced in China, the amount of time it takes to have the finished products shipped from China to our facilities has increased. This has directly impacted our ability to sell product directly, and it has increased the amount of inventory we purchase, although we continue to have product available through third-party sellers, such as Amazon, although sales through such third-party sellers result in smaller profit margins than direct sales.
The extent to which the COVID-19 outbreak impacts our business, results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to the duration, spread, severity and impact of the COVID-19 outbreak, the effects of the outbreak on our customers and vendors and the remedial actions and stimulus measures adopted by local and federal governments, and to what extent normal economic and operating conditions can resume. Even after the COVID-19 outbreak has subsided, we may continue to experience materially adverse impacts to our business as a result of any economic recession or depression that has occurred or may occur in the future. Furthermore, the financial condition of our customers and vendors may be adversely impacted, which may result in a decrease in spending by our customers, and an increase in bankruptcies or insolvencies, or a delay in payments, with respect to our vendors. Either of these events may, in turn, have a material adverse impact our business, results of operations and financial condition.
We face business, political, operational, financial and economic risks because a portion of our net sales are generated internationally and substantially all of our products are manufactured outside of the United States.
We face business, political, operational, financial and economic risks inherent in international business, many of which are beyond our control, including: difficulties obtaining domestic and foreign export, import and other governmental approvals, permits and licenses, and compliance with foreign laws, which could halt, interrupt or delay our operations if we cannot obtain such approvals, permits and licenses, and that could have a material adverse effect on our results of operations; difficulties encountered by our international distributors or us in staffing and managing foreign operations or international sales, including higher labor costs, which could increase our expenses and decrease our net sales and profitability; transportation delays and difficulties of managing international distribution channels, which could halt, interrupt or delay our operations; longer payment cycles for, and greater difficulty collecting, accounts receivable, which could reduce our net sales and harm our financial results; trade restrictions, higher tariffs, currency fluctuations or the imposition of additional regulations relating to import or export of our products, especially in China, where substantially all of our products are manufactured, which could force us to seek alternate manufacturing sources or increase our expenses, either of which could have a material adverse effect on our results of operations; political and economic instability, including wars, terrorism, political unrest, boycotts, curtailment of trade and other business restrictions, any of which could materially and adversely affect our net sales and results of operations; and natural disasters, which could have a material adverse effect on our results of operations.
In addition, the outbreak of communicable diseases, such as a new virus known as the Coronavirus (COVID-19), could result in a widespread health crisis that could adversely affect general commercial activity and our business. An outbreak of communicable diseases in the region that we operate or regions from which our customers travel from or through, or the perception that such an outbreak could occur, and the measures taken by the governments of countries affected, including restricting air travel and other means of transportation, imposing quarantines and curfews and requiring the closure of our offices or other businesses, including office buildings, theatres, retail stores and other commercial venues, could adversely affect our business, financial condition or results of operations.
Any of these factors could reduce our net sales, decrease our gross margin or increase our expenses. Should we establish our own operations in international territories where we currently utilize a distributor, we will become subject to greater risks associated with operating outside of the United States.
Our business could suffer if any of our manufacturers fail to use acceptable labor practices.
We do not control our manufacturers or their labor practices. The violation of labor or other laws by a manufacturer utilized by us, or the divergence of an independent manufacturer’s labor practices from those generally accepted as ethical or legal in the United States, could damage our reputation or disrupt the shipment of finished products to us if such manufacturer is ordered to cease its manufacturing operations due to violations of laws or if such manufacturer’s operations are adversely affected by such failure to use acceptable labor practices. If this were to occur, it could have a material adverse effect on our financial condition and results of operations.
Exchange rate fluctuation between the U.S. dollar and Non-U.S. currencies may negatively affect our earnings.
Although most of our products imported for our core business are denominated in U.S. dollars, our operating results and cash flows may be subject to fluctuations due to changes in the relative values of the U.S. dollar and other foreign currencies. These fluctuations could negatively affect our operating results and could cause our revenues and net income or loss to vary from quarter to quarter. Furthermore, to the extent that we increase our revenues in regions, where our sales are denominated in U.S. dollars, a strengthening of the dollar versus other currencies could make our products less competitive in those foreign markets and collection of receivables more difficult.
Weakened global economic conditions may adversely affect our industry, business and results of operations.
Our overall performance will depend, in part, on worldwide economic conditions. The United States and other key international economies have been impacted by falling demand for a variety of goods and services, restricted credit, going concern threats to major multinational companies and medium and small businesses, poor liquidity, reduced corporate profitability, volatility in credit, equity and foreign exchange markets and bankruptcies. These conditions affect the rate of information technology spending and could adversely affect our customers’ ability or willingness to purchase our proposed enterprise cloud computing application service, delay prospective customers’ purchasing decisions, reduce the value or duration of their subscription contracts, or affect renewal rates, all of which could adversely affect our operating results.
If we experience significant fluctuations in our rate of anticipated growth and fail to balance our expenses with our revenue forecasts, our results could be harmed.
Due to our evolving business model, the unpredictability of new markets that we intend to enter and the unpredictability of future general economic and financial market conditions, we may not be able to accurately forecast our rate of growth. We plan our expense levels and investment on estimates of future revenue and future anticipated rate of growth. As a result, we expect that our revenues, operating results and cash flows may fluctuate significantly on a quarterly basis.
We do not anticipate paying dividends in the foreseeable future.
We anticipate that we will retain all future earnings and other cash resources for the future operation and development of our business and we do not intend to declare or pay any cash dividends in the foreseeable future. Future payment of cash dividends will be at the discretion of our board of directors after taking into account many factors, including our operating results, financial condition and capital requirements. Corporations that pay dividends may be viewed as a better investment than corporations that do not.
Management has identified material weaknesses in the design and effectiveness of our internal controls, which, if not remediated could affect the accuracy and timeliness of our financial reporting and result in misstatements in our financial statements.
In connection with the preparation of our Report on Form 10-K, an evaluation was carried out by management, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”) as of December 31, 2019. Disclosure controls and procedures are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified, and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
During evaluation of disclosure controls and procedures as of December 31, 2020 conducted as part of our annual audit and preparation of our annual financial statements, management conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures and concluded that our disclosure controls and procedures were not effective. Management determined that at December 31, 2020, we had material weaknesses that relate to: (i) the lack of an independent audit committee; (ii) failure to have the Board of Directors review and approve significant transactions; (iii) an insufficient number of personnel appropriately qualified to perform control design, execution and monitoring activities; (iv) an insufficient number of personnel with an appropriate level of U.S. GAAP knowledge and experience and ongoing training in the application of U.S. GAAP and SEC disclosure requirements commensurate with our financial reporting requirements; (v) inadequate segregation of duties consistent with control objectives; and (vi) lack of written documentation of our key internal control policies and procedures over financial reporting.
These material weaknesses could result in a misstatement to the accounts and disclosures that would result in a material misstatement to our annual or interim consolidated financial statements that would not be prevented or detected. If we do not remediate the material weaknesses or if other material weaknesses are identified in the future, we may be unable to report our financial results accurately or to report them on a timely basis, which could result in the loss of investor confidence and have a material adverse effect on our stock price as well as our ability to access capital and lending markets.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

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ITEM 2. PROPERTIES
ITEM 2. DESCRIPTION OF PROPERTY.
Our principal executive offices and warehouse are located at 1689-A Arrow Rt., Upland, CA 91786. We occupy a 2,974 square foot facility pursuant to a four-year lease with an independent party ending on January 31, 2023, pursuant to which we pay $2,825 per month in rental charges.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS.
Other than disclosed below, we know of no material, existing or pending legal proceedings against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to our interest.
Employment Matters
On September 27, 2019, Dennis Forchic (the “Plaintiff”) filed a breach of contract case against the Company in the Los Angeles Superior Court of Los Angeles, California, under case number 19STCV34592, alleging that the Company wrongfully terminated the Plaintiff’s employment agreement on February 5, 2018. The Plaintiff claims damages of $646,000 for unpaid severance, unpaid reimbursed expenses, and unpaid health benefits. In addition, the Plaintiff claims damages for failing to compensate Plaintiff for 3,000,000 stock options which vested on termination. On March 3, 2020, the Plaintiff was awarded a default judgment against the Company in the amount of $646,000, plus post judgment interest, as well as the vesting of options to purchase 1,000,000 shares of the Company’s common stock. On September 25, 2020, the Company negotiated a settlement for a total cash consideration of $165,000.
On or about June 25, 2018, Matthew Geschke (the “Plaintiff”) filed a breach of contract case against the Company in the San Diego Superior Court of San Diego, California. The Plaintiff claimed damages for breach of an employment contract when the Company terminated the Plaintiff’s employment agreement on February 22, 2018. On June 26, 2020, the Plaintiff was awarded a default judgment against the Company in the amount of $448,000. No payments were made during the year ended December 31, 2020.
Lease Abandonment
On February 15, 2019, MSCP, L.L.C (“MSCP”), filed suit in the Superior Court of Arizona, County of Maricopa, Case No. CV2019-001613 against the Company and YLK. The case arises from YLK’s alleged breach of a certain lease agreement dated May 19, 2018 (the “Lease”), for the lease of certain real property located at 4301 W. Buckeye Road, Phoenix, Arizona 85043 (the “Premises”), between MSCP and YLK, which the Company guaranteed. MSCP filed the lawsuit after YLK provided a notice of termination for, amongst other reasons, MSCP’s failure to disclose various material information regarding code, safety, structural and other issues in the Premises that rendered the Premises unsuitable for use, unless the Company undertook significant and extraneous costs that were not contemplated under the Lease to remedy said issues in and outside of the Premises. MSCP’s complaint alleged counts for breach of lease and waste and breach of guaranty. MSCP is seeking compensatory damages, rents and other charges due under the lease, and attorney’s fees and costs. The Company just recently filed its answer denying the allegations as well as having filed counterclaims for fraud in the inducement, negligent misrepresentation, breach of the implied covenant of good faith and fair dealing, rescission of contract, unjust enrichment and punitive damages. On December 12, 2019, MSCP was awarded a default judgment against the Company in the amount of $1,487,000, which is recorded as a charge to operating expenses in the consolidated statements of operations for the year ended December 31, 2019. On September 11, 2020, the Company negotiated a settlement for a total consideration of $193,000, which were comprised of $150,000 in cash, and the issuance of 3,333,333 shares of the Company’s common stock valued at $43,000, and recorded a gain on settlement of legal obligations of $1,441,000.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4. MINE SAFETY DISCLOSURE.
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market Information
Our common stock is available for quotation on the OTCQB under the symbol “GNAL”. The OTCQB is a quotation service that displays real-time quotes, last-sale prices, and volume information in over-the-counter (“OTC”) equity securities. An OTCQB equity security generally is any equity that is not listed or traded on a national securities exchange. Our stock is thinly traded, and a robust, active trading market may never develop. The market for the Company’s common stock has been limited, volatile, and sporadic.
Price Range of Common Stock
The following table shows, for the periods indicated, the high and low closing prices per share of our common stock as reported by the OTCQB quotation service.
Fiscal Year 2020
High Low
First Quarter $ 0.05 $ 0.01
Second Quarter $ 0.02 $ 0.01
Third Quarter $ 0.02 $ 0.01
Fourth Quarter $ 0.02 $ 0.01
Fiscal Year 2019
High Low
First Quarter $ 0.72 $ 0.26
Second Quarter $ 0.47 $ 0.10
Third Quarter $ 0.12 $ 0.02
Fourth Quarter $ 0.04 $ 0.01
Holders of Common Stock
As of March 31, 2021, there were approximately 54 shareholders of record of our common stock. The actual number of stockholders is greater than this number of record holders and includes stockholders who are beneficial owners but whose shares are held in street name by brokers and other nominees. This number of holders of record also does not include stockholders whose shares may be held in trust or by other entities.
Dividend Policy
We have never paid any cash dividends on our capital stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We intend to retain future earnings to fund ongoing operations and future capital requirements of our business. Any future determination to pay cash dividends will be at the discretion of the Board and will be dependent upon our financial condition, results of operations, capital requirements and such other factors as the Board deems relevant.
Recent Sales of Unregistered Securities
None.
Repurchases of Equity Securities by the Issuer and Affiliated Purchasers
We did not purchase any of our registered securities during the period covered by this Annual Report.

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. SELECTED FINANCIAL DATA.
Not required under Regulation S-K for “smaller reporting companies.”

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. See “Note Regarding Forward-Looking Statements.” Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors discussed in “Risk Factors” and elsewhere in this report.
The following discussion and analysis of the Company’s financial condition and results of operations is based on the preparation of our financial statements in accordance with U.S. generally accepted accounting principles. You should read this discussion and analysis together with such financial statements and the related notes thereto.
Business Overview
We are focused on the research, design, development and manufacturing of advanced, energy efficient indoor horticulture lighting, plant nutrient products, and ancillary equipment. Our vision is to apply the latest advances in high efficiency lighting and controls technology as well as effective manufacturing techniques to deliver highly differentiated lighting and nutrient products with clear benefits at competitive prices to the greenhouse and indoor horticulture markets.
Our subsidiary, Solis Tek, Inc., a California corporation, was formed in June of 2010. Its operations consist of designing, developing and sourcing of a line of Solis Tek Digital Ballasts intended for use in high intensity lighting systems used for horticulture. An electrical ballast is a device intended to limit the amount of current in an electric circuit. A familiar and widely used example is the inductive ballast used in fluorescent lamps, which limits the current through the tube, which would otherwise rise to destructive levels due to the tube’s negative resistance characteristic. Since the commencement of operations, our product line has evolved from digital ballasts to a line of lighting products including a line of specialty ballasts ranging from 400 watts to 1,000 watts with various features, our Lamp Products, a line of reflectors, high intensity lighting accessories and a new line of LED lighting technologies.
Results of Operations for the year ended December 31, 2020 compared to the year ended December 31, 2019
Revenue and Cost of Goods Sold
Revenue for the years ended December 31, 2020 and 2019 was $1,282,000 and $1,965,000, respectively, a decrease of $683,000, or 35%. The decrease was due to two significant factors during the year ended December 31, 2020, as compared to the prior year period. Those factors were: 1) a failed expansion of operations into cannabis cultivation and processing management services, which diverted resources and management attention; and 2) stagnation of the cannabis industry in terms of new markets and granting of new cultivation licenses, which resulted in few new companies obtaining licenses to legally grow cannabis, which ultimately resulted in a lack of orders for our lights.
Specific reasons to beset our revenue included a change of message and direction. We had previously been a retail driven company servicing our 500+ hydro-stores targeting the home and hobbyist growers. While we continue to service those valued retail customers, we have repositioned a segment of our sales force to nationwide commercial cultivation account managers and have re-programed the sales team, changed pricing and changed marketing strategies. Our recent shift to convert to a commercial mindset, also altered our inventory strategy to longer fulfillment and lead times. For the first time, our product engineers and sales team are also offering specific consulting services into every aspect of a new cultivation, including environmental requirements as well as full build-out and growing ancillary services, up to and including production requirements and specifications.
Cost of sales for the years ended December 31, 2020 and 2019 was $687,000 and $1,066,000, respectively. Gross profit for the years ended December 31, 2020 and 2019 was $595,000 and $899,000, respectively. As a percentage of revenue, gross profit was 46% for the years ended December 31, 2020 and 2019. The decrease in our gross profit was due to our decrease in revenue.
Selling, General and Administrative (SG&A) Expenses
SG&A expenses for the years ended December 31, 2020 and 2019 were $1,105,000 and $3,580,000, respectively, a decrease of $2,475,000, or 69%. We implemented a number of cost reduction initiatives leading to decreased wages and benefits of $998,000, decreased legal and professional fees of $374,000, decreased rent expense of $296,000, decreased delivery costs of $155,000, decreased bad debt of $152,000, and decreased stock-based compensation expense of $95,000, as compared to the prior year period. The remaining decrease of $405,000 was across our numerous remaining expense accounts.
Research and Development (R&D) Expenses
R&D expenses for the years ended December 31, 2020 and 2019 were $100,000 and $155,000, respectively, a decrease of $55,000, or 35%. The decrease in R&D expenses was primarily due to decreased R&D investments in the current year period.
Legal Judgments
On or about June 25, 2018, Matthew Geschke (the “Plaintiff”) filed a breach of contract case against the Company in the San Diego Superior Court of San Diego, California. The Plaintiff claimed damages for breach of an employment contract when the Company terminated the Plaintiff’s employment agreement on February 22, 2018. On June 26, 2020, the Plaintiff was awarded a default judgment against the Company in the amount of $448,000.
On February 15, 2019, MSCP, L.L.C, or MSCP, filed suit in the Superior Court of Arizona, County of Maricopa, Case No. CV2019-001613 against us and YLK Partners. The case arises from YLK Partner’s alleged breach of a certain lease agreement dated May 19, 2018, or the Lease, for the lease of certain real property located at 4301 W. Buckeye Road, Phoenix, Arizona 85043, or the Premises, between MSCP and YLK Partners, which we guaranteed. MSCP filed the lawsuit after YLK Partners provided a notice of termination. MSCP’s complaint alleged counts for breach of lease and waste and breach of guaranty. On December 12, 2019, MSCP was awarded a default judgment against the Company in the amount of $1,487,000.
Impairment of Right of Use Asset
Impairment of right of use asset for the years ended December 31, 2020 and 2019 was $427,000 and $100,000, respectively. During the years ended 2020 and 2019, we determined that our right of use asset was impaired and recorded an impairment charge accordingly (See Note 5 to the accompanying consolidated financial statements).
Loss on Abandonment of Leasehold Improvements
In February 2019, we terminated our Arizona facility lease, thereby abandoning $217,000 of leasehold improvements. We recorded the abandonment of leasehold improvements of $217,000 during the year ended December 31, 2019. No similar activity occurred during the current year period.
Impairment of Intangible Assets
Impairment of intangible assets for the year ended December 31, 2019 was $1,139,000. In June 2019, we determined that our intangible assets were impaired and recorded an impairment charge accordingly. (See Note 3 to the accompanying consolidated financial statements). No similar activity occurred during the current year period.
Other Income and Expenses
Other income for the year ended December 31, 2020 was $914,000, as compared to other expense of $1,952,000 for the year ended December 31, 2019. The change in balance was due to the aggregate gain on settlements of legal judgments and a trade account payable of $2,417,000, offset by the loss on conversion of accrued interest of $85,000, both of which did not exist during the current year period. Additionally, we realized the change in financing and debt extinguishment costs of $1,090,000, the change in the fair value of derivative liability of $195,000, and the change in interest expense of $361,000, as compared to the prior year period.
Net Loss
Net loss for the years ended December 31, 2020 and 2019 was $571,000 and $7,894,000, respectively. The decrease in net loss was due to the increase in gross profit, the decrease in operating expenses, and the change in other income and expenses as discussed above.
Liquidity and Capital Resources
Cash and Liquidity
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.
Cash Flows Used in Operating Activities
During the year ended December 31, 2020, we used $499,000 in operating activities, comprised primarily of our net loss of $571,000, a gain on settlement of legal judgments and trade accounts payable of $2,417,000, an impairment of right of use asset of $427,000, a change in the fair value of derivative liabilities of $398,000, a change in inventory of $352,000, a $328,000 legal settlement payable, a $209,000 increase in interest due to related parties, $185,000 of stock-based related compensation, a $134,000 increase in accounts payable and accrued expenses, and a $85,000 loss on conversion of accrued interest.
During the year ended December 31, 2019, we used $1,010,000 in operating activities, comprised primarily of our net loss of $7,894,000, a $1,545,000 in legal settlements payable, a $1,139,000 impairment of intangible asset, a $962,000 in debt extinguishment cost, a $870,000 increase in accounts payable, a $786,000 decrease in provision for inventory reserves, $336,000 of amortization on debt discount, $256,000 of fair value of common stock for services, a $232,000 decrease in prepaid expenses and other current assets, a $226,000 increase in interest due to related parties, a $224,000 loss on abandonment of leasehold improvements and other fixed assets, a $203,000 change in the fair value of derivative liability, $194,000 in financing costs related to change in terms of warrants and convertible notes, a $124,000 decrease in accounts receivable, and a $24,000 of fair value of vested stock options.
Cash Flows Used in Investing Activities
During the year ended December 31, 2019, we used $222,000 of cash to purchase property and equipment. No similar activity occurred during the current year period.
Cash Flows Provided by Financing Activities
During the years ended December 31, 2020 and 2019, we had cash provided from financing activities of $767,000 and $449,000, respectively. During the year ended December 31, 2020, we received proceeds of $465,000, net of fees of $35,000, from a secured convertible note payable and $355,000 from loans payable, offset by $53,000 of payments on our loan payable.
During the year ended December 31, 2019, we generated cash from financing activities of $449,000, compared to cash provided by financing activities of $3,977,000 for the year ended December 31, 2018. During the year ended December 31, 2019, we received proceeds of $275,000, net of fees of $38,000, from a secured convertible note payable, $150,000 from a loan payable and $150,000 from a note payable to related parties, offset by $88,000 of payments on our notes payable to related parties.
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated financial statements, during the year ended December 31, 2020, we incurred a net loss of $571,000 and used cash in operations of $499,000 and had a shareholders’ deficit of $8,736,000 as of December 31, 2020. These factors raise substantial doubt about our ability to continue as a going concern within one year after the date of the financial statements being issued. Our ability to continue as a going concern is dependent upon our ability to raise additional funds and implement our business plan. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
At December 31, 2020, we had cash on hand in the amount of $372,000. Management estimates that the current funds on hand will be sufficient to continue operations through September 30, 2021. The continuation of our company as a going concern is dependent upon our ability to obtain necessary debt or equity financing to continue operations until we begin generating positive cash flow. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in case or equity financing.
Historically, we have financed our operations primarily through private sales of common stock, a line of credit, loans from a third party financial institutions, related parties, and operations. We anticipate that our primary capital source will be from the issuance of notes payable or the proceeds from the sale of our common stock. If our sales goals do not materialize as planned, we believe that we can reduce our operating costs and achieve positive cash flow from operations. However, we may not generate sufficient revenues from product sales in the future to achieve profitable operations. If we are not able to achieve profitable operations at some point in the future, we may have insufficient working capital to maintain our operations as we presently intend to conduct them or to fund our expansion, marketing, and product development plans. There can be no assurance that we will be able to obtain such financing on acceptable terms, or at all.
Notes Payable to Related Parties
On May 9, 2016, we entered into note payable agreements with Alan Lien and Alvin Hao, former officers and directors, to borrow $300,000 under each individual note. Pursuant to the terms of each of these agreements, we borrowed $300,000 from each of Alan Lien and Alvin Hao. The notes accrue interest at a rate of 8% per annum, are unsecured and were due on or before May 31, 2018. The notes are currently past due. A total of $600,000 was due on the combined notes at December 31, 2020 and 2019.
On May 8, 2019, we entered into a note agreement with the sister of Alvin Hao, a former officer and director, to borrow $150,000. The loan accrues interest at 8% per annum, are unsecured and due on November 8, 2019. The note is currently past due. A total of $150,000 was due on the note at December 31, 2020 and 2019.
We entered into note agreements with the parents of Alan Lien, a former officer and director. The loans accrue interest at 10% per annum, are unsecured and were due on or before December 31, 2016. The notes are currently past due.
A total of $40,000 was due on the loans at each of December 31, 2020 and 2019.
Secured Convertible Notes Payable
On May 10, 2018, we issued a secured debenture (the “2018 Note”) to YA II PN in the principal amount of $1,500,000 with interest at 8% per annum (18% on default) and due on February 9, 2019. The 2018 Note was amended effective February 9, 2019 for which the maturity date was extended to August 9, 2019 and could be converted into our common stock at a conversion price of $0.50 a share. On October 29, 2019, the 2018 Note was further amended to include an extended maturity date of June 30, 2020, and provide a conversion right, in which the principal amount of the 2018 Note, together with any accrued but unpaid interest, could be converted into our common stock at a conversion price at 75% of the lowest volume weighted average price (VWAP) of our common stock during the 10 trading days immediately preceding the conversion date.
On October 29, 2019, we issued a convertible secured debenture (the “2019 Note”) to YA II PN in the principal amount of $275,000 with interest at 10% per annum (15% on default) and due on April 29, 2020. We received net proceeds of $237,500, net of closing costs of $37,500. The 2019 Note provides a conversion right, in which the principal amount of the Note, together with any accrued but unpaid interest, could be converted into our common stock at a conversion price at 75% of the lowest volume weighted average price (VWAP) of our common stock during the 10 trading days immediately preceding the conversion date.
On February 13, 2020, we issued a secured convertible debenture (the “2020 Note”) in the amount of $150,000. The 2020 Note bears interest at a rate of 10% per annum (15% on default) and has a maturity date of August 10, 2021. The 2020 Note is secured by all our and our subsidiaries assets. The 2020 Note provides a conversion right, in which any portion of the principal amount of the 2020 Note, together with any accrued but unpaid interest, may be converted into our common stock at a conversion price equal to 75% of the lowest VWAP of our common stock during the ten (10) trading days immediately preceding the date of conversion, subject to adjustment.
On September 23, 2020, we issued a secured convertible debenture (the “September 2020 Note”) in the amount of $150,000. The September 2020 Note bears interest at a rate of 10% per annum (15% on default) and has a maturity date of August 10, 2021. The September 2020 Note is secured by all our and our subsidiaries assets. The 2020 September Note provides a conversion right, in which any portion of the principal amount of the 2020 September Note, together with any accrued but unpaid interest, may be converted into our common stock at a conversion price equal to 75% of the lowest VWAP of our common stock during the ten (10) trading days immediately preceding the date of conversion, subject to adjustment.
Term Loan
On May 21, 2019, we entered into a loan agreement with Celtic Bank in the principal amount of $150,000 with interest at 40.44% per annum and due on May 21, 2020. The loan was guaranteed by Alvin Hao, one of our former officers. We have made principal payment of $53,000, leaving a total of $11,000 due on the term loan as of December 31, 2020. In February 2021, the loan was paid in full.
On May 7, 2020, the Company was granted a loan (the “PPP loan”) from Wells Fargo Bank in the aggregate amount of $205,000, pursuant to the Paycheck Protection Program (the “PPP”) under the CARES Act. The PPP loan agreement is dated May 8, 2020, matures on May 7, 2022, bears interest at a rate of 1% per annum, with the first six months of interest deferred, and is unsecured and guaranteed by the U.S. Small Business Administration (“SBA”). The loan term may be extended to May 7, 2025, if mutually agreed to by the Company and lender. A total of $205,000 was due on the loan as of December 31, 2020.
On June 7, 2020, the Company obtained an Economic Injury Disaster Loan from the SBA in the amount of $150,000. Interest on the loan is at the rate of 3.75% per year, and all loan payments are deferred for twelve months, at which time the balance is payable in monthly installments of $731 over a 30-year term. The loan is secured by all the Company’s assets. A total of $150,000 was due on the loan as of December 31, 2020.
Critical Accounting Policies and Estimates
Management’s discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to impairment of long-lived assets, including finite lived intangible assets, accrued liabilities, fair value of warrant derivatives and certain expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.
Our significant accounting policies are more fully described in Note 1 to our financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and the related disclosures of contingent assets and liabilities. Actual results could differ from those estimates under different assumptions or conditions. We believe that the following critical accounting policies are subject to estimates and judgments used in the preparation of our consolidated financial statements:
Revenue Recognition
The Company recognizes revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”). Revenue is recognized when control of promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company reviews its sales transactions to identify contractual rights, performance obligations, and transaction prices, including the allocation of prices to separate performance obligations, if applicable. Revenue and cost of sales are recognized once products are delivered to the customer’s control and performance obligations are satisfied.
Accounts Receivable
Accounts receivable are recorded net of an allowance for expected losses. The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, the age of the accounts receivable balances, credit quality, economic conditions that may affect a customer’s ability to pay and expected default frequency rates. Trade receivables are written off at the point when they are considered uncollectible.
Inventories
Inventories are stated at the lower of cost or net realizable value. The Company provides inventory reserves based on excess and obsolete inventories determined primarily by historical sales and future demand forecasts. The write down amount is measured as the difference between the cost of the inventory and market based upon assumptions about future demand and charged to the provision for inventory, which is a component of cost of sales. At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.
New Accounting Standards
See Note 1 of the financial statements for a discussion of recent accounting pronouncements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results or operations, liquidity, capital expenditures or capital resources that is material to investors.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not required under Regulation S-K for “smaller reporting companies.”

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
Page
PART I - FINANCIAL INFORMATION
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Operations for the Years Ended December 31, 2020 and 2019
Consolidated Statements of Shareholders’ Deficit for the Years Ended December 31, 2020 and 2019
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and 2019
Notes to Consolidated Financial Statements to
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholder’s and Board of Directors
Generation Alpha, Inc.
Upland, California
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Generation Alpha, Inc. (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, shareholders’ deficit, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2020 and 2019, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, the Company experienced a net loss and utilized cash from operations during the year ended December 31, 2020, and has a stockholders’ deficit at December 31, 2020. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1 to the financial statements. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, and audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved especially challenging, subjective, or complex judgments. The communication of critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Issuance of convertible notes with adjustable conversion features
As discussed in Note 8 to the consolidated financial statements, in February 2020 and September 2020, the Company issued $500,000 in convertible notes that are convertible into shares of the common stock of the Company at adjustable conversion prices. The accounting for the transactions was complex, as it required management to assess whether the conversion feature required bifurcation and separate valuation. As a result, the Company determined that the conversion feature of the convertible notes were not considered indexed to the Company’s own stock, and should be bifurcated, with the fair value of the bifurcated conversion features characterized as derivative liabilities. At December 31, 2020, the derivative liabilities totaled $2,161,000. The Company utilized a Monte Carlo Simulation Model prepared by a third-party valuation firm to determine the fair value of the embedded derivatives, which uses certain assumptions related to expected life of the conversion features, expected volatility, risk-free interest rates, and future dividends.
We identified the accounting for the issuance of convertible notes and accounting for the assessment of the fair values of the derivative liabilities as a critical audit matter, because of the significance of the account balances, and due to the complexity in assessing the features of the convertible notes for separate accounting, and the significant judgments used by the third party valuation firm in determining the fair value of the bifurcated conversion feature. Auditing the accounting for the issuance of the convertible notes and the valuation of the derivative liabilities involved increased extent of effort and a high degree of auditor judgment.
The primary audit procedures we performed to address this critical audit matter included the following, among others:
● We inspected the convertible note agreements and relevant documentation.
● We evaluated the Company’s conclusions regarding the application of relevant accounting guidance to the convertible notes, including conclusions reached with respect to identification and bifurcation of embedded conversion features.
● We assessed the professional competence, experience, and objectivity of the Company’s third-party valuation specialist.
● We tested the accuracy and completeness of data used by the third-party valuation specialist, including expected life, expected volatility, the risk free interest rate, and the dividend rate, and tested the mathematical accuracy of calculations.
● We developed independent estimates for the fair value of certain of the derivative liabilities based on the assumptions and data used by the third-party valuation specialist.
We have served as the Company’s auditor since 2015.
/s/ Weinberg & Company, P.A.
Los Angeles, California
April 13, 2021
GENERATION ALPHA INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2020 December 31, 2019
ASSETS
Current Assets
Cash $ 372,000 $ 104,000
Accounts receivable, net of allowance for doubtful accounts and returns of $12,000 and $112,000, respectively 54,000 -
Inventories, net of reserves of $30,000 and $125,000, respectively 133,000 390,000
Prepaid expenses and other current assets 54,000 24,000
Total Current Assets 613,000 518,000
Property and equipment, net 15,000 22,000
Right of use asset, net 63,000 427,000
Other assets 11,000 10,000
Total Assets $ 702,000 $ 977,000
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current Liabilities
Accounts payable and accrued expenses $ 1,649,000 $ 1,562,000
Legal obligations payable, including $0 and $646,000 due to former officer and shareholder, respectively 448,000 2,550,000
Lease payable, current portion 440,000 133,000
Contract obligations - past due 816,000 799,000
Notes payable - related parties - past due 790,000 790,000
Convertible notes payable to related party (including $1,775,000 and $0 that are past due, respectively), net of discount of $220,000 and $178,000, respectively 2,055,000 1,597,000
Accrued interest to related parties 531,000 351,000
Loans payable 11,000 64,000
Total Current Liabilities 6,740,000 7,846,000
Lease payable, net of current portion 182,000 423,000
Loans payable 355,000 -
Derivative liabilities 2,161,000 1,332,000
Total Liabilities 9,438,000 9,601,000
Commitments and Contingencies
Shareholders’ Deficit
Preferred stock, no par value, 20,000,000 shares authorized; no shares issued and outstanding at December 31, 2020 and December 31, 2019 - -
Common stock, $0.001 par value, 100,000,000 shares authorized; 59,557,830 and 46,820,564 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively 59,000 47,000
Additional paid-in-capital 32,186,000 31,739,000
Accumulated deficit (40,981,000 ) (40,410,000 )
Total Shareholders’ Deficit (8,736,000 ) (8,624,000 )
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT $ 702,000 $ 977,000
The accompanying notes are an integral part of these consolidated financial statements.
GENERATION ALPHA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31,
Sales $ 1,282,000 $ 1,965,000
Cost of goods sold 687,000 1,066,000
Gross profit 595,000 899,000
Operating expenses
Selling, general and administrative expenses 1,105,000 3,580,000
Research and development 100,000 155,000
Legal judgments 448,000 1,487,000
Impairment of right of use asset 427,000 100,000
Loss on abandonment of leasehold improvements - 217,000
Impairment of intangible assets acquired from related party - 1,139,000
Amortization of license agreement - 163,000
Total operating expenses 2,080,000 6,841,000
Loss from operations (1,485,000 ) (5,942,000 )
Other income (expenses)
Gain on settlement of legal judgments 2,370,000 -
Gain on settlement of trade accounts payable 47,000 -
Loss on conversion of accrued interest on convertible notes related party (85,000 )
Financing and debt extinguishment costs (1) (66,000 ) (1,156,000 )
Change in fair value of derivative liability (398,000 ) (203,000
Interest expense (2) (954,000 ) (593,000 )
Total other income (expenses) 914,000 (1,952,000 )
Net loss $ (571,000 ) $ (7,894,000 )
BASIC AND DILUTED LOSS PER SHARE $ (0.01 ) $ (0.17 )
WEIGHTED - AVERAGE COMMON SHARES OUTSTANDING BASIC AND DILUTED 53,419,000 46,343,600
(1) Included in financing costs are these amounts from a related party $ 66,000 $ 1,156,000
(2) Included in interest expense are these amounts from related parties $ 699,000 $ 523,000
The accompanying notes are an integral part of these consolidated financial statements.
GENERATION ALPHA INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
Balance, December 31, 2018 45,794,564 $ 46,000 $ 29,042,000 $ (32,516,000 ) $ (3,428,000 )
Reclassification of warrant liability to equity due to adoption of ASU 2017-11
2,161,000
2,161,000
Modification of warrants recorded as financing costs
194,000
194,000
Fair value of common stock issued for services 426,000 - 178,000
178,000
Fair value of common stock issued to directors and employees 600,000 1,000 77,000
78,000
Fair value of warrants recorded as a valuation discount
63,000
63,000
Fair value of vested stock options
24,000
24,000
Net loss
(7,894,000 ) (7,894,000 )
Balance, December 31, 2019 46,820,564 47,000 31,739,000 (40,410,000 ) (8,624,000 )
Common stock issued for conversion of accrued interest on convertible notes related party 2,287,066 2,000 112,000
114,000
Fair value of common stock issued to directors 6,116,867 6,000 86,000
92,000
Fair value of common stock issued in settlement of legal judgments 4,333,333 4,000 56,000
60,000
Fair value of warrants issued with convertible notes related party
100,000
100,000
Fair value of vested stock options
93,000
93,000
Net loss
(571,000 ) (571,000 )
Balance, December 31, 2020 59,557,830 $ 59,000 $ 32,186,000 $ (40,981,000 ) $ (8,736,000 )
The accompanying notes are an integral part of these consolidated financial statements.
GENERATION ALPHA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31
Cash Flows from Operating Activities
Net Loss $ (571,000 ) $ (7,894,000 )
Adjustments to reconcile net loss to net cash used in operating activities
Provision for allowance for doubtful accounts and sales returns (100,000 ) (33,000 )
Amortization of right of use asset 26,000 118,000
Impairment of right of use asset 427,000 100,000
Change in lease liability (23,000 ) (104,000 )
Provision for inventory reserves (95,000 ) -
Depreciation and amortization 7,000 196,000
Imputed interest on contractual obligation 17,000 17,000
Impairment of intangible asset - 1,139,000
Loss on conversion of accrued interest 85,000
Loss on abandonment and disposal of fixed assets - 224,000
Fair value of vested stock options 93,000 24,000
Fair value of common stock issued for services - 178,000
Fair value of common stock issued to directors and employees 92,000 78,000
Amortization of debt discount 458,000 336,000
Debt extinguishment cost - 962,000
Warrants or modification of warrants recorded as financing costs 66,000 194,000
Gain on settlement of legal judgments (2,370,000 ) -
Gain on settlement of trade accounts payable (47,000 ) -
Change in the fair value of derivative liability 398,000 203,000
Changes in operating assets and liabilities
Accounts receivable 46,000 124,000
Inventories 352,000 180,000
Prepaid expenses and other (30,000 ) 232,000
Other assets (1,000 ) 74,000
Accounts payable and accrued expenses 134,000 871,000
Legal settlement payable 328,000 1,545,000
Accrued interest to related parties 209,000 226,000
Net cash used in operating activities (499,000 ) (1,010,000 )
Cash Flows from Investing Activities
Purchase of property and equipment - (222,000 )
Net cash used in investing activities - (222,000 )
Cash Flows from Financing Activities
Proceeds from secured convertible note payable from related party, net of fees 465,000 237,000
Proceeds from notes payable related parties - 150,000
Proceeds from loans payable 355,000 150,000
Payment of loans payable (53,000 ) (88,000 )
Net cash provided by financing activities 767,000 449,000
Net increase (decrease) in cash 268,000 (783,000 )
Cash beginning of period 104,000 887,000
Cash end of period $ 372,000 $ 104,000
Interest paid $ 46,000 $ 64,000
Taxes paid $ - $ -
Non-Cash Financing Activities
Recording of right of use asset and lease liability $ 89,000 $ 645,000
Common stock issued for conversion of accrued interest on convertible notes related party $ 29,000 $
Fair value of derivative liability created upon issuance of convertible notes and warrants from related party $ 431,000 $ 167,000
Fair value of common stock issued on settlement of legal judgments $ 60,000 $ -
Fair value of warrants issued with convertible notes related party $ 100,000 $ 63,000
Reclassification of accounts payable and accrued expenses to legal settlement payable $ - $ 535,000
Reclassification of derivative liability to equity due to adoption of ASU 2017-11 $ - $ 2,107,000
The accompanying notes are integral part of these consolidated financial statements.
GENERATION ALPHA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
History and Organization
Generation Alpha, Inc. (the “Company”) was originally incorporated under the laws of the State of Nevada on March 2, 2007 as Cinjet, Inc. (“Cinjet”). Effective September 1, 2015, Cinjet changed its corporate name to Solis Tek Inc. (“Solis Tek”). Effective September 25, 2018, Solis Tek changed its corporate name to Generation Alpha, Inc. Effective September 25, 2018, Generation Alpha, Inc. (f/k/a Solis Tek Inc.) (the “Company”) entered into an agreement and plan of merger (the “Merger Agreement”), whereby a wholly-owned subsidiary of the Company (the “Merger Sub”) was merged into the Company (the “Merger”). Upon consummation of the Merger, the separate existence of Merger Sub ceased. On June 23, 2015, the Company entered into an Agreement of Merger and Plan of Reorganization (the “Agreement”) with Solis Tek Inc., a California corporation (“STI”), and CJA Acquisition Corp., a California corporation and a wholly owned subsidiary of the Company (“Merger Sub”), providing for the merger of Merger Sub with and into STI (the “Merger”), with STI surviving the Merger as a wholly-owned subsidiary of the Company. The Merger was accounted for as a recapitalization of the Company with STI being deemed the accounting acquirer.
Overview of Business
The Company is a vertically integrated technology innovator, developer, manufacturer and distributor focused on bringing products and solutions to commercial and retail cannabis growers in both the medical and adult use recreational space in legal markets across the U.S. The Company’s lighting and nutrient customers include retail stores, distributors and commercial growers in the United States and abroad.
COVID-19 Considerations
During the year ended December 31, 2020, the COVID-19 pandemic did not have a material net impact on our operating results. Although there were delays in product manufacturing and delivery from China during parts of 2020 as a result of COVID-19, manufacturing and shipping did resume later in 2020, resulting in little overall impact on operating results. We do continue to see longer lead times from product ordering to delivery. In the future, the pandemic may cause reduced demand for our products if, for example, the pandemic results in a recessionary economic environment which negatively effects the consumers who purchase our products. The Company has not observed any material impairments of its assets or a significant change in the fair value of its assets due to the COVID-19 pandemic.
Our ability to operate without significant negative operational impact from the COVID-19 pandemic will in part depend on our ability to protect our employees and our supply chain. The Company has endeavored to follow the recommended actions of government and health authorities to protect our employees. Since the onset of the COVID-19 pandemic, we maintained the consistency of our operations. However, the uncertainty resulting from the pandemic could result in an unforeseen disruption to our workforce and supply chain (for example an inability of a key supplier or transportation supplier to source and transport materials) that could negatively impact our operations.
Going Concern
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated financial statements, during the year ended December 31, 2020, the Company incurred a net loss of $571,000 and used cash in operations of $499,000 and had a shareholders’ deficit of $8,736,000 as of December 31, 2020. In addition, $2,565,000 of notes payable to related parties, $531,000 of accrued interest to related parties, and $816,000 of contract obligations are past due. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date of the financial statements being issued. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
At December 31, 2020, the Company had cash on hand in the amount of $372,000. Management estimates that the current funds on hand will be sufficient to continue operations through September 30, 2021. The continuation of the Company as a going concern is dependent upon its ability to obtain necessary debt or equity financing to continue operations until it begins generating positive cash flow. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stockholders, in case or equity financing.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: STI; Solis Tek East, Corporation (“STE”), an entity incorporated under the laws of the State of New Jersey, Zelda Horticulture, Inc. (“Zelda”), an entity incorporated under the laws of the State of California, and YLK Partners NV, LLC (“YLK”), Generation Alpha Brands, Inc., Trilogy Dispensaries, Inc., Extracting Point, LLC (“Extracting Point”), and GrowPro Solutions, Inc., all entities formed under the laws of Nevada. Intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in valuing our allowances for doubtful accounts, reserves for inventory obsolescence, valuing derivative liabilities, valuing equity instruments issued for services, and valuation allowance for deferred tax assets, among others. Actual results could differ from these estimates.
Revenue Recognition
The Company recognizes revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”). This standard provides authoritative guidance clarifying the principles for recognizing revenue and developing a common revenue standard for U.S. generally accepted accounting principles. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in the exchange for those goods or services.
Revenue is recognized when control of promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company reviews its sales transactions to identify contractual rights, performance obligations, and transaction prices, including the allocation of prices to separate performance obligations, if applicable. Revenue and cost of sales are recognized once products are delivered to the customer’s control and performance obligations are satisfied.
All products sold by the Company are distinct individual products and consist of advanced energy efficient indoor horticulture lighting, plant nutrient products, and ancillary equipment. The products are offered for sale as finished goods only, and there are no performance obligations required post-shipment for customers to derive the expected value from them. Contracts with customers contain no incentives or discounts that could cause revenue to be allocated or adjusted over time.
The Company does not offer a general right of return on any of its sales and considers all sales as final. The Company generally provides a three-year warranty on its ballasts. However, the Company does not maintain a warranty reserve as the Company is able to chargeback its vendors for all warranty claims. As of December 31, 2020, and 2019, the Company recorded reserves for returned product in the amounts of $0 and $60,000, respectively, which reduced the accounts receivable balances as of those periods.
In the following table, revenue is disaggregated by major product line for the year ended 2020:
Sales Channels Lighting Plant Nutrients and Fertilizers
Total
Hydroponic resellers/retail $ 433,000 $ 827,000 $ 1,260,000
Direct to consumer/online 22,000 - 22,000
Total $ 455,000 $ 827,000 $ 1,282,000
In the following table, revenue is disaggregated by major product line for the year ended 2019:
Sales Channels Lighting Plant Nutrients and Fertilizers
Total
Hydroponic resellers/retail $ 1,411,000 $ 496,000 $ 1,907,000
Direct to consumer/online 58,000 - 58,000
Total $ 1,469,000 $ 496,000 $ 1,965,000
Accounts Receivable
Accounts receivable are recorded net of an allowance for expected losses. The Company evaluates the collectability of its trade accounts receivable based on a number of factors. In circumstances where the Company becomes aware of a specific customer’s inability to meet its financial obligations to the Company, a specific reserve for bad debts is estimated and recorded, which reduces the recognized receivable to the estimated amount the Company believes will ultimately be collected. In addition to specific customer identification of potential bad debts, bad debt charges are recorded based on the Company’s historical losses and an overall assessment of past due trade accounts receivable outstanding.
The allowance for doubtful accounts and returns is established through a provision reducing the carrying value of receivables. At December 31, 2020 and 2019, the allowance for doubtful accounts was $12,000 and $52,000, respectively.
Inventories
Inventories are stated at the lower of cost or net realizable value. Cost is computed on a first-in, first-out basis. The Company’s inventories consist almost entirely of finished goods as of December 31, 2020 and 2019.
The Company provides inventory reserves based on excess and obsolete inventories determined primarily by future demand forecasts. The write down amount is measured as the difference between the cost of the inventory and net realizable value based on upon assumptions about future demand and charged to the provision for inventory write down, which is a component of cost of sales. At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. At December 31, 2020 and 2019, the reserve for excess and obsolete inventory was $30,000 and $125,000, respectively.
Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The Company has determined the estimated useful lives of its property and equipment, as follows:
Machinery and equipment years
Computer equipment years
Furniture and fixtures years
Maintenance and repairs are charged to expense as incurred. The cost and accumulated depreciation of assets sold or otherwise disposed of are removed from the related accounts and the resulting gain or loss is reflected in the statements of operations.
Management assesses the carrying value of property and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If there is an indication of impairment, management prepares an estimate of future cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. The Company did not record an impairment loss for the years ended December 31, 2020 and 2019.
Intangible Assets
The Company accounts for intangible assets in accordance with the authoritative guidance issued by the FASB. Intangibles are valued at their fair market value and are amortized taking into account the character of the acquired intangible asset and the expected period of benefit. The Company evaluates intangible assets for impairment, at a minimum, on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated undiscounted future cash flows. Recoverability of intangible assets is measured by comparing their net book value to the related projected undiscounted cash flows from these assets, considering a number of factors, including past operating results, budgets, economic projections, market trends and product development cycles. If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss.
At December 31, 2018, the Company had intangible assets of $1,302,000 that consisted of a license right. In June 2019, and based on management’s assessment, it was determined that the intangible asset was impaired, and an impairment charge was recorded for $1,139,000 during the year ended December 31, 2019.
Leases
Prior to January 1, 2019, the Company accounted for leases under ASC 840, Accounting for Leases. Effective January 1, 2019, the Company adopted the guidance of ASC 842, Leases (“ASC 842”), which requires an entity to recognize a right of use (“ROU”) asset and a lease liability for virtually all leases. The Company adopted ASC 842 using a modified retrospective approach. The adoption of ASC 842 on January 1, 2019 resulted in the recognition of operating lease ROU assets and lease liabilities for operating leases of $645,000. There was no cumulative-effect adjustment to accumulated deficit.
Income Taxes
Income tax expense is based on pretax financial accounting income. Deferred tax assets and liabilities are recognized for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts. Valuation allowances are recorded to reduce deferred tax assets to the amount that will more likely than not be realized. The Company has recorded a valuation allowance against its deferred tax assets as of December 31, 2020 and 2019.
The Company accounts for uncertainty in income taxes using a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50 percent likely of being realized upon settlement. The Company classifies the liability for unrecognized tax benefits as current to the extent that the Company anticipates payment (or receipt) of cash within one year. Interest and penalties related to uncertain tax positions are recognized in the provision for income taxes.
Derivative Financial Instruments
The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
Research and Development
Research and development costs are expensed in the period incurred. The costs primarily consist of personnel and supplies.
Shipping and Handling Costs
The Company’s shipping and handling costs relating to inbound freight are reported as cost of goods sold in the consolidated Statements of Operations, while shipping and handling costs relating to outbound freight are reported as selling, general and administrative expenses in the consolidated Statements of Operations. The Company classifies amounts billed to customers for shipping fees as revenues.
Fair Value Measurements
The Company determines the fair value of its assets and liabilities based on the exchange price in U.S. dollars that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company uses a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value:
● Level 1 - Quoted prices in active markets for identical assets or liabilities.
● Level 2 - Inputs, other than Level 1, that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
● Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The carrying amounts of financial instruments such as cash, accounts receivable, inventories, and accounts payable and accrued liabilities, approximate the related fair values due to the short-term maturities of these instruments. The carrying values of notes payable approximate their fair values due to the fact that the interest rates on these obligations are based on prevailing market interest rates.
The fair value of the derivative liabilities of $2,161,000 and $1,332,000 at December 31, 2020 and 2019, respectively, was valued using Level 2 inputs.
Loss per Share Calculations
Basic earnings per share are computed by dividing net income (loss) available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed by dividing the net income applicable to common shareholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued using the treasury stock method. Potential common shares are excluded from the computation when their effect is antidilutive. The dilutive effect of potentially dilutive securities is reflected in diluted net income per share if the exercise prices were lower than the average fair market value of common shares during the reporting period.
Options to acquire 10,002,210 shares of common stock, warrants to acquire 28,283,140 shares of common stock, and 173,780,295 shares of common stock issuable under convertible note agreements, have been excluded from the calculation of weighted average common shares outstanding at December 31, 2020, as their effect would have been anti-dilutive. Options to acquire 1,948,300 shares of common stock, warrants to acquire 18,283,140 shares of common stock, and 37,994,931 shares of common stock issuable under convertible note agreements, have been excluded from the calculation of weighted average common shares outstanding at December 31, 2019, as their effect would have been anti-dilutive.
Concentration Risks
Cash includes cash on hand and cash in banks and are reported as “Cash” in the consolidated balance sheets. At December 31, 2020 and December 31, 2019, cash includes cash on hand of $289,000 and $12,000, respectively, and cash in banks of $83,000 and $92,000, respectively. The balance of cash on hand is not insured by the Federal Deposit Insurance Corporation. The balance of cash in banks is insured by the Federal Deposit Insurance Corporation for up to $250,000.
The Company operates in markets that are highly competitive and rapidly changing. Significant technological changes, shifting customer needs, the emergence of competitive products or services with new capabilities, and other factors could negatively impact the Company’s operating results. State and federal government laws could have a material adverse impact on the Company’s future revenues and results of operations.
The Company’s products require specific components that currently are available from a limited number of sources. The Company purchases some of its key products and components from single vendors. During the years ended December 31, 2020 and 2019, its ballasts, lamps, and reflectors, which comprised the clear majority of the Company’s purchases during those periods, were each only purchased from one separate vendor.
The Company performs a regular review of customer activity and associated credit risks and does not require collateral or other arrangements. There were no customers that accounted for more than 10% of the Company’s revenue for the years ended December 31, 2020 and 2019. Shipments to customers outside the United States comprised less than 5% of our sales for the years ended December 31, 2020 and 2019, respectively.
As of December 31, 2020, three customers accounted for 37%, 23%, and 15% of the Company’s trade accounts receivable balance, and as of December 31, 2019, two customers accounted for 24% and 10% of the Company’s trade accounts receivable balance.
Segment Reporting
The Company operates in one segment for the manufacture and distribution of our products. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and President, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes. Since the Company operates in one segment, all financial information required by “Segment Reporting” can be found in the accompanying consolidated financial statements.
Recently Issued Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires entities to use a forward-looking approach based on current expected credit losses (“CECL”) to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company beginning January 1, 2023, and early adoption is permitted. The Company does not believe the potential impact of the new guidance and related codification improvements will be material to its financial position, results of operations and cash flows.
In August 2020, the FASB issued ASU No. 2020-06 (“ASU 2020-06”) “Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity.” ASU 2020-06 will simplify the accounting for convertible instruments by reducing the number of accounting models for convertible debt instruments and convertible preferred stock. Limiting the accounting models will result in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Convertible instruments that continue to be subject to separation models are (1) those with embedded conversion features that are not clearly and closely related to the host contract, that meet the definition of a derivative, and that do not qualify for a scope exception from derivative accounting and (2) convertible debt instruments issued with substantial premiums for which the premiums are recorded as paid-in capital. ASU 2020-06 also amends the guidance for the derivatives scope exception for contracts in an entity’s own equity to reduce form-over-substance-based accounting conclusions. ASU 2020-06 will be effective for the Company beginning January 1, 2024. Early adoption is permitted, but no earlier than January 1, 2021, including interim periods within that year. Management is currently evaluating the effect of the adoption of ASU 2020-06 on the consolidated financial statements, but currently does not believe ASU 2020-06 will have a significant impact on the Company’s accounting for its convertible debt instruments. The effect will largely depend on the composition and terms of the financial instruments at the time of adoption.
Other recent accounting pronouncements issued by the FASB, its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future financial statements.
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 2020 and 2019:
Machinery and equipment $ 67,000 $ 81,000
Computer equipment 11,000 11,000
Furniture and fixtures 40,000 40,000
118,000 132,000
Less: accumulated depreciation and amortization (103,000 ) (110,000 )
Property and equipment, net $ 15,000 $ 22,000
Depreciation expense for the years ended December 31, 2020 and 2019 was $7,000 and $33,000, respectively.
During the year ended December 31, 2020, the Company disposed of fully depreciated property and equipment of $14,000. During the year ended December 31, 2019, the Company disposed of property and equipment with a book value of $7,000, resulting in a loss on the disposal of property and equipment of $7,000.
In February 2019, the Company terminated its Arizona facility lease thereby abandoning of leasehold improvements with a remaining unamortized balance of $217,000. The Company recorded the abandonment of leasehold improvements of $217,000 during the year ended December 31, 2019 as a component of operating expense in the consolidated statement of operations (see Note 5).
NOTE 3 - CONTRACT OBLIGATION ACQUIRED FROM RELATED PARTIES
In May 2018, the Company entered into an acquisition agreement with the members, which in the aggregate, owned 100% of the membership interests in YLK, a related party. The major asset of YLK is a Cultivation Management Services Agreement (the “Management Agreement”) with an Arizona licensee that was entered into on January 5, 2018. During the year ended December 31, 2019, the Company determined the acquired assets were fully impaired, and recorded an impairment charge of $1,139,000 accordingly. The Company has a continuing obligation under the Management Agreement of $799,000 (net of discount of $51,000) as of December 31, 2019. As of December 31, 2020, the remaining Management Agreement obligation was $816,000 (net of discount of $34,000) and is reflected as a current liability in the accompanying consolidated balance sheet. As of December 31, 2020, the Company is past due on its installment payments obligations under the Management Agreement.
NOTE 4 - NOTES PAYABLE TO RELATED PARTIES - PAST DUE
Notes payable to related parties consists of the following at December 31, 2020 and 2019:
December 31, 2020 December 31, 2019
Notes payable to officers/shareholders - past due (a) 600,000 600,000
Notes payable to related party - past due (b) 150,000 150,000
Notes payable to related parties - past due (c) 40,000 40,000
Total $ 790,000 $ 790,000
a. On May 9, 2016, the Company entered into note payable agreements with Alan Lien and Alvin Hao, each a former officer and director, to borrow $300,000 under each individual note. Pursuant to the terms of each of these agreements, the Company borrowed $300,000 from each of Alan Lien and Alvin Hao. The notes accrue interest at a rate of 8% per annum, are unsecured and were due on or before May 31, 2018. The loans are currently past due. A total of $600,000 was due on the combined notes at December 31, 2020 and 2019.
b. On May 8, 2019, the Company entered into a note agreement with the sister of Alvin Hao, a former officer and director, to borrow $150,000. The loan accrues interest at 8% per annum (12% on default), is unsecured and is due on November 8, 2019. The note is currently past due. A total of $150,000 was due on the loans as of December 31, 2020 and 2019.
c. The Company entered into note agreements with the parents of Alan Lien, the Company’s Chief Executive Officer and one of its directors. The loans accrue interest at 10% per annum, are unsecured and were due on or before December 31, 2016. The loans are currently past due. A total of $40,000 was due on the loans as of December 31, 2020 and 2019.
At December 31, 2019, accrued interest on the notes payable to related parties was $149,000. During the year ended December 31, 2020, the Company added $70,000 of additional accrued interest, and made interest payments of $32,000, leaving an accrued interest on the notes payable to related parties balance of $187,000 at December 31, 2020.
NOTE 5 - LEASE PAYABLE
In 2019, our principal executive offices and warehouse were located at 853 Sandhill Avenue, Carson, California, 90746. We occupied a 17,640 square foot facility pursuant to a five-year lease with an independent party ending on June 30, 2023, pursuant to which we paid $15,000 per month in rental charges. On December 31, 2019, we abandoned our Carson, California lease. The Company remains obligated under its Carson, California lease, until such time the landlord releases us from our lease agreement. Based on the abandonment, the Company determined its ROU asset was impaired and recorded an impairment charge of $100,000 during the year ended December 31, 2019. During the year ended December 31, 2020, management determined it no longer had access to the Carson, California facility, and recorded an impairment charge for the remaining ROU asset balance of $427,000, which was charged to operating expenses in the consolidated statements of operations for the year ended December 31, 2020. As of the date of this report, the Company has not been released from the lease agreement, and no lease payments were made during the year ended December 31, 2020. The remaining balance of the lease obligation was $556,000 at both December 31, 2020 and 2019.
On January 1, 2020, the Company relocated its principal executive offices and warehouse to 1689-A Arrow Rt., Upland, California, 91786. The Upland, California lease is for a 2,974 square foot facility pursuant to a three-year lease with an independent party ending on January 31, 2023, pursuant to which it pays $2,800 per month in rental charges. On January 1, 2020, the Company recognized an operating lease ROU asset and lease liability of $89,000, related to the Upland, California operating lease. During the year ended December 31, 2020, the Company reflected amortization of the ROU assets of $26,000 related to its Upland, California operating lease, resulting in an ROU asset balance of $63,000 as of December 31, 2020.
As of December 31, 2019, liabilities recorded under operating leases were $556,000. During the year ended December 31, 2020, the Company added $89,000 in lease liabilities related to its Upland, California operating lease, and made lease payments of $23,000 towards its operating lease liability. As of December 31, 2020, liabilities under operating leases amounted to $622,000, of which $440,000 were reflected as current due.
The lease agreements above have a weighted average remaining lease term of 3.50 years as of December 31, 2020. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company accounts for the lease and non-lease components of its leases as a single lease component. Rent expense is recognized on a straight-line basis over the lease term.
Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Generally, the implicit rate of interest in arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The Company’s incremental borrowing rate is a hypothetical rate based on its understanding of what its credit rating would be. The operating lease ROU asset includes any lease payments made and excludes lease incentives.
The components of rent expense and supplemental cash flow information related to leases for the period are as follows:
Year ended
December 31, 2020
Lease Cost
Operating lease cost (included in general and administration in the Company’s statement of operations) $ 36,000
Other Information
Cash paid for amounts included in the measurement of lease liabilities during the year ended December 31, 2020 $ -
Weighted average remaining lease term - operating leases (in years) 3.50
Average discount rate - operating leases 10.0 %
The supplemental balance sheet information related to leases for the period is as follows:
At December 31, 2020
Operating leases
ROU assets, net of accumulated amortization of $144,000 and an impairment charge of $527,000 $ 36,000
Current operating lease liabilities $ 440,000
Long-term operating lease liabilities 182,000
Total operating lease liabilities $ 622,000
Maturities of the Company’s lease liabilities are as follows:
Year Ending Operating Leases
$ 406,000
225,000
97,000
6,000
-
Total lease payments 734,000
Less: Imputed interest (112,000 )
Total operating lease liability 622,000
Current portion (440,000 )
$ 182,000
Rent expense for the twelve months ended December 31, 2020 and 2019 was $36,000 and $316,000, respectively.
NOTE 6 - LEGAL OBLIGATIONS PAYABLE
Lease Abandonment Settlement
On February 15, 2019, MSCP, L.L.C (“MSCP”), filed suit in the Superior Court of Arizona, County of Maricopa, Case No. CV2019-001613 against the Company and YLK. The case arises from YLK’s alleged breach of a certain lease agreement dated May 19, 2018 (the “Lease”), for the lease of certain real property located at 4301 W. Buckeye Road, Phoenix, Arizona 85043 (the “Premises”), between MSCP and YLK, which the Company guaranteed. MSCP filed the lawsuit after YLK provided a notice of termination for, amongst other reasons, MSCP’s failure to disclose various material information regarding code, safety, structural and other issues in the Premises that rendered the Premises unsuitable for use, unless the Company undertook significant and extraneous costs that were not contemplated under the Lease to remedy said issues in and outside of the Premises. MSCP’s complaint alleged counts for breach of lease and waste and breach of guaranty. MSCP is seeking compensatory damages, rents and other charges due under the lease, and attorney’s fees and costs. The Company just recently filed its answer denying the allegations as well as having filed counterclaims for fraud in the inducement, negligent misrepresentation, breach of the implied covenant of good faith and fair dealing, rescission of contract, unjust enrichment and punitive damages. On December 12, 2019, MSCP was awarded a default judgment against the Company in the amount of $1,487,000, which is recorded as a charge to operating expenses in the consolidated statements of operations for the year ended December 31, 2019. During the year ended December 31, 2020, interest of $147,000 was added, leaving a balance owed of $1,634,000, for which the Company negotiated a settlement for a total consideration of $193,000 and recorded a gain on the settlement of legal obligations of $1,441,000. The $193,000 settlement payments were comprised of $150,000 in cash, and the issuance of 3,333,333 shares of the Company’s common stock valued at $43,000.
Employment Matter Judgment
On or about June 25, 2018, Matthew Geschke (the “Plaintiff”) filed a breach of contract case against the Company in the San Diego Superior Court of San Diego, California. The Plaintiff claimed damages for breach of an employment contract when the Company terminated the Plaintiff’s employment agreement on February 22, 2018. On June 26, 2020, the Plaintiff was awarded a default judgment against the Company in the amount of $448,000. No payments were made during the year ended December 31, 2020.
On September 27, 2019, Dennis Forchic (the “Plaintiff”) filed a breach of contract case against the Company in the Los Angeles Superior Court of Los Angeles, California, under case number 19STCV34592, alleging that the Company wrongfully terminated the Plaintiff’s employment agreement on February 5, 2018. The Plaintiff claims damages of $646,000 for unpaid severance, unpaid reimbursed expenses, and unpaid health benefits. In addition, the Plaintiff claims damages for failing to compensate Plaintiff for 3,000,000 stock options which vested on termination. As of December 31, 2018, the Company had recorded $588,000 related to this matter. On March 3, 2020, the Plaintiff was awarded a judgment against the Company in the amount of $646,000, plus post judgment interest, as well as the vesting of options to purchase 1,000,000 shares of the Company’s common stock. During the year ended December 31, 2019, the Company recorded an additional $58,000 of legal expenses, leaving a total balance due to Plaintiff of $646,000 at December 31, 2019. During the year ended December 31, 2020, interest of $38,000 was added, leaving a balance owed of $684,000, for which the Company negotiated a settlement for a total cash consideration of $165,000 and recorded a gain on the settlement of legal obligations of $519,000.
Breach of Contract
On September 12, 2019, DPA, Inc., or DPA, filed suit in the Superior Court of Arizona, County of Maricopa, Case No. CV2019-008265 against us. The plaintiff alleges the Company breached an agreement to pay DPA for architectural design services related to a facility in Arizona and has requested a judgment for $252,000 plus interest. On September 18, 2019, the DPA was awarded a judgment against the Company for $252,000 plus interest at 18% per annum from June 6, 2019 until paid. During the year ended December 31, 2019, interest of $22,000 was added, leaving a balance owed of $274,000 at December 31, 2019. During the year ended December 31, 2020, interest of $26,000 was added, leaving a balance owed of $300,000, for which the Company negotiated a settlement for a total consideration of $37,000 and recorded a gain on the settlement of legal obligations of $263,000. The $37,000 settlement payments were comprised of $20,000 in cash, and the issuance of 1,000,000 shares of the Company’s common stock valued at $17,000.
On August 7, 2019, Rose Law Group PC (“RLG”) filed a breach of contract case against the Company in the Superior Court of the State of Arizona, County of Maricopa, Case No. CV2019-008484 against the Company. RLG alleges breach of a contract to pay RLG for legal representation, and requested a judgment for $144,000. On October 17, 2019, RLG was awarded judgment against the Company for $150,000 plus interest at 12% per annum until paid. During the year ended December 31, 2020, additional settlement-related expenses of $7,000, and interest of $12,000 was added, leaving a balance owed of $162,000, for which the Company negotiated a settlement for a total cash consideration of $15,000 and recorded a gain on the settlement of legal obligations of $147,000.
NOTE 7 - LOANS PAYABLE
Notes payable consists of the following at December 31, 2020 and December 31, 2019:
December 31, 2020 December 31, 2019
Notes payable to Celtic Bank - past due (a) $ 11,000 $ 64,000
SBA Paycheck Protection Program loan (b) 205,000 -
SBA Economic Injury Disaster Loan (c) 150,000 -
Total loans payable 366,000 64,000
Loans payable, current portion (11,000 ) (64,000 )
Loans payable, net of current portion $ 355,000 $ -
a) On May 21, 2019, the Company entered into a loan agreement with Celtic Bank in the principal amount of $150,000 with interest at 40.44% per annum and due on May 21, 2020. The loan was guaranteed by Alvin Hao, a former officer of the Company. A total of $64,000 was owed on the loan as of December 31, 2019. During the year ended December 31, 2020, the Company made principal payments of $53,000, leaving a total of $11,000 owed on the loan as of December 31, 2020, and was past due. In February 2021, the loan was paid in full.
b) On May 7, 2020, the Company was granted a loan (the “PPP loan”) from Wells Fargo Bank in the aggregate amount of $205,000, pursuant to the Paycheck Protection Program (the “PPP”) under the CARES Act.
The PPP loan agreement is dated May 8, 2020, matures on May 7, 2022, bears interest at a rate of 1% per annum, with the first six months of interest deferred, and is unsecured and guaranteed by the U.S. Small Business Administration (“SBA”). The loan term may be extended to May 7, 2025, if mutually agreed to by the Company and lender. The Company applied ASC 470, Debt, to account for the PPP loan. The PPP loan may be prepaid at any time prior to maturity with no prepayment penalties. Funds from the PPP loan may only be used for qualifying expenses as described in the CARES Act, including qualifying payroll costs, qualifying group health care benefits, qualifying rent and debt obligations, and qualifying utilities. The Company intends to use the entire loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses. The Company intends to apply for forgiveness of the PPP loan with respect to these qualifying expenses, however, it cannot assure that such forgiveness of any portion of the PPP loan will occur. As for the potential loan forgiveness, once the PPP loan is, in part or wholly, forgiven and a legal release is received, the liability would be reduced by the amount forgiven and a gain on extinguishment would be recorded. The terms of the PPP loan provide for customary events of default including, among other things, payment defaults, breach of representations and warranties, and insolvency events. The Company was in compliance with the terms of the PPP loan as of December 31, 2020.
c) On June 7, 2020, the Company obtained an Economic Injury Disaster Loan (“EIDL”) from the SBA in the amount of $150,000. Interest on the loan is at the rate of 3.75% per year, and all loan payments are deferred for twelve months, at which time the balance is payable in monthly installments of $731 over a 30-year term. The loan is secured by all the Company’s assets. The Company was in compliance with the terms of the EIDL as of December 31, 2020.
NOTE 8 - CONVERTIBLE SECURED NOTE PAYABLE TO RELATED PARTY
Secured notes payable to related party consists of the following as of December 31, 2020 and December 31, 2019:
December 31, 2020 December 31, 2019
YA II PN, Ltd. $ 2,275,000 $ 1,775,000
Less debt discount (220,000 ) (178,000 )
Secured note payable, net $ 2,055,000 $ 1,597,000
On May 10, 2018 and October 29, 2019, the Company issued convertible secured debentures (“Notes”) to YA II PN Ltd. (“YA II PN”) in the principal amounts of $1,500,000 and $275,000, respectively, with interest rates of 8% and 10%, respectively, which matured in June 2020 and April 2020, respectively. The notes are currently past due. The Company is in discussion with YA II PN to extend the maturity date of the Notes. The Notes provide a conversion right, in which the principal amount of the Note, together with any accrued but unpaid interest, could be converted into the Company’s common stock at a conversion price at 75% of the lowest volume weighted average price (VWAP) of the Company’s Common Stock during the 10 trading days immediately preceding the conversion date. As part of the issuance, the Company also granted YA II PN 5-year warrants, which were modified, to purchase a total of 13,000,000 shares of the Company at an exercise price of $0.05 per share, with expiration dates ranging from May 2024 to December 2024.
During the year ended December 31, 2019, the Company twice entered into an amendment agreement with YA II, PN, which amended the secured promissory note in the principal face amount of $1.5 million issued on May 10, 2018 (the “Note”). The maturity date of the Note was first extended to August 9, 2019 and then to June 30, 2020. Furthermore, the Note was first amended to be converted into the Company’s common stock at a conversion price of $0.50 a share, as the Note was not convertible previously, and the Note was further amended to provide a conversion right, in which the principal amount of the Note, together with any accrued but unpaid interest, could be converted into the Company’s common stock at a conversion price at 75% of the lowest volume weighted average price (VWAP) of the Company Common Stock during the 10 trading days immediately preceding the conversion date. The Company calculated the fair market value of the Secured Note Payable before and after the modifications above and recorded the difference of $962,000 as a debt extinguishment cost and included in other expenses during the twelve months ended December 31, 2019.
The 7,500,000 warrants granted as part of the Note issuances were also twice modified to ultimately change the exercise price from $0.50 per share (1,000,000 warrants), $0.75 per share (2,250,000 warrants), $1.00 per share (2,250,000 warrants) and $1.25 per share (2,000,000 warrants) to $0.05 per share for all four warrants. Furthermore, the amendments removed the Company’s right of redemption and right to compel exercise on certain Warrants. The Company calculated the fair market value of the Warrants before and after the modifications above and recorded the difference of $194,000 as a financing cost included in other expenses during the twelve months ended December 31, 2019.
On February 13, 2020, the Company issued a note (the “2020 Note”) to YAII PN in the amount of $150,000. The 2020 Note bears interest at a rate of 10% per annum (15% on default) and has a maturity date of August 10, 2021. The Company received net proceeds of $125,000, net of closing costs of $25,000. The 2020 Note is secured by all the assets of the Company and its subsidiaries. The 2020 Note provides a conversion right, in which any portion of the principal amount of the 2020 Note, together with any accrued but unpaid interest, may be converted into the Company’s common stock at a conversion price equal to 75% of the lowest VWAP of the Company’s common stock during the ten (10) trading days immediately preceding the date of conversion, subject to adjustment. As such, the Company determined that the conversion feature created a derivative with a fair value of $109,000 at the date of issuance. The Company also granted YA II PN 5-year warrants with a fair value of $66,000, to purchase a total of 3,000,000 shares of the Company at an exercise price of $0.05 per common share. The aggregate amount of the closing costs, and the fair value of the derivative liability, was $177,000, of which $150,000 was recorded as a valuation discount on the 2020 Note to be amortized over the life of the 2020 Note, and $27,000 was recorded as a financing cost during the year ended December 31, 2020.
On September 23, 2020, the Company issued a note (the “September 2020 Note”) to YAII PN in the amount of $350,000. The September 2020 Note bears interest at a rate of 10% per annum (15% on default) and has a maturity date of March 23, 2021. The Company received net proceeds of $340,000, net of closing costs of $10,000. The September 2020 Note is secured by all the assets of the Company and its subsidiaries. The September 2020 Note provides a conversion right, in which any portion of the principal amount of the September 2020 Note, together with any accrued but unpaid interest, may be converted into the Company’s common stock at a conversion price equal to 75% of the lowest VWAP of the Company’s common stock during the ten (10) trading days immediately preceding the date of conversion, subject to adjustment. As such, the Company determined that the conversion feature created a derivative with a fair value of $322,000 at the date of issuance. The Company also granted YA II PN 5-year warrants with a fair value of $68,000, to purchase a total of 7,000,000 shares of the Company at an exercise price of $0.05 per common share. The aggregate amount of the closing costs, and the fair value of the warrants and derivative liability, was $389,000, of which $350,000 was recorded as a valuation discount on the September 2020 Note to be amortized over the life of the September 2020 Note, and $39,000 was recorded as a financing cost during the year ended December 31, 2020.
During the year ended December 31, 2019, amortization of valuation discount was $89,000 and was recorded as an interest cost, leaving a $178,000 remaining unamortized balance of the valuation discount at December 31, 2019. During the year ended December 31, 2020, valuation discounts of $500,000 were added as discussed above, and amortization of valuation discount of $458,000 was recorded as an interest cost, leaving a $220,000 remaining unamortized balance of the valuation discount at December 31, 2020.
At December 31, 2019, accrued interest on the convertible secured notes payable to related parties of $202,000 was included in accrued interest to related parties on the consolidated balance sheet. During the year ended December 31, 2020, interest of $29,000 was converted into common stock (see Note 11), and the Company added $171,000 of additional accrued interest, leaving an accrued interest to related parties balance of $344,000 at December 31, 2020.
As of December 31, 2020, 239,274,957 shares of common stock were potentially issuable under the conversion terms of the convertible secured notes.
NOTE 9 - ACQUISITION OF FACILITY, LOAN AGREEMENT, AND SUBSEQUENT SETTLEMENT
Acquisition of Facility
On April 2, 2019, the Company, through its wholly-owned subsidiary Extracting Point, entered into an agreement to purchase real property located at 2601 West Holly Street in Phoenix, Arizona (the “Property”) for $3,500,000. The Property held the approval and authorization for a Conditional Use Permit, which allowed the Property to be used for the operation of a cultivation and infusion facility, allowing for the cultivation, harvesting, preparation, packaging and storing of medical cannabis, as well as extraction, refinement, infusion, production, preparation, packaging, and storage of manufactured and derivative oils, waxes, concentrates, edible and non-edible products that contain cannabis.
Loan Agreement
On April 2, 2019, Extracting Point entered into a loan agreement (the “Loan Agreement”) with Michael Cannon and Jennifer Cannon, Trustees of the Core 4 Trust Dated February 29, 2016 (the “Lender”), pursuant to which Extracting Point borrowed $3,500,000 from the Lender (the “Loan”). The Loan was evidenced by an installment note - interest included (the “Note”), guaranteed by the Company pursuant to a corporate guaranty (the “Guaranty”) and was secured by a first priority lien on the Property pursuant to a deed of trust and assignment of rents between Extracting Point and Thomas Title & Escrow, for the benefit of the Lender (the “Deed of Trust”). Extracting Point used the net proceeds from the Loan to acquire the Property.
The Note, together with accrued and unpaid interest, was due and payable on March 31, 2024 (the “Maturity Date”). Interest on the Note was to accrue at the rate of 10% per annum. For the first 12 months, Extracting Point was to pay the Lender interest only of $29,167 per month. After the first 12 months, Extracting Point was to pay the Lender principal and interest of $88,769 per month. Extracting Point had the right to prepay the Note at any time, however, Extracting Point agreed to pay the first 36 months of interest, even if the Note was repaid prior to that date.
As additional consideration for the issuance of the Loan, Extracting Point and the Company agreed to pay the Lender an amount equal to five percent (5%) of the management fees (the “Management Royalty”) received relating to the services rendered on the Property, for a period of three years from the date an “Approval to Operate” is granted by the Arizona Department of Health Services (such date, the “Commencement Date”). In the event that the Commencement Date has not occurred on or prior to April 2, 2021, then Extracting Point and the Company agreed to pay the Lender an amount equal to five percent (5%) of the fair market value of the rent of the Property as if the Property was fully occupied (the “Rental Royalty”), such payments to be made each month for a period of thirty-nine months, provided, that, if the Commencement Date occurs after the Rental Royalty has commenced, the Rental Royalty payments shall cease and the Management Royalty payments shall commence, and any amounts paid as a Rental Royalty shall be credited against any Management Royalty owed.
In connection with the Loan, the Company issued to the Lender a warrant (the “Warrant”) to purchase 1,000,000 shares of the Company’s common stock, exercisable for five years from issuance at an exercise price of $1.00 per share. The Warrant exercise price is subject to adjustment only in the event of a stock dividend or split.
Extracting Point was delinquent in payment under the Note, and the Lender informed Extracting Point and the Company that unless payment was made current or an agreement reached between the parties, the Lender would declare Extracting Point in default, call the entire Note due and payable, record a notice of default of the Deed of Trust, and take any other actions it deemed necessary or appropriate against the Company and Extracting Point.
Settlement Agreement
On May 24, 2019, the Company and Extracting Point entered into a Deed in Lieu of Foreclosure Release and Settlement Agreement (the “Settlement Agreement”) with the Lender. Pursuant to the Settlement Agreement, Extracting Point executed a Deed in Lieu of Foreclosure (the “Deed”), conveying the real property located at 2601 West Holly Street in Phoenix, Arizona to the Lender.
In exchange, the Lender agreed to release the Company and Extracting Point from all their obligations under the Loan Agreement, the Note, the Deed of Trust and the Guaranty. Pursuant to the Settlement Agreement, the Loan Agreement, the Note, the Deed of Trust and the Guaranty were terminated. In addition, the Warrant was returned to the Company and canceled.
NOTE 10 - DERIVATIVE LIABILITY
The FASB has issued authoritative guidance whereby instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The conversion prices and the exercise prices of the notes as described in Note 8 were not a fixed amount because they were either subject to an adjustment based on the occurrence of future offerings or events or they were variable. Since the number of shares is not explicitly limited, the Company is unable to conclude that enough authorized and unissued shares are available to settle the conversion option. In accordance with the FASB authoritative guidance, the conversion features of the notes have been characterized as derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.
As of December 31, 2020, and 2019, the derivative liabilities were valued using either a probability weighted average Monte Carlo pricing model or the Black Scholes pricing model with the following assumptions:
At December 31, 2020 Issued During 2020 At December 31, 2019 Issued During 2019
Exercise Price $ 0.05 $ 0.05 $ 0.05 $ 0.05
Stock Price $ 0.013 $ 0.011 - 0.025 $ 0.01 $ 0.02
Risk-free interest rate 0.09 % 0.11 - 1.48 % 1.55 - 1.60 % 1.64 %
Expected volatility - 278 % - 324 % - 203 % 147-165 %
Expected life (in years) 0.25 - 0.62 0.50 - 1.50 0.33 - 0.50 .050-0.67 %
Expected dividend yield 0 % 0 % 0 %
Fair value:
Conversion feature $ 2,161,000 $ 431,000 $ 1,332,000 $ 1,129,000
The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the historical volatility of its common stock to estimate the future volatility for its common stock. The expected life of the conversion feature of the notes was based on the remaining term of the notes. The expected dividend yield was based on the fact that the Company has not customarily paid dividends in the past and does not expect to pay dividends in the future.
The balance of the derivative liability at December 31, 2019 was $1,332,000. During the year ended December 31, 2020, the Company recognized derivative liabilities of $431,000 upon issuance of a secured convertible notes (see Note 8), and recognized $398,000 as other expense, which represented the change in the fair value of the derivative from the respective prior period, leaving a $2,161,000 balance of the derivative liability at December 31, 2020.
During the prior years, the Company issued 7,950,000 warrants as part of its Convertible Notes and Series A preferred stock financings. The Company determined that the exercises prices of the warrants were not a fixed amount because they were subject to an adjustment based on the occurrence of future offerings or events. As a result, the Company had determined at issuance that the warrants should be classified as liabilities due to variability in shares to be issued and changes in exercise price due to down round protection. The fair value of these liabilities at December 31, 2018 was $2,161,000. During the year ended December 31, 2019, the Company adopted ASU 2017-11, which simplified the accounting for financial instruments with down round features. The adoption resulted in the reclassification of the Company’s derivative liability to equity of $2,161,000 as of January 1, 2019.
During the year ended December 31, 2019, the Company recognized derivative liabilities of $167,000 upon issuance of a secured convertible note (see Note 8), and recognized $203,000 as other expense, which represented the change in the fair value of the derivative from the respective prior period. In addition, the Company recognized a derivative liability of $962,000 that resulted from a change in the terms of two convertible notes that was recorded as a financing cost and included in other expense. The balance of the derivative liability at December 31, 2019 was $1,332,000.
NOTE 11 - SHAREHOLDERS’ EQUITY
Common Shares Issued on Conversion of Convertible Note Payable
During the year ended December 31, 2020, the Company was notified by YA II PN (see Note 8) in writing of their election to convert $29,000 of interest accrued on convertible notes payable into 2,287,066 shares of the Company’s common at a conversion price of $0.0127 per share. As the closing trading price on date of conversion was $0.05 per share, the fair market value of the shares issued on conversion of interest was $114,000. The Company recorded a loss on extinguishment of accrued interest of $85,000, which represents the difference between the fair market value of the shares issued of $114,000, and the carrying value of the accrued interest of $29,000, which is included as a component of other expense on the consolidated statements of operations for the year ended December 31, 2020.
Common Shares Issued to Directors
The Company appointed certain directors and issued shares as part of their director compensation agreements. During the years ended December 31, 2020 and 2019, the Company issued an aggregate of 6,116,867 and 600,000 shares of common stock, with a fair value of $92,000 and $78,000 at date of grant, respectively, which was recognized as compensation cost.
Common Shares Issued for Services
The Company entered into various consulting agreements with third parties (“Consultants”) pursuant to which these Consultants provided business development, sales promotion, introduction to new business opportunities, strategic analysis and sales and marketing activities. No shares for services were issued for the year ended December 31, 2020. During the year ended December 31, 2019, the Company issued an aggregate of 426,000 shares of common stock to these consultants, with a fair value of $178,000 at date of grant.
Common Shares Issued for Legal Judgments
During the year ended December 31, 2020, the Company issued an aggregate of 4,333,333 shares of common stock, with a fair value of $60,000 at the date of grant, as settlement of certain legal judgments (see Note 6).
Stock Incentive Plan
On November 30, 2018, the 2018 Stock Incentive Plan (the “Plan”) for officers, employees, non-employee members of the Board of Directors, and consultants of the Company was approved pursuant to a Joint Written Consent of the Board of Directors and Majority Stockholders of the Company. The Plan authorized the granting of not more than 10,000,000 restricted shares, stock appreciation rights (“SAR’s”), and incentive and non-qualified stock options to purchase shares of the Company’s common stock. The Plan provided that stock options or SAR’s granted can be exercisable immediately as of the effective date of the applicable agreement, or in accordance with a schedule or performance criteria as may be set in the applicable agreement. The exercise price for non-qualified stock options or SAR’s would be the amount specified in the agreement, but shall not be less than the fair value of the Company’s common stock at the date of the grant. The maximum term of options and SARs granted under the plan is ten years. During the years ended December 31, 2020 and 2019, the Company issued 8,068,910 and 833,300 options to purchase shares of its common stock under the Plan, and 15,000 and 7,279,391 were forfeited, respectively. As of December 31, 2020, options to purchase 2,920,867 shares of common stock remain reserved for issuance under the Plan.
Summary of Stock Options
A summary of stock options for the years ended December 31, 2020 and 2019, is as follows:
Weighted
Number Average
of Exercise
Options Price
Balance outstanding, December 31, 2018 8,394,391 0.66
Options granted 833,300 0.03
Option exercised - -
Options expired or forfeited (7,279,391 ) (0.67 )
Balance outstanding, December 31, 1,948,300 0.35
Options granted 8,068,910 0.012
Options exercised - -
Options expired or forfeited (15,000 ) (0.69 )
Balance outstanding, December 31, 2020 10,002,210 $ 0.077
Balance exercisable, December 31, 2020 10,002,210 $ 0.077
Executive Employment Agreement
On October 31, 2019, the Board of Directors of the Company reappointed Ms. Tiffany Davis as Chief Executive Officer, Chief Financial Officer and as a director, effective immediately. In connection with the appointment of Ms. Davis, the Company granted her options to purchase 833,300 shares of common stock, which vested immediately, expire five years from the date of issuance, and are exercisable at a price of $0.03 per share. The fair value of the stock options granted was determined to be $25,000, which was recorded to stock-based compensation expense during the year ended December 31, 2019. Ms. Davis is entitled to receive stock options of $25,000 of shares per quarter at the then closing market price on the last trading day at the end of each calendar quarter, which expire five years from the date of issuance. Accordingly, during the year ended December 31, 2020, Ms. Davis was granted a total of 8,068,910 stock options, with the fair value determined to be $93,000, and was recorded to stock-based compensation expense during the year ended December 31, 2020.
The fair value of each option on the date of grant was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:
Exercise Price $ 0.012 $ 0.03
Stock Price $ 0.012 $ 0.03
Risk-free interest rate 0.21 % 1.51 %
Expected volatility 211 % 155 %
Expected life (in years) 3.0 5.0
Expected dividend yield 0 % 0 %
Information relating to outstanding options at December 31, 2020, summarized by exercise price, is as follows:
Outstanding Exercisable
Exercise Price Per Share Shares Life
(Years)
Weighted
Average
Exercise Price
Shares Weighted
Average
Exercise Price
$ 0.01-0.03 8,902,210 5.78 $ 0.014 8,902,210 $ 0.014
$ 0.46 100,000 3.95 $ 0.46 100,000 $ 0.46
$ 0.60 1,000,000 2.11 $ 0.60 1,000,000 $ 0.60
10,002,210 2.54 $ 0.077 10,002,210 $ 0.077
As of December 31, 2020, the Company has no outstanding unvested options with future compensation costs. In addition, there will be future compensation related to the options to be awarded to Ms. Davis under her employment agreement discussed above. The weighted-average remaining contractual life of options outstanding and exercisable at December 31, 2020 was 2.54 years. Both the outstanding and exercisable stock options had an intrinsic value of $10,000 at December 31, 2020.
Summary of Warrants
A summary of warrants for the years ended December 31, 2020 and 2019, is as follows:
Weighted
Number Average
of Exercise
Warrants Price
Balance outstanding, December 31, 2018 12,783,140 $ 0.91
Warrants granted 5,500,000 0.05
Warrants exercised - -
Warrants expired or forfeited - -
Balance outstanding, December 31, 18,283,140 0.06
Warrants granted 10,000,000 0.05
Warrants exercised - -
Warrants expired or forfeited - -
Balance outstanding, December 31, 2020 28,283,140 $ 0.05
Balance exercisable, December 31, 2020 28,283,140 $ 0.05
Information relating to outstanding warrants at December 31, 2020, summarized by exercise price, is as follows:
Outstanding Exercisable
Exercise Price Per Share Shares Life
(Years)
Weighted
Average
Exercise Price
Shares Weighted
Average
Exercise Price
$ 0.01 5,000,000 2.35 $ 0.01 5,000,000 $ 0.01
$ 0.05 23,000,000 3.66 $ 0.05 23,000,000 $ 0.05
$ 1.10 283,140 1.80 $ 1.10 283,140 $ 1.10
28,283,140 3.41 $ 0.05 28,283,140 $ 0.05
During the years ended December 31, 2020 and 2019, the Company issued five-year warrants with a fair value of $43,000 and $57,000, to purchase 5,500,000 and 10,000,000 shares of common stock at an exercise price of $0.05 as part of a secured convertible promissory note, respectively (see Note 8). The weighted-average remaining contractual life of warrants outstanding and exercisable at December 31, 2020 was 3.41 years. Both the outstanding and exercisable warrants had an intrinsic value of $15,000 at December 31, 2020.
The fair value of each warrant on the date of grant was estimated using the Black-Scholes option pricing model with the following weighted average assumptions:
Exercise Price $ 0.05 $ 0.05
Stock Price $ 0.016 $ 0.02
Risk-free interest rate 0.53 % 1.65 %
Expected volatility 214 % 171 %
Expected life (in years) 3.0 3.0
Expected dividend yield 0 % 0 %
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Technology License Agreement
The Company entered into a Technology License Agreement with a third-party vendor for consulting services. Under the agreement, the Company will pay the vendor a minimum consulting amount of $100,000 per year, plus a royalty of 7% of all net sales of the vendor’s products above $1,429,000 per calendar year. For each of the years ended December 31, 2020 and 2019, $100,000 was recorded as research and development expense under the agreement on the consolidated Statements of Operations related to the minimum annual fee. For each of the years ended December 31, 2020 and 2019, no royalty was recorded as cost of goods sold on the Consolidated Statements of Operations. A total of $339,000 and $239,000 was owed under the amended agreement at December 31, 2020 and 2019, respectively.
Litigation
On September 25, 2018, Matthew Geschke (the “Plaintiff”) filed a breach of contract case against the Company in the San Diego Superior Court of San Diego, California. The Plaintiff claimed damages of $335,000 for breach of an employment contract when the Company terminated the Plaintiff’s employment agreement on February 22, 2018. On June 26, 2020, the Plaintiff was awarded a default judgment against the Company in the amount of $448,000 (see Note 6).
NOTE 13 - INCOME TAXES
At December 31, 2020, the Company had available Federal and state net operating loss carryforwards to reduce future taxable income. The amounts available were approximately $14,119,000 for Federal and state purposes. The carryforwards expire in various amounts through 2040. Given the Company’s history of net operating losses, management has determined that it is more likely than not that the Company will not be able to realize the tax benefit of the carryforwards. Accordingly, the Company has not recognized a deferred tax asset for this benefit. Section 382 generally limits the use of NOLs and credits following an ownership change, which occurs when one or more 5 percent shareholders increase their ownership, in aggregate, by more than 50 percentage points over the lowest percentage of stock owned by such shareholders at any time during the “testing period” (generally three years).
Effective January 1, 2007, the Company adopted FASB guidelines that address the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under this guidance, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. This guidance also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. At the date of adoption, and as of December 31, 2020 and 2019, the Company did not have a liability for unrecognized tax benefits, and no adjustment was required at adoption.
The Company’s policy is to record interest and penalties on uncertain tax provisions as income tax expense. As of December 31, 2020, and 2019, the Company has not accrued interest or penalties related to uncertain tax positions. Additionally, tax years 2017 through 2020 remain open to examination by the major taxing jurisdictions to which the Company is subject.
Upon the attainment of taxable income by the Company, management will assess the likelihood of realizing the tax benefit associated with the use of the carryforwards and will recognize the appropriate deferred tax asset at that time.
The Company’s effective income tax rate differs from the amount computed by applying the federal statutory income tax rate to loss before income taxes as follows:
December 31, 2020 December 31, 2019
Income tax benefit at federal statutory rate (21.0 )% (21.0 )%
State income tax benefit, net of federal benefit (6.0 )% (6.0 )%
Change in valuation allowance 27.00 % 27.00 %
Income taxes at effective tax rate - - %
The components of deferred taxes consist of the following at December 31, 2020 and 2019:
December 31, 2020 December 31, 2019
Inventory reserves $ 95,000 $ 212,000
Allowance for doubtful accounts and returns 100,000 9,000
Depreciation and amortization (33,000 ) (53,000 )
Net operating loss carryforwards 3,789,000 2,721,000
Less: Valuation allowance (3,951,000 ) (2,889,000 )
Net deferred tax assets $ - $ -
NOTE 14 - SUBSEQUENT EVENTS
Chief Executive Officer
On January 1, 2021, Company entered into a new five year employment agreement with Tiffany Davis as the Company’s Chief Executive Officer. As part of the employment agreement, Ms. Davis is entitled to receive stock options of $12,500 per quarter for a five year period at the then closing market price on the last trading day at the end of each calendar quarter.
Trade Accounts Payable Balance Settlement and Release
On March 30, 2021, the Company entered into a Settlement Agreement and Release (“Agreement”) with Sichenzia Ross Ference LLP (“SRF”), for services that were performed for the Company. The Company owed SRF $160,000, which was included in accounts payable and accrued expenses on the accompanying balance sheet.
The Company agreed to pay SRF the sum total of Seventy-Five Thousand Dollars ($75,000) (the “Settlement Payment”). The Settlement Payment shall be made in fifteen monthly installments to be paid no later than the fifteenth day of each month (the “Installment Payments”), commencing on March 31, 2021 (the “Initial Installment Payment”), and with the last Installment Payment due no later than May 31, 2022 (the “Final Payment”). As an alternative to the Settlement Payment, the Company shall have the option to pay to SRF:
a. The Initial Installment Payment of $5,000 on or before March 31, 2021, $5,000 on or before April 30, 2021, and a lump sum payment of $40,000 on or before June 7, 2021, for a total payment of $50,000; or
b. The Initial Installment Payment of $5,000 on or before March 31, 2021, $5,000 on or before April 30, 2021, $5,000 on or before May 31, 2021, $5,000 on or before June 30, 2021, $5,000 on or before July 30, 2021 and a lump sum payment of $50,000 on or before August 6, 2021 for a total payment of $75,000.
As further consideration of the full and final settlement of these matters, the Company issued to SRF, a cashless five year warrant to purchase four million (4,000,000) shares of common stock of the Company at an exercise price per share equal to $0.001 per share.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES.
Management’s evaluation of disclosure controls and procedures.
Our Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act as of December 31, 2020. Based on this evaluation, our principal executive officer and our principal financial officer concluded that as of December 31, 2020, our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosures. The conclusion that our disclosure controls and procedures were not effective was due to the presence of material weaknesses in internal control over financial reporting, as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. In light of the material weaknesses identified by management, we performed additional analyses and procedures in order to conclude that our financial statements for the year ended December 31, 2020, are fairly presented, in all material respects, in accordance with U.S. generally accepted accounting principles.
Management’s report on internal control over financial reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term as defined in Exchange Act Rule 13a-15(f). Internal control over financial reporting is a process designed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
As of December 31, 2020, our management assessed the effectiveness of our internal control over financial reporting using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013 Framework). Based on this assessment, our management concluded that, as of December 31, 2020, our internal control over financial reporting was not effective as of December 31, 2020 and identified the material weaknesses described below.
Description of Material Weaknesses and Management’s Remediation Initiatives
The following material weaknesses in our internal control over financial reporting were identified by management as of December 31, 2020:
Ineffective control environment. The Company did not maintain an effective control environment, which is the foundation necessary for effective internal control over financial reporting. Specifically, the Company (i) did not maintain a functioning independent audit committee; (ii) did not have its Board of Directors review and approve significant transactions; (iii) had an insufficient number of personnel appropriately qualified to perform control design, execution and monitoring activities; (iv) had an insufficient number of personnel with an appropriate level of U.S. GAAP knowledge and experience and ongoing training in the application of U.S. GAAP and SEC disclosure requirements commensurate with the Company’s financial reporting requirements; (v) had inadequate segregation of duties consistent with control objectives; and (vi) lack of written documentation of the Company’s key internal control policies and procedures over financial reporting. The Company is required under Section 404 of the Sarbanes-Oxley Act to have written documentation of key internal controls over financial reporting. The Company did not formally document policies and controls to enable management and other personnel to understand and carry out their internal control responsibilities including the lack of closing checklists, budget-to-actual analyses, balance sheet variation analysis, and pro-forma financial statements. Additionally, the Company did not have an adequate process in place to complete its testing and assessment of the design and operating effectiveness of internal control over financial reporting in a timely manner;
Ineffective controls over financial statement close and reporting process. The Company did not maintain effective controls over its financial statement close and reporting process. Specifically, the Company: (i) had insufficient preparation and review procedures for disclosures accompanying the Company’s financial statements; and (ii) did not provide reasonable assurance that accounts were complete and accurate and agreed to detailed support and that reconciliations of accounts were properly performed, reviewed and approved; and
Insufficient segregation of duties in our finance and accounting functions due to limited personnel. We do not have sufficient segregation of duties within accounting functions. During the year ended December 31, 2020, we had limited personnel that performed nearly all aspects of our financial reporting process, including, but not limited to, access to the underlying accounting records and systems, the ability to post and record journal entries and responsibility for the preparation of the financial statements. Due to the fact that these duties were often performed by the same person, this creates a lack of review over the financial reporting process that would likely result in a failure to detect errors in spreadsheets, calculations, or assumptions used to compile the financial statements and related disclosures as filed with the SEC. These control deficiencies could result in a material misstatement to our interim or annual financial statements that would not be prevented or detected.
As of the date of this report, our remediation efforts continue related to each of the material weaknesses that we have identified in our internal control over financial reporting, and additional time and resources will be required in order to fully address these material weaknesses. We have not been able to complete all actions necessary and test the remediated controls in a manner that would enable us to conclude that such controls are effective. We are committed to implementing the necessary controls to remediate the material weaknesses described below as our resources permit. These material weaknesses will not be considered remediated until (1) the new processes are designed, appropriately controlled and implemented for a sufficient period of time and (2) we have sufficient evidence that the new processes and related controls are operating effectively.
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to the rules of the SEC that permit us to provide only management’s report in this annual report.
Changes in internal control over financial reporting.
There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION.
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The Board of Directors elects our executive officers annually. A majority vote of the directors who are in office is required to fill vacancies. Each director shall be elected for the term of one year and until his successor is elected and qualified or until his earlier resignation or removal. Our directors and executive officers are as follows:
NAME
AGE
CURRENT POSITION
Tiffany Davis
Chief Executive Officer, Chief Financial Officer and Director
George O’Leary
Chairman of the Board
Raymond Davidson
Director
The following is certain biographical information relating to each of our directors and executive officers as provided to us by each of the respective directors and executive offers.
Tiffany Davis, 44, was appointed Chief Executive Officer, Chief Financial Officer and a member of the Board in October 2019. Ms. Davis previously served as the Company’s Chief Operating Officer between February 2018 and September 2019, and as a member of the Board between August 2018 and September 2019. Ms. Davis has had 19 years of experience as a financial professional working in both Management Consulting and Private Equity. She has held several key leadership positions in accounting, finance, and operations. She has extensive experience in supply chain functionality, financial and operational due diligence, cash flow forecasting, financial statement analysis, development and value retention in a number of industries including most recently in the cannabis industry. Since June 2019, Ms. Davis has been the founder and manager of Trilogy Wellness Brands LLC and Trilogy Wellness Manufacturing LLC, companies developing and manufacturing premium products from hemp CBD. From 2016 through 2017, Ms. Davis worked as a senior executive for a US based cannabis consulting group supporting legal grows, assisting in license applications, developing programs for cultivators, business structuring for medical dispensaries including developing M&A opportunities and initiation of several start-up ventures. Beginning in 2012 into 2016, Ms. Davis worked as a Group Vice President for a US based private equity group, performing due diligence tasks resulting in placing hundreds of millions of dollars in creative investment and debt instruments for appropriate investment opportunities. From 2009 to 2011, Ms. Davis was a Manger of Corporate Advisory for Grant Thornton, one of the Big 6 worldwide accounting firms, again in accounting and supply chain services during the automotive crisis in the US, specifically on the Chrysler turnaround project. From 2005-2008, Ms. Davis worked for an international technology sector company with $500 million in revenues as a Vice President of Special Projects for an automobile parts sourcing project in India from the company’s headquarters in Chicago, Il. Ms. Davis received her B.S. from DePaul University in 2002 and a MBA from University of Chicago Graduate School of Business in 2009. Our board of directors believes Ms. Davis’ extensive cannabis and CBD experience provides her with the qualifications and skills to serve as a director.
George O’Leary, 59, was appointed as Chairman of the Board on October 21, 2019. Mr. O’Leary has been the Chief Financial Officer and a member of the board of directors of HealthLynked Corp., a publicly-listed company, since August 2014. Mr. O’Leary is also Co-Founder and Managing Director of InLight Capital Partners LLC since January 2014. Mr. O’Leary is currently the Vice-Chairman of the Board of Directors of Timios Holdings Corp. since March 2014 and on the Board of Directors of MedOfficeDirect since October 2013. From June 2009 to May 2013, Mr. O’Leary was Chairman of the Board and Chief Financial Officer of Protection Plus Securities Corporation until it was sold to Universal Protection Services. From February 2007 to June 2015, Mr. O’Leary was a member of the Board of Directors of NeoMedia Technologies. Mr. O’Leary is founder and President of SKS Consulting of South Florida Corp. (“SKS”) since June 2006 where he works with public and private companies in board representation and/or under consulting agreements providing executive level management expertise, as well as helping the implementation and execution of their companies’ strategic & operational plans. From 1996 to 2000, Mr. O’Leary was Chief Executive Officer and President of Communication Resources Incorporated (“CRI”). Prior to CRI, Mr. O’Leary was Vice President of Operations of Cablevision Industries, where he ran $125 million of business until it was sold to Time Warner. Mr. O’Leary started his professional career as a senior accountant with Peat Marwick and Mitchell (KPMG). Mr. O’Leary holds a B.B.A. degree in Accounting with honors from Siena College. Our board of directors believes Mr. O’Leary’s extensive business experience provides him with the qualifications and skills to serve as a director.
Raymond Davidson, 62, was appointed to the Board on December 10, 2019. Mr. Davison currently serves as Chief Executive Officer of Timios Holding Corp. (“Timios”), a title and settlement services company, where he has responsibility for all lines of business as well as administrative teams within Timios and its subsidiaries. Mr. Davison is one of the original founders of Timios, previously serving as Chief Financial Officer from its inception in August 2008 until his appointment as Chief Executive Officer in 2018, leading financial, human resources and compliance areas throughout the company. Timios was a wholly-owned, indirect subsidiary of Timios National Corporation, a public company until 2014. Prior to joining Timios, Mr. Davison served as the Chief Financial Officer for Lenders First Choice from January 2003 to July 2008. Prior to that, Mr. Davison served as the executive in charge of Agency Operation for the Automobile Club of Southern California. Prior to his work at the Automobile Club, Mr. Davison served as Senior Vice President/Controller for Coast Federal Services, the financial services subsidiary of Coast Federal Bank, a Los Angeles-based thrift bank. Mr. Davison holds an MBA from the University of Redlands. Our board of directors believes Mr. O’Leary’s extensive business experience provides him with the qualifications and skills to serve as a director.
Family Relationships
No family relationships exist between any of our executive officers or directors.
Director Independence
Our Board of Directors is currently composed of three members. We are not required to have any independent members of the Board of Directors. The board of directors has determined that (i) Tiffany Davis has a relationship with the company which, in the opinion of the board of directors, would not allow her to be considered as an “independent director” as defined in the Marketplace Rules of The NASDAQ Stock Market and (ii) George O’Leary and Raymond Davidson are each an independent director as defined in the Marketplace Rules of The NASDAQ Stock Market.
The NASDAQ independence definition includes a series of objective tests, such as that the director is not, and has not been for at least three years, an employee and that neither the director, nor any of his/ her family members has engaged in various types of business dealings with us.
Board Committees
The Board of Directors has no standing committees. However, we intend to implement a comprehensive corporate governance program, including establishing various board committees and adopting a Code of Ethics in the future. In addition, we have secured Directors and Officers insurance.
Delinquent Section 16(a) Reports
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors, executive officers and holders of more than 10% of our common stock to file with the SEC reports regarding their ownership and changes in ownership of our securities. During fiscal 2020, Ms. Davis, Mr. O’Leary and Mr. Davidson failed to file Form 4s relating to option grants made to each of them, which are the only Section 16(a) filings by our directors, executive officers and 10% stockholders that were delinquent.
Code of Business Conduct and Ethics and Insider Trading Policy
We have not adopted a code of ethics or an insider trading policy. We expect that we will adopt a code of business conduct and ethics and an insider trading policy that apply to all of our employees, officers and directors, including those officers responsible for financial reporting. Once adopted, we will make the code of business conduct and ethics and such insider trading policy available on our website at www.genalphainc.com. We intend to post any amendments to the code, or any waivers of its requirements, on our website.
Involvement in Certain Legal Proceedings
Our directors and executive officers have not been involved in any of the following events during the past ten years:
1. any bankruptcy petition filed by or against such person or any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
2. any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
3. being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise limiting his involvement in any type of business, securities or banking activities or to be associated with any person practicing in banking or securities activities;
4. being found by a court of competent jurisdiction in a civil action, the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a Federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
5. being subject of, or a party to, any Federal or state judicial or administrative order, judgment decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any Federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
6. being subject of or party to any sanction or order, not subsequently reversed, suspended, or vacated, of any self-regulatory organization, any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Table
The following table provides certain summary information concerning compensation awarded to, earned by or paid to our Chief Executive Officer and the two highest paid executive officers and up to two other highest paid individuals whose total annual salary and bonus exceeded $100,000 for fiscal years 2020 and 2019.
Name and Principal Position Year Salary
($) Bonus
($) (a) Stock
Awards
($) Option
Awards
($) Non-Equity
Incentive Plan
Compensation
($) Nonqualified
Deferred
Compensation
Earnings
($) All Other
Compensation
($) Total
($)
Tiffany Davis, Chief Executive Officer and Chief Financial Officer, former Chief Operating
Officer (a)
181,000 - - 93,125 - - - 274,125
181,000 - - 25,261 - - - 206,261
Alvin Hao, former Executive Vice President (b) 96,731 - - - - - - 96,731
Alan Lien, former Chief Executive Officer, President, and Chief Financial Officer (c) 156,153 - - - - - - 156,153
(a) Ms. Davis served as Chief Operating Officer between February 2018 and her resignation in September 2019, and was subsequently hired as Chief Executive Officer and Chief Financial Officer in October 2019.
(b) Mr. Hao served as Executive Vice President until his resignation in September 2019.
(c) Mr. Lien served as Chief Executive Officer, President and Chief Financial Officer until his resignation in October 2019.
Grants of Plan-Based Awards in Fiscal 2020
The following table provides information with regard to each grant of plan-based award made to a named executive officer under any plan during the fiscal year ended December 31, 2020.
Name Grant Date All Other Option Awards:
Number of Securities
Underlying
Options (#) Exercise or
Base Price of
Option Awards
($/Share) Grant Date Fair
Value of
Stock and Option
Awards ($) (1)
Tiffany Davis 3/31/2020 2,500,000 $ 0.010 $ 0.010
Tiffany Davis 6/30/2020 1,562,500 $ 0.016 $ 0.016
Tiffany Davis 9/30/2020 2,083,333 $ 0.012 $ 0.012
Tiffany Davis 12/31/2020 1,923,077 $ 0.013 $ 0.013
(1) Represents the aggregate grant date fair value of options granted in accordance with FASB ASC Topic 718.
Outstanding Equity Awards at December 31, 2020
The following table presents information regarding outstanding equity awards held by our named executive officers as of December 31, 2020.
Name Number of
Securities
underlying
Unexercised
Options (#)
Exercisable Number of
Securities
underlying
Unexercised
Options (#)
Unexercisable Option
Exercise
Price($/Sh) Option
Expiration
Date
Tiffany Davis 100,000 - $ 0.46 9/13/2022
833,300 - $ 0.03 10/31/2024
2,500,000 - $ 0.01 3/31/2025
1,562,500 - $ 0.016 6/30/2025
2,083,333 - $ 0.012 9/30/2025
1,923,077 - $ 0.013 12/31/2025
Option Exercises and Stock Vested
No options were exercised by any of the named executive officers and no named executive officers held restricted stock units during the fiscal year ended December 31, 2020.
Equity Compensation Information
The following table summarizes information about our equity compensation plans as of December 31, 2020.
Plan Category Number of
Shares
of Common Stock
to be Issued
upon Exercise
of Outstanding
Options
(a) Weighted-Average
Exercise Price of
Outstanding
Options
(b)
Number of
Options
Remaining
Available for
Future Issuance
Under Equity
Compensation Plans
(excluding securities
reflected in column (a))
(c)
Equity compensation plans approved by stockholders - $ - -
Equity compensation plans not approved by stockholders 9,002,210 0.019 2,920,867
Total 9,002,210 $ 0.019 2,920,867
Employment Agreements with Executive Officers
Tiffany Davis
On January 1, 2021, the Company entered into an employment agreement with Tiffany Davis to serve as our Chief Executive Officer (the “Employment Agreement”). The base salary for Ms. Davis under the Employment Agreement is $175,000 per annum. The base salary is subject to review annually by the Board and/or the Compensation Committee and may be increased but not decreased. The Employment Agreement has an initial term of one year and automatically renew for successive one year terms unless either party delivers written notice not to renew at least 60 days prior to the end of the current term. Ms. Davis will receive a year-end bonus of $30,000, which was to be paid no later than March 31, 2021. Ms. Davis is entitled to receive performance-based bonuses based on increases in our total gross, top-line revenue compared to the prior year. These performance-based bonuses are a percentage of her base salary.
Pursuant to the Employment Agreement, Ms. Davis shall receive options to purchase $12,500 of the Company’s common stock, exercisable for a period of five years, with all such options having an exercise price equal to the then closing market price on the last trading day at the end of each calendar quarter.
Pursuant to the Employment Agreement, if Ms. Davis’ employment is terminated as a result of death or permanent disability, Ms. Davis or her estate, as applicable, is entitled to Ms. Davis’ fully earned but unpaid base salary through the end of the month in which termination occurs at the rate then in effect.
Directors Compensation Table
The following table sets forth summary information concerning the total compensation paid to our non-employee directors in 2020 for services to our Company.
Name Cash ($) Stock
Awards ($)(1) Total ($)
Raymond Davidson $ - $ 20,000 $ 20,000
George O’Leary $ 20,000 $ 60,000 $ 80,000
Total: $ 20,000 $ 80,000 $ 100,000
(1) Represents the aggregate grant date fair value of stock awards granted in accordance with FASB ASC Topic 718.
Option Plan
On November 30, 2018, the 2018 Stock Incentive Plan (the “Plan”) for officers, employees, non-employee members of the Board of Directors, and consultants of the Company was approved pursuant to a Joint Written Consent of the Board of Directors and Majority Stockholders of the Company. The Plan authorized the granting of not more than 10,000,000 restricted shares, stock appreciation rights (“SAR’s”), and incentive and non-qualified stock options to purchase shares of the Company’s common stock. The Plan provided that stock options or SAR’s granted can be exercisable immediately as of the effective date of the applicable agreement, or in accordance with a schedule or performance criteria as may be set in the applicable agreement. The exercise price for non-qualified stock options or SAR’s would be the amount specified in the agreement, but shall not be less than the fair value of the Company’s common stock at the date of the grant. The maximum term of options and SARs granted under the plan is ten years. During the year ended December 31, 2020, the Company issued 8,068,910 shares and options to purchase 8,068,910 shares of its common stock under the Plan, and 15,000 options were forfeited, leaving 10,002,210 shares of common stock remain reserved for issuance under the Plan at December 31, 2020.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information regarding beneficial ownership of our common stock by: (i) each person known by us to own beneficially more than five percent (5%) of our outstanding voting stock; (ii) each of our directors and director nominees; (iii) each of our executive officers and significant employees; and (iv) all of our current executive officers, significant employees and directors as a group, as of March 31, 2021. To the best of our knowledge, each of the persons named in the table below as beneficially owning the shares set forth therein has sole voting power and sole investment power with respect to such shares, unless otherwise indicated.
Unless otherwise indicated in the footnotes to the following table, each person named in the table has sole voting and investment power and that person’s address is c/o Generation Alpha, Inc., 1689-A Arrow Route, Upland, California 91786.
Name of Beneficial Owner Title of Class Number of
Shares Owned (1) Percentage
of Class (2)
Tiffany N. Davis Common Stock 9,002,210 (3) 13.13 %
George O’Leary Common Stock 4,959,478 (4) 8.33 %
Raymond Davidson Common Stock 1,526,940 2.56 %
Officers and Directors as a Group (3 persons) Common Stock 15,488,628 (5) 22.59 %
Alan Lien Common Stock 10,000,000 16.79 %
Alvin Hao Common Stock 10,000,000 16.79 %
Dennis G. Forchic (6) Common Stock 7,196,079 (7) 11.88 %
YA II PN, Ltd. (8) Common Stock 6,526,895 (9) 9.99 %
D-Beta One EQ, Ltd. (10) Common Stock 6,526,895 (9) 9.99 %
Four Leaf Investors Limited Partnership (11) Common Stock 3,333,333 5.60 %
* Denotes less than 1%
(1)
Beneficial Ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock subject to options or warrants currently exercisable or convertible, or exercisable or convertible within 60 days of March 31, 2021 are deemed outstanding for computing the percentage of the person holding such option or warrant but are not deemed outstanding for computing the percentage of any other person.
(2)
Percentage based upon 59,557,830 shares of common stock issued and outstanding as of March 31, 2021.
(3)
Represents shares of common stock issuable upon exercise of options.
(4)
Represents shares of common stock held by SKS Consulting, of which Mr. O’Leary is the beneficial owner.
(5)
Includes the shares described in Notes (3) and (4) above.
(6)
The mailing address for this beneficial owner is 4712 Pace Drive, Park City, Utah 84098.
(7)
Includes 1,000,000 shares of common stock issuable upon exercise of options.
(8)
Based upon an amended Schedule 13G filed with the SEC on February 8, 2021. The mailing address for this beneficial owner is 1012 Springfield Avenue, Mountainside, New Jersey 07092. Matthew Beckman makes the investment decisions on behalf of this entity and may be deemed to beneficially own the securities held by this entity.
(9)
Includes 750,434 shares of Common Stock titled in the name of YA II PN, Ltd., but are beneficially owned by D-Beta One EQ, Ltd. through a participation agreement with YA II PN, Ltd., plus a number of additional shares underlying (i) warrants exercisable into shares of Common Stock and (ii) convertible debt convertible into shares of Common Stock, such that the reporting person is deemed the beneficial owner, subject to a beneficial ownership limitation of 9.99%.
(10)
Based upon an amended Schedule 13G filed with the SEC on February 8, 2021. The mailing address for this beneficial owner is 1012 Springfield Avenue, Mountainside, New Jersey 07092. Mark Angelo makes the investment decisions on behalf of this entity and may be deemed to beneficially own the securities held by this entity.
(11)
The mailing address for this beneficial owner is 2920 E. Camelback Road, #200, Phoenix, Arizona 85016. Jerry Tokoph makes the investment decisions on behalf of this entity and may be deemed to beneficially own the securities held by this entity.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Amounts Due to Officers/Shareholders
On May 9, 2016, we entered into note payable agreements with Alan Lien and Alvin Hao, each a former officer and director, to borrow $300,000 under each individual note. Pursuant to the terms of each of these agreements, we borrowed $300,000 from each of Alan Lien and Alvin Hao. The notes accrue interest at a rate of 8% per annum, are unsecured and were due on or before May 31, 2018. The notes are currently past due. A total of $600,000 was due on the combined notes at December 31, 2020 and 2019.
On May 8, 2019, we entered into a note agreement with the sister of Alvin Hao, a former officer and director, to borrow $150,000. The loan accrues interest at 8% per annum, are unsecured and due on November 8, 2019. The note is currently past due. A total of $150,000 was due on the note at December 31, 2020 and 2019.
We entered into note agreements with the parents of Alan Lien, our former Chief Executive Officer and one of our directors. The loans accrue interest at 10% per annum, are unsecured and were due on or before December 31, 2016. The loans are currently past due. A total of $40,000 was due on the loans at December 31, 2020 and 2019.
Consulting Agreements
On October 21, 2019, the Board appointed George O’Leary as Chairman of the Board effective immediately. Mr. O’Leary is founder and President of SKS Consulting of South Florida Corp. (“SKS”) since June 2006 where he works with public and private companies in board representation and/or under consulting agreements providing executive level management expertise, as well as helping the implementation and execution of their companies’ strategic & operational plans. On October 31, 2019, the Company entered into an executive chairman agreement (the “Chairman Agreement”) with SKS. Pursuant to the Chairman Agreement, Mr. O’Leary received 500,000 shares of common stock of the Company upon his appointment to the Board. In addition, he will receive equity compensation of $15,000 of shares per quarter as well as $5,000 per month as set forth in the Chairman Agreement.
Effective February 5, 2019, we and Mr. Lenigas, a former director, entered into a consulting agreement (the “Consulting Agreement”), pursuant to which we shall pay Mr. Lenigas a monthly consulting fee of $13,000 per calendar month for his marketing, branding, investor and public relations services. We also agreed, during the term of the Consulting Agreement, to issue Mr. Lenigas such number of shares of common stock equal to two percent of the total shares then issued and outstanding upon our common stock reaching a market capitalization (as defined in the Consulting Agreement) of $76 million for ten consecutive trading days, and an additional two percent for each additional $76 million market capitalization achieved for ten consecutive trading days, up to a market capitalization of $380 million. In addition, should we, during the consulting term or for a period of six months thereafter, enter into a transaction that constitutes a change of control in which our enterprise value (as defined in the Consulting Agreement) equals or exceeds, $500 million, then we agreed to pay Mr. Lenigas a bonus equal to 5% of such enterprise value. The Consulting Agreement has a term of two years, and may be terminated by either party after one year upon 30 days’ prior written notice. On September 4, 2019, Mr. Lenigas, notified us that he was resigning, effective immediately. As of September 4, 2019, none of the milestones had been met and therefore, no compensation expense was recorded during the period ended December 31, 2019.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Audit Fees
The following table sets forth the fees billed to us for professional services rendered by our independent registered public accounting firm, for the years ended December 31, 2020 and 2019:
Fees
Weinberg & Company, CPAs
Audit fees $ 105,000 $ 129,000
Audit Related Fees
Tax fees 15,000 35,000
All other fees
Total Fees $ 120,000 $ 164,000
Audit Fees. Consist of fees billed for professional services rendered for the audits of our financial statements and reviews of our interim consolidated financial statements included in quarterly reports.
Tax Fees. Weinberg & Company, CPAs did provide us with professional services for tax compliance, tax advice and tax planning. These services include assistance regarding federal, state and local tax compliance and consultation in connection with various transactions and acquisitions.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
(a)(1) Consolidated Financial statements:
The Consolidated Financial Statements of Generation Alpha, Inc. and Report of Independent Registered Public Accounting Firm are included herein beginning on page.
(a)(2) Financial Statement Schedules:
These schedules have been omitted because the required information is included in the financial statements or notes thereto or because they are not applicable or not required.
(a)(3) Exhibits
Exhibit Index
Exhibit Number
Description of Document
2.1
Agreement of Merger and Plan of Reorganization between the Company, Cinjet, Inc., and CJA Acquisition Corp., dated June 23, 2015. Incorporated by reference to the Current Report on Form 8-K filed on June 26, 2015 as Exhibit 2.1 thereto.
3.1
Amended and Restated Articles of Incorporation of the Company, dated August 31, 2015. Incorporated by reference to the Current Report on Form 8-K filed on September 2, 2015 as Exhibit 3.2 thereto.
3.2
Bylaws. Incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form SB-2 filed with the Securities and Exchange Commission on June 28, 2007.
3.3
Agreement of Merger between the Company, Cinjet, Inc., and CJA Acquisition Corp., dated June 23, 2015. Incorporated by reference to Exhibit 3.4 of the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on December 20, 2017.
3.4
Certificate of Designation of Series A Preferred Stock, dated October 20, 2017. Agreement of Merger between the Company, Cinjet, Inc., and CJA Acquisition Corp., dated June 23, 2015. Incorporated by reference to Exhibit 3.4 of the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August 3, 2018.
3.5
Articles of Merger between Solis Tek Inc. and Generation Alpha, Inc., effective September 25, 2018. Incorporated by reference to Exhibit 3.01 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 26, 2018.
3.6
Agreement and Plan of Merger, by and between Solis Tek Inc. and Generation Alpha, Inc., effective September 25, 2018. Incorporated by reference to Exhibit 3.01 of the Current Report on Form 8-K filed with the Securities and Exchange Commission on September 26, 2018.
4.1*
Form of Common Stock Certificate of the Registrant.
4.2
Common Stock Purchase Warrant issued by the Company to FirstFire Global Opportunities Fund, LLC, dated October 20, 2017. Incorporated by reference to the Current Report on Form 8-K filed on November 13, 2017 as Exhibit 10.5 thereto.
4.3
Common Stock Purchase Warrant issued by the Company to FirstFire Global Opportunities Fund, LLC, dated October 20, 2017. Incorporated by reference to the Current Report on Form 8-K filed on November 13, 2017 as Exhibit 10.8 thereto.
4.4
Common Stock Purchase Warrant issued by the Company to YA II PN, Ltd., dated May 10, 2018. Incorporated by reference to the Current Report on Form 8-K filed on May 11, 2018 as Exhibit 10.15 thereto.
4.5
Common Stock Purchase Warrant issued by the Company to YA II PN, Ltd., dated May 10, 2018. Incorporated by reference to the Current Report on Form 8-K filed on May 11, 2018 as Exhibit 10.16 thereto.
4.6
Common Stock Purchase Warrant issued by the Company to YA II PN, Ltd., dated May 10, 2018. Incorporated by reference to the Current Report on Form 8-K filed on May 11, 2018 as Exhibit 10.17 thereto.
4.7
Common Stock Purchase Warrant issued by the Company to YA II PN, Ltd., dated May 10, 2018. Incorporated by reference to the Current Report on Form 8-K filed on May 11, 2018 as Exhibit 10.18 thereto.
4.8
Common Stock Purchase Warrant issued by the Company to YA Global II SPV, LLC, dated April 16, 2018. Incorporated by reference to Exhibit 10.29 of the Company’s amended Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on October 19, 2018.
4.9
Form of Warrant, dated April 2, 2019, issued by Generation Alpha, Inc. to Michael Cannon and Jennifer Cannon, Trustees of the Core 4 Trust Dated February 29, 2016. Incorporated by reference to Exhibit 10.05 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 8, 2019.
4.10
Warrant dated October 31, 2019. Incorporated by reference to Exhibit 10.5 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 19, 2019.
4.11
Warrant dated February 13, 2020. Incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 20, 2020.
4.12
Form of Warrant, dated September 23, 2020. Incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 6, 2020.
4.13*
Description of Registrant’s securities.
4.14
Form of Warrant, dated March 30, 2021.
10.1
Secured Convertible Debenture issued by the Company to YAII PN, Ltd., dated November 8, 2017. Incorporated by reference to the Current Report on Form 8-K filed on November 13, 2017 as Exhibit 10.2 thereto.
10.2
Security Agreement between the Company, Solis Tek East Corporation, Zelda Horticulture, Inc., and YAII PN, Ltd., dated November 8, 2017. Incorporated by reference to the Current Report on Form 8-K filed on November 13, 2017 as Exhibit 10.3 thereto.
10.3
Securities Purchase Agreement between the Company, Solis Tek East Corporation, Zelda Horticulture, Inc., and YA II PN, Ltd., dated May 10, 2018. Incorporated by reference to the Current Report on Form 8-K filed on May 11, 2018 as Exhibit 10.11 thereto.
10.4
Secured Promissory Note issued by the Company to YA II PN Ltd., dated May 10, 2018. Incorporated by reference to the Current Report on Form 8-K filed on May 11, 2018 as Exhibit 10.12 thereto.
10.5
Amended and Restated Global Guaranty Agreement between the Company, Solis Tek East Corporation, Zelda Horticulture, Inc., and YA II PN, Ltd., dated May 10, 2018. Incorporated by reference to the Current Report on Form 8-K filed on May 11, 2018 as Exhibit 10.13 thereto.
10.6
Registration Rights Agreement between the Company and YA II PN, Ltd., dated May 10, 2018. Incorporated by reference to the Current Report on Form 8-K filed on May 11, 2018 as Exhibit 10.14 thereto.
10.7
Consulting Services Agreement between the Company and MD Global Partners, LLC, dated May 18, 2018. Incorporated by reference to Exhibit 10.26 of the Company’s Registration Statement on Form S-1 filed with the Securities and Exchange Commission on August 3, 2018.
10.8
Standby Equity Distribution Agreement, dated April 16, 2018, by and between the Company and YA II PN, Ltd. Incorporated by reference to Exhibit 10.27 of the Company’s amended Registration Statement on Form S-1/A filed with the Securities and Exchange Commission on October 19, 2018.
10.09
Consulting Agreement, dated February 5, 2019, by and between Generation Alpha, Inc. and David Lenigas. Incorporated by reference to Exhibit 10.01 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 11, 2019.
10.10
Amendment Agreement, dated February 25, 2019, by and between Generation Alpha, Inc. and YA II PN, Ltd. Incorporated by reference to Exhibit 10.01 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 26, 2019.
10.11
Form of Real Estate Sale Purchase Agreement, dated March 21, 2019, by and between Generation Alpha, Inc. and Black Rock Venture LLC. Incorporated by reference to Exhibit 10.01 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 27, 2019.
10.12
Form of Loan Agreement, dated April 2, 2019, by and among Extracting Point, LLC, Generation Alpha, Inc. and Michael Cannon and Jennifer Cannon, Trustees of the Core 4 Trust Dated February 29, 2016. Incorporated by reference to Exhibit 10.01 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 8, 2019.
10.13
Form of Note, dated April 2, 2019, issued by Extracting Point, LLC in favor of Michael Cannon and Jennifer Cannon, Trustees of the Core 4 Trust Dated February 29, 2016. Incorporated by reference to Exhibit 10.02 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 8, 2019.
10.14
Form of Guaranty, dated April 2, 2019, issued by Generation Alpha, Inc. for the benefit of Michael Cannon and Jennifer Cannon, Trustees of the Core 4 Trust Dated February 29, 2016. Incorporated by reference to Exhibit 10.03 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 8, 2019.
10.15
Form of Deed of Trust and Assignment of Rents, dated April 2, 2019, by and between Extracting Point, LLC and Thomas Title & Escrow, for the benefit of Michael Cannon and Jennifer Cannon, Trustees of the Core 4 Trust Dated February 29, 2016. Incorporated by reference to Exhibit 10.04 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on April 8, 2019.
10.16
Form of Deed in Lieu of Foreclosure Release and Settlement Agreement, dated May 24, 2019, by and among Extracting Point, LLC, Generation Alpha, Inc. and Michael Cannon and Jennifer Cannon, Trustees of the Core 4 Trust Dated February 29, 2016. Incorporated by reference to Exhibit 10.01 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 5, 2019.
10.17
Form of Deed in Lieu of Foreclosure, dated May 24, 2019, issued by Extracting Point, LLC in favor of Michael Cannon and Jennifer Cannon, Trustees of the Core 4 Trust Dated February 29, 2016. Incorporated by reference to Exhibit 10.02 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on June 5, 2019.
10.18
Securities Purchase Agreement dated October 31, 2019. Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 19, 2019.
10.19
Secured Convertible Debenture dated October 31, 2019. Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 19, 2019.
10.20
Global Security Agreement dated October 31, 2019. Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 19, 2019.
10.21
Registration Rights Agreement dated October 31, 2019. Incorporated by reference to Exhibit 10.4 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 19, 2019.
10.22
Security Agreement dated October 31, 2019. Incorporated by reference to Exhibit 10.6 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 19, 2019.
10.23+
Executive Employment Agreement dated October 31, 2019 between the Company and Tiffany Davis. Incorporated by reference to Exhibit 10.7 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 19, 2019.
10.24+
Executive Chairman Agreement dated October 31, 2019 between the Company, SKS and George O’Leary. Incorporated by reference to Exhibit 10.8 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on November 19, 2019.
10.25+
Directors Agreement, dated December 10, 2019 between the Company and Raymond Davison. Incorporated by reference to Exhibit 10.42 of the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 13, 2020.
10.26
Securities Purchase Agreement dated February 13, 2020. Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 20, 2020.
10.27
Secured Convertible Debenture dated February 13, 2020. Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 20, 2020.
10.28
Registration Rights Agreement dated February 13, 2020. Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on February 20, 2020.
10.29
Form of Securities Purchase Agreement, dated September 23, 2020. Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 6, 2020.
10.30
Form of Secured Convertible Debenture, dated September 23, 2020. Incorporated by reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 6, 2020.
10.31
Form of Registration Rights Agreement, dated September 23, 2020. Incorporated by reference to Exhibit 10.3 of the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on October 6, 2020.
10.32*+
Employment Agreement, dated January 1, 2021, by and between the Registrant and Tiffany Davis.
21.1
List of Subsidiaries. Incorporated by reference to Exhibit 21.1 of the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 15, 2019.
24.1*
Power of Attorney. Reference is made to the signature page hereto.
31.1*
Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*
Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
The following materials from Generation Alpha, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2020, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Loss, (iv) the Consolidated Statements of Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements.
* Filed herewith.
** This certification will not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act, except to the extent specifically incorporated by reference into such filing.
+ Indicates management contract or compensatory plan.