NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2021 AND 2020
(Unaudited)
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 three months ended March 31, 2021, the COVID-19 pandemic did not have a material net impact on our operating results. 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 three months ended March 31, 2021, the Company incurred a net loss of $1,863,000 and had a shareholders’
deficit of $10,376,000 as of March 31, 2021. In addition, $2,915,000 of notes payable to related parties, $590,000 of accrued interest
to related parties, and $820,000 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
March 31, 2021, the Company had cash on hand in the amount of $345,000. Management estimates that the current funds on hand will be sufficient
to continue operations through December 31, 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.
Under
this guidance, 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 March 31, 2021 and December 31, 2020, the Company determined that no reserves for returned
product were necessary.
In
the following table, revenue is disaggregated by major product line for three months ended March 31, 2021:
Sales Channels
|
|
Lighting
|
|
|
Plant Nutrients and Fertilizers
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Hydroponic resellers/retail
|
|
$
|
142,000
|
|
|
$
|
312,000
|
|
|
$
|
454,000
|
|
Direct to consumer/online
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
142,000
|
|
|
$
|
312,000
|
|
|
$
|
454,000
|
|
In the following table, revenue is disaggregated by major product line for three months ended March 31, 2020:
Sales Channels
|
|
Lighting
|
|
|
Plant Nutrients and Fertilizers
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Hydroponic resellers/retail
|
|
$
|
127,000
|
|
|
$
|
175,000
|
|
|
$
|
302,000
|
|
Direct to consumer/online
|
|
|
5,000
|
|
|
|
-
|
|
|
|
5,000
|
|
Total
|
|
$
|
132,000
|
|
|
$
|
175,000
|
|
|
$
|
307,000
|
|
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 March 31,
2021 and December 31, 2020, the allowance for doubtful accounts was $10,000 and $12,000, 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 March 31, 2021 and December 31, 2020.
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 March 31, 2021 and December 31, 2020, the reserve for excess
and obsolete inventory was $45,000 and $30,000, respectively.
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 $3,598,000 and $2,161,000 at March 31, 2021 and December 31, 2020, 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 stock holders 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.
For
the three months ended March 31, 2021, options to acquire 10,262,627 shares of common stock, warrants to acquire 32,283,140 shares of
common stock, and 70,033,903 shares to be issued upon conversion of our convertible notes have been excluded from the calculation of
weighted average common shares, as their effect would have been anti-dilutive. For the three months ended March 31, 2020, options to
acquire 4,433,300 shares of common stock, warrants to acquire 21,283,140 shares of common stock, and 267,089,041 shares to be issued
upon conversion of our convertible notes have been excluded from the calculation of weighted average common shares, 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 March 31, 2021
and December 31, 2020, cash includes cash on hand of $255,000 and $289,000, respectively, and cash in banks of $90,000 and $83,000, 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 three months ended March 31, 2021 and 2020, 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.
One customer accounted for 12% of the Company’s revenue for the three months ended March 31, 2021, and one customer accounted for
30% of the Company’s revenue for the three months ended March 31, 2020. Shipments to customers outside the United States comprised
less than 5% of our sales for the three months ended March 31, 2021 and 2020, respectively.
As
of March 31, 2021, three customers accounted for 33%, 24%, and 12% of the Company’s trade accounts receivable balance, and as of
December 31, 2020, three customers accounted for 37%, 23%, and 15% of the Company’s trade accounts receivable balance.
Segment
Reporting
The
Company operates in one segment for the manufacture and distribution of its 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).” ASU 2020-06
reduces the number of accounting models for convertible debt instruments by eliminating the cash conversion and beneficial conversion
models. As a result, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost as long
as no other features require bifurcation and recognition as derivatives. By removing those separation models, the effective interest
rate of convertible debt instruments will be closer to the coupon interest rate. Further, the diluted net income per share calculation
for convertible instruments will require the Company to use the if-converted method. For contracts in an entity’s own equity, the
type of contracts primarily affected by this update are freestanding and embedded features that are accounted for as derivatives under
the current guidance due to a failure to meet the settlement conditions of the derivative scope exception. This update simplifies the
related settlement assessment by removing the requirements to (i) consider whether the contract would be settled in registered shares,
(ii) consider whether collateral is required to be posted, and (iii) assess shareholder rights. ASU 2020-06 will be effective January
1, 2024, for the Company and the provisions of this update can be adopted using either the modified retrospective method or a fully retrospective
method. Early adoption is permitted, but no earlier than January 1, 2021, including interim periods within that year. Effective January
1, 2021, the Company early adopted ASU 2020-06 and that adoption did not have an impact on our financial statements and the related disclosures.
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 March 31, 2021 and December 31, 2020:
|
|
March 31,
2021
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
Machinery and equipment
|
|
$
|
81,000
|
|
|
$
|
67,000
|
|
Computer equipment
|
|
|
11,000
|
|
|
|
11,000
|
|
Furniture and fixtures
|
|
|
48,000
|
|
|
|
40,000
|
|
Leasehold improvements
|
|
|
10,000
|
|
|
|
-
|
|
|
|
|
150,000
|
|
|
|
118,000
|
|
Less: accumulated depreciation
|
|
|
(106,000
|
)
|
|
|
(103,000
|
)
|
Property and equipment, net
|
|
$
|
44,000
|
|
|
$
|
15,000
|
|
Depreciation
expense for the three months ended March 31, 2021 and 2020 was $3,000 and $2,000, respectively.
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 $816,000 (net of discount of $34,000) as of December 31, 2020. As of March 31, 2021, the remaining
Management Agreement obligation was $820,000 (net of discount of $30,000) and is reflected as a current liability in the accompanying
consolidated balance sheet. As of March 31, 2021, 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 March 31, 2021 and December 31, 2020:
|
|
March 31,
2020
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
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 March 31, 2021 and December 31,
2020.
|
|
|
|
|
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 March 31, 2021 and December 31, 2020.
|
|
|
|
|
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 March 31, 2021 and December 31, 2020.
|
At
December 31, 2020, accrued interest on the notes payable to related parties was $187,000. During the three months ended March 31, 2021,
the Company added $17,000 of additional accrued interest, and made interest payments of $7,000, leaving an accrued interest on the notes
payable to related parties balance of $197,000 at March 31, 2021.
NOTE
5 – LEASE PAYABLE
The Company leases its executive offices and warehouse
space. The Company analyzes all leases at inception to determine if a right-of-use (“ROU”) asset and lease liability should
be recognized. Leases with an initial term of 12 months or less are not included on the condensed consolidated balance sheets. The ROU
asset and lease liability is measured at the present value of future lease payments as of the lease commencement date. 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.
In 2019, we occupied a 17,640 square foot facility
located at 853 Sandhill Avenue, Carson, California under 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. During the three-months
ended March 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 $82,000. 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 three months ended March 31, 2021. The remaining balance of the lease obligation
was $556,000 at both March 31, 2021 and December 31, 2020.
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 under a three-year lease with an independent party ending on January 31, 2023, pursuant to which the Company pays
$2,800 per month in rental charges. The operating lease ROU asset balance related to the Upland, California operating lease
was $63,000 as of December 31, 2020. During the three months ended March 31, 2021, the Company reflected amortization of the ROU
assets of $7,000 related to its Upland, California operating lease, resulting in an ROU asset balance of $56,000 as of March 31, 2021.
On
January 11, 2021, the Company opened a regional sales and distribution office at Windolph Plaza Center, 1020 NW 6th Street,
Bay G, Deerfield Beach in Broward County, Florida. The Florida lease is for a 4,304 square foot facility under a five-year and
two-month lease with an independent party ending on March 31, 2026, pursuant to which it pays an average $3,691 per month in rental charges.
On January 11, 2021, the Company recognized an operating lease ROU asset and lease liability of $173,000, related to the Florida operating
lease. During the three months ended March 31, 2021, the Company reflected amortization of the ROU assets of $4,000 related to its Florida
operating lease, resulting in an ROU asset balance of $169,000 as of March 31, 2021.
As
of December 31, 2020, liabilities recorded under operating leases were $622,000. During the three months ended March 31, 2021, the Company
added $173,000 in lease liabilities related to its Florida operating lease, and made lease payments of $4,000 towards its operating lease
liability. As of March 31, 2021, liabilities under operating leases amounted to $791,000, of which $380,000 were reflected as current
due.
The lease agreements above have a weighted average
remaining lease term of 2.85 years as of March 31, 2021, and the weighted average discount rate for operating leases is 10%. Rent expense
during the three months ended March 31, 2021 and 2020 was $18,000 and $6,000, respectively.
Maturities of the Company’s
lease liabilities are as follows:
Year Ending
|
|
Operating Leases
|
|
Remainder of 2021
|
|
$
|
446,000
|
|
2022
|
|
|
265,000
|
|
2023
|
|
|
142,000
|
|
2024
|
|
|
49,000
|
|
2025
|
|
|
44,000
|
|
Thereafter
|
|
|
11,000
|
|
Total lease payments
|
|
|
957,000
|
|
Less: Imputed interest
|
|
|
(166,000
|
)
|
Total operating lease liability
|
|
|
791,000
|
|
Current portion
|
|
|
(380,000
|
)
|
|
|
$
|
411,000
|
|
NOTE
6 – LEGAL OBLIGATION PAYABLE
Effective
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 have been made,
leaving $448,000 owed at March 31, 2021 and December 31, 2020.
NOTE
7 – LOANS PAYABLE
Notes
payable consists of the following at March 31, 2021 and December 31, 2020:
|
|
March 31,
2021
|
|
|
December 31,
2020
|
|
|
|
|
|
|
|
|
Notes payable to Celtic Bank – past due (a)
|
|
$
|
-
|
|
|
$
|
11,000
|
|
SBA Paycheck Protection Program loan (b)
|
|
|
205,000
|
|
|
|
205,000
|
|
SBA Economic Injury Disaster Loan (c)
|
|
|
150,000
|
|
|
|
150,000
|
|
Total loans payable
|
|
|
355,000
|
|
|
|
366,000
|
|
Loans payable, current portion
|
|
|
-
|
|
|
|
(11,000
|
)
|
Loans payable, net of current portion
|
|
$
|
355,000
|
|
|
$
|
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 $11,000 was
owed on the loan as of December 31, 2020. During the three months ended March 31, 2021, the Company entered into a settlement agreement
with Celtic Bank, whereas the Company agreed to make a reduced payment in full of $9,000, and recorded a gain on extinguishment of
debt of $2,000, as reflected in the condensed consolidated statements of income during the three months ended March 31, 2021.
|
|
|
|
|
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 March 31, 2021. A total
of $205,000 was due on the PPP loan as of March 31, 2021 and 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 twenty four 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 March 31, 2021. A total of $150,000 was due on the EIDL loan as of March
31, 2021 and December 31, 2020.
|
NOTE
8 – CONVERTIBLE SECURED NOTE PAYABLE TO RELATED PARTY
Secured
notes payable to related party consists of the following as of March 31, 2021 and December 31, 2020:
|
|
March 31, 2021
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
YA II PN, Ltd.
|
|
$
|
2,275,000
|
|
|
$
|
2,275,000
|
|
Less debt discount
|
|
|
(37,000
|
)
|
|
|
(220,000
|
)
|
Secured note payable, net
|
|
$
|
2,238,000
|
|
|
$
|
2,055,000
|
|
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.
In
2019, the Company entered into an amendment agreements 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 Company
calculated the fair market value of the secured note payable before and after the modifications and recorded the difference of
$962,000 as a debt extinguishment cost in 2019.
As
part of the issuance of the Notes, 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. 7,500,000
warrants granted as part of the Note issuances were also 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 in 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.
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.
The
remaining unamortized balance of the valuation discount was $220,000 at December 31, 2020. During the three months ended March 31, 2021,
amortization of valuation discount was $183,000 and was recorded as an interest cost, leaving a $37,000 remaining unamortized balance
of the valuation discount at March 31, 2021.
At
December 31, 2020, accrued interest on the convertible secured notes payable to related parties of $344,000 was included in accrued interest
to related parties on the consolidated balance sheet. During the three months ended March 31, 2021, the Company added $49,000 of additional
accrued interest, leaving an accrued interest to related parties balance of $393,000 at March 31, 2021.
As
of March 31, 2021, 70,033,933 shares of common stock were potentially issuable under the conversion terms of the convertible secured
notes.
NOTE
9 – 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 warrants 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 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 March 31, 2021 and December 31, 2020, the derivative liabilities were valued using a Black-Scholes Merton pricing model with the following
assumptions:
|
|
March 31, 2021
|
|
|
Issued During 2021
|
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
Exercise Price
|
|
$
|
0.033
|
|
|
$
|
-
|
|
|
$
|
0.05
|
|
Stock Price
|
|
$
|
0.048
|
|
|
$
|
-
|
|
|
$
|
0.013
|
|
Risk-free interest rate
|
|
|
0.07
|
%
|
|
|
-
|
%
|
|
|
0.09
|
%
|
Expected volatility
|
|
|
299
|
%
|
|
|
-
|
%
|
|
|
268-278
|
%
|
Expected life (in years)
|
|
|
1.0
|
|
|
|
-
|
|
|
|
0.25-0.62
|
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
-
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value: Conversion Feature
|
|
$
|
3,598,000
|
|
|
$
|
-
|
|
|
$
|
2,161,000
|
|
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
following table sets forth a summary of the changes in the estimated fair value of our embedded derivative during the three months ended
March 31, 2021 and 2020:
|
|
Three Months Ended
|
|
|
|
March
31, 2021
|
|
|
March
31, 2020
|
|
Fair value at beginning of period
|
|
$
|
2,161,000
|
|
|
$
|
1,332,000
|
|
Recognition of derivative liabilities upon initial valuation
|
|
|
-
|
|
|
|
140,000
|
|
Extinguishment of derivative liabilities
|
|
|
-
|
|
|
|
-
|
|
Net change in the fair value of derivative liabilities
|
|
|
1,437,000
|
|
|
|
942,000
|
|
Fair value at end of period
|
|
$
|
3,598,000
|
|
|
$
|
2,414,000
|
|
NOTE
10 – SHAREHOLDERS’ EQUITY
Common
Shares Issued to Directors
The
Company appointed certain directors and issued shares as part of their director compensation agreements. During the three months ended
March 31, 2021, the Company issued an aggregate of 472,000 shares of common stock, with a fair value of $20,000 at date of grant. During
the three months ended March 31, 2020, the Company issued an aggregate of 2,166,667 shares of common stock, with a fair value of
$23,000 at date of grant. The issued shares were recognized as compensation cost.
Common
Shares Issued on Conversion of Convertible Note Payable
During
the three months ended March 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 into 2,287,066 shares of the Company’s common at $0.0127 per share.
Summary
of Stock Options
A
summary of stock options for the three months ended March 31, 2021, is as follows:
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Average
|
|
|
|
of
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
Balance outstanding, December 31, 2020
|
|
|
10,002,210
|
|
|
|
0.077
|
|
Options granted
|
|
|
260,417
|
|
|
|
0.048
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
Options expired or forfeited
|
|
|
-
|
|
|
|
-
|
|
Balance outstanding, March 31, 2021
|
|
|
10,262,627
|
|
|
$
|
0.76
|
|
Balance exercisable, March 31, 2021
|
|
|
10,262,627
|
|
|
$
|
0.76
|
|
On
January 1, 2021, the Company entered into a new five-year employment agreement with Tiffany Davis as the Company’s Chief Executive
Officer. Ms. Davis is entitled to receive stock options of $12,500 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 three months
ended March 31, 2021, Davis was granted a total of 260,417 stock options, with the fair value determined to be $12,000, and was recorded
to stock-based compensation expense during the three months ended March 31, 2021. The fair value of options on the date of grant was
estimated using the Black-Scholes option pricing model with the following weighted average assumptions: stock price of $0.048, risk-free
interest rate of 0.35%, expected volatility of 248%, and an expected life of 3.0 years.
Information
relating to outstanding options at March 31, 2021, 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
|
|
$
|
0.01-0.05
|
|
|
|
9,162,627
|
|
|
|
4.29
|
|
|
$
|
0.015
|
|
|
|
9,162,627
|
|
|
$
|
0.015
|
|
$
|
0.46
|
|
|
|
100,000
|
|
|
|
2.70
|
|
|
$
|
0.46
|
|
|
|
100,000
|
|
|
$
|
0.46
|
|
$
|
0.60
|
|
|
|
1,000,000
|
|
|
|
1.86
|
|
|
$
|
0.60
|
|
|
|
1,000,000
|
|
|
$
|
0.60
|
|
|
|
|
|
|
10,262,627
|
|
|
|
2.34
|
|
|
$
|
0.077
|
|
|
|
10,262,627
|
|
|
$
|
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 March 31, 2021 was 2.34 years. Both the outstanding and exercisable stock
options had an intrinsic value of $302,000 at March 31, 2021.
Summary
of Warrants
A
summary of warrants for the year ended March 31, 2021, is as follows:
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Average
|
|
|
|
of
|
|
|
Exercise
|
|
|
|
Warrants
|
|
|
Price
|
|
Balance outstanding, December 31, 2020
|
|
|
28,283,140
|
|
|
|
0.05
|
|
Warrants granted
|
|
|
4,000,000
|
|
|
|
0.001
|
|
Warrants exercised
|
|
|
-
|
|
|
|
-
|
|
Warrants expired or forfeited
|
|
|
-
|
|
|
|
-
|
|
Balance outstanding, March 31, 2021
|
|
|
32,283,140
|
|
|
$
|
0.05
|
|
Balance exercisable, March 31, 2021
|
|
|
32,283,140
|
|
|
$
|
0.05
|
|
Information
relating to outstanding warrants at March 31, 2021, 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
|
|
$
|
0.001
|
|
|
|
4,000,000
|
|
|
|
5.00
|
|
|
$
|
0.01
|
|
|
|
4,000,000
|
|
|
$
|
0.01
|
|
$
|
0.01
|
|
|
|
5,000,000
|
|
|
|
2.11
|
|
|
$
|
0.01
|
|
|
|
5,000,000
|
|
|
$
|
0.01
|
|
$
|
0.05
|
|
|
|
23,000,000
|
|
|
|
3.41
|
|
|
$
|
0.05
|
|
|
|
23,000,000
|
|
|
$
|
0.05
|
|
$
|
1.10
|
|
|
|
283,140
|
|
|
|
1.56
|
|
|
$
|
1.10
|
|
|
|
283,140
|
|
|
$
|
1.10
|
|
|
|
|
|
|
32,283,140
|
|
|
|
3.39
|
|
|
$
|
0.05
|
|
|
|
32,283,140
|
|
|
$
|
0.05
|
|
During
the three months ended March 31, 2021, the Company issued five-year warrants with a fair value of $191,000 to purchase 4,000,000 shares
of common stock at an exercise price of $0.001 as part of a settlement agreement regarding a trade vendor payable (see Note 11). The
fair value of warrants on the date of grant was estimated using the Black-Scholes option pricing model with the following weighted average
assumptions: stock price of $0.048, risk-free interest rate of 0.35%, expected volatility of 248%, and an expected life of 3.0 years.
The
weighted-average remaining contractual life of warrants outstanding and exercisable at December 31, 2020 was 3.39 years. Both the outstanding
and exercisable warrants had an intrinsic value of $378,000 at March 31, 2021.
NOTE
11 – COMMITMENTS AND CONTINGENCIES
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, of which the Company agreed to pay SRF the sum total $75,000. The $75,000 is
payable in fifteen monthly installments, commencing on March 31, 2021, and with the last installment payment due no later
than May 31, 2022. As an alternative to the Settlement Payment, the Company shall have the option to pay to SRF:
a.
An 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 payments of $50,000; or
b.
An 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 payments 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
4,000,000 shares of common stock of the Company at an exercise price per share equal to $0.001 per share and a fair value of $191,000
on the date granted.
The total settlement amount was $266,000,
made up the $75,000 reduced payable to SFR, plus the fair value of the warrants of $191,000, which was more than
the original trade vendor balance owed of $160,000. The difference of $106,000 was recorded as a loss on settlement of trade vendor payable
on the accompanying condensed consolidated statements of operations for the three months ended March 31, 2021.
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 the three months ended March 31, 2021 and 2020, $25,000 was recorded as research and development
expense under the agreement on the Condensed Consolidated Statements of Operations related to the minimum annual fee. For the three months
ended March 31, 2021 and 2020, no royalty was recorded as cost of goods sold on the Consolidated Statements of Operations. A total of
$364,000 and $339,000 was owed under the amended agreement at March 31, 2021 and December 30, 2020, respectively.