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
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.
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
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
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
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
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
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
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.
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:
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 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 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
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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