This Management's Discussion and Analysis of Financial Condition and Results of
Operations includes a number of forward-looking statements that reflect
Management's current views with respect to future events and financial
performance. You can identify these statements by forward-looking words such as
"may," "will," "expect," "anticipate," "believe," "estimate" and "continue," or
similar words. Those statements include statements regarding the intent, belief
or current expectations of us and members of our management team as well as the
assumptions on which such statements are based. Prospective investors are
cautioned that any such forward-looking statements are not guarantees of future
performance and involve risk and uncertainties, and that actual results may
differ materially from those contemplated by such forward-looking statements.
Readers are urged to carefully review and consider the various disclosures made
by us in this report and in our other reports filed with the Securities and
Exchange Commission. Important factors currently known to Management could cause
actual results to differ materially from those in forward-looking statements. We
undertake no obligation to update or revise forward-looking statements to
reflect changed assumptions, the occurrence of unanticipated events or changes
in the future operating results over time. We believe that our assumptions are
based upon reasonable data derived from and known about our business and
operations. No assurances are made that actual results of operations or the
results of our future activities will not differ materially from our
assumptions. Factors that could cause differences include, but are not limited
to, expected market demand for our products, fluctuations in pricing for
materials, and competition.
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
Results of Operations for the three months ended June 30, 2021 compared to the
three months ended June 30, 2020.
Revenue and Cost of Goods Sold
Revenue for the three months ended June 30, 2021 and 2020 was $463,000 and
$276,000, respectively, an increase of $187,000, or 68%. The increase is due to
two factors 1) the company's initiative to focus direct sales and marketing
efforts on its nutrient business and 2) the increase in new markets that are
granting new cultivation licenses which resulted in new companies obtaining
licenses to legally grow cannabis, which has ultimately resulted in new order
for our lights and our nutrient product.
Cost of sales for the three months ended June 30, 2021 and 2020 was $141,000 and
$134,000, respectively. Gross profit for the three months ended June 30, 2021
and 2020 was $322,000 and $142,000, respectively. As a percentage of revenue,
gross profit was 70% and 51% for the three months ended June 30, 2021 and 2020,
respectively. The increase in our gross profit was due to our increase in
revenue.
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Selling, General and Administration Expenses
Selling, general and administrative (SG&A) expenses for the three months ended
June 30, 2021 and 2020 were $303,000 and $260,000, respectively, an increase of
$43,000, or 17%. The increase in SG&A expenses was from increased rent expense
and increased employee compensation expense.
Research and Development Expenses
Research and Development expenses for the three months ended June 30, 2021 and
2020 were comparable at $25,000 and $25,000, respectively.
Legal Judgment
On September 25, 2018, Matthew Geschke (the "Plaintiff") filed a breach of
contract case against us in the San Diego Superior Court of San Diego,
California. The Plaintiff claimed damages for breach of an employment contract
when we terminated the Plaintiff's employment agreement on February 22, 2018. On
June 26, 2020, the Plaintiff was awarded a default judgment against us in the
amount of $448,000. No similar activity occurred during the current year period.
Other Income and Expenses
Other income for the three months ended June 30, 2021 was $658,000, as compared
to other expense of $829,000 for the three months ended June 30, 2020. The
change in balance was due to the loss on settlement of trade vendor payables
totaling $46,000, the change in the fair value of derivative liability of
$1,295,000, and the change in interest expense of $146,000, as compared to the
prior year period.
Net Loss
Net income for the three months ended June 30, 2021 was $652,000, as compared to
a net loss of $1,420,000 for the three months ended June 30, 2020. The increase
in net income was due to the increase in gross profit, the decrease in operating
expenses, and the change in other income and expenses as discussed above.
Results of Operations for the six months ended June 30, 2021 compared to the six
months ended June 30, 2020.
Revenue and Cost of Goods Sold
Revenue for the six months ended June 30, 2021 and 2020 was $917,000 and
$583,000, respectively, an increase of $334,000, or 57%. The increase is due to
two factors 1) the company's initiative to focus direct sales and marketing
efforts on its nutrient business and 2) the increase in new markets that are
granting new cultivation licenses which resulted in new companies obtaining
licenses to legally grow cannabis, which has ultimately resulted in new order
for our lights and our nutrient product.
Cost of sales for the six months ended June 30, 2021 and 2020 was $368,000 and
$329,000, respectively. Gross profit for the six months ended June 30, 2021 and
2020 was $549,000 and $254,000, respectively. As a percentage of revenue, gross
profit was 60% and 44% for the six months ended June 30, 2021 and 2020,
respectively. The increase in our gross profit was due to our increase in
revenue.
Selling, General and Administration Expenses
Selling, general and administrative expenses for the six months ended June 30,
2021 and 2020 were $569,000 and $621,000, respectively, a decrease of $52,000,
or 8%. The decrease was primarily from decreased rent expense of $53,000.
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Research and Development (R&D) Expenses
R&D expenses for the six months ended June 30, 2021 and 2020 were comparable at
$51,000 and $50,000, respectively.
Legal Judgment
On September 25, 2018, the Plaintiff filed a breach of contract case against us
in the San Diego Superior Court of San Diego, California. The Plaintiff claimed
damages for breach of an employment contract when we terminated the Plaintiff's
employment agreement on February 22, 2018. On June 26, 2020, the Plaintiff was
awarded a default judgment against us in the amount of $448,000.
Impairment of Right of Use (ROU") Asset
Impairment of ROU asset for the six months ended June 30, 2020 was $82,000. In
March 2020, we determined that our ROU asset was impaired and recorded an
impairment charge accordingly. (See Note 4 to the accompanying condensed
consolidated financial statements). No similar activity occurred during the
prior year period.
Other Income and Expenses
Other expense for the six months ended June 30, 2021 was $1,140,000, as compared
to other expense of $2,111,000 for the six months ended June 30, 2020. The
change in balance was due to the loss on settlement of trade vendor payables of
$60,000, offset by a gain on the settlement of debt of $2,000, and reduced
financing costs of $15,000, all of three of which did not exist during the prior
year period. Additionally, we realized the change in the fair value of
derivative liability of $800,000, and the change in interest expense of
$214,000, as compared to the prior year period.
Net Loss
Net loss for the six months ended June 30, 2021 and 2020 was $1,211,000 and
$3,058,000, 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 six months ended June 30, 2021, we used cash from operating
activities of $58,000 as compared to cash used in operating activities of
$111,000 in the prior year period. During the six months ended June 30, 2021,
cash was primarily used to fund our operating loss of $5,000, a change in the
fair value of derivative liabilities of $725,000, amortization on convertible
notes payable of $208,000, a change in inventory of $54,000, a $118,000 increase
in interest due to related parties, $65,000 of stock-based related compensation,
a $46,000 increase in accounts receivable, and a $60,000 loss on settlement of
trade accounts payables.
Cash Flows Used in Investing Activities
During the six months ended June 30, 2021 and 2020, we used $32,000 and $0 in
cash from investing activities to purchase property and equipment.
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Cash Flows Provided by (Used in) Financing Activities
During the six months ended June 30, 2021, we used cash in financing activities
of $9,000, compared to cash provided by financing activities of $454,000 for the
six months ended June 30, 2020. During the six months ended June 30, 2021, we
made $9,000 of payments on our notes payable. During the six months ended June
30, 2020, we received proceeds of $125,000, net of fees of $25,000, from a
secured convertible note payable, $355,000 from loans payable, offset by $26,000
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 six months ended
June 30, 2021, the Company incurred a net loss of $1,211,000 and had a
shareholders' deficit of $9,691,000 as of June 30, 2021. In addition, $3,065,000
of notes payable to related parties, $649,000 of accrued interest to related
parties, and $824,000 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.
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 June
30, 2021 and December 31, 2020.
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 June 30, 2021 and December 31,
2020.
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 June 30, 2021 and December 20, 2020.
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.
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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 $350,000. 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 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 June 30, 2021.
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 June 30, 2021.
Critical Accounting Policies
The Securities and Exchange Commission ("SEC") defines "critical accounting
policies" as those that require application of management's most difficult,
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain and may change in
subsequent periods. Not all of the accounting policies require management to
make difficult, subjective or complex judgments or estimates. However, the
following policies could be deemed to be critical within the SEC definition.
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"). 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.
Recent Accounting Pronouncements
See Note 2 of the condensed consolidated financial statements for management's
discussion of recent accounting pronouncements.
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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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GENERATION ALPHA, INC. 
