Securities Registration Statement (s-1/a)

Date : 10/19/2018 @ 10:37PM
Source : Edgar (US Regulatory)
Stock : Generation Alpha, Inc. (GNAL)
Quote : 0.1  -0.009348 (-8.55%) @ 4:39PM

Securities Registration Statement (s-1/a)

 

As filed with the Securities and Exchange Commission on October 19, 2018

Registration No. 333- 226579

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON D.C. 20549

 

 

 

Amendment No. 1

To

FORM S-1

 

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

 

 

 

GENERATION ALPHA, INC.

(Name of registrant in its charter)

 

Nevada   7380   20-8609439

(State or other Jurisdiction

of Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

 

853 Sandhill Avenue

Carson, California 90746

(888) 998-8881

(Address and telephone number of principal executive offices and principal place of business)

 

Alan Lien

Chief Executive Officer

Generation Alpha, Inc.

853 Sandhill Avenue

Carson, California 90746

(888) 998-8881

(Name, address and telephone number of agent for service)

 

Copies to:

Marc J. Ross, Esq.

James M. Turner, Esq.

Sichenzia Ross Ference LLP

1185 Avenue of the Americas, 37 th Floor

New York, New York 10036

(212) 930-9700

(212) 930-9725 (fax)

 

APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:

From time to time after this registration statement becomes effective.

 

If any securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [X]

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer   [  ]   Accelerated filer   [  ]
       
Non-accelerated filer  

[X]

  Smaller reporting company   [X]
       
        Emerging growth company   [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. [  ]

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class Of
Securities To Be Registered

 

Amount To Be
Registered
(1)(2)

   

Proposed
Maximum
Offering Price
Per Share

   

Proposed
Maximum
Aggregate
Offering Price

   

Amount Of
Registration
Fee

 
Common Stock, par value $0.001 per share     500,000 (3)   $ 0.42 (4)   $ 207,500.00 (4)   $

25.83

 
Common Stock, par value $0.001 per share, underlying warrants     1,000,000 (5)   $ 1.50 (6)   $ 1,500,000.00 (6)   $ 186.75  

Common Stock, par value $0.001 per share

    1,000,000 (7)   $ 0.01 (6)   $ 10,000.00 (6)   $ 1.25  
Common Stock, par value $0.001 per share     2,410,162 (8)   $

0.42

(4)   $

1,000,217.23

(4)   $

124.53

 
Total     4,910,162     $       $

2,717,717.23

    $

338.36

(9)

 

(1) The shares of our common stock being registered hereunder are being registered for resale by the Selling Stockholder, as defined in the accompanying prospectus.
   
(2) Pursuant to Rule 416 under the Securities Act of 1933, as amended (the “Securities Act”), the securities being registered hereunder include such indeterminate number of additional shares of common stock as may from time to time become issuable by reason of anti-dilution provisions, stock splits, stock dividends, recapitalizations or other similar transactions.
   
(3) Represents outstanding shares of common stock previously issued to the Selling Stockholder named herein pursuant to a purchase agreement with the Selling Stockholder named herein.
   
(4) Estimated solely for purposes of calculating the amount of the registration fee pursuant to Rule 457(c) under the Securities Act, based on the average of the high and low trading prices of $0.415 for the registrant’s common stock on August 2, 2018, as reported on the OTCQB tier of the OTC Markets Group.
   
(5) Represents shares of common stock issuable upon exercise of warrants at an exercise price of $1.50 per share.
   
(6) Estimated solely for purposes of calculating the amount of the registration fee pursuant to Rule 457(g) under the Securities Act.
   
(7)

Represents shares of common stock issued on October 12, 2018 upon exercise of warrants with an exercise price of $0.01 per share.

   
(8) Represents shares of common stock being registered for resale by the Selling Stockholder named herein pursuant to a Standby Equity Distribution Agreement, dated April 16, 2018 (the “SEDA”). In the event that the adjustment provisions of the SEDA requires the registrant to issue more shares than are being registered in this registration statement, for reasons other than those stated in Rule 416 of the Securities Act, the registrant will file a new registration statement to register those additional securities.
   
(9)

Previously paid.

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 

 
 

 

The information in this prospectus (this “Prospectus”) is not complete and may be changed. The Selling Stockholder may not sell these securities under this Prospectus until the registration statement of which it is a part and filed with the Securities and Exchange Commission is effective. This Prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS, SUBJECT TO COMPLETION, DATED OCTOBER 19, 2018

 

GENERATION ALPHA, INC.

 

Up to 4,910,162 Shares of Common Stock

 

 

This Prospectus relates to the offer and resale by YA II PN, Ltd. and YA Global II SPV, LLC, or any of their pledgees, assignees or successors-in-interest, or collectively, the Selling Stockholder, of up to 4,910,162 shares of common stock, par value $0.001 per share, or the Common Stock, of Generation Alpha, Inc., a Nevada corporation.

 

Of the Common Stock offered hereby:

 

  500,000 shares of Common Stock, or the Shares, were issued to the Selling Stockholder pursuant to a Securities Purchase Agreement, dated May 10, 2018, or the Purchase Agreement;
     
  1,000,000 shares of Common Stock, or the Warrant Shares, are issuable upon exercise of warrants issued to the Selling Stockholder in connection with the Purchase Agreement;
     
 

1,000,000 shares of Common Stock, or the Commitment Fee Shares, that were issued on October 12, 2018, upon exercise of five-year warrants, or the Fee Warrants, issued to the Selling Stockholder as a commitment fee upon execution of a Standby Equity Distribution Agreement, dated April 16, 2018, or the SEDA; and

     
  2,410,162 shares of Common Stock, or the SEDA Shares, are issuable pursuant to a “put right” under the SEDA, also referred to as an equity line of credit, that we have entered into with the Selling Stockholder, which permits us to “put” up to $25,000,000 of shares of Common Stock to the Selling Stockholder in installments, the maximum of each of which is limited to $1,000.000.

 

As used herein, the “Shares”, the “Warrant Shares”, the “Commitment Fee Shares” and the “SEDA Shares” shall collectively be referred to as the “Resale Shares.”

 

We will not receive proceeds from the sale of the Resale Shares by the Selling Stockholder. However, we will receive proceeds from the exercise of warrants, but not for the subsequent sale of the Warrant Shares and the Commitment Fee Shares. We will also receive proceeds from the sale of the SEDA Shares pursuant to our exercise of the put right offered by the Selling Stockholder under the SEDA. When we “put” an amount of shares to the Selling Stockholder, the per-share purchase price that the Selling Stockholder will pay to us in respect of the put will be equal to 90% of the lowest volume weighted average price of our Common Stock during the five (5) consecutive Trading Days (as defined in the SEDA) immediately following the applicable Advance Notice Date (as defined in the SEDA).

 

The Selling Stockholder is offering the Resale Shares being registered hereby. The Selling Stockholder may sell all or a portion of the Resale Shares from time to time in market transactions through any market on which the Common Stock is then traded, in negotiated transactions or otherwise, and at prices and on terms that will be determined by the then prevailing market price or at negotiated prices directly or through a broker or brokers, who may act as agent or as principal or by a combination of such methods of sale. For additional information on the methods of sale, you should refer to the section entitled “Plan of Distribution.” The Selling Stockholder is an “underwriter” within the meaning of Section 2(a)(11) of the Securities Act.

 

We will bear all costs relating to the registration of these shares of our Common Stock. All selling and other expenses incurred by the Selling Stockholder will be borne by the Selling Stockholder. See “Plan of Distribution”.

 

Our Common Stock is currently quoted on the OTCQB under the symbol “ GNAL ”. On October 18, 2018, the closing price of our Common Stock was $0.73 per share.

 

Investing in our Common Stock involves a high degree of risk. Before making any investment in our Common Stock, you should read and carefully consider the risks described in this Prospectus under “Risk Factors” beginning on page 9 of this Prospectus.

 

You should rely only on the information contained in this Prospectus or any prospectus supplement or amendment thereto. We have not authorized anyone to provide you with different information.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

This Prospectus is dated       , 2018

 

 
 

 

TABLE OF CONTENTS

 

 

Page

Special Note Regarding Forward-Looking Statements 1
About this Prospectus 1
Prospectus Summary 2
The Offering 6
Risk Factors 9
Use of Proceeds 21
Market For Common Equity and Related Stockholder Matters 22
Management’s Discussion and Analysis of Financial Condition and Results of Operations 23
Business 33
Description of Properties 40
Legal Proceedings 40
Management 41
Executive Compensation 44
Certain Relationships and Related Transactions 46
Security Ownership of Certain Beneficial Owners and Management 48
Description of Securities 49
Indemnification for Securities Act Liabilities 53
Plan of Distribution 54
Selling Stockholders 56
Legal Matters 57
Experts 57
Where You can Find More Information 57
Incorporation of Certain Information by Reference 57

 

i
 

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus, including the documents that we incorporate by reference, contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact. These statements include, but are not limited to, statements regarding, our liquidity and our expectations regarding our needs for and ability to raise additional capital.

 

These forward-looking statements are based on our current expectations and projections about future events and they are subject to risks and uncertainties known and unknown to us that could cause actual results and developments to differ materially from those expressed or implied in such statements, including the risks described under “Risk Factors” in this prospectus.

 

In some cases, you can identify forward-looking statements by terminology, such as “expects,” “anticipates,” “intends,” “estimates,” “plans,” “believes,” “seeks,” “may,” “should”, “could” or the negative of such terms or other similar expressions. Accordingly, these statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this prospectus.

 

You should read this prospectus and the documents that we reference herein and therein, completely and with the understanding that our actual future results may be materially different from what we expect. You should assume that the information appearing in this prospectus and the documents incorporated by reference is accurate as of their respective dates. Our business, financial condition, results of operations and prospects may change. We may not update these forward-looking statements, even though our situation may change in the future, unless required by law to update and disclose material developments related to previously disclosed information. We qualify all of the information presented in this prospectus, and particularly our forward-looking statements, by these cautionary statements.

 

ABOUT THIS PROSPECTUS

 

You should rely only on the information contained in this Prospectus. We have not authorized anyone to provide you with information different from that contained in this Prospectus. The selling stockholder is offering to sell and seeking offers to buy shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this Prospectus is accurate only as of the date of this Prospectus, regardless of the time of delivery of this Prospectus or of any sale of our common stock. The Prospectus will be updated and updated prospectuses made available for delivery to the extent required by the federal securities laws.

 

No person is authorized in connection with this Prospectus to give any information or to make any representations about us, the selling stockholder, the securities or any matter discussed in this Prospectus, other than the information and representations contained in this Prospectus. If any other information or representation is given or made, such information or representation may not be relied upon as having been authorized by us or any selling stockholder. This Prospectus does not constitute an offer to sell, or a solicitation of an offer to buy the securities in any circumstances under which the offer or solicitation is unlawful. Neither the delivery of this Prospectus nor any distribution of securities in accordance with this Prospectus shall, under any circumstances, imply that there has been no change in our affairs since the date of this Prospectus. The Prospectus will be updated and updated prospectuses made available for delivery to the extent required by the federal securities laws.

 

  1
     

 

PROSPECTUS SUMMARY

 

The items in the following summary are described in more detail later in this prospectus. This summary provides an overview of selected information and does not contain all of the information you should consider in making your investment decision. Therefore, you should read the entire prospectus carefully before investing in our securities. Investors should carefully consider the information set forth under “Risk Factors” beginning on page 9 of this prospectus. Except where the context otherwise requires, the terms, “we,” “us,” “our,” “ Generation Alpha ” or “the Company,” refer to the business of Generation Alpha , Inc., a Nevada corporation and its wholly-owned subsidiaries.  

 

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 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, a line of specialty metal halide digital lamps, or our Lamp Products, a line of reflectors, high intensity lighting accessories and a new line of light emitting diode, or LED, lighting technologies.

 

We sell our products primarily to retailers in the United States and international markets who specialize in hydroponic horticulture. Currently, we have approximately 500 retail stores in the United States as well as various ecommerce websites that sell our products. We have six full time sales employees and four wholesale distributors who cover U.S., Canada, Spain and the United Kingdom for both retail customers as well as commercial growers in cannabis legal states and countries.

 

We believe that almost all of the end users that use our products are using the equipment for the growing of cannabis. However, our products can be, and are used for, the hydroponic and indoor growing of other horticultural products, such as hothouse vegetables, decorative plant nurseries, indoor aquariums, and industrial painting facilities. We intend to continue to expand and improve our products for use in as many applications as possible and to market our products to the entire indoor horticultural industry as well as other industrial applications that require artificial lighting.

 

In 2014, Solis Tek East, Corporation, or STE, was incorporated in the State of New Jersey as our wholly-owned subsidiary. STE was formed for the purpose of commencing its operations and servicing and supplying the Eastern part of North America with our products. In September 2014, STE leased a 10,160 square foot office and warehouse facility in South Hackensack, New Jersey. The South Hackensack facility was closed in June 2018 as part of our effort to consolidate distribution out of our warehouse in Carson, California.

 

In 2014, GrowPro Solutions, Inc., or GrowPro Solutions , was incorporated in the State of California as our wholly-owned subsidiary. GrowPro Solutions was formed to develop and sell plant nutrients to help expand our market reach and maximize our revenue potential.

 

In July 2017, we changed the name of GrowPro Solutions to Zelda Horticulture, Inc., or Zelda. Zelda shares our facility in Carson, California

 

Our ballast products are produced in China under a proprietary manufacturing agreement. Our Lamp Products including lamps and ancillary products and equipment are manufactured to our specifications under proprietary product control and to our designs, in China.

 

  2
     

 

License Agreement

 

In May of 2015, we entered into an Amended and Restated License Agreement with GAS Technologies, Incorporated of Kapolei Hawaii, or GAST, pursuant to which we agreed to pay GAST a minimum royalty of $100,000 per year plus 7% of sales of products licensed by GAST to us over a fixed amount of licensed products sale per calendar year. In 2017 and 2016, we owed an additional $45,595 and $41,490, respectively under the amended agreement. The License grants us an exclusive world-wide license to produce, manufacture, have manufactured, use, import, sell, market, distribute and sell the products and systems and any further products and systems that may be developed by the Licensor for use in the horticulture and hydroponic industries. Such products include our “Single Ended: and “Double Ended” metal halide digital lamps.

 

The Cannabis Industry and Government Regulation

 

Currently, there are thirty- one (31) States plus the District of Columbia, Guam, and Puerto Rico that have laws and/or regulation that recognize in one form or another legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. In addition, the States of Colorado, Washington, Alaska, Oregon, California, Massachusetts, Nevada, Vermont, Maine and the District of Columbia, have approved the recreational use of cannabis. The State laws are in conflict with the Federal Controlled Substances Act, which makes cannabis use and possession illegal on a national level. The Trump Administration has effectively stated that it is not an efficient use of resources to direct law federal law enforcement agencies to prosecute those lawfully abiding by State-designated laws allowing the use and distribution of medical cannabis and we do not have a clear reading from possible changes in the Trump Administration. Additionally, any new administration that follows could change this policy and decide to enforce the federal laws strongly. Any such change in the federal government’s enforcement of current federal laws could cause significant financial damage to us and our shareholders.

 

Our Business Strategy

 

Due to the expected increase in the number of States where the use of cannabis, both for medical and recreational use is being legalized, we intend to take advantage of what we believe is our premium brand image within the cannabis farming and growing community. We believe that as participation in the cannabis farming industry grows, in order to supply increasing demand caused by legalization, our Solis Tek brand equipment will be sought out by existing and new cannabis farms and commercial businesses. Our strategy is to maintain and increase our market share by expanding our marketing efforts and by introducing new and improved lighting technology to help the industry become more efficient. In addition, we have started to market and sell a new line of plant nutrients and fertilizers through our wholly-owned subsidiary, Zelda, to help expand our market reach and maximize our revenue potential. Additionally, we are aggressively pursuing opportunities within the cannabis sector for expansion of our product offerings, as well as compatible opportunities to represent other products to the retail and commercial trade.

 

Our Product Pipeline

 

Digital Lighting Controller

 

The Solis Tek Digital Lighting Controller is a temperature monitoring control system which was specifically designed for commercial cultivation. A single controller can run up to 300 lights with 150 lights per zone and contains such features integrated temperature sensors, custom sunrise and sunset modes, data log tracking, and cloud cover simulation. The controller has been rigorously tested in multiple garden environments and has been specifically designed for both commercial grows and large gardens. The data log tracks garden activity and events with options to run up to two independent light zones, each with their own customized sunrise, sunset, and cloud modes. The controller includes high temperature auto-dim and shut off prevention systems to prevent systems from overheating.

 

Ballasts

 

Ballasts provide the proper starting voltage, operating voltage and current to the lamp to initiate and sustain its arc. High Intensity Discharge, or HID, lamps have negative resistance, which causes them to draw an increasing amount of current; hence, they require a current-limiting device. The ballast provides the following functions:

 

It provides starting voltage and, in some cases, ignition pulses. All ballasts must provide some specific minimum voltage to ignite the lamp. In the case of pulse start lamps, an additional high voltage pulse is needed to ionize the gases within the lamp. These pulses are superimposed near the peak starting voltage waveform; it regulates the lamp’s current and power. The ballast limits the current through the lamp once it has started. The ballast’s current is set to a level that delivers the proper power to the lamp. In addition, the ballast regulates the lamp’s current through the range of typical line voltage variations, thereby keeping the lamp’s power fairly stable to maximize the lamp’s life and performance and; it provides appropriate sustaining voltage and current wave shape to achieve the lamp’s rated life. The ballast provides sufficient voltage to sustain the lamp as it ages. Solis Tek ballasts come in a variety of voltage settings to conform to the consumer needs.

 

  3
     

 

Solis Tek Digital Ballasts were designed to work with our exclusive “Ignition Control” sequential lamp ignition, and “SenseSmart”, self- diagnostic safety systems. Solis Tek digital ballasts are software based, that makes our ballasts more versatile and enables us to incorporate special features such as sequential ballast ignition technology and SenseSmart technologies that ignites metal halide lamps one at a time based on load stability. Ignition Control is a main feature of our ballasts that comes as a standard feature in all of our ballasts. The exclusive Ignition Control assures that no matter how many lamps are contained in a lighting array attached to one power source, only one lamp will turn on at a predetermined time. This technology (not a randomized ignition startup) detects the voltage and amperage frequencies of the electrical circuit and ignites an array of metal halide or sodium lamps when the load for each lamp is most stable. The use of our technology prevents surges and spikes in electrical environment in which an array of ballasts operates and also prevents the overloading of circuit breakers.

 

Our SenseSmart self-diagnosing system feature, enables our ballasts to internally safety check for over/under voltage, overheating, open circuits, short circuits and more. SenseSmart will recognize an unsafe condition and take pre-determined actions to alleviate the safety issue.

 

We offer a line of remote ballasts that include: 400W 120/240V, 600W 120/240V, 1000W 120/240V, 1000W 120/240V with remote control and timer, 1000W 240V only, and 1000W 277V.

 

Digital Lamps

 

Metal halide lamps are a type of HID lamp; mercury vapor and high-pressure sodium lamps are also HID lamps. Light is generated by creating an arc between the two electrodes located inside the inner arc tube. The inner arc tube is typically made of quartz, and this is a very harsh environment, with high temperatures approaching 1000°C and pressures of 3 or 4 atmospheres. To start a metal halide lamp, a high starting voltage is applied to the lamp’s electrodes to ionize the gas before current can flow and start the lamp.

 

Solis Tek Digital Lamps are designed to be specifically tuned and matched with Solis Tek Digital Ballasts. Our lamps feature color enhanced full balanced spectrums, prolonged lamp life, less depreciation of lumen output over time, and precise gas combinations for increased blues, reds, and ultra violet output. Our lamps emit a full spectrum of light tuned specifically for particular types of plants. As well, our lamps provide ample UV light that plants thrive upon. We have designed our lamps using special low iron glass envelopes so as to prevent the blockage of the full spectrum of light that our lamps are designed to provide. According to a 2017 light study conducted by Light Laboratory Inc., an independent photometric testing laboratory, growers using Solis Tek lamps can expect enhanced photosynthetic photon flux density of leading tested competitors in additional to proper UV balance, and advanced HID lamp designed especially for plant growth, plant quality, and plant yield.

 

We offer a select variety of light color spectrums in High Pressure Sodium, or HPS, Metal Halides, or MH, and Ceramic Metal Halides, or CMH.

 

LED Technology

 

LED (light emitting diode) lighting supports sustainable design in several ways. It uses less energy than most other types of lamps, produces less heat, lasts longer (which means less frequent replacement and therefore reduced waste), is mercury-free, and is housed in special semi-conductor “chips” designed for easier configuration, disassembly, and recycling.

 

In our ongoing research and development program, we have designed and are developing our next generation of high intensity lighting. Our LED technology, unlike other LED lighting sources, uses an advanced UV (Ultra Violet) diode phosphor combination to make our high intensity LED based lighting systems. Our LED systems should be available in the same light spectrums as our current HID lamps. Our design will emit lighting equivalent to the high-pressure sodium spectrum and ultra-violet spectrums and eliminate the inadequacies of current LED offerings to the horticultural industry i.e.: a) low intensity; b) lack of proper spectrum for particular plants; and c) longevity. Our LED “chips” will provide, from one LED, a full spectrum of light that mimics sunlight, as compared to other LED manufacturers of LEDs who provide arrays of several color specific LEDs in an attempt to cover the full light spectrum.

 

  4
     

 

LED lighting produces significantly less heat than conventional HID and HPS lamps, so growers can control their greenhouse climate more accurately. Less heat also means more effective use of light, for example by increasing light levels, extending lighting periods, or by using LED light in greenhouses on warmer days without having to ventilate. Less heat also means you can place the light source closer to plants, reducing light loss. We intend to bring our LED lighting solutions to market in 2018.

 

Solis Tek Reflectors

 

Our line of “Reflectors” is designed for use with our digital ballasts and lamps. However, they additionally have standard sockets so that lamps and ballasts manufactured by others may also be used. Each Reflector features air cooling, heavily tinned wiring, low iron glass for less filtering of light, and utilize highly reflective aluminum to reflect light in the desired direction.

 

Plant Nutrients and Fertilizers

 

Zelda has developed “Terpenez™” which is a proprietary product formulated from all organic botanical extracts and is designed to assist plants with processes associated with oil and resin production. Terpenez is all natural and has organic inputs aimed at enhancing the aromatics of cannabis cultivation. Zelda commenced test marketing Terpenez in late 2016 and had rolled out the product regionally across the USA in 2017. In 2017, Zelda had almost doubled sales over 2016 in nutrient sales.

 

Terpenez, the first product in our launch into the nutrient/additive sector of the greenhouse and growing business, leads a new class of horticultural products aimed at enhancing the cannabis aromatic experience and intensity. It does not contain cannabis derived terpenes within, instead it is made from natural components available and is specifically formulated to assist the cannabis plant with processes associated with oil and resin production and naturally enhances the cannabis plant’s terpene profile. The formula provides essential oil-bearing plants with both precursors (i.e. metabolic building blocks, trace elements, etc.) and readily available bio-identical plant compounds aiming to increase overall essential oil production and intensity. It is, to our knowledge, the first product of its kind to deliver plant nutrients to cannabis cultivating customers with a fully plant derived 0-0-0 (Nitrogen, Phosphate, and Potassium free) product. In July 2017, independent bioanalytical testing laboratory analysis was conducted by A&L Western Agricultural Laboratories, Inc., who determined the level of heavy metals to be below the EPA’s detection limit. Terpenez is used to increase the value of cannabis crops through the intensification of oil production, which has results in a significant improvement in flavor and aroma. Terpenez is unique to our family of products in that it is intended for daily use as a nutrient additive to the cannabis grow, and is available through the over 500+ retail hydroponic stores and online retailers throughout the USA and Europe.

 

We plan to extensively develop additional nutrient products within the Zelda line and expect these products to flourish in an environment of lighter regulatory controls at both the State and Federal level. We are in discussions to add to the product line via custom blending in third-party laboratories under our proprietary formulations.

 

Additionally, we signed an exclusive Distributor Agreement in March 2018 with Torus Hydro, a California-based manufacturer of a pH stabilizer that automatically balances the pH of a hydroponic nutrient feed. Their proprietary capsule keeps the ideal range of pH in a growers feed system for optimal nutrient absorption. This capsule uses next generation ionization technology to eliminate pH swing that inhibits plant growth and weakens the plants immune system. We believe this is the perfect “razor and blades model”, since a customer who purchases the capsule will necessarily need to repurchase the complementary recharging solution for each new grow (approximately 12 weeks).

 

Corporate Information

 

We were incorporated on March 2, 2007 under the laws of the State of Nevada as Cinjet Inc. On September 1, 2015, we changed our name to Solis Tek Inc. Effective September 25, 2018, we changed our name to Generation Alpha, Inc. Our principal executive offices are located at 853 Sandhill Avenue, Carson, California 90746, and our telephone number is (888) 998-8881. Our website address is www.solis-tek.com . The information on our website is not part of this prospectus. We have included our website address as a factual reference and do not intend for it to be an active link to our website.

 

  5
     

 

The Offering

 

Common stock offered by the Selling Stockholder  

4,910,162 shares of common stock, par value $0.001 per share, consisting of:

 

    500,000 Shares issued to the Selling Stockholder pursuant to the Purchase Agreement;
       
    1,000,000 Warrant Shares issuable upon exercise of warrants issued to the Selling Stockholder in connection with the Purchase Agreement;
       
   

1,000,000 Commitment Fee Shares issued upon exercise of Fee Warrants issued to the Selling Stockholder as a commitment fee upon execution of the SEDA; and

       
    2,410,162 SEDA Shares issuable pursuant to a “put right” under the SEDA, which permits us to “put” up to $25,000,000 of shares of Common Stock to the Selling Stockholder in installments, the maximum of each of which is limited to $1,000.000.

 

Common stock outstanding before the offering  

46,066,564 shares, as of October 18, 2018.

     
Common stock outstanding after the offering   49, 4 76,726 shares.
     
Use of proceeds   We will not receive proceeds from the sale of the Resale Shares by the Selling Stockholder. However, we will receive proceeds from the exercise of warrants and the sale of the SEDA Shares pursuant to our exercise of the put right offered by the Selling Stockholder under the SEDA Agreement. When we “put” an amount of shares to the Selling Stockholder, the per-share purchase price that the Selling Stockholder will pay to us in respect of the put will be equal to 90% of the lowest volume weighted average price of our Common Stock during the five (5) consecutive Trading Days immediately following the applicable Advance Notice Date. See “Use of Proceeds”.
     
Symbol on the OTCQB  

“GNAL”.

     
Risk factors   You should carefully consider the information set forth in this Prospectus and, in particular, the specific factors set forth in the “Risk Factors” section beginning on page 9 of this Prospectus before deciding whether or not to invest in our common stock.

 

Purchase Agreement with the Selling Stockholder

 

On May 10, 2018, we entered in to the Purchase Agreement with the Selling Stockholder, pursuant to which we sold and issued the following:

 

  (a) 500,000 Shares for a consideration of $500,000;
     
  (b) A warrant, or Warrant #1, to purchase 1,000,000 Warrant Shares at an exercise price of $1.50 per share for a term expiring on May 10, 2023;
     
  (c)

A warrant, or Warrant #2, purchase 2,250,000 shares of common stock at an exercise price of $1.50 per share for a term expiring on May 10, 2023. At any time, we have the right and option to purchase any unexercised shares of Common Stock underlying Warrant #2 for a purchase price of $0.03 per share so purchased if and only if the average volume weighted average price, or VWAP, (as reported by Bloomberg, LP) of our Common Stock is greater than $1.75 per share for the five (5) consecutive trading days immediately preceding our delivery of a notice of exercise.

 

We have the right and option to compel the Selling Stockholder to exercise and purchase Shares of Common Stock underlying Warrant #2 on the terms set forth in Warrant #2 if and only if the average VWAP of our Common Stock is greater than $1.75 per share for the five (5) consecutive trading days immediately preceding our delivery of a notice of exercise.

 

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  (d) A warrant, or Warrant #3, to purchase 2,250,000 shares of Common Stock at an exercise price of $1.50 per share for a term expiring on May 10, 2023. At any time, we have the right and option to purchase any unexercised shares of Common Stock underlying Warrant #3 for a purchase price of $0.03 per share so purchased if and only if the average VWAP (as reported by Bloomberg, LP) of our Common Stock is greater than $2.00 per share for the five (5) consecutive trading days immediately preceding our delivery of a notice of exercise.
     
    We have the right and option to compel the Selling Stockholder to exercise and purchase Shares of Common Stock underlying Warrant #3 on the terms set forth in Warrant #3 if and only if the average VWAP of our Common Stock is greater than $2.00 per share for the five (5) consecutive trading days immediately preceding our delivery of a notice of exercise.
     
  (e) A warrant, or Warrant #4, to purchase 2,000,000 shares of Common Stock at an exercise price of $1.50 per share for a term expiring on May 10, 2023. At any time, we have the right and option to purchase any unexercised shares of Common Stock underlying Warrant #4 for a purchase price of $0.03 per share so purchased if and only if the average VWAP (as reported by Bloomberg, LP) of our Common Stock is greater than $1.50 per share for the five (5) consecutive trading days immediately preceding our delivery of a notice of exercise.
     
    We have the right and option to compel the Selling Stockholder to exercise and purchase the Shares of Common Stock underlying Warrant #4 on the terms set forth in Warrant #4 if and only if the average VWAP of our Common Stock is greater than $2.50 per share for the five (5) consecutive trading days immediately preceding our delivery of a notice of exercise.
     
  (f) A Secured Promissory Note, or the Note, in the amount of $1,500,000. The Note bears interest at the rate of 8% per annum and has a maturity date of February 9, 2019. The Note is secured by all of our assets.

 

In connection with the Purchase Agreement, we executed: (i) a registration rights agreement, or the Registration Rights Agreement, pursuant to which we are required to file a registration statement with the SEC for the resale of certain of the shares of common stock that have been or may be issued to the Selling Stockholder under the Purchase Agreement and (ii) a Global Guaranty Agreement pursuant to which we and all of our subsidiaries, guaranteed the repayment of the Note; and (iii) a Security Agreement pursuant to which we and all of our subsidiaries pledged all of our assets as collateral for the repayment of the Note.

 

SEDA

 

On April 16, 2018, or the SEDA Effective Date, we entered into the SEDA with the Selling Stockholder. The SEDA establishes what is sometimes termed an equity line of credit or an equity draw-down facility. The SEDA permits us to “put” up to $25,000,000 of shares of Common Stock to the Selling Stockholder in installments, the maximum of each of which is limited to $1,000.000, at any time, at our request, over a three-year commitment period commencing on the SEDA Effective Date, by delivering an advance notice, or the Advance Notice, to the Selling Stockholder, except that, we are prohibited from delivering an Advance Notice during any black-out periods or during any other period in which we are, or could be deemed to be, in possession of material non-public information.

 

When we “put” an amount of shares to the Selling Stockholder, the per-share purchase price that the Selling Stockholder will pay to us in respect of the put will be equal to 90% of the lowest VWAP of our Common Stock during the five (5) consecutive Trading Days immediately following the applicable Advance Notice Date. The VWAP that will be used in the calculation will be that reported by Bloomberg, LP, a third-party reporting service. In general, the VWAP represents the sum of the value of all the sales of our Common Stock for a given day (the total shares sold in each trade times the sales price per share of the common stock for that trade), divided by the total number of shares sold on that day.

 

In connection with the SEDA, we issued the Fee Warrants to the Selling Stockholder to purchase 1,000,000 shares of Common Stock at an exercise price of $0.01 per share as a commitment fee. On October 12, 2018, the Selling Stockholder exercised the Fee Warrants and we issued the Commitment Fee Shares , which Commitment Fee Shares are being registered hereunder for resale by the Selling Stockholder.

 

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We are not obligated to utilize any of the $25,000,000 available under the SEDA and there are no minimum commitments or minimum use penalties. The total amount of funds that ultimately can be raised under the SEDA over the three-year term will depend on the market price of our common stock and the number of shares actually sold. The Selling Stockholder is obligated under the SEDA to purchase shares of our common stock from us, subject to certain conditions and limitations, including, but not limited to: (i) us filing a registration statement under the Securities Act, to register the resale by the Selling Stockholder of shares of common stock sold to the Selling Stockholder under the SEDA, or the Registration Statement, and the SEC declaring such Registration Statement effective and (ii) that in no event shall the number of shares issuable to the Selling Stockholder pursuant to the SEDA cause the aggregate number of shares of common stock beneficially owned (as calculated pursuant to Section 13(d) of the Exchange Act) by the Selling Stockholder and its affiliates exceed 9.99% of the then outstanding shares of our common stock.

 

Pursuant to the terms of the SEDA, we were required to file with the SEC an initial Registration Statement covering the resale of the Registrable Securities (as defined in the SEDA) within thirty (30) days of the SEDA Effective Date and to use commercially reasonable efforts to have such initial Registration Statement, and each other Registration Statement required to be filed pursuant to the terms of the SEDA, declared effective by the SEC as soon as practicable but in no event later than one-hundred twenty (120) days of the SEDA Effective Date.

 

The SEDA does not impose any restrictions on our operating activities. During the term of the SEDA, the Selling Stockholder is prohibited from engaging in any short selling or hedging transactions related to the our common stock, except that, upon receipt of an Advance Notice, the Selling Stockholder has the right to sell the shares to be issued pursuant to such Advance Notice, or the Advance Notice Shares, prior to receiving the Advance Notice Shares.

 

We have the unconditional right, at any time upon fifteen (15) Trading Days’ prior written notice to the Selling Stockholder to terminate the SEDA, provided that (i) there are no outstanding Advance Notices, the shares under which have yet to be issued, and (ii) we have paid all amounts owed to the Selling Stockholder pursuant to the SEDA.

 

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RISK FACTORS

 

This investment has a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described below and the other information in this Prospectus. If any of the following risks actually occur, our business, operating results and financial condition could be harmed and the value of our stock could go down. This means you could lose all or a part of your investment.

 

RISKS RELATED TO OUR BUSINESS

 

We have incurred significant net losses and cannot assure you that we will achieve or maintain profitable operations, and our auditors have issued a “going concern” audit opinion.

 

Our net loss was $(14,021,728) for the year ended December 31, 2017 and $(10,448,773) for the six months ended June 30, 2018. As of June 30, 2018, we had stockholders’ deficit of $(338,018) . We will need to raise additional working capital to continue our normal and planned operations. We will need to generate and sustain significant revenue levels in future periods in order to become profitable, and, even if we do, we may not be able to maintain or increase our level of profitability. We anticipate that our operating expenses will increase in the foreseeable future as we undertake increased technology and production efforts to support our business and increase our marketing and sales efforts to drive an increase in the number of customers and clients utilizing our services. In addition, as a public company, we will incur significant accounting, legal and other expenses that we did not incur as a private company. These expenditures will make it necessary for us to continue to raise additional working capital and make it harder for us to achieve and maintain profitability. Our efforts to grow our business may be costlier than we expect, and we may not be able to generate sufficient revenue to offset our higher operating expenses. If we are forced to reduce our expenses, our growth strategy could be compromised. We may incur significant losses in the future for a number of reasons, including unforeseen expenses, difficulties, complications and delays and other unknown events. Accordingly, substantial doubt exists about our ability to continue as a going concern and we cannot assure you that we will achieve sustainable operating profits as we continue to expand our infrastructure, restructure our balance sheet, further develop our marketing efforts, and otherwise implement our growth initiatives.

 

Our independent auditors have indicated in their report on our December 31, 2017 consolidated financial statements that there is substantial doubt about our ability to continue as a going concern. A “going concern” opinion indicates that the financial statements have been prepared assuming we will continue as a going concern and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets, or the amounts and classification of liabilities that may result if we do not continue as a going concern. Therefore, you should not rely on our consolidated balance sheet as an indication of the amount of proceeds that would be available to satisfy claims of creditors, and potentially be available for distribution to stockholders, in the event of liquidation.

 

Our manufacturing is concentrated with two key manufacturers, and if our relationship with either or both of them terminates or is otherwise impaired, we would likely experience increased costs, disruptions in the manufacture and shipment of our products and a material loss of net sales.

 

We have no long-term contracts with our manufacturers and as a result, our manufacturers could cease to provide products to us with no notice. Two of our manufacturers, Shenzhen Jayo Technologies Co., Ltd. and Zhuhai Relite Co., Ltd, together accounted for approximately 96% of our cost of goods sold in 2017 and 2016. Each of these manufacturers is the sole source supplier for the products that it produces. We purchase from these two manufacturers on a purchase order basis with orders generally filled between 45 and 60 days after our purchase order is placed. A loss of either or both of these manufacturers or other key manufacturers would result in delayed deliveries to our retailers and distributors, would adversely impact our net sales and may require the establishment of new manufacturing relationships. Additionally, we cannot be certain that we will not experience operational difficulties with our manufacturers, including reductions in the availability of production capacity, errors in complying with product specifications, insufficient quality control, failures to meet production deadlines, increases in manufacturing costs and increased lead times.

 

Risk of reliance on suppliers and manufacturers in China for production of our lighting related products.

 

All of our products are imported from and manufactured in China. For this reason, a major change in the political, economic and/or legal environment, or a natural disaster in China or another center of production, could have an impact on our ability to supply products.

 

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We face business, political, operational, financial and economic risks because a portion of our net sales are generated internationally and substantially all of our products are manufactured outside of the United States.

 

We face business, political, operational, financial and economic risks inherent in international business, many of which are beyond our control, including: difficulties obtaining domestic and foreign export, import and other governmental approvals, permits and licenses, and compliance with foreign laws, which could halt, interrupt or delay our operations if we cannot obtain such approvals, permits and licenses, and that could have a material adverse effect on our results of operations; difficulties encountered by our international distributors or us in staffing and managing foreign operations or international sales, including higher labor costs, which could increase our expenses and decrease our net sales and profitability; transportation delays and difficulties of managing international distribution channels, which could halt, interrupt or delay our operations; longer payment cycles for, and greater difficulty collecting, accounts receivable, which could reduce our net sales and harm our financial results; trade restrictions, higher tariffs, currency fluctuations or the imposition of additional regulations relating to import or export of our products, especially in China, where substantially all of our products are manufactured, which could force us to seek alternate manufacturing sources or increase our expenses, either of which could have a material adverse effect on our results of operations; political and economic instability, including wars, terrorism, political unrest, boycotts, curtailment of trade and other business restrictions, any of which could materially and adversely affect our net sales and results of operations; and natural disasters, which could have a material adverse effect on our results of operations.

 

Any of these factors could reduce our net sales, decrease our gross margin or increase our expenses. Should we establish our own operations in international territories where we currently utilize a distributor, we will become subject to greater risks associated with operating outside of the United States.

 

Any shortage of raw materials or components could impair our ability to ship orders of our products in a cost-efficient manner or could cause us to miss the delivery requirements of our retailers or distributors, which could harm our business.

 

The ability of our manufacturers to supply our products is dependent, in part, upon the availability of raw materials and certain components. Our manufacturers may experience shortages in the availability of raw materials or components, which could result in delayed delivery of products to us or in increased costs to us. Any shortage of raw materials or components or inability to control costs associated with manufacturing could increase the costs for our products or impair our ability to ship orders in a timely cost-efficient manner. As a result, we could experience cancellation of orders, refusal to accept deliveries or a reduction in our prices and margins, any of which could harm our financial performance and results of operations.

 

Our business could suffer if any of our manufacturers fail to use acceptable labor practices.

 

We do not control our manufacturers or their labor practices. The violation of labor or other laws by a manufacturer utilized by us, or the divergence of an independent manufacturer’s labor practices from those generally accepted as ethical or legal in the United States, could damage our reputation or disrupt the shipment of finished products to us if such manufacturer is ordered to cease its manufacturing operations due to violations of laws or if such manufacturer’s operations are adversely affected by such failure to use acceptable labor practices. If this were to occur, it could have a material adverse effect on our financial condition and results of operations.

 

Exchange rate fluctuation between the U.S. dollar and Non-U.S. currencies may negatively affect our earnings.

 

Although most of our products imported for our core business are denominated in U.S. dollars, our operating results and cash flows may be subject to fluctuations due to changes in the relative values of the U.S. dollar and other foreign currencies. These fluctuations could negatively affect our operating results and could cause our revenues and net income or loss to vary from quarter to quarter. Furthermore, to the extent that we increase our revenues in regions, where our sales are denominated in U.S. dollars, a strengthening of the dollar versus other currencies could make our products less competitive in those foreign markets and collection of receivables more difficult.

 

We may elect from time to time to make changes to our pricing, service, hiring and marketing decisions that could increase our expenses, affect our revenues and impact our financial results.

 

Because our expense levels in any given quarter are based, in part, on management’s expectations regarding future revenues, if revenues are below expectations, the effect on our operating results may be magnified by our inability to adjust spending in a timely manner to compensate for a shortfall in revenues. The extent to which expenses are not subsequently followed by increased revenues would harm our operating results and could seriously impair our business.

 

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If we are unable to generate sufficient cash flow from operations or are unable to obtain additional equity or debt financing, to meet our working capital requirements, we may have to curtail our business operations sharply or cease business altogether.

 

We have a relatively short operating history on which to evaluate our potential for future success. This makes it difficult to evaluate our future prospects and the risk of success or failure of our business.

 

We incorporated in June of 2010 and your evaluation of our business and prospects will be based on our limited history. Consequently, our short history and results of operations may not give you an accurate indication of our future results of operations or prospects. You must consider our business and prospects in light of the risks and difficulties we will encounter as an early-stage company in a highly competitive market. We may not be able to successfully address these risks and difficulties, which could materially harm our business and operating results.

 

As we grow our business, we cannot guarantee our business strategies will be successful or that our revenues will ever increase sufficiently to achieve and maintain profitability on a quarterly or annual basis.

 

Defects or disruptions in the delivery of our service could diminish demand, decrease market acceptance or decrease customer satisfaction of our service and subject us to substantial liability.

 

We may, from time to time, find defects in our products service may be detected in the future. Any defects with our products could hurt our reputation and may damage our customers’ businesses. If that occurs, customers could elect not to renew, or delay or withhold payment to us, we could lose future sales, or, customers may make warranty or other claims against us, which could result in an increase in our provision for doubtful accounts, an increase in collection cycles for accounts receivable or the expense and risk of litigation.

 

Our inability to effectively manage our growth could harm our business and materially and adversely affect our operating results and financial condition.

 

Our strategy envisions growing our business. We plan to expand our product, sales, administrative and marketing organizations. Any growth in or expansion of our business is likely to continue to place a strain on our management and administrative resources, infrastructure and systems. As with other growing businesses, we expect that we will need to further refine and expand our business development capabilities, our systems and processes and our access to financing sources. We also will need to hire, train, supervise and manage new employees. These processes are time consuming and expensive, will increase management responsibilities and will divert management attention. We cannot assure you that we will be able to:

 

  expand our products offerings effectively or efficiently or in a timely manner;
     
  allocate our human resources optimally;
     
  meet our capital needs;
     
  identify and hire qualified employees or retain valued employees; or
     
  incorporate effectively the components of any business or product line that we may acquire in our effort to achieve growth.

 

Our inability or failure to manage our growth and expansion effectively could harm our business and materially and adversely affect our operating results and financial condition.

 

Our operating results may fluctuate significantly based on customer acceptance of our products. As a result, period-to-period comparisons of our results of operations are unlikely to provide a good indication of our future performance.

 

Management expects that we will experience substantial variations in our net sales and operating results from quarter to quarter due to customer acceptance of our products. If customers do not accept our products, our sales and revenues will decline, resulting in a reduction in our operating income.

 

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Customer interest for our products could also be impacted by the timing of our introduction of new products. If our competitors introduce new products around the same time that we issue new products, and if such competing products are superior to our own, customers’ desire for our products could decrease, resulting in a decrease in our sales and revenues. To the extent that we introduce new products and customers decide not to migrate to our new products from our older products, our revenues could be negatively impacted due to the loss of revenue from those customers. In the event that our newer products do not sell as well as our older products, we could also experience a reduction in our revenues and operating income.

 

As a result of fluctuations in our revenue and operating expenses that may occur, management believes that period-to-period comparisons of our results of operations are unlikely to provide a good indication of our future performance.

 

If we do not successfully generate additional products and services, or if such products and services are developed but not successfully commercialized, we could lose revenue opportunities.

 

Our future success depends, in part, on our ability to expand our product offerings. To that end we have engaged in the process of identifying new product opportunities to provide additional products to our customers. The process of identifying and commercializing new products is complex and uncertain, and if we fail to accurately predict customers’ changing needs and emerging technological trends our business could be harmed. We may have to commit significant resources to commercializing new products before knowing whether our investments will result in products the market will accept. Furthermore, we may not execute successfully on commercializing those products because of errors in product planning or timing, technical hurdles that we fail to overcome in a timely fashion, or a lack of appropriate resources. This could result in competitors providing those solutions before we do and a reduction in net sales and earnings.

 

The success of new products depends on several factors, including proper new product definition, timely completion and introduction of these products, differentiation of new products from those of our competitors, and market acceptance of these products. There can be no assurance that we will successfully identify new product opportunities, develop and bring new products to market in a timely manner, or achieve market acceptance of our products or that products and technologies developed by others will not render our products or technologies obsolete or non-competitive.

 

Our inability to effectively protect our intellectual property would adversely affect our ability to compete effectively, our revenue, our financial condition and our results of operations.

 

We may be unable to obtain intellectual property rights to effectively protect our technology. Our ability to compete effectively may be affected by the nature and breadth of our intellectual property rights. While we intend to defend against any threats to our intellectual property rights, there can be no assurance that any such actions will adequately protect our interests. If we are unable to secure intellectual property rights to effectively protect our technology, our revenue and earnings, financial condition, or results of operations would be adversely affected.

 

We may be adversely affected by the financial condition of our retailers and distributors.

 

Some of our retailers and distributors have experienced financial difficulties in the past. A retailer or distributor experiencing such difficulties will generally not purchase and sell as many of our products as it would under normal circumstances and may cancel orders. In addition, a retailer or distributor experiencing financial difficulties generally increases our exposure to uncollectible receivables. We extend credit to our retailers and distributors based on our assessment of their financial condition, generally without requiring collateral. While such credit losses have historically been within our reserves, we cannot assure you that this will continue to be the case. Financial difficulties on the part of our retailers or distributors could have a material adverse effect on our results of operations and financial condition.

 

Our industry is highly competitive and we have less capital and resources than many of our competitors, which may give them an advantage in developing and marketing products similar to ours or make our products obsolete.

 

We are involved in a highly competitive industry where we may compete with numerous other companies who offer alternative methods or approaches, who have far greater resources, more experience, and personnel perhaps more qualified than we do. Such resources may give our competitors an advantage in developing and marketing products similar to ours or products that make our products obsolete. There can be no assurance that we will be able to successfully compete against these other entities.

 

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We will be required to attract and retain top quality talent to compete in the marketplace.

 

We believe our future growth and success will depend in part on our ability to attract and retain highly skilled managerial, product development, sales and marketing, and finance personnel. There can be no assurance of success in attracting and retaining such personnel. Shortages in qualified personnel could limit our ability to increase sales of existing products and launch new product and service offerings.

 

Our future success depends on our ability to grow and expand our customer base. Our failure to achieve such growth or expansion could materially harm our business.

 

To date, our revenue growth has been derived primarily from the sale of our products. Our success and the planned growth and expansion of our business depend on us achieving greater and broader acceptance of our products, expanding our customer base and successfully moving into providing management services. There can be no assurance that customers will purchase our products , that we will continue to expand our customer base or that we will successfully be able to provide management services to other companies in the cannabis space. If we are unable to effectively market or expand our product offerings, we will be unable to grow and expand our business or implement our business strategy. This could materially impair our ability to increase sales and revenue and materially and adversely affect our margins.

 

Weakened global economic conditions may adversely affect our industry, business and results of operations .

 

Our overall performance will depend, in part, on worldwide economic conditions. The United States and other key international economies have been impacted by falling demand for a variety of goods and services, restricted credit, going concern threats to major multinational companies and medium and small businesses, poor liquidity, reduced corporate profitability, volatility in credit, equity and foreign exchange markets and bankruptcies. These conditions affect the rate of information technology spending and could adversely affect our customers’ ability or willingness to purchase our proposed enterprise cloud computing application service, delay prospective customers’ purchasing decisions, reduce the value or duration of their subscription contracts, or affect renewal rates, all of which could adversely affect our operating results.

 

If we experience significant fluctuations in our rate of anticipated growth and fail to balance our expenses with our revenue forecasts, our results could be harmed.

 

Due to our evolving business model, the unpredictability of new markets that we intend to enter and the unpredictability of future general economic and financial market conditions, we may not be able to accurately forecast our rate of growth. We plan our expense levels and investment on estimates of future revenue and future anticipated rate of growth. As a result, we expect that our revenues, operating results and cash flows may fluctuate significantly on a quarterly basis.

 

We may in the future be sued by third parties for alleged infringement of their proprietary rights.

 

The lighting industry are characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of infringement or other violations of intellectual property rights. We may receive in the future communications from third parties claiming that we have infringed the intellectual property rights of others. We may in the future be, sued by third parties for alleged infringement of their proprietary rights. Our technologies may not be able to withstand any third-party claims against their use. The outcome of any litigation is inherently uncertain. Any intellectual property claims, whether with or without merit, could be time-consuming and expensive to resolve, could divert management attention from executing our business plan and could require us to change our technology, change our business practices and/or pay monetary damages or enter into short- or long-term royalty or licensing agreements which may not be available in the future at the same terms or at all. In addition, many of our subscription agreements require us to indemnify our customers for third-party intellectual property infringement claims, which would increase the cost to us of an adverse ruling on such a claim. Any adverse determination related to intellectual property claims or litigation could prevent us from offering our service to others or could otherwise adversely affect our operating results or cash flows or both in a particular quarter.

 

Supporting a growing customer base could strain our personnel and corporate infrastructure, and if we are unable to scale our operations and increase productivity, we may not be able to successfully implement our business plan.

 

Our current Management and human resources infrastructure is comprised of our CEO, President, Executive Vice President and Chief Operating Officer. Our success will depend, in part, upon the ability of our Management to manage our proposed business effectively. To do so, we will need to hire, train and manage new employees as needed. To manage the expected domestic growth of our operations and personnel, we will need to continue to improve our operational, financial and management controls and our reporting systems and procedures. If we fail to successfully scale our operations and increase productivity, we will be unable to execute our business plan.

 

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We are dependent on our CEO, President , Executive Vice President and Chief Operating Officer, and the loss of one or more of these individuals could harm our business and prevent us from implementing our business plan in a timely manner.

 

Our success depends substantially upon the continued services of our executive officers and other key members of management, particularly Alan Lien, our Chief Executive Officer, President, and Chief Financial Officer, Alvin Hao, our Executive Vice President and Tiffany Davis, our Chief Operating Officer . We do not maintain key person life insurance policies on our Chief Executive Officer, President and Chief Financial Officer or our Executive Vice President. The loss of the services of Loss of the services of Messrs. Lien or Hao or Ms. Davis would have a material adverse effect on our growth, revenues, and prospective business. The loss of any of our key personnel, or the inability to attract and retain qualified personnel, may significantly delay or prevent the achievement of our research, development or business objectives and could materially adversely affect our business, financial condition and results of operations.

 

Any employment agreement we enter into will not ensure the retention of the employee who is a party to the agreement. In addition, we have only limited ability to prevent former employees from competing with us. Furthermore, our future success will also depend in part on the continued service of our key management personnel and our ability to identify, hire, and retain additional personnel. We experience intense competition for qualified personnel and may be unable to attract and retain the personnel necessary for the development of our business. Moreover, competition for personnel with the technical skills that we seek is extremely high and is likely to remain high. Because of this competition, our compensation costs may increase significantly. 

 

Failure to manage growth properly could seriously harm our business.

 

We have experienced, and may continue to experience, significant growth in our business. If we do not effectively manage our growth, the quality of our business may suffer, which could negatively affect our reputation and demand for our offerings. Our growth has placed, and is expected to continue to place, a significant strain on our managerial, administrative, operational, and financial resources and our infrastructure. Our future success will depend, in part, upon the ability of our senior management to manage growth effectively. Among other things, this will require us to: implement additional management information systems; further develop our operating, administrative, legal, financial, and accounting systems and controls; hire additional personnel; develop additional levels of management within our company; locate additional office space; maintain and improve coordination among our engineering, product, operations, legal, finance, sales, marketing, and customer service and support organizations; and manage our expanding international operations.

 

Moreover, as our sales increase, we may be required to concurrently deploy our business infrastructure at multiple additional locations and/or provide increased levels of customization. As a result, we may lack the resources to deploy our products on a timely and cost-effective basis. Failure to accomplish any of these requirements could impair our ability to deliver our products in a timely fashion, fulfill existing customer commitments or attract and retain new customers.

 

Our ability to grow our business may depend on developing a positive brand reputation and member loyalty.

 

Establishing and maintaining a positive brand reputation and nurturing customer loyalty is critical to attracting new customers. We expect to expend reasonable but limited resources to develop, maintain and enhance our brand in the near future. In addition, nurturing customer loyalty will depend on our ability to provide high-quality products which we may not do successfully. If we are unable to maintain and enhance our brand reputation and customer loyalty, our ability to attract new marketplace participants will be harmed.

 

There can be no assurance that we will be able to compete against the numerous direct, indirect and partial competitors, many of which have valuable industry relationships and access to greater resources than we do.

 

Our retail and online distribution channels compete for customers and sales with many different companies and products that are competitive today and likely to be even more competitive in the future. Accordingly, it is essential that we continue to develop, improve and refine our products and the value propositions that are offered to customers.

 

We also face competition from other companies that offer equipment. Moreover, as the negative stigma associated with cannabis horticulture diminishes, it is very possible that other better capitalized public and private companies many enter the market and may effectively challenge the value proposition offered by us. These competitors may be able to attract customers more easily because of their financial resources. Our larger competitors can also devote substantially more resources to business development and may adopt more aggressive pricing policies. There can be no assurance that we will be successful in accomplishing our business initiatives, or that we will be able to maintain significant levels of revenues, or recognize net income, from the sale of our products and services.

 

We do not anticipate paying dividends in the foreseeable future.

 

We anticipate that we will retain all future earnings and other cash resources for the future operation and development of our business and we do not intend to declare or pay any cash dividends in the foreseeable future. Future payment of cash dividends will be at the discretion of our board of directors after taking into account many factors, including our operating results, financial condition and capital requirements. Corporations that pay dividends may be viewed as a better investment than corporations that do not.

 

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We are dependent to some extent on our Chief Technology Consultant for new and improved products.

 

Our Chief Technology Consultant is GAST. Should GAST or any other participating technology providers be unable to execute their portion of the development effort, new development of exclusive products of Solis Tek or any of its future plans could be delayed until a replacement is found.

 

Cannabis remains illegal under federal law, and any change in the enforcement priorities of the federal government could render our current and planned future operations unprofitable or even prohibit such operations.

 

Our business is dependent on laws pertaining to the cannabis industry, which, in turn, is dependent on state laws and regulations pertaining to such industry; however, under federal law, cannabis remains illegal.

 

The United States federal government regulates drugs through the Controlled Substances Act, or the CSA, which places controlled substances, including cannabis, on one of five schedules. Cannabis is currently classified as a Schedule I controlled substance, which is viewed as having a high potential for abuse and having no currently accepted medical use in treatment in the United States. No prescriptions may be written for Schedule I substances, and such substances are subject to production quotas imposed by the United States Drug Enforcement Administration. Because of this, doctors may not prescribe cannabis for medical use under federal law, although they can recommend its use under the First Amendment.

 

Currently, 31 U.S. states, the District of Columbia and the U.S. territories of Guam and Puerto Rico allow the use of medical cannabis. Voters in the states of Alaska, California, Colorado, Maine, Massachusetts, Nevada, Oregon and Washington have approved ballot measures to legalize cannabis for adult recreational use. Such state and territorial laws are in conflict with the federal CSA, which makes cannabis use and possession illegal at the federal level. Because cannabis is a Schedule I controlled substance, the development of a legal cannabis industry under the laws of these states is in conflict with the CSA, which makes cannabis use and possession illegal on a national level. The United States Supreme Court has confirmed that the federal government has the right to regulate and criminalize cannabis, including for medical purposes, and that federal law criminalizing the use of cannabis preempts state laws that legalize its use.

 

In light of such conflict between federal laws and state laws regarding cannabis, the previous administration under President Obama had effectively stated that it was not an efficient use of resources to direct federal law enforcement agencies to prosecute those lawfully abiding by state-designated laws allowing the use and distribution of medical cannabis. For example, the prior United States Department of Justice, or DOJ, Deputy Attorney General of the Obama administration, James M. Cole, issued a memorandum, or the Cole Memo, to all United States Attorneys providing updated guidance to federal prosecutors concerning cannabis enforcement under the CSA. The Cole Memo ultimately emphasizes the need for robust state regulation of cannabis. The memorandum “rests on its expectation that state and local governments that have enacted laws authorizing cannabis-related conduct will implement strong and effective regulatory and enforcement systems that will address the threat those state laws could pose to public safety, public health, and other law enforcement interests.” In addition, the Financial Crimes Enforcement Network provided guidelines on February 14, 2014, regarding how financial institutions can provide services to cannabis-related businesses consistent with their Bank Secrecy Act obligations.

 

In 2014, the United States House of Representatives passed an amendment, or the Rohrabacher-Farr Amendment, to the Commerce, Justice, Science, and Related Agencies Appropriations Bill, which funds the DOJ. The Rohrabacher-Farr Amendment prohibits the DOJ from using funds to prevent states with medical cannabis laws from implementing such laws. In August 2016, a 9th Circuit federal appeals court ruled in United States v. McIntosh that the Rohrabacher-Farr Amendment bars the DOJ from spending funds on the prosecution of conduct that is allowed by state medical cannabis laws, provided that such conduct is in strict compliance with applicable state law. In March 2015, bipartisan legislation titled the Compassionate Access, Research Expansion, and Respect States Act, or the CARERS Act, was introduced, proposing to allow states to regulate the medical use of cannabis by changing applicable federal law, including by reclassifying cannabis under the Controlled Substances Act to a Schedule II controlled substance and thereby changing the plant from a federally-criminalized substance to one that has recognized medical uses. More recently, the Respect State Marijuana Laws Act of 2017 has been introduced in the U.S. House of Representatives, which proposes to exclude persons who produce, possess, distribute, dispense, administer or deliver cannabis in compliance with state laws from the regulatory controls and administrative, civil and criminal penalties of the CSA.

 

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Although these developments have been met with a certain amount of optimism in the cannabis industry, neither the CARERS Act nor the Respect State Marijuana Laws Act of 2017 has been enacted, the Rohrabacher-Farr Amendment has been renewed as part of an omnibus spending bill, in effect through September 30, 2018.

 

Furthermore, on January 4, 2018, the U.S. Attorney General, Jeff Sessions, issued a written memorandum, or the Sessions Memo, to all U.S. Attorneys stating that the Cole Memo was rescinded effectively immediately. In particular, Mr. Sessions stated that “prosecutors should follow the well-established principles that govern all federal prosecutions,” which require “federal prosecutors deciding which cases to prosecute to weigh all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community.” Mr. Sessions went on to state in the memorandum that given the Justice Department’s well-established general principles, “previous nationwide guidance specific to cannabis is unnecessary and is rescinded, effective immediately.”

 

In response to the Sessions Memo, U.S. Attorney Bob Troy for the District of Colorado, the state in which our principal business operations are presently located, issued a statement on January 4, 2018, stating that the United States Attorney’s Office in Colorado is already guided by the well-established principles referenced in the Sessions Memo, “focusing in particular on identifying and prosecuting those who create the greatest safety threats to our communities around the state. We will, consistent with the Attorney General’s latest guidance, continue to take this approach in all of our work with our law enforcement partners throughout Colorado.”

 

It is unclear at this time whether the Sessions Memo indicates that the Trump administration will strongly enforce the federal laws applicable to cannabis or what types of activities will be targeted for enforcement. However, a significant change in the federal government’s enforcement policy with respect to current federal laws applicable to cannabis could cause significant financial damage to us. While we do not currently harvest, distribute or sell cannabis, we intend to do so in the future, and thus we may be irreparably harmed by a change in enforcement policies of the federal government depending on the nature of such change. At such time, we could be deemed to be aiding and abetting illegal activities, a violation of federal law.

 

Additionally, as we are always assessing potential strategic acquisitions of new businesses, we may in the future also pursue opportunities that include growing and distributing medical or recreational cannabis, should we determine that such activities are our and our stockholders’ best interest. Any such pursuit would involve additional risks with respect to the regulation of cannabis.


Any potential growth in the cannabis industry continues to be subject to new and changing state and local laws and regulations.

 

Continued development of the cannabis industry is dependent upon continued legislative legalization of cannabis at the state level, and a number of factors could slow or halt progress in this area, even where there is public support for legislative action. Any delay or halt in the passing or implementation of legislation legalizing cannabis use, or its sale and distribution, or the re-criminalization or restriction of cannabis at the state level could negatively impact our business. Additionally, changes in applicable state and local laws or regulations could restrict the products and services we offer or impose additional compliance costs on us or our customers and tenants. Violations of applicable laws, or allegations of such violations, could disrupt our business and result in a material adverse effect on our operations. We cannot predict the nature of any future laws, regulations, interpretations or applications, and it is possible that regulations may be enacted in the future that will be materially adverse to our business.

 

The cannabis industry faces significant opposition, and any negative trends will adversely affect our business operations.

 

We are substantially dependent on the continued market acceptance, and the proliferation of consumers, of medical and recreational cannabis. We believe that with further legalization, cannabis will become more accepted, resulting in a growth in consumer demand. However, we cannot predict the future growth rate or future market potential, and any negative outlook on the cannabis industry may adversely affect our business operations.

 

Large, well-funded business sectors may have strong economic reasons to oppose the development of the cannabis industry. For example, medical cannabis may adversely impact the existing market for the current “cannabis pill” sold by mainstream pharmaceutical companies. Should cannabis displace other drugs or products, the medical cannabis industry could face a material threat from the pharmaceutical industry, which is well-funded and possesses a strong and experienced lobby. Any inroads the pharmaceutical or any other potentially displaced, industry or sector could make in halting or impeding the cannabis industry could have a detrimental impact on our business.

 

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We may have claims and lawsuits threatened and/or commenced by or against us, which may result in adverse outcomes.

 

From time to time, we may be involved in routine legal proceedings, as well as demands, claims and threatened litigation that arise in the normal course of our business. The ultimate amount of liability, if any, for any claims of any type (either alone or in the aggregate) may materially and adversely affect our financial condition, results of operations and liquidity. In addition, the ultimate outcome of any litigation is uncertain. Any outcome, whether favorable or unfavorable, may materially and adversely affect us due to legal costs and expenses, diversion of management attention and other factors. We expense legal costs in the period incurred. We cannot assure you that additional contingencies of a legal nature or contingencies having legal aspects will not be asserted against us in the future, and these matters could relate to prior, current or future transactions or events. Except as described below, we are not currently a party to any material litigation.

 

We may need to raise additional capital. If we are unable to raise additional capital, we may not be able to achieve our business plan.

 

We may need to raise additional funds through public or private debt or equity financings as well as obtain credit from vendors to be able to fully execute our business plan. Any additional capital raised through the sale of equity may dilute current shareholders’ ownership interest. We may not be able to raise additional funds on favorable terms, or at all. If we are unable to obtain additional funds or credit from our vendors, we will be unable to execute our business plan and you could lose your investment.

 

We have limited protection of our intellectual property.

 

There can be no assurance that we will be able to adequately protect our trade secrets. In the event competitors independently develop or otherwise obtain access to our know-how, concepts or trade secrets, we may be adversely affected.

 

RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK

 

There is minimal active liquid trading market for our common stock.

 

Our common stock is quoted on the OTCQB. However, there is relatively small active trading market in our common stock, and we cannot give an assurance that a more active trading market will develop. If a more active market for our common stock develops, there is a significant risk that our stock price may fluctuate dramatically in the future in response to any of the following factors, some of which are beyond our control, such as:

 

  Actual or anticipated variations in our operating results (including whether we have achieved our key business targets, and/or earnings estimates) and prospects;
     
  Announcements of technological innovations by us or our competitors;
     
  Announcements by us or our competitors of significant acquisitions, business achievements, strategic partnerships, joint ventures, or capital commitments;
     
  Additions or departures of key personnel;
     
  Introduction of new services by us or our competitors;
     
  Sales of our common stock or other securities in the open market (particularly if overall trading volume is not high);
     
  General market conditions and broader political and economic conditions;
     
  Actual or anticipated monetization’s of our patents; and
     
  Other events or factors, many of which are beyond our control.

 

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Our board of directors has the authority to issue up to 20 million shares of “blank check” preferred stock. The issuance of any preferred stock may adversely affect the holders of common stock.

 

Our Amended and Restated Articles of Incorporation authorizes the issuance of up to 20,000,000 shares of preferred stock with designations, rights and preferences determined from time to time by its Board of Directors. Accordingly, our Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting, or other rights which could adversely affect the voting power or other rights of the holders of the common stock. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of our company. Although we have no present intention to issue any shares of our authorized preferred stock, there can be no assurance that we will not do so in the future.

 

Future issuance of our Common Stock could dilute the interests of existing shareholders.

 

We may issue additional shares of our Common Stock in the future. The issuance of a substantial amount of Common Stock could have the effect of substantially diluting the interests of our shareholders. In addition, the sale of a substantial amount of Common Stock in the public market, either in the initial issuance or in a subsequent resale by the target company in an acquisition which received such Common Stock as consideration or by investors who acquired such Common Stock in a private placement could have an adverse effect on the market price of our Common Stock.

 

We have no plans to pay dividends.

 

To date, we have paid no cash dividends on our Common Stock. For the foreseeable future, earnings generated from our operations will be retained for use in our business and not to pay dividends.

 

The application of the Securities and Exchange Commission’s “penny stock” rules to our Common Stock could limit trading activity in the market, and our shareholders may find it more difficult to sell their stock.

 

It is expected our Common Stock will be trading at less than $5.00 per share and is therefore subject to the SEC penny stock rules. Penny stocks generally are equity securities with a price of less than $5.00. Penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account. The broker-dealer must also make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security that becomes subject to the penny stock rules. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our securities, which could severely limit their market price and liquidity of our securities. These requirements may restrict the ability of broker-dealers to sell our Common Stock and may affect your ability to resell our Common Stock.

 

If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negative effect on the market price for shares of our Common Stock.

 

Effective internal controls are necessary for us to provide reliable financial reports and to effectively prevent fraud. We maintain a system of internal control over financial reporting, which is defined as a process designed by, or under the supervision of, our principal executive officer and principal financial officer, or persons performing similar functions, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

As a public company, we have significant requirements for enhanced financial reporting and internal controls. We will be required to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal controls over financial reporting. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company.

 

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We cannot assure you that we will not, in the future, identify areas requiring improvement in our internal control over financial reporting. We cannot assure you that the measures we will take to remediate any areas in need of improvement will be successful or that we will implement and maintain adequate controls over our financial processes and reporting in the future as we continue our growth. If we are unable to establish appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations, result in the restatement of our financial statements, harm our operating results, subject us to regulatory scrutiny and sanction, cause investors to lose confidence in our reported financial information and have a negative effect on the market price for shares of our Common Stock.

 

Lack of experience as officers of publicly-traded companies of our management team may hinder our ability to comply with Sarbanes-Oxley Act.

 

It may be time consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal controls and other finance staff or consultants in order to develop and implement appropriate internal controls and reporting procedures.

 

We incur costs as a public company which may affect our profitability.

 

As a public company, we incur significant legal, accounting and other expenses. We are subject to the SEC’s rules and regulations relating to public disclosure. SEC disclosures generally involve a substantial expenditure of financial resources. Compliance with these rules and regulations will significantly increase our legal and financial compliance costs and some activities will become more time-consuming and costly. Management may need to increase compensation for senior executive officers, engage additional senior financial officers who are able to adopt financial reporting and control procedures, allocate a budget for an investor and public relations program, and increase our financial and accounting staff in order to meet the demands and financial reporting requirements as a public reporting company. Such additional personnel, public relations, reporting and compliance costs may negatively impact our financial results.

 

Public company compliance may make it more difficult to attract and retain officers and directors.

 

The Sarbanes-Oxley Act and rules implemented by the SEC require changes in corporate governance practices of public companies. As a public company, these rules and regulations increase our compliance costs and make certain activities more time consuming and costly. As a public company, these rules and regulations make it more difficult and expensive for us to obtain director and officer liability insurance in the future and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers.

 

Because our directors and executive officers are among our largest shareholders, they can exert significant control over our business and affairs and have actual or potential interests that may depart from those of shareholders.

 

Our directors and executive officers own or control a significant percentage of the Common Stock. Additionally, the holdings of our directors and executive officers may increase in the future if they otherwise acquire additional shares of our Common Stock. The interests of such persons may differ from the interests of our other shareholders. As a result, in addition to their board seats and offices, such persons will have significant influence over and control all corporate actions requiring shareholder approval, irrespective of how our other shareholders, including purchasers in the Offering, may vote, including the following actions:

 

  to elect or defeat the election of our directors;
     
 

to amend or prevent amendment of our Articles of Incorporation or By-laws;

     
  to effect or prevent a merger, sale of assets or other corporate transaction; and
     
  to control the outcome of any other matter submitted to our shareholders for vote.

 

Such persons’ stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company, which in turn could reduce our stock price or prevent our shareholders from realizing a premium over our stock price.

 

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RISKS RELATED TO THIS OFFERING

 

There are substantial risks associated with the SEDA, which could contribute to the decline of our share price and have a dilutive impact on our existing shareholders.

 

The sale of our Common Stock to the Selling Stockholder pursuant to the SEDA will have a dilutive impact on our shareholders. The Selling Stockholder may resell some, if not all, of the shares we issue to it under the SEDA and such sales could cause the market price of our Common Stock to decline. We believe that the Selling Stockholder intends to promptly re-sell the SEDA Shares we sell to it under the SEDA. Such re-sales could cause the market price of our Common Shares to decline significantly. Any subsequent sales by us to the Selling Stockholder under the SEDA may, to the extent of any such decline, require us to issue a greater number of Common Stock to the Selling Stockholder in exchange for each dollar of such subsequent sale.

 

Under these circumstances, our existing shareholders would experience a greater dilution. Although the Selling Stockholder is precluded from short sales, the sale of our Common Stock under the SEDA could encourage short sales by third parties anticipating the issuance of additional shares of Common Stock, which could contribute to the further decline of our share price.

 

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USE OF PROCEEDS

 

We will not receive proceeds from the sale of the Resale Shares by the Selling Stockholder. However, we will receive proceeds from the exercise of warrants and the sale of the SEDA Shares pursuant to our exercise of the put right offered by the Selling Stockholder under the SEDA Agreement. When we “put” an amount of shares to the Selling Stockholder, the per-share purchase price that the Selling Stockholder will pay to us in respect of the put will be equal to 90% of the lowest volume weighted average price of our Common Stock during the five (5) consecutive Trading Days immediately following the applicable Advance Notice Date.

 

We expect to use any proceeds that we receive from the Warrant Shares and the SEDA Shares for working capital and general corporate purposes.

 

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MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Market Information

 

Our common stock is quoted on the OTCQB Market under the trading symbol “GNAL”. Prior to September 26, 2018, our common stock was quoted on the OTCQB Market under the trading symbol “ SLTK”. Trading in stocks quoted on the OTC Markets is often thin and is characterized by wide fluctuations in trading prices due to many factors that may have little to do with a company’s operations or business prospects.

 

The following quotations reflect the high and low bids for our common stock based on inter-dealer prices, without retail mark-up, mark-down or commission, and may not represent actual transactions.

 

Fiscal Year 2018

 

    High     Low  
First Quarter   $ 2.64     $ 1.08  
Second Quarter   $ 1.55     $ 0.57  
Third Quarter   $ 1.05     $ 0.40  
Fourth Quarter (through October 18 , 2018)   $ 0.95     $ 0.71  

 

Fiscal Year 2017

 

    High     Low  
First Quarter   $ 1.39     $ 0.57  
Second Quarter   $ 3.37     $ 1.00  
Third Quarter   $ 1.54     $ 1.02  
Fourth Quarter   $ 2.23     $ 1.08  

 

Fiscal Year 2016

 

    High     Low  
First Quarter   $ 1.00     $ 0.20  
Second Quarter   $ 0.50     $ 0.50  
Third Quarter   $ 0.50     $ 0.50  
Fourth Quarter   $ 0.77     $ 0.25  

 

Holders of Common Stock

 

As of October 18, 2018, there were approximately 56 shareholders of record holding a total of 46,066,564 shares of Common Stock. The holders of the Common Stock are entitled to one vote for each share held of record on all matters submitted to a vote of shareholders. Holders of the Common Stock have no preemptive rights and no right to convert their Common Stock into any other securities. There are no redemption or sinking fund provisions applicable to the Common Stock.

 

Dividend Policy

 

We have never paid any cash dividends on our capital stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We intend to retain future earnings to fund ongoing operations and future capital requirements of our business. Any future determination to pay cash dividends will be at the discretion of the Board and will be dependent upon our financial condition, results of operations, capital requirements and such other factors as the Board deems relevant.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. See “Special 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 prospectus.

 

The following discussion and analysis of our financial condition and results of operations is based on the preparation of our financial statements in accordance with U.S. generally accepted accounting principles. You should read this discussion and analysis together with such financial statements and the related notes thereto.

 

Business Overview

 

We are focused on the research, design, development and manufacturing of advanced, energy efficient indoor horticulture lighting, plant nutrient products, and ancillary equipment. Our vision is to apply the latest advances in high efficiency lighting and controls technology as well as effective manufacturing techniques to deliver highly differentiated lighting and nutrient products with clear benefits at competitive prices to the greenhouse and indoor horticulture markets.

 

Our subsidiary, Solis Tek Inc., a California corporation, was formed in June of 2010. Its operations consist of designing, developing and sourcing of a line of Solis Tek Digital Ballasts intended for use in high intensity lighting systems used for horticulture. An electrical ballast is a device intended to limit the amount of current in an electric circuit. A familiar and widely used example is the inductive ballast used in fluorescent lamps, which limits the current through the tube, which would otherwise rise to destructive levels due to the tube’s negative resistance characteristic. Since the commencement of operations, our product line has evolved from digital ballasts to a line of lighting products including a line of specialty ballasts ranging from 400 watts to 1,000 watts with various features, our Lamp Products, a line of reflectors, high intensity lighting accessories and a potential new line of LED lighting technologies.

 

We sell our products primarily to retailers in the United States and international markets who specialize in hydroponic horticulture. Currently, we have approximately 500 retail stores in the United States as well as various ecommerce websites that sell our products. We have six full time sales employees and four wholesale distributors who cover U.S., Canada, Spain and the United Kingdom for both retail customers as well as commercial growers in cannabis legal states and countries.

 

We believe that almost all of the end users that use our products are using the equipment for the growing of cannabis. Currently, there are thirty- one (31) States and the District of Columbia that have laws and/or regulation that recognize in one form or another, legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. In addition, the States of Colorado, Washington, Alaska, Oregon, California, Massachusetts, Nevada, Maine, Vermont and the District of Columbia have approved the recreational use of cannabis. Many other states are considering legislation to similar effect. Active enforcement of the current federal regulatory position on cannabis on a regional or national basis may directly and adversely affect the willingness of our end user customers to continue to grow cannabis. Active enforcement of the current federal regulatory position on cannabis may thus directly and adversely affect revenues and profits.

 

However, our products can be, and are used for, the hydroponic and indoor growing of other horticultural products, such as hothouse vegetables, decorative plant nurseries, indoor aquariums, and industrial painting facilities. We intend to continue to expand and improve our products for use in as many applications as possible and to market our products to the entire indoor horticultural industry as well as other industrial applications that require artificial lighting.

 

In 2014, STE was incorporated in the State of New Jersey as our wholly-owned subsidiary. STE was formed for the purpose of commencing its operations and servicing and supplying the Eastern part of North America with our products. In September 2014, STE leased a 10,160 square foot office and warehouse facility in South Hackensack, New Jersey. The South Hackensack facility was closed in June 2018 as part of our effort to consolidate distribution out of our warehouse in Carson, California.

 

Our ballast products are produced in China under a proprietary manufacturing agreement. Our Lamp Products including lamps and ancillary products and equipment are manufactured to our specifications under proprietary product control and to our designs, in China.

 

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Results of Operations

 

Results of Operations for the Six Months Ended June 30, 2018 compared to the Six Months Ended June 30, 2017

 

Revenue and Cost of Goods Sold

 

Revenue for the six months ended June 30, 2018 and 2017 was $1,713,375 and $5,343,115, respectively, a decrease of $3,629,740, or 68%. The decrease was due to several negative factors during the first six months of 2018, as compared to the prior year period.

 

Such factors included, market instability and uncertainty, reports of over-capacity and price declines at the wholesale level. This state of ambiguity as to the number of licenses, announced cultivations in the building out process, demand on a state-by-state level, and lead time to production and profitability has put a general pall on the marketplace as exhibited in the Company sales, and is also reflected in the sales of competitive US based companies. U.S. Attorney General Jeff Sessions messaging, the Administration’s stance and announcements on marijuana enforcement, particularly the rescinding of the Cole Memorandum and giving the Federal US Attorneys “free-reign” as to enforcement priorities set a very negative tone and caused hesitation from buyers in the cannabis industry. Industry-wide build-outs slowed and were pushed-out. Additionally, as the new legal adult use recreational States come on stream- the requirements for testing, oversight, and tightening of the regulatory environment have caused a pause in the expansion timetable of many new licensees.

 

Specific reasons to beset to Solis Tek, included a change at the Chief Executive Officer level and change of message and direction. Solis Tek 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, Solis Tek has repositioned a segment of its sales force to nationwide commercial cultivation account managers and has re-programed the sales team, changed pricing and changed marketing strategies. Its recent shift to convert to a commercial mindset, also altered its 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 six months ended June 30, 2018 and 2017, was $ 1,118,841 and $ 3,302,714, respectively. Gross profit for the six months ended June 30, 2018 and 2017 was $ 594,534 and $ 2,040,401, respectively. The decrease in gross profit of $ 1,445,867, or 71% , was primarily due to our decrease in revenue. As a percentage of revenue, gross profit for the six months ended June 30, 2018 was 35%, compared to 38% for the six months ended June 30, 2017. The decrease in gross profit percentage was due to an increase in our reserve for returned product and the change in product mix sold.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative, or SG&A , expenses for the six months ended June 30, 2018 and 2017 was $ 6,098,289 and $ 7,155,886 , respectively, a decrease of $ 1,057,597 , or 15%. For the six months ended June 30, 2018, stock-based compensation expense decreased $ 1,990,338 to $ 2,889,513 , compared to $ 4,879,851 for the prior year period. Excluding stock-based compensation expense, our SG&A increased $ 858,658 due to the recording of a $449,000 severance obligation to our former Chief Executive Officer (see Note 12 of the accompanying condensed consolidated financial statements), an increase in salaries and benefits, professional fees, and general operating expenses to support our operations.

 

Research and Development Expenses

 

R esearch and development, or R&D, expenses for the six months ended June 30 , 2018 and 2017 were $114,584 and $ 165,270 , respectively, a decrease of $ 50,686 , or 31 %. The decrease in R&D expenses was primarily due to decreased employee compensation and royalty expense.

 

Excess Cost of Acquisition to Related Party over Historical Basis

 

Excess cost of acquisition to related party over historical basis for the six months ended June 30, 2018 was $4,450,000, representing a non-cash charge related to our acquisition on YLK Partners NV from related parties on May 10, 2018 (See Note 4 to the accompanying condensed consolidated financial statements).

 

Other Income and Expenses

 

Other expense for the six months ended June 30 , 2018 was $ 380,434, as compared to other expense of $ 55,820 for the six months ended June 30, 2017. The increase in other expense was due to the recording of a gain on the change in fair value of derivative liability of $ 6,811,926 and a gain on the extinguishment of derivatives of $2,389,427, offset by financing costs of $ 7,317,406, and the amortization of discounts to interest expense of $2,177,074, all of which did not exist during the prior year period. The remaining increase in interest expense increased over the prior year period by $ 31,487 due to our increase in borrowings.

 

Net loss

 

Net loss for the six months ended June 30, 2018 was $10,451,973, compared to a net loss of $5,340,688 for the six months ended June 30, 2017. The increase in net loss was due to the increase in other expenses, increased operating expenses, and decreased revenues and gross profit as discussed above.

 

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Year Ended December 31, 2017 Compared to the Year Ended December 31, 2016

 

Revenue and Cost of Goods Sold

 

Revenue for the years ended December 31, 2017 and 2016 was $8,975,840 and $8,563,751, respectively, an, increase of $412,089, or 5%. The increase was primarily due to more market penetration within our hydroponic customers and commercial facilities during 2017, as compared to 2016.

 

Cost of goods sold for the years ended December 31, 2017 and 2016, was $5,830,568 and $5,439,982, respectively. Gross profit for the years ended December 31, 2017 and 2016, was $3,145,272 and $3,123,859, respectively. The increase in gross profit of $21,413 or 1% was primarily due to increase in revenue. As a percentage of revenue, gross profit for years ended December 31, 2017 and 2016, was 35.0% and 36.5%, respectively. The decrease in gross profit percentage was due to product mix.

 

Selling, General and Administrative Expenses

 

SG&A expenses for the years ended December 31, 2017 and 2016 was $11,804,322 and $3,173,851, respectively, an increase of $8,630,471 or 272%. Included in the increase in SG&A expenses was an increase in stock-based compensation expense of $6,342,596. Excluding the increase in stock-based compensation expense, SG&A increased $2,287,875 due to an increase in payroll, professional fees, consulting, marketing, and other operating expenses to support our current business objectives.

 

Research and Development Expenses

 

R&D expenses for the years ended December 31, 2017 and 2016 was $231,770 and $370,625, respectively, a decrease of $138,855 or 37%. The decrease in R&D expenses was primarily related to the timing and scope of R&D projects as compared to the same period of last year.

 

Other Income and Expenses

 

Other expenses, net, for the years ended December 31, 2017 and 2016 was $5,123,753 and $117,293, respectively, an increase of $5,006,460. The increase in other income and expenses was due to the recording of financing costs of $2,353,234 and the change in fair value of derivative liability of $2,545,918, all of which did not exist during the prior year period. Interest expense increased over the prior year period by $128,409 due to increase in borrowings.

 

Net Loss

 

Our net loss for the years ended December 31, 2017 and 2016 was $14,021,728 and $538,710, respectively, an increase of $13,483,018. The increase in net loss was due to the increase in gross profit offset by increases in operating expenses and other income and expenses as discussed above.

 

Liquidity and Capital Resources

 

Cash flows used in operating activities

 

During the year ended December 31, 2017, we used $2,060,576 in operating activities, compared to cash provided by operating activities of $580,634 during the year ended December 31, 2016. During the year ended December 31, 2017, cash flow was impacted by our net loss, excluding non-cash expenses, and the change in our working capital accounts as compared to the same period prior year.

 

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During the six months ended June 30, 2018, we used cash in operating activities of $ 2,315,672, compared to cash used in operating activities of $ 514,137 during the six months ended June 30, 2017. Cash was primarily used to fund our operating loss during each period.

 

Cash flows provided by ( used in ) investing activities

 

During the years ended December 31, 2017 and 2016, we used $3,200 and $8,185 in cash from investing activities to purchase property and equipment, respectively.

 

During the six months ended June 30, 2018 and 2017, we realized $203,195 in cash flows from investment activities, representing the collection of an acquired receivable of $250,000, offset by $46,805 used to purchase property and equipment. During the six months ended June 30, 2017, we used $ 3,200 in cash from investing activities to purchase property and equipment.

 

Cash flows provided by financing activities

 

During the year ended December 31, 2017, we incurred a net loss of $14,021,728 and used cash in operations of $2,060,576 and had a stockholders’ deficit of $6,326,189 as of December 31, 2017.

 

During the six months ended June 30, 2018, we generated cash from financing activities of $ 3,988,530, compared to cash provided by financing activities of $ 669,134 for the six months ended June 30, 2017. During the six months ended June 30, 2018, we raised $1, 568 ,000 from the sale of common stock, raised $ 1,436,996 from the exercise of warrants, received proceeds of $1,500,000 from a secured note payable, made payments of $ 505 ,000 on our notes payable to related parties, and made payments on loans payable and capital lease obligation totaling $ 11,466 . During the six months ended June 30 , 2017, we raised $400,000 through an issuance of common stock, received proceeds from notes payable to related parties of $300,000, of which $20,000 was used to pay notes payable to related parties, and made payments on loans payable and capital lease obligation totaling $ 10,866 .

 

During the six months ended June 30, 2018, we incurred an operating loss of $ 10,068,339 and used cash in operations of $ 2,315,672, and as of June 30, 2018, we had a shareholders’ deficit of $ 338,018. 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 June 30, 2018 , we had cash on hand in the amount of $ 2,843,996. On April 16, 2018, we entered in a Standby Equity Distribution Agreement, or SEDA (See Note 12 of the accompanying condensed consolidated financial statements). Management estimates that the current funds on hand will be sufficient to continue operations through December 2018. Our continuation 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 shareholders , 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 positive cash flow from operations commencing third quarter 2019. If our sales goals do not materialize as planned, we believe that we can reduce its 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

 

On July 1, 2012, we entered into a notes payable agreement with Lydia Hao, who is the mother of Alvin Hao, our executive vice president. The maximum borrowings allowed under the note are $200,000. Through December 31, 2013, the note bore interest at 20% per annum. Beginning on January 1, 2014, the interest rate on the note was reduced to 8% per annum. The note is due 30 days after demand. Amounts owed on the note balance were $195,000 at December 31, 2017 . During the six months ended June 30, 2018, we made payments of $195,000 and the notes were retired.

 

On May 9, 2016, we also entered into notes payable agreements with Alan Lien and Alvin Hao, each an officer, 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 loans are currently past due. A total of $600,000 was due on the combined notes at June 30, 2018 and December 31, 2017 , respectively.

 

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In February 2017, we executed two separate promissory notes and borrowed $300,000 from the relatives of Alan Lien, our Chief Executive Officer and one of our directors. The notes are unsecured, payable on demand and carry an interest rate of 14% per annum. A total of $300,000 was outstanding on the combined notes at December 31, 2017. During the six months ended June 30, 2018, we made payments of $300,000 and the notes were retired.

 

We also entered into note agreements with the parents of Alan Lien, our Chief Executive Officer and one of our directors . The loans accrue interest at 10% per annum, are unsecured and were due on or before December 31, 2016. A total of $50,000 was due on the loans as of December 31, 2017 and 2016, respectively. During the six months ended June 30, 2018, we made payments of $10,000, leaving a balance due of $40,000 as of June 30, 2018. The loans are currently past due.

 

As of December 31, 2017 and 2016, we also owed Alan Lien and Alvin Hao an additional $146,534 and $134,088, respectively. Included in the balances were short-term loans from Alan Lien and Alvin Hao to the us totaling $3,297 and $3,297 as of December 31, 2017 and 2016, respectively. The balances are payable on demand, bear zero interest and are unsecured. The balances also included interest owed on the notes payable described above, which totaled to $65,222 and $68,472 at December 31, 2017 and 2016, respectively. Also included is $29,580 and $62,319 of unpaid compensation, which was owed to Alan Lien and Alvin Hao at December 31, 2017 and 2016, respectively. Subsequent to December 31, 2017, payments of $68,106 were made and additional accrued interest was added of $39,782.

 

Proceeds from Exercise of Warrants

 

During the six months ended June 30, 2018 , we received $1, 436,996 in proceeds on the exercise of 1,306,360 warrants.

 

Proceeds from Secured Note Payable

 

During the six months ended June 30, 2018, we received proceeds of $1,500,000 on the issuance of a secured note payable for $1,500,000.

 

Private Placement Offerings

 

During the year ended December 31, 2017, we raised a total of $455,000 through an issuance of 511,957 shares through a Private Placement Offering to accredited investors pursuant to Regulation D. On September 3, 2017, the Company closed the Private Placement Offering.

 

During the six months ended June 30, 2018, we raised a total of $1,068,000 through an issuance of 821,538 shares , at $1.30 per share, through a private placement to accredited investors pursuant to Regulation D.

 

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In October 2017, we engaged Garden State Securities to develop potential accredited investors to participate in a private offering to raise up to $3,000,000 in convertible Preferred Series A stock. Each unit consisted of (i) three shares of our Series A Convertible Preferred Stock, or the Series A, and (ii) a warrant to purchase 1,936 shares of our common stock at $1.25 per share. Each Series A share is convertible into 1,000 shares of our common stock. The minimum subscription amount was 84 Units for $252,000, at $3,000 per unit. The purchasers of the Series A have registration rights to have us register the underlying common shares. On October 24, 2017 an accredited investor, FirstFire Global Opportunity Fund LLC, purchased 117 Units which consisted of 117 Series A and Warrants to purchase 283,140 shares of common stock for $351,000. We received a total of $295,410 after fees and expenses. The conversion price of the stock is the lower of $1.00 or a potential 20% discount to the market price at the date of conversion. On November 8, 2017, we terminated the Unit offering. Subsequently, per the terms of the agreements, we issued an additional 168,860 cash warrants at $1.10 per share. Subsequent to December 31, 2017, we issued 168,860 shares of its common stock from the conversion of warrants, at $1.10 per share, resulting in proceeds of $185,746, and issued 368,550 shares of common stock on the conversion of 351 shares of Series-A preferred shares.

 

On November 8, 2017, we issued a secured convertible debenture, or the Note, to the Selling Stockholder in the principal amount of $1,750,000 with interest at 5% per annum (15% on default) and due eighteen (18) months from closing. The Note is secured by all of our and our subsidiaries, STI, STE and Zelda’s, assets, as evidenced by a security agreement. The Note is convertible into shares of our common stock at $1.00 per share, or the Conversion Price. The Conversion Price may be adjusted by the Selling Stockholder on the earlier of (a) the 90-day anniversary of the closing with effectiveness of a registration statement or (b) the 180-day anniversary of the closing to a 20% discount to the lowest daily VWAP over the prior 10 trading days, if lower than $1.00 per share, or the Ownership Cap. Subject to the Ownership Cap, the Note will automatically convert if our stock has traded 250% above the Conversion Price for a period of 20 consecutive trading days provided that the shares can be sold pursuant to an effective registration statement or Rule 144 without any limitations, and our common stock has an average daily trading value of $350,000 per day for a period of 20 con s ecutive trading days. We will repay the outstanding principal of the Note in equal installments of $250,000 per month starting on the 270-day anniversary of the closing date either in cash by paying the installment amount plus the Redemption Premium or in kind through conversion into free trading common stock at a price equal to the less of (i) the Fixed Conversion Price, or (ii) a 20% discount to the lowest daily VWAP of the Common Stock during the 10 trading days prior to the payment date (or any combination of cash and stock). We will not be required to make a monthly amortization payment if the 10-day lowest VWAP is at or above 125% of the then effective Conversion Price. The Selling Stockholder will have the option to defer any monthly amortization payment to the maturity date at is sole discretion. The stock component of each monthly amortization payment will be limited to 300% of the average daily dollar traded value over the previous 10 trading days. We may redeem in cash amounts owed under the Note prior to the maturity date by provided The Selling Stockholder with 10 business days advance note provided that the common stock is trading below the conversion price at the time of the redemption note. We shall pay the redemption premium equal to the percentage of the principal amount being redeemed as follows: 10% for first 180 days following the closing, 15% for day 181 to 360 following the closing; and 20% for day 361 to the maturity date. We issued to the Selling Stockholder, five-year warrants to purchase up to 1,137,500 shares of our common stock at an exercise price of $1.10 per share. We paid 5% of aggregate funding as commitment fee to the Selling Stockholder and $15,000 towards due diligence and structuring fee. We netted $1,647,500 after fees and expenses. Subsequent to December 31, 2017, the Selling Stockholder notified us in writing that it elected to convert all remaining outstanding principal and interest accrued and otherwise payable under the debenture, which included the conversion of $1,750,000 of principal and $38,082 of interest. Upon the conversion of the debenture, we issued an aggregate of 1,788,082 shares of our Common Stock to the Selling Stockholder. Upon the conversion, the debenture and the security agreement were both terminated in accordance with their respective terms effective as of April 18, 2018, and all security interest and liens under the security agreement were released and terminated. As of August 3, 2018, all of the warrants have been exercised.

 

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On May 10, 2018, we entered in to a Securities Purchase Agreement with YA PN II, LLC, pursuant to which we sold and issued the following:

 

  (a) 500,000 Shares for a consideration of $500,000;
     
  (b) A warrant, or Warrant #1, to purchase 1,000,000 Warrant Shares at an exercise price of $1.50 per share for a term expiring on May 10, 2023;
     
  (c)

A warrant, or Warrant #2, purchase 2,250,000 shares of common stock at an exercise price of $1.50 per share for a term expiring on May 10, 2023. At any time, we have the right and option to purchase any unexercised shares of Common Stock underlying Warrant #2 for a purchase price of $0.03 per share so purchased if and only if the average volume weighted average price, or VWAP, (as reported by Bloomberg, LP) of our Common Stock is greater than $1.75 per share for the five (5) consecutive trading days immediately preceding our delivery of a notice of exercise.

 

We have the right and option to compel the Selling Stockholder to exercise and purchase Shares of Common Stock underlying Warrant #2 on the terms set forth in Warrant #2 if and only if the average VWAP of our Common Stock is greater than $1.75 per share for the five (5) consecutive trading days immediately preceding our delivery of a notice of exercise.

     
  (d) A warrant, or Warrant #3, to purchase 2,250,000 shares of Common Stock at an exercise price of $1.50 per share for a term expiring on May 10, 2023. At any time, we have the right and option to purchase any unexercised shares of Common Stock underlying Warrant #3 for a purchase price of $0.03 per share so purchased if and only if the average VWAP (as reported by Bloomberg, LP) of our Common Stock is greater than $2.00 per share for the five (5) consecutive trading days immediately preceding our delivery of a notice of exercise.
     
    We have the right and option to compel the Selling Stockholder to exercise and purchase Shares of Common Stock underlying Warrant #3 on the terms set forth in Warrant #3 if and only if the average VWAP of our Common Stock is greater than $2.00 per share for the five (5) consecutive trading days immediately preceding our delivery of a notice of exercise.
     
  (e) A warrant, or Warrant #4, to purchase 2,000,000 shares of Common Stock at an exercise price of $1.50 per share for a term expiring on May 10, 2023. At any time, we have the right and option to purchase any unexercised shares of Common Stock underlying Warrant #4 for a purchase price of $0.03 per share so purchased if and only if the average VWAP (as reported by Bloomberg, LP) of our Common Stock is greater than $1.50 per share for the five (5) consecutive trading days immediately preceding our delivery of a notice of exercise.
     
    We have the right and option to compel the Selling Stockholder to exercise and purchase the Shares of Common Stock underlying Warrant #4 on the terms set forth in Warrant #4 if and only if the average VWAP of our Common Stock is greater than $2.50 per share for the five (5) consecutive trading days immediately preceding our delivery of a notice of exercise.
     
  (f) A Secured Promissory Note, or the Note, in the amount of $1,500,000. The Note bears interest at the rate of 8% per annum and has a maturity date of February 9, 2019. The Note is secured by all of our assets.

 

In connection with the Purchase Agreement, we executed: (i) a registration rights agreement, or the Registration Rights Agreement, pursuant to which we are required to file a registration statement with the SEC for the resale of certain of the shares of common stock that have been or may be issued to the Selling Stockholder under the Purchase Agreement and (ii) a Global Guaranty Agreement pursuant to which we and all of our subsidiaries, guaranteed the repayment of the Note; and (iii) a Security Agreement pursuant to which we and all of our subsidiaries pledged all of our assets as collateral for the repayment of the Note.

 

Critical Accounting Policies

 

The 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.

 

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.

 

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For the six months ended June 30, 2018, options to acquire 3,000,000 shares of common stock and warrants to acquire 13,783,140 shares of common stock and shares potentially issuable under our convertible note agreements have been excluded from the calculation of weighted average common shares outstanding at June 30, 2018 , as their effect would have been anti-dilutive. For the six months ended June 30, 2017, options to acquire 3,000,000 shares of common stock have been excluded from the calculation of weighted average common shares outstanding at June 30, 2017, as their effect would have been anti-dilutive.

 

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 equity instruments issued for services and valuation allowance for deferred tax assets, among others. Actual results could differ from these estimates.

 

Revenue Recognition

 

In September 2014, the Financial Accounting Standards Board issued Accounting Standards Update No. 2014-09 (ASU No. 2014-09) regarding revenue recognition. The new 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. The ASU became effective January 1, 2018. Due to the nature of the products sold by us, the adoption of the new standard has had no quantitative effect on the financial statements. However, the guidance requires additional disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized.

 

We recognize revenue upon shipment of our products to its customers, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured. Title to our products primarily is transferred to the customer once the product is shipped from our warehouses. Products are not shipped until there is a written agreement with the customer with a specified payment arrangement. Any discounts that are offered are done as a reduction of the invoiced amount at the time of billing. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as customer deposits.

 

Under the new guidance, revenue is recognized when control of promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. We review 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 costs of sales are recognized once products are delivered to the customer’s control and performance obligations are satisfied.

 

All products sold by us 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.

 

We do not offer a general right of return on any of our sales and considers all sales as final. We generally provide a three-year warranty on our ballasts. However, we do not maintain a warranty reserve as we are able to chargeback our vendors for all warranty claims. As of June 30, 2018 and December 31, 2017, we recorded a reserve for returned product in the amount of $ 308,706 and $112,339, respectively, which reduced the inventory balances as of those periods.

 

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Concentration Risks

 

We maintain the majority of our cash balances with one financial institution, in the form of demand deposits. At June 30, 2018 and December 31, 2017, we had cash deposits that exceeded the federally insured limit of $250,000. We believe that no significant concentration of credit risk exists with respect to these cash balances because of our assessment of the creditworthiness and financial viability of the financial institution.

 

We operate 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 our operating results. State and federal government laws could have a material adverse impact on our future revenues and results of operations.

 

Our products require specific components that currently are available from a limited number of sources. We purchase some of our key products and components from single vendors. During the six months ended June 30, 2018 and 2017, our ballasts, lamps and reflectors, which comprised the majority of our purchases during those periods, were each only purchased from one separate vendor. The ballast vendor is a former related party (see Note 5 ).

 

We perform a regular review of customer activity and associated credit risks and do not require collateral or other arrangements. Two customers accounted for 29.4 % and 10.3%, respectively, of our revenue for the three months ended June 30, 2018, and for the three months ended June 30, 2017, no customer accounted for more than 10 % of our revenue. Shipments to customers outside the United States comprised 3.3 % and 6. 0% for the three months ended June 30, 2018 and 2017, respectively. One customer accounted for 12.1% of our revenue for the six months ended June 30, 2018, and for the six months ended June 30, 2017, no customer accounted for more than 10% of our revenue. Shipments to customers outside the United States comprised 3.6% and 4.0% for the six months ended June 30, 2018 and 2017, respectively.

 

As of June 30, 2018, two customers accounted for 26.5% and 13.7%, respectively, of our trade accounts receivable balance, and as of December 31, 2017, four customers accounted for 17.1%, 14.8%, 14.5% and 14.3%, respectively, of our trade accounts receivable balance.

 

Fair Value measurements

 

We determine 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. We use 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 fair value of the derivative liabilities of $ 4,092,050 and $7,415,000 at June 30, 2018 and December 31, 2017, respectively, was valued using Level 2 inputs.

 

Derivative Financial Instruments

 

We evaluate our 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.

 

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Recently Issued Accounting Pronouncements

 

In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02, Leases. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. We are in the process of evaluating the impact of ASU 2016-02 on our financial statements and disclosures.

 

In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features; (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception” (“ASU 2017-11”). ASU 2017-11 allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required to be accounted for as derivative liabilities. A company will recognize the value of a down round feature only when it is triggered, and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings. ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The guidance in ASU 2017-11 can be applied using a full or modified retrospective approach. We are currently evaluating the impact of the adoption of ASU 2017-11 on our financial statement presentation or disclosures.

 

Other recent accounting pronouncements issued by the FASB, including 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 our present or future consolidated financial statements.

 

Allowance for Doubtful Accounts

 

The allowance for doubtful accounts is based on our assessment of the collectability of customer accounts. We regularly review 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

 

We provide 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 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.

 

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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BUSINESS

Overview of Business

 

We are focused on the research, design, development and manufacturing of advanced, energy efficient indoor horticulture lighting, plant nutrient products, and ancillary equipment. Our vision is to apply the latest advances in high efficiency lighting and controls technology as well as effective manufacturing techniques to deliver highly differentiated lighting and nutrient products with clear benefits at competitive prices to the greenhouse and indoor horticulture markets.

 

Our subsidiary, Solis Tek , Inc., a California corporation, was formed in June of 2010. Its operations consist of designing, developing and sourcing of a line of Solis Tek Digital Ballasts intended for use in high intensity lighting systems used for horticulture. An electrical ballast is a device intended to limit the amount of current in an electric circuit. A familiar and widely used example is the inductive ballast used in fluorescent lamps, which limits the current through the tube, which would otherwise rise to destructive levels due to the tube’s negative resistance characteristic. Since the commencement of operations, our product line has evolved from digital ballasts to a line of lighting products including a line of specialty ballasts ranging from 400 watts to 1,000 watts with various features, our Lamp Producets, a line of reflectors, high intensity lighting accessories and a new line of LED lighting technologies.

 

We sell our products primarily to retailers in the United States and international markets who specialize in hydroponic horticulture. Currently, we have approximately 500 retail stores in the United States as well as various ecommerce websites that sell our products. We have six full time sales employees and four wholesale distributors who cover U.S., Canada, Spain and the United Kingdom for both retail customers as well as commercial growers in cannabis legal states and countries.

 

We believe that almost all of the end users that use our products are using the equipment for the growing of cannabis. Currently, there are thirty- one (31) States and the District of Columbia that have laws and/or regulation that recognize in one form or another, legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. In addition, the States of Colorado, Washington, Alaska, Oregon, California, Massachusetts, Nevada, Maine and the District of Columbia have recently approved the recreational use of cannabis. Many other States are considering legislation to similar effect. As of July 30, 2015, the policy and regulations of the Federal government and its agencies is that cannabis has no proven medical benefit and a range of activities including cultivation and use of cannabis for personal use is prohibited on the basis of federal law and may or may not be permitted on the basis of State law. Active enforcement of the current federal regulatory position on cannabis on a regional or national basis may directly and adversely affect the willingness of our end user customers to continue to grow cannabis. Active enforcement of the current federal regulatory position on cannabis may thus directly and adversely affect revenues and profits.

 

However, our products can be, and are used for, the hydroponic and indoor growing of other horticultural products, such as hothouse vegetables, decorative plant nurseries, indoor aquariums, and industrial painting facilities. We intend to continue to expand and improve our products for use in as many applications as possible and to market our products to the entire indoor horticultural industry as well as other industrial applications that require artificial lighting.

 

In 2014, STE was incorporated in the State of New Jersey as our wholly-owned subsidiary. STE was formed for the purpose of commencing its operations and servicing and supplying the Eastern part of North America with our products. In September 2014, STE leased a 10,160 square foot office and warehouse facility in South Hackensack, New Jersey. Also, in 2014, GrowPro Solutions was incorporated in the State of California as our wholly-owned subsidiary. GrowPro Solutions was formed to develop and sell plant nutrients to help expand the market reach and maximize our revenue potential. In July of 2017, we changed the name of GrowPro Solutions to Zelda Horticulture, Inc. Zelda is sharing our facility in Carson, CA.

 

Our ballast products are produced in China under a proprietary manufacturing agreement. Our Lamp Products including lamps and ancillary products and equipment are manufactured to our specifications under proprietary product control and to our designs, in China.

 

License Agreement

 

In May of 2015, we entered into an Amended and Restated License Agreement with GAST, pursuant to which we agreed to pay GAST a minimum royalty of $100,000 per year plus 7% of sales of products licensed by GAST to us over a fixed amount of licensed products sale per calendar year. In 2017 and 2016, we owed an additional $45,595 and $41,490, respectively under the amended agreement. The License grants us an exclusive world-wide license to produce, manufacture, have manufactured, use, import, sell, market, distribute and sell the products and systems and any further products and systems that may be developed by the Licensor for use in the horticulture and hydroponic industries. Such products include our “Single Ended: and “Double Ended” metal halide digital lamps.

 

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The Cannabis Industry and Government Regulation

 

Currently, there are thirty- one (31) States plus the District of Columbia, Guam, and Puerto Rico that have laws and/or regulation that recognize in one form or another legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. In addition, the States of Colorado, Washington, Alaska, Oregon, California, Massachusetts, Nevada, Vermont, Maine as well as the District of Columbia, have recently approved the recreational use of cannabis. The State laws are in conflict with the Federal Controlled Substances Act, which makes cannabis use and possession illegal on a national level. The Trump Administration has effectively stated that it is not an efficient use of resources to direct law federal law enforcement agencies to prosecute those lawfully abiding by State-designated laws allowing the use and distribution of medical cannabis a and we do not have a clear reading from possible changes in the Trump Administration. Additionally, any new administration that follows could change this policy and decide to enforce the federal laws strongly. Any such change in the federal government’s enforcement of current federal laws could cause significant financial damage to us and our shareholders.

 

Indoor Lighting Industry

 

Light and plant growth

 

Light is essential for plant growth. Natural sunlight is the cheapest source available, but for horticulture it is not always attainable in sufficient quantities due to weather and other climate challenges. Therefore, the uses of artificial or alternative light sources have become very common in order to increase production and quality predominantly in indoor or greenhouse environments. Plants have a completely different sensitivity to light spectrum than humans. Every plant has their own sensitivity and receptivity for colors and intensity of light. Using these alternate light sources for plants, effective light recipes are essential to obtain the optimal results in plant production.

 

Grow lights

 

A grow light or plant light is an artificial light source, generally an electric light, designed to stimulate plant growth by emitting an electromagnetic spectrum appropriate for photosynthesis. Grow lights are used in applications where there is either no naturally occurring light, or where supplemental light is required. For example, in the winter months when the available hours of daylight may be insufficient for the desired plant growth, lights are used to extend the time the plants receive light.

 

Grow lights either attempt to provide a light spectrum similar to that of the sun, or to provide a spectrum that is more tailored to the needs of the plants being cultivated. Outdoor conditions are mimicked with varying color, temperatures and spectral outputs from the grow light, as well as varying the lumen output (intensity) and PAR output of the lamps. Depending on the type of plant being cultivated, the stage of cultivation (e.g., the germination/vegetative phase or the flowering/fruiting phase), and the photoperiod required by the plants, specific ranges of spectrum, luminous efficacy and color temperature are desirable for use with specific plants and time periods.

 

Specially designed artificial light sources can improve diverse growth parameters. These all depends on several factors, like crop, environmental circumstances, light recipe and many more. The following is a list of benefits that can be achieved with specially designed artificial lighting:

 

  Increased production and yield
     
  Increased aromatic flavor and higher potency
     
  Shortening of the total growth cycle
     
  Better plant uniformity
     
  Better space utility
     
  Improved plant quality

 

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  Energy savings
     
  Better germination rate
     
  Higher multiplication factor
     
  Higher survival rate in rooting
     
  Improved/controlled stretching process
     
  Accelerated hardening phase

 

Hydroponics

 

The great majority of our customers are retailers that specialize in Hydroponics and sell our products to Hydroponic enclosed farm and grower operators. Hydroponics is a method of growing plants in mineral nutrient solutions, in water, without soil. Terrestrial plants may be grown with their roots in the mineral nutrient solution only or in an inert medium, such as polite, gravel, expanded clay pebbles or coconut husks.

 

Some of the reasons why hydroponics is being adapted around the world for plant production are the following:

 

  No soil is needed for hydroponics.
     
  The water stays in the system and can be reused - thus, a lower water requirement.
     
  It is possible to control the nutrition levels in their entirety; thus, lower nutrition requirements.
     
  No nutrition pollution is released into the environment because of the controlled system.
     
  Stable and high yields.
     
  Pests and diseases are easier to get rid of than in soil because of the container’s mobility.
     
  Ease of harvesting.
     
  No pesticide damage.

 

Our Business Strategy

 

Due to the expected increase in the number of States where the use of cannabis, both for medical and recreational use is being legalized, we intend to take advantage of what we believe is our premium brand image within the cannabis farming and growing community. We believe that as participation in the cannabis farming industry grows, in order to supply increasing demand caused by legalization, our Solis Tek brand equipment will be sought out by existing and new cannabis farms and commercial businesses. Our strategy is to maintain and increase our market share by expanding our marketing efforts and by introducing new and improved lighting technology to help the industry become more efficient. In addition, we have started to market and sell a new line of plant nutrients and fertilizers through Zelda to help expand our market reach and maximize our revenue potential. Additionally, we are aggressively pursuing opportunities within the cannabis sector for expansion of our product offerings, or compatible opportunities to represent other products to the retail and commercial trade.

 

Products

 

Digital Lighting Controller

 

The Solis Tek Digital Lighting Controller is a temperature monitoring control system which was specifically designed for commercial cultivation. A single controller can run up to 300 lights with 150 lights per zone and contains such features integrated temperature sensors, custom sunrise and sunset modes, data log tracking, and cloud cover simulation. The controller has been rigorously tested in multiple garden environments and has been specifically designed for both commercial grows and large gardens. The data log tracks garden activity and events with options to run up to two independent light zones, each with their own customized sunrise, sunset, and cloud modes. The controller includes high temperature auto-dim and shut off prevention systems to prevent systems overheating.

 

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Ballasts

 

Ballasts provide the proper starting voltage, operating voltage and current to the lamp to initiate and sustain its arc. High Intensity Discharge (HID) lamps have negative resistance, which causes them to draw an increasing amount of current; hence, they require a current-limiting device. The ballast provides the following functions:

 

It provides starting voltage and, in some cases, ignition pulses. All ballasts must provide some specific minimum voltage to ignite the lamp. In the case of pulse start lamps, an additional high voltage pulse is needed to ionize the gases within the lamp. These pulses are superimposed near the peak starting voltage waveform; it regulates the lamp’s current and power. The ballast limits the current through the lamp once it has started. The ballast’s current is set to a level that delivers the proper power to the lamp. In addition, the ballast regulates the lamp’s current through the range of typical line voltage variations, thereby keeping the lamp’s power fairly stable to maximize the lamp’s life and performance and; it provides appropriate sustaining voltage and current wave shape to achieve the lamp’s rated life. The ballast provides sufficient voltage to sustain the lamp as it ages. Solis Tek ballasts come in a variety of voltage settings to conform to the consumer needs.

 

Solis Tek Digital Ballasts were designed to work with our exclusive “Ignition Control” sequential lamp ignition, and “SenseSmart”, self- diagnostic safety systems. Solis Tek Digital Ballasts are software based, that makes our ballasts more versatile and enables us to incorporate special features such as sequential ballast ignition technology and SenseSmart technologies that ignites metal halide lamps one at a time based on load stability. Ignition Control is a main feature of our ballasts that comes as a standard feature in all of our ballasts. The exclusive Ignition Control assures that no matter how many lamps are contained in a lighting array attached to one power source, only one lamp will turn on at a predetermined time. This technology (not a randomized ignition startup) detects the voltage and amperage frequencies of the electrical circuit and ignites an array of metal halide or sodium lamps when the load for each lamp is most stable. The use of our technology prevents surges and spikes in electrical environment in which an array of ballasts operates and also prevents the overloading of circuit breakers.

 

Our SenseSmart self-diagnosing system feature enables our ballasts to internally safety check for over/under voltage, overheating, open circuits, short circuits and more. SenseSmart will recognize an unsafe condition and take pre-determined actions to alleviate the safety issue.

 

We offer a line of remote ballasts that include: 400W 120/240V, 600W 120/240V, 1000W 120/240V, 1000W 120/240V with remote control and timer, 1000W 240V only, and 1000W 277V.

 

A1 1000W Complete Fixture

 

Beginning in 2015, we introduced a new A1 complete fixture equipped with ballast, reflector, and double ended lamp.

 

Digital Lamps

 

Metal halide lamps are a type of HID (High Intensity Discharge) lamp; mercury vapor and high-pressure sodium lamps are also HID lamps. Light is generated by creating an arc between the two electrodes located inside the inner arc tube. The inner arc tube is typically made of quartz, and this is a very harsh environment, with high temperatures approaching 1000°C and pressures of 3 or 4 atmospheres. To start a metal halide lamp, a high starting voltage is applied to the lamp’s electrodes to ionize the gas before current can flow and start the lamp.

 

Solis Tek Digital Lamps are designed to be specifically tuned and matched with Solis Tek Digital Ballasts. Our lamps feature color enhanced full balanced spectrums, prolonged lamp life, less depreciation of lumen output over time, and precise gas combinations for increased blues, reds, and ultra violet output. Our Lamps emit a full spectrum of light tuned specifically for particular types of plants. As well, our lamps provide ample Ultra Violet light that plants thrive upon. We have designed our lamps using special low iron glass envelopes so as to prevent the blockage of the full spectrum of light that our lamps are designed to provide. Using Solis Tek lamps, growers can expect superior photo-chemical reactions, proper UV balance, advanced HID lamp designed especially for plant growth, plant quality, and plant yield.

 

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We offer a select variety of light color spectrums in both High Pressure Sodium (HPS), Metal Halides (MH), and Ceramic Metal Halides (CMH).

 

LED Technology

 

LED (light emitting diode) lighting supports sustainable design in several ways. It uses less energy than most other types of lamps, produces less heat, lasts longer (which means less frequent replacement and therefore reduced waste), is mercury-free, and is housed in special semi-conductor “chips” designed for easier configuration, disassembly, and recycling.

 

In our ongoing research and development program, we have designed and are developing our next generation of high intensity lighting. Our LED technology, unlike other LED lighting sources, uses an advanced UV (Ultra Violet) diode phosphor combination to make our high intensity LED based lighting systems. Our LED systems should be available in the same light spectrums as our current HID lamps. Our design will emit lighting equivalent to the high-pressure sodium spectrum and ultra-violet spectrums and eliminate the inadequacies of current LED offerings to the horticultural industry i.e.: a) low intensity; b) lack of proper spectrum for particular plants; and c) longevity. Our LED “chips” will provide, from one LED, a full spectrum of light that mimics sunlight, as compared to other LED manufacturers of LEDs who provide arrays of several color specific LEDs in an attempt to cover the full light spectrum.

 

LED lighting produces significantly less heat than conventional HID and HPS lamps, so growers can control their greenhouse climate more accurately. Less heat also means more effective use of light, for example by increasing light levels, extending lighting periods, or by using LED light in greenhouses on warmer days without having to ventilate. Less heat also means you can place the light source closer to plants, reducing light loss. We intend to bring our LED lighting solutions to market in 2018.

 

Solis Tek Reflectors

 

Our line of “Reflectors” is designed for use with our digital ballasts and lamps. However, they additionally have standard sockets so that lamps and ballasts manufactured by others may also be used. Each Reflector features air cooling, heavily tinned wiring, low iron glass for less filtering of light, and utilize highly reflective aluminum to reflect light in the desired direction.

 

We offer five different variations and sizes of Reflectors.

 

Plant Nutrients and Fertilizers

 

Zelda has developed “Terpenez™” which is a proprietary product formulated from all organic botanical extracts and is designed to assist plants with processes associated with oil and resin production. Terpenez is all natural and has organic inputs aimed at enhancing the aromatics of cannabis cultivation. Zelda commenced test marketing Terpenez in late 2016 and had rolled out the product regionally across the USA in 2017. In 2017, Zelda had almost doubled sales over 2016 in nutrient sales.

 

Terpenez, the first product in our launch into the approximately $32 billion nutrient/additive sector of the greenhouse and growing business, leads a new class of horticultural products aimed at enhancing the cannabis aromatic experience and intensity. It does not contain cannabis derived terpenes within, instead it is made from the finest natural components available and is specifically formulated to assist the cannabis plant with processes associated with oil and resin production and naturally enhances the cannabis plant’s terpene profile. The formula provides essential oil-bearing plants with both precursors (i.e. metabolic building blocks, trace elements, etc.) and readily available bio-identical plant compounds aiming to increase overall essential oil production and intensity. It is the first product of its kind to deliver plant nutrients to cannabis cultivating customers with a fully plant derived 0-0-0 (Nitrogen, Phosphate, and Potassium free) product. Independent bioanalytical testing laboratory analysis was conducted and determined the level of heavy metals to be below the EPA’s detection limit. Terpenez is used to increase the value of cannabis crops through the intensification of oil production, which has results in a significant improvement in flavor and aroma. Terpenez is unique to our family of products in that it is intended for daily use as a nutrient additive to the cannabis grow, and is available through the over 500+ retail hydroponic stores and online retailers throughout the USA and Europe.

 

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We plan to extensively develop additional nutrient products within the Zelda line and expect these products to flourish in an environment of lighter regulatory controls at both the State and Federal level. We are under discussion to additionally add to the product line via custom blending in third-party laboratories under our proprietary formulations.

 

Additionally, we signed an exclusive Distributor Agreement in March 2018 with Torus Hydro, a California based manufacturer of a pH stabilizer that automatically balances the pH of a hydroponic nutrient feed. Their proprietary capsule keeps the ideal range of pH in a growers feed system for optimal nutrient absorption. This capsule uses next generation ionization technology to eliminate pH swing that inhibits plant growth and weakens the plants immune system. We believe this is the perfect “razor and blades model”, since a customer who purchases the capsule will necessarily need to repurchase the complementary recharging solution for each new grow (approximately 12 weeks).

 

Marketing

 

We currently market our products directly and through distributors, to hydroponic retailers through direct contacts, on-line email advertising, social media, trade magazine advertising, trade show promotions, and cross-promotional offerings. Our officers, along with six retail and commercial sales representatives and four distributors, are engaged in marketing our products. Our primary brand-building marketing efforts are directed through a New York City based national firm who also coordinates our public relations efforts. In addition, we work with a select few wholesale distributors who cover parts of the United States, Canada, Spain and the United Kingdom. Approximately 3% and 5% of our revenues were derived from non-U.S. sources in 2016 and 2017, respectively.

 

Manufacturing and Supply

 

All of our current lighting products are manufactured to our specifications in China. We currently rely upon one manufacturer and supplier of our ballast products. We continue to evaluate and upgrade our China manufacturing specifications and relationships and believe that the prices charged by these suppliers are industry-wide competitive. All of our other lighting products, including our lamps, are manufactured and supplied by third-party suppliers.

 

Our reliance upon manufacturers and suppliers located in China, subjects us to various political, economic, and other risks and uncertainties inherent in importing products from this country, including among other risks, export/import duties, quotas and embargoes; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; and political conditions and governmental regulations. There can be no assurance that if there were an interruption of our supply lines from China, that we would be able to quickly find replacement suppliers of our products domestically, or from other countries, and even if we found replacement suppliers, that we would be able to obtain the products at the quality and prices we currently pay which is why our founders continue to develop alternate relationships in China light and ballast manufacturing.

 

Our Terpenez nutrient products are formulated in our facility in Carson, CA under the strictest of manufacturing protocols. We intend to develop additional nutrient lines using local state-of-the-art processing labs in southern California under our proprietary formulations. Given the regulatory environment and intense scrutiny and testing required by both State and Federal agencies, we believe staying the course with natural, organic, and heavy-metal free ingredients will allow Zelda to provide substantial growth and opportunity within the industry.

 

Technology and Development

 

We have entered into an agreement, or the GAST Agreement, with GAST pursuant to which GAST will provide design, supply and engineering services to us as well as exclusively license certain products to us for the horticultural industry, including all digital lighting products developed by GAST. The GAST Agreement gives us the exclusive right to manufacture, market and distribute all of the licensed technology.

 

The GAST Agreement provides that we will pay to GAST a minimum royalty at the rate of $100,000 per year, commencing on the date of the GAST Agreement, plus seven per cent (7%) of all net sales in excess of a fixed amount per calendar year.

 

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Intellectual Property

 

We own a number of trademarks and rely on a combination of copyright and trade secrets as well as confidentiality procedures and contractual provisions to protect our proprietary technology and our brand. We rely on copyright laws to protect copy on our web site, www.solis-tek.com, and all marketing materials.

 

We own the trademark for our proprietary product “Terpenez”.

 

From time to time, we may encounter disputes over rights and obligations concerning intellectual property. Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. Any significant impairment of our intellectual property rights could harm our business, our brand and reputation, or our ability to compete. Also, protecting our intellectual property rights could be costly and time consuming.

 

Government Regulation

 

Almost all of the end users of our products have used our products for the growing of cannabis. Currently, there are twenty-nine States plus the District of Columbia, Guam, and Puerto Rico that have laws and/or regulation that recognize in one form or another legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. In addition, the States of Colorado, Washington, California, Massachusetts, Alaska, Nevada, Oregon, Maine, Vermont and the District of Columbia, have recently approved the recreational use of cannabis. Many other States are considering legislation to similar effect. Active enforcement of the current federal regulatory position on cannabis on a regional or national basis may directly and adversely affect the willingness of our end user customers to continue to grow cannabis. Active enforcement of the current federal regulatory position on cannabis may thus directly and adversely affect revenues.

 

Competition

 

Our Lighting Products currently face competition from traditional lighting fixture companies, lamp manufacturers and from non-traditional companies focused on LED lighting systems including fixtures and lamps. Lighting companies such as Acuity Brands, Inc., the Cooper Lighting division of Eaton Corporation plc, General Electric Company, Hubbell Incorporated, Philips, OSRAM, Gavita, Nanolux, Sunlight Supply and Hydrofarm are the main competitors in this market. Increasingly, however, other companies (i.e., start-ups) are beginning to emerge in the LED lighting markets in which we compete. We compete on the basis of product features, quality, product availability and price.

 

Our LED lighting products will compete against traditional lighting products using incandescent, fluorescent, halogen, ceramic metal halide or other lighting technology. Our LED lighting products compete against traditional lighting products based upon superior energy savings, extended life, improved lighting quality and lower total cost of ownership. Also, our LED lighting products have a reduced impact on the environment as compared to fluorescent and compact fluorescent technologies that contain mercury.

 

We will also compete with LED-based products from traditional and non-traditional lamp and fixture companies, some of which are customers for our LED chips and LED components. Our products compete on the basis of color quality and consistency, superior light output, reduced energy consumption, brand and lower total cost of ownership. Within the Zelda nutrient product line, the Terpenez product is unique in its product class. The formula provides essential oil-bearing plants with both precursors (i.e. metabolic building blocks, trace elements, etc.) and readily available bio-identical plant compounds aiming to increase overall essential oil production and intensity. It is the first product of its kind to deliver plant nutrients to cannabis cultivating customers with a fully plant derived 0-0-0 (Nitrogen, Phosphate, and Potassium free) product. Independent bioanalytical testing laboratory analysis was conducted and determined the level of heavy metals to be below the EPA’s detection limit (BDL). Terpenez is used to increase the value of cannabis crops through the intensification of oil production, which has results in a significant improvement in flavor and aroma. With other nutrient lines, products that provide plant growth, and insect and pest protection, are marketed through a plethora of local and regional brands with literally scores of names and claims of value and productivity- none of which compete head on with Terpenez whose lab tested and grower proven track record is beyond compare.

 

Employees

 

As of October 18, 2018, we have 17 full-time employees, employed by us in various capacities, including three Executive Officers, three in sales, six administrative, three in the warehouse, one in nutrient manufacturing and one in warranty . In addition, from time to time, we employ temporary personal to meet the business needs.

 

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DESCRIPTION OF PROPERTIES

 

California Facility (West Coast Facility)

 

We do not own any real property. Our principal executive offices and warehouse are located at 853 Sandhill Avenue, Carson, California, 90746. We occupy a 17,640 square foot facility pursuant to a five-year lease with an independent party ending on June 30, 2023, with an unaffiliated party, pursuant to which we pay $15,000 per month in rental charges.

 

Closure of New Jersey Facility (East Coast Facility)

 

On October 1, 2014, our wholly owned subsidiary, STE executed a lease with an independent party for 10,160 square feet of offices and warehouse facilities located at 89 Leuning Street, Unit D2, South Hackensack New Jersey. The lease, with an unaffiliated party, is for the five year period ending on December 31, 2019, pursuant to which STE pays $8,818 per month in rental charges. We guaranteed STE’s performance under the lease.

 

On May 7, 2018 we signed a sublease with Atlas Company for subletting our east coast facility in East Hackensack, NJ. The decision to close the east coast operations was a consolidation move to better serve the customer base with all shipments coming out of the west coast facility in Carson, CA. With this move, the serviceability and supply chain fulfillment has eliminated multiple shipping destinations out of China, and split shipment to customers from both east and west in the USA. The sublease has been executed and provides a zero out-of-pocket cost to us for the remainder of the lease.

 

Arizona Property

 

On April 19, 2018, we entered into an Option Agreement, or the Option, with MSCP, LLC, a non-affiliated Arizona limited liability company, or the Lessor, pursuant to which, our subsidiary was granted an option to enter into a certain Lease Agreement, or the Lease, for the real property, including the structure and all improvements, identified in the Option, or the Premises. The Premises consists of 70,000 square feet of space and is to be used for the sole purpose of providing services related to the management, administration and operation of a cultivation and processing facility, or the Facility, on behalf of an Arizona limited liability company operating as a nonprofit organization, or the Arizona Licensee, which has been allocated a Medical Marijuana Dispensary Registration Certificate by the Arizona Department of Health Services. The activities within the Facility shall be limited to the cultivation, processing, production and packaging of medical marijuana and manufactured and derivative products which contain medical marijuana, with no right to sell or dispense any such plants or products. The Lease is for a 5-year initial term, or the Term, with an option to renew for an additional 5 year term. The base rent for the initial year of the Term is $101,500.00 per month with additional pro-rata net-lease charges. As consideration for the Option, we paid to Lessor, $160,000.00, or the Deposit.

 

On May 19, 2018, we exercised the Option and our wholly owned subsidiary, YLK Partners AZ, LLC, or YLK Partners, executed the Lease, and the Deposit was treated a security deposit and rent advance, in accordance with the terms and conditions of the Lease. We are a guarantor of YLK Partners’ obligations under the Lease, on behalf of Arizona Licensee.

 

LEGAL PROCEEDINGS

 

We know of no material, existing or pending legal proceedings against our company, nor are we involved as a plaintiff in any material proceeding or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial stockholder, is an adverse party or has a material interest adverse to our interest.

 

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MANAGEMENT

 

The Board of Directors elects our executive officers annually. A majority vote of the directors who are in office is required to fill vacancies. Each director shall be elected for the term of one year and until his successor is elected and qualified or until his earlier resignation or removal. Our directors and executive officers are as follows:

 

NAME   AGE   CURRENT POSITION
         
Alan Lien   34   Chairman, President, CEO, Chief Financial Officer
Alvin Hao   35   Executive Vice President
Tiffany Davis   40   Chief Operating Officer , Director
Peter Najarian   54   Director

 

The following is certain biographical information relating to each of our directors and executive officers as provided to us by each of the respective directors and executive offers.

 

Alan Lien , 34, is a co-founder of our company, and has served as the Chairman, President, and Chief Financial Officer since June 23, 2015. Mr. Lien is responsible for setting the sales, product development, product strategy, and input on our strategic direction. He leads the manufacturing, development and sourcing of Solis Tek products and setting up company infrastructure. Mr. Lien received his BS in Marketing from Monmouth University in 2006.

 

Alvin Hao , 35, is a co-founder of our company, and has served as Executive Vice President since June 23, 2015. Between June 2015 and August 2018, Mr. Hao also served as a director. Mr. Hao has broad knowledge of the hydroponics industry, including aspects of hardware and years of gardening experience. Mr. Hao is responsible for creating and maintaining corporate infrastructure, oversee daily operations, sales, and financial planning, lead marketing strategy, He received his BS in Business Administration and Marketing from California State University Long Beach in 2007.

 

Tiffany Davis , 40 , has served as Chief Operating Officer since February 21, 2018 and as a director since August 2018. Ms. Davis has had 19 years of experience as a financial professional working in both Management Consulting and Private Equity. She has held several key leadership positions in accounting, finance, and operations. She has extensive experience in supply chain functionality, financial and operational due diligence, cash flow forecasting, financial statement analysis, development and value retention in a number of industries including most recently in the cannabis industry. From 2016 through 2017, Ms. Davis has worked as a senior executive for a US based cannabis consulting group supporting legal grows, assisting in license applications, developing programs for cultivators, business structuring for medical dispensaries including developing M&A opportunities and initiation of several start-up ventures. Beginning in 2012 into 2016 Ms. Davis worked as a Group Vice President for a US based private equity group, performing due diligence tasks resulting in placing hundreds of millions of dollars in creative investment and debt instruments for appropriate investment opportunities. From 2009 to 2011 Ms. Davis was a Manger of Corporate Advisory for Grant Thornton, one of the Big 6 worldwide accounting firms, again in accounting and supply chain services during the automotive crisis in the US, specifically on the Chrysler turnaround project. From 2005-2008 Ms. Davis worked for an international technology sector company with $500 million in revenues as a Vice President of Special Projects for an automobile parts sourcing project in India from the company’s headquarters in Chicago, Il. Ms. Davis received her B.S. from DePaul University in 2002 and a MBA from University of Chicago Graduate School of Business in 2009.

 

Peter Najarian , 54, has served as a director since August 2018. Mr. Najarian is a recognizable contributor on the CNBC mid-day show “Halftime Report” as well as CNBC’s post-market show “Fast Money”, having served as a broadcoaster for CNBC since 2013. Mr. Najarian is a founding member of Investitute.com, a financial education and newsletter services company established in 2016. He is also a founding member of Rebellion Partners, LLC, a private banking company, established in 2016.

 

Between 2012 and December 2016, Mr. Najarian served as a broadcaster for ESPN Sports. Between 2013 and 2014, Mr. Najarian served as a broadcaster for NBCSports. Since 2014, Mr. Najarian has been the President and owner of his own consulting company, Najarian Consulting. Since at least 2013, has been the President of Class Action Securities Services, LLC, a subsidiary of Institutional Shareholder Services (ISS) that offers litigation research and claims filing solution covering equities and fixed income securities across all markets for securities class action settlements. Since at least 2013, Mr. Najarian has been the President of Goliath Group, LLC, a private investment related company. Since at least 2013, Mr. Najarian has been the President of TCB Productions, a private production company for television programs.

 

He is also is a founding member of One Chicago, an electronic exchange in futures on individual stocks, narrow-based indexes, and ETFs. He is also the Co-Founder of Hedgehog, a stock, options, and futures trading platform and he co-developed the HeatSeeker™ and complementary programs identifying unusual buying activity in stocks, options, and futures.

 

Following a football career that included several seasons with the NFL’s Tampa Bay Buccaneers and Minnesota Vikings, he began options trading in 1992 at Mercury Trading, a market-making firm at the Chicago Board Options Exchange. Two years later, he assumed responsibility for Mercury’s risk and arbitrage departments. In 2005, Najarian co-founded, optionMONSTER, an options news and education firm, and tradeMONSTER, an online brokerage firm. In 2014, a majority ownership was acquired by private equity and in 2016, the entire company was sold to E*Trade. Mr. Najarian graduated with a B.A. degree from the University of Minnesota.

 

  41
     

 

No family relationships exist between any of our executive officers or directors.

 

Director Independence

 

Our Board of Directors is currently composed of three members. We are not required to have any independent members of the Board of Directors. The board of directors has determined that (i) Alan Lien and Tiffany Davis each has a relationship with the company which, in the opinion of the board of directors, would not allow him/her to be considered as an “independent director” as defined in the Marketplace Rules of The NASDAQ Stock Market.

 

The NASDAQ independence definition includes a series of objective tests, such as that the director is not, and has not been for at least three years, an employee and that neither the director, nor any of his/ her family members has engaged in various types of business dealings with us.

 

Board Committees

 

The Board of Directors has no standing committees. However, we intend to implement a comprehensive corporate governance program, including establishing various board committees and adopting a Code of Ethics in the future. In addition, we have secured Directors and Officers insurance.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Exchange Act requires our executive officers and directors and persons who own more than ten percent of a registered class of our equity securities to file an initial report of ownership on Form 3 and changes in ownership on Form 4 or Form 5 with the SEC. Executive officers, directors and ten percent shareholders are also required by SEC rules to furnish us with copies of all Section 16(a) forms they file. Based solely upon our review of Forms 3, 4 and 5 received by us, or written representations from certain reporting persons, we believe that during the fiscal year ended December 31, 2017, all such filing requirements applicable to our officers, directors and ten percent shareholders were fulfilled, except that Dennis G. Forchic filed a late Form 3.

 

Code of Business Conduct and Ethics and Insider Trading Policy

 

We have not adopted a code of ethics or an insider trading policy. We expect that we will adopt a code of business conduct and ethics and an insider trading policy that apply to all of our employees, officers and directors, including those officers responsible for financial reporting. Once adopted, we will make the code of business conduct and ethics and such insider trading policy available on our website at www.solis-tekcom. We intend to post any amendments to the code, or any waivers of its requirements, on our website.

 

  42
     

 

Involvement in Certain Legal Proceedings

 

Our directors and executive officers have not been involved in any of the following events during the past ten years:

 

  1. any bankruptcy petition filed by or against such person or any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
     
  2. any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
     
  3. being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise limiting his involvement in any type of business, securities or banking activities or to be associated with any person practicing in banking or securities activities;
     
  4. being found by a court of competent jurisdiction in a civil action, the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a Federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
     
  5. being subject of, or a party to, any Federal or state judicial or administrative order, judgment decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any Federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or
     
  6. being subject of or party to any sanction or order, not subsequently reversed, suspended, or vacated, of any self-regulatory organization, any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

 

  43
     

 

EXECUTIVE COMPENSATION

 

Executive Compensation Overview

 

Historically, our executive compensation program has reflected our growth and development-oriented corporate culture. As of December 31, 2017, the compensation of our executive officers has consisted of a base salary. Our executive officers and all salaried employees are also eligible to receive health and welfare benefits.

 

As we have transitioned from a private company to a publicly-traded company, we have and will continue to evaluate our compensation values and philosophy and compensation plans and arrangements as circumstances require. At a minimum, we expect to review executive compensation annually. As part of this review process, we expect the Board of Directors to apply our values and philosophy, while considering the compensation levels needed to ensure our executive compensation program remains competitive. We will also review whether we are meeting our retention objectives and the potential cost of replacing a key employee.

 

Our growth and progress centered around its ability to innovate its technology to respond to the changing needs of the industry, and stay ahead of the sales curve relating to new states becoming cannabis enabled and legal, thereby creating new demand in medical and recreational growers. Our requirements in these areas of sales and technology demanded that the our founders devote more and more of their time to growth and development creating a need in the areas of business management with particular attention to the public company sector. Our search for key executives to fill these growth needs demands that we find a seasoned high level executive with broad based multi-national experience in a growth industry yet intimately knowledgeable of the needs associated with early stage growth companies.

 

Summary Compensation Table

 

The following table provides certain summary information concerning compensation awarded to, earned by or paid to our Chief Executive Officer and the two highest paid executive officers and up to two other highest paid individuals whose total annual salary and bonus exceeded $100,000 for fiscal years 2017 and 2016.

 

Name and Principal Position     Year       Salary
($)
      Bonus
($)
    Stock
Awards
($)
      Option
Awards
($)
      Non-Equity
Incentive Plan
Compensation
($)
  Nonqualified
Deferred
Compensation
Earnings
($)
    All Other
Compensation
($)
      Total
($)
 
Alan Lien, Chief Executive Officer, Director, President, and Chief Financial Officer     2017       162,500     N/A     N/A       N/A     N/A   N/A     N/A       162,500  
      2016       162,500     N/A     N/A       N/A     N/A   N/A     N/A       162,500  
                                                             
Alvin Hao, Executive Vice President and Director     2017       162,500     N/A     N/A       N/A     N/A   N/A     N/A       162,500  
      2016       162,500     N/A     N/A       N/A     N/A   N/A     N/A       162,500  
                                                             
Dennis G. Forchic, Former Chief Executive Officer (a)     2017       162,000     N/A     2,760,000       835,767     N/A   N/A     300,000       4,057,767  
                                                             
Stanley Teeple, Chief Compliance Officer (b)     2017       -     N/A     1,710,000       N/A     N/A   N/A     N/A       1,710,000  

 

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  (a) On January 6, 2017, we extended an offer to Dennis G. Forchic to become CEO. Mr. Forchic accepted the offer and contracts were executed on March 27, 2017. As part of the Employment Agreement, we issued a total of 5,411,765 shares valued at $2,760,000. Mr. Forchic was also granted an option to purchase 3,000,000 shares at $0.60 per share, with 33.3% of these shares vesting on the one year anniversary of the date of grant and the remainder vesting in equal installments at the end of each month over the next three years. The options were valued at $835,767 using a Black Scholes options pricing model and will be amortized as an expense over the vesting period. Mr. Forchic purchased an additional 784,314 shares valued at $400,000 for a consideration of $100,000. The fair value of the shares on the date of grant over consideration received was $300,000, which was recorded as stock compensation expense. On January 6, 2017, we extended an offer to Dennis G. Forchic to become CEO. Mr. Forchic accepted the offer and contracts were executed on March 27, 2017. On February 5, 2018, we terminated the employment agreement with Mr. Forchic.
     
  (b) On December 27, 2017, we entered into a four year employment agreement with Stanley L. Teeple as our Chief Compliance Officer, Secretary, and Sr. VP. Mr. Teeple is to receive an annual salary of $145,000 and is entitled to receive 1,000,000 shares of our common stock, valued at $1,710,000 of which 250,000 immediately vested and were issued on the signing of the employment agreement and 250,000 shares vest each year on the anniversary date of the employment agreement. Prior to the date of Mr. Teeple’s employment with the us, Mr. Teeple was a consultant to the us.

 

Employment Agreements with Executive Officers

 

On August 22, 2018, we entered into an employment agreement, or the Lien Agreement, with Alan Lien, or Lien, to continue to serve as our President, Chief Executive Officer and Chief Financial Officer. On August 22, 2018, as amended on August 27, 2018, we entered into an employment agreement, or the Davis Agreement, and together with the Lien Agreement, the Agreements, with Tiffany Davis, or Davis, and together with Lien, the Executives, to continue to serve as our Chief Operating Officer. The Davis Agreement supersedes and replaces the employment agreement entered into between us and Davis on February 14, 2018, which was terminated on August 22, 2018.

 

The base salary for Lien under the Lien Agreement is $280,000 per annum and the base salary for Davis under the Davis Agreement is $230,000 per annum. The base salaries increase by 10% and 8% per annum for Lien and Davis, respectively. The Lien Agreement has an initial term of four years and the Davis Agreement has an initial term of three years and the Agreements automatically renew for successive one year terms unless either party delivers written notice not to renew at least 60 days prior to the end of the current term. Lien and Davis will receive signing bonuses of $46,500 and $55,000, respectively, within 30 days. The Executives are entitled to receive performance-based bonuses based on increases in our total gross, top-line revenue compared to the prior year. These performance-based bonuses are a percentage of their total salary and options to purchase our common stock.

 

Pursuant to the Agreements, Lien and Davis received options to purchase shares of common stock equal to 6% and 3%, respectively, of our total number of shares of common stock outstanding. These options are immediately exercisable, expire five years from issuance, and are exercisable at $0.74 per share. On the first, second and third anniversaries, (i) Lien shall receive options to purchase 3% of the total number of shares of common stock then outstanding and (ii) Davis shall receive options to purchase 2%, 2% and 3%, respectively, of the total number of shares of common stock then outstanding, with all such options having an exercise price equal to the closing price of the Company’s common stock on the trading day prior to such anniversary and exercisable for five years from issuance. In addition, Davis received options to purchase 750,000 shares of common stock, effective August 27, 2018, at an exercise price of $0.94 per share.

 

  45
     

 

Pursuant to the Agreements, if the Company terminates Executive’s employment without Cause (as defined in the Agreements) or Executive resigns for Good Reason (as defined in the Agreement), the Executive is entitled to the following payments and benefits: (1) Executive’s fully earned but unpaid base salary through the date of termination at the rate then in effect, plus all other benefits, if any, under any group retirement plan, nonqualified deferred compensation plan, equity award plan or agreement, health benefits plan or other group benefit plan to which Executive may be entitled to under the terms of such plans or agreements; (2) a lump sum cash payment in an amount equal to 12 months of Executive’s base salary as in effect immediately prior to the date of termination; (3) continuation of health benefits for Executive and Executive’s eligible dependents for a period of 12 months following the date of termination; and (4) the automatic acceleration of the vesting and exercisability of outstanding unvested stock awards as to the number of stock awards that would have vested over the 12-month period following termination had such Executive remained continuously employed by the Company during such period.

 

Pursuant to the Agreements, if Executive’s employment is terminated as a result of death or permanent disability, Executive or Executive’s estate, as applicable, is entitled to Executive’s fully earned but unpaid base salary through the end of the month in which termination occurs at the rate then in effect.

 

Director Compensation

 

Our employees that also serve as directors do not receive additional compensation for their performance of services as directors. For fiscal years 2017 and 2016, our directors did not receive additional consideration for their service as directors.

 

Option Plan

 

There are no stock option plans or common shares set aside for any stock option plan.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

 

Amounts Due to Officers/Shareholders

 

On July 1, 2012, we entered into a notes payable agreement with Lydia Hao, who is the mother of Alvin Hao, our executive vice president and a director. The maximum borrowings allowed under the note are $200,000. Through December 31, 2013, the note bore interest at 20% per annum. Beginning on January 1, 2014, the interest rate on the note was reduced to 8% per annum. The note is due 30 days after demand. Amounts owed on the note balance were $195,000 at December 31, 2017 and 2016. Subsequent to December 31, 2017, the Company made payments of $195,000 and the note was retired.

 

On May 9, 2016, we also entered into notes payable agreements with Alan Lien and Alvin Hao, each an officer and director, to borrow $300,000 under each individual note. Pursuant to the terms of each of these agreements, we borrowed $300,000 from each of Alan Lien and Alvin Hao. The notes accrue interest at a rate of 8% per annum, are unsecured and were due on or before May 31, 2018. A total of $600,000 was due on the combined notes at December 31, 2017 and 2016.

 

In February 2017, we executed two separate promissory notes and borrowed $300,000 from the relatives of one of our directors. The notes are unsecured, payable on demand and carry an interest rate of 14% per annum. A total of $300,000 was outstanding on the combined notes at December 31, 2017. Subsequent to December 31, 2017, the Company made payments of $300,000 and the notes were retired.

 

We also entered into note agreements with the parents of one of our officers and shareholders. The loans accrue interest at 10% per annum, are unsecured and were due on or before December 31, 2016. A total of $50,000 and $50,000 was due on the loans as of December 31, 2017 and 2016, respectively. Subsequent to December 31, 2017, the Company made payments of $10,000, leaving a balance due of $40,000.

 

As of December 31, 2017 and 2016, we also owed Alan Lien and Alvin Hao an additional $146,534 and $134,088, respectively. Included in the balances were short-term loans from Alan Lien and Alvin Hao to us totaling $3,297 and $3,297 as of December 31, 2017 and 2016, respectively. The balances are payable on demand, bear zero interest and are unsecured. The balances also included interest owed on the notes payable described above, which totaled to $65,222 and $68,472 at December 31, 2017 and 2016, respectively. Also included is $29,580 and $62,319 of unpaid compensation, which was owed to Alan Lien and Alvin Hao at December 31, 2017 and 2016, respectively. Subsequent to December 31, 2017, payments of $ 75,306 were made and additional accrued interest was added of $ 52,889.

 

  46
     

 

Purchase of YLK Partners NV, LLC

 

On May 10, 2018, we entered into an Acquisition Agreement with the members, which in the aggregate, own 100% of the membership interests (the “Sellers”) in YLK Partners NV, LLC, a Nevada limited liability company (“YLK”). Pursuant to the Acquisition Agreement, in consideration of the Company acquiring all of the outstanding membership interests of YLK, the Company issued to the Sellers, a total of 5,000,000 warrants (the “Warrants”) to purchase 5,000,000 common shares, at an exercise price of $0.01 per share. The Warrants are exercisable until May 9, 2023.

 

The Sellers were:

 

  (a) LK Ventures, LLC a Nevada limited liability company. One half of the membership interests of LK Ventures, LLC is owned by Alan Lien, Chief Executive Officer, President and a director of the Company, and the remaining one half is owned by a non-affiliated party. LK Ventures LLC received 2,250,000 Warrants under the Acquisition Agreement for the 45% membership interests held in YLK.
     
  (b)

MDM Cultivation LLC, a Delaware limited liability company. The members of MDM Cultivation are affiliates of the Selling Stockholder and D-Beta One EQ, Ltd., which presently hold (i) 2,258,382 shares of Generation Alpha’s common stock, (ii) warrants to purchase 11,200,000 shares of the Company’s common stock and (iii) a Secured Promissory Note issued by Generation Alpha in the original principal amount of $1.5 million. In addition, YA II PN, Ltd. and the Company are parties to that Standby Equity Distribution Agreement pursuant to which YA II PN, Ltd. has agreed to purchase up to $25.0 million of the Company’s common stock, subject to the terms and conditions thereof. MDM Cultivation owned 45% of the outstanding membership interests of YLK. MDM Cultivation was issued 2,250,000 Warrants under the Acquisition Agreement. As affiliates of MDM Cultivation, the Selling Stockholder and D-Beta One EQ, Ltd. will be deemed to be the beneficial owners of the 2,250,000 Warrants in addition to the other shares and warrants presently held by them.

     
  (c) Future Farm Technologies Inc of Vancouver British Columbia, Canada. Future Farm Technologies, Inc. was issued 500,000 Warrants under the Acquisition Agreement for the 10% membership interests held in YLK.

 

  47
     

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth certain information regarding beneficial ownership of our common stock by: (i) each person known by us to own beneficially more than five percent (5%) of our outstanding voting stock; (ii) each of our directors and director nominees; (iii) each of our executive officers and significant employees; and (iv) all of our current executive officers, significant employees and directors as a group, as of October 18, 2018. To the best of our knowledge, each of the persons named in the table below as beneficially owning the shares set forth therein has sole voting power and sole investment power with respect to such shares, unless otherwise indicated.

 

Beneficial ownership is determined in accordance with the rules of the SEC and includes voting and/or investing power with respect to securities. These rules generally provide that shares of common stock subject to options, warrants or other convertible securities that are currently exercisable or convertible, or exercisable or convertible within 60 days of October 18, 2018, are deemed to be outstanding and to be beneficially owned by the person or group holding such options, warrants or other convertible securities for the purpose of computing the percentage ownership of such person or group, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person or group.

 

Unless otherwise indicated in the footnotes to the following table, each person named in the table has sole voting and investment power and that person’s address is c/o Generation Alpha, Inc., 853 Sandhill Avenue, Carson, California, 90746.

 

Name and Address
of Beneficial Owner
  Title of Class   Amount and
Nature
of Beneficial
Owner
    Percentage
of Class (1)
 
Alan Lien
Director, Chairman, President, Chief Financial Officer
  Common Stock     12,689,594 (2     26.03 %
                     
Alvin Hao
Executive Vice President
  Common Stock     10,000,000       21.71 %
                     
Tiffany N. Davis
Chief Operating Officer , Director
  Common Stock     2,444,797 (3)      5.08 %
                     
Peter Najarian
Director
  Common Stock     100,000       *  
                     
Officers and Directors as a Group ( 4 persons)   Common Stock     25,234,391 (4)     49.62 %
                     
Dennis G. Forchic (5)   Common Stock     9,196,079 (6)     18.74 %
                     
YA II PN, Ltd. ( 7 )   Common Stock     4,685,517 (8)     9.99 %

 

* Denotes less than 1%
       
  (1)   Percentage based upon 46,066,564 shares of common stock issued and outstanding as of October 18, 2018.
       
  (2)   Includes 2,689,594 shares of common stock issuable upon exercise of options.
       
  (3)   Includes 2,094,797 shares of common stock issuable upon exercise of options.
       
  (4)   Includes 4,784,391 shares of common stock issuable upon exercise of options.
       
  (5)   The mailing address for this beneficial owner is 4712 Pace Drive, Park City, Utah 84098.
       
  (6)   Includes 3,000,000 shares of common stock issuable upon exercise of options.
       
  (7)   Based , in part, upon a Schedule 13G filed with the SEC on May 18, 2018. The mailing address for this beneficial owner is 1012 Springfield Avenue, Mountainside, New Jersey 07092. Matthew Beckman makes the investment decisions on behalf of this entity and may be deemed to beneficially own the securities held by this entity.
       
  ( 8 )   Includes 3, 650,000 shares of Common Stock beneficially owned directly by YA II PN, Ltd. and D-Beta One EQ, Ltd., plus a number of additional shares underlying warrants exercisable into shares of Common Stock such that the reporting person is deemed to be the beneficial owner, subject to a beneficial ownership limitation of 9.99%.

 

  48
     

 

DESCRIPTION OF SECURITIES

 

Authorized and Outstanding Capital Stock

 

We are authorized to issue up to 100,000,000 shares of common stock, par value $0.001 per share, and up to 20,000,000 shares of preferred stock, no par value.

 

Common Stock

 

As of October 18, 2018, there were 46,066,564 shares of our common stock issued and outstanding. The outstanding shares of our common stock are validly issued, fully paid and nonassessable.

 

Holders of our common stock are entitled to one vote for each share held of record on each matter submitted to a vote of stockholders. Except as otherwise required by Nevada law, and subject to the rights of the holders of preferred stock, if any, all stockholder action is taken by the vote of a majority of the outstanding shares of common stock voting as a single class present at a meeting of stockholders at which a quorum consisting of one-half of the outstanding shares of common stock is present in person or proxy.

 

Subject to the prior rights of any class or series of preferred stock which may from time to time be outstanding, if any, holders of our common stock are entitled to receive ratably, dividends when, as, and if declared by our board of directors out of funds legally available for that purpose and, upon our liquidation, dissolution, or winding up, are entitled to share ratably in all assets remaining after payment of liabilities and payment of accrued dividends and liquidation preferences on the preferred stock.

 

Preferred Stock

 

We are authorized to issue up to 20,000,000 shares of preferred stock, no par value. As of October 18, 2018, no shares of our preferred stock were issued and outstanding. The shares of preferred stock may be issued in series, and shall have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions providing for the issuance of such stock adopted from time to time by the board of directors. The board of directors is expressly vested with the authority to determine and fix in the resolution or resolutions providing for the issuances of preferred stock the voting powers, designations, preferences and rights, and the qualifications, limitations or restrictions thereof, of each such series to the full extent now or hereafter permitted by the laws of the State of Nevada.

 

5% Series A Convertible Preferred Stock

 

On October 20, 2017, we filed with the Secretary of State of the State of Nevada a certificate of designation designating 3,000 shares of preferred stock as 5% Series A Convertible Preferred Stock, or the Series A Preferred Stock, par value $0.0001. As of October 18, 2018, no shares of our Series A Preferred Stock were issued and outstanding.

 

Ranking

 

As described more fully below, the Series A Preferred Stock ranks senior with respect to liquidation preference and dividend rights to any holders of “Junior Securities,” which means the holder of shares of our common stock, any preferred stock other than the Series A Preferred Stock, and any other class or series of stock that we may issue.

 

Liquidation Preference

 

In the event of any voluntary or involuntary liquidation, dissolution, or winding up of our Company’s affairs, a holder of Series A Preferred Stock will be entitled to be paid, before any distribution or payment may be made to any holders of Junior Stock: (1) the liquidation preference amount of $ 1,207.50 per share of Series A Preferred Stock; and (2) 115% of amount of any accrued and unpaid dividends, if any, whether declared or not declared, prior to such distribution or payment date.

 

  49
     

 

Dividends

 

Holders of the Series A Preferred Stock are entitled to receive, on each share, if, as and when declared by the Board of Directors or any duly authorized committee of the Board of Directors out of assets legally available, cumulative cash dividends with respect to each quarterly dividend period at a rate of 5.0% per annum on the stated value amount of $ 1,050.00 per share, which shall be cumulative and be due and payable in Series A Preferred Stock on the Dividend Date (as that term is defined in the Certificate of Designation). Subject to certain exceptions that are specified in the certificate of designations for the Series A Preferred Stock, no dividends or distributions may be paid on common stock unless all accrued and unpaid dividends on the Series A Preferred Stock are paid in full.

 

Redemption

 

Subject to the Redemption Notice requirements (as that term is defined in the Certificate of Designation), we may redeem the Series A Preferred Stock, in whole or in part, at a price per share equal to $ 1,207.50 , plus 115% of the amount of any accrued and unpaid dividends.

 

Voting Rights

 

The holders of shares of Series A Preferred Stock have no voting rights, except that the vote or consent of the holders of at least 75% of the shares of the Series A Preferred Stock at the time outstanding, voting as a separate class, shall be necessary for effecting:

 

  Any amendment to our Company’s Articles of Incorporation in any manner that adversely affects the rights of the holder of Series A Preferred Stock;
     
  Any adverse modifications to the voting or other powers, preferences, rights, privileges, or restrictions of the Series A Preferred Stock contained in our Company’s Certificate of Designation, or any amendments thereto;
     
  The acquisition, redemption, or otherwise purchase, directly or indirectly, of any Junior Securities (as that term is defined in the Certificate of Designation) or any shares pari passu with the Series A Preferred Stock;
     
  Any payment or distribution, including declaring any dividend, either directly or indirectly, in respect of, any Junior Securities (at that term is defined in the Certificate of Designation), or set aside any monies for the purchase or redemption (through a sinking fund or otherwise) of any Junior Securities (as that term is defined in the Certificate of Designation) or any shares pari passu with the Series A Preferred Stock;
     
  Until the date that is twelve (12) months following the initial Closing, authorize or create any class of stock ranking as to dividends, redemption, or distribution of assets upon a liquidation senior to the Series A Preferred Stock; or
     
  Any agreement with respect to the foregoing.

 

Convertible Securities

 

None.

 

  50
     

 

Warrants

 

As of December 31, 2017, we had outstanding warrants to purchase 1,589,500 shares of common stock at a weighted-average exercise price of $1.10 per share. Subsequent to December 31, 2017, warrants to purchase 1,306,360 shares of common stock were exercised for total proceeds of $1,436,996.

 

On or about April 16, 2018, we issued a warrant to purchase 1,000,000 shares of our common stock at an exercise price of $0.01 per share, exercisable until and including April 15, 2023.

 

On or about May 10, 2018, we issued a total of 7,500,000 warrants to purchase shares of our common stock at an exercise price of $1.50 per share, exercisable until and including May 9, 2023.

 

On or about May 10, 2018, we issued a total of 5,000,0000 warrants to purchase 5,000,000 shares of common stock, at an exercise price of $0.01 per share, exercisable until and including May 9, 2023.

 

Anti-Takeover Effects of Provisions of the Articles of Incorporation and Bylaws

 

The provisions of Nevada law and our bylaws may have the effect of delaying, deferring or preventing another party from acquiring control of us. These provisions may discourage and prevent coercive takeover practices and inadequate takeover bids.

 

Nevada Law

 

Nevada law contains a provision governing “acquisition of controlling interest.” This law provides generally that any person or entity that acquires 20% or more of the outstanding voting shares of a publicly-held Nevada corporation in the secondary public or private market may be denied voting rights with respect to the acquired shares, unless a majority of the disinterested shareholders of the corporation elects to restore such voting rights in whole or in part. The control share acquisition act provides that a person or entity acquires “control shares” whenever it acquires shares that, but for the operation of the control share acquisition act, would bring its voting power within any of the following three ranges: 20 to 33-1/3%; 33-1/3 to 50%; or more than 50%.

 

A “control share acquisition” is generally defined as the direct or indirect acquisition of either ownership or voting power associated with issued and outstanding control shares. The shareholders or Board of Directors of a corporation may elect to exempt the stock of the corporation from the provisions of the control share acquisition act through adoption of a provision to that effect in the articles of incorporation or bylaws of the corporation. Our articles of incorporation and bylaws do not exempt our common stock from the control share acquisition act.

 

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The control share acquisition act is applicable only to shares of “Issuing Corporations” as defined by the Nevada law. An Issuing Corporation is a Nevada corporation which (i) has 200 or more shareholders, with at least 100 of such shareholders being both shareholders of record and residents of Nevada, and (ii) does business in Nevada directly or through an affiliated corporation.

 

At this time, we do not believe we have 100 shareholders of record resident of Nevada and we do not conduct business in Nevada directly. Therefore, the provisions of the control share acquisition act are believed not to apply to acquisitions of our shares and will not until such time as these requirements have been met. At such time as they may apply, the provisions of the control share acquisition act may discourage companies or persons interested in acquiring a significant interest in or control of us, regardless of whether such acquisition may be in the interest of our shareholders.

 

The Nevada “Combination with Interested Stockholders Statute” may also have an effect of delaying or making it more difficult to effect a change in control of us. This statute prevents an “interested stockholder” and a resident domestic Nevada corporation from entering into a “combination,” unless certain conditions are met. The statute defines “combination” to include any merger or consolidation with an “interested stockholder,” or any sale, lease, exchange, mortgage, pledge, transfer or other disposition, in one transaction or a series of transactions with an “interested stockholder” having (i) an aggregate market value equal to 5% or more of the aggregate market value of the assets of the corporation, (ii) an aggregate market value equal to 5% or more of the aggregate market value of all outstanding shares of the corporation, or (iii) representing 10% or more of the earning power or net income of the corporation.

 

An “interested stockholder” means the beneficial owner of 10% or more of the voting shares of a resident domestic corporation, or an affiliate or associate thereof. A corporation affected by the statute may not engage in a “combination” within three years after the interested stockholder acquires its shares unless the combination or purchase is approved by the Board of Directors before the interested stockholder acquired such shares. If approval is not obtained, then after the expiration of the three-year period, the business combination may be consummated with the approval of the Board of Directors or a majority of the voting power held by disinterested stockholders, or if the consideration to be paid by the interested stockholder is at least equal to the highest of (i) the highest price per share paid by the interested stockholder within the three years immediately preceding the date of the announcement of the combination or in the transaction in which he became an interested stockholder, whichever is higher, (ii) the market value per common share on the date of announcement of the combination or the date the interested stockholder acquired the shares, whichever is higher, or (iii) if higher for the holders of preferred stock, the highest liquidation value of the preferred stock.

 

Articles of Incorporation and Bylaws

 

Our articles of incorporation are silent as to cumulative voting rights in the election of our directors. Nevada law requires the existence of cumulative voting rights to be provided for by a corporation’s articles of incorporation. In the event that a few stockholders end up owning a significant portion of our issued and outstanding common stock, the lack of cumulative voting would make it more difficult for other stockholders to replace our Board of Directors or for a third party to obtain control of us by replacing our Board of Directors. Our articles of incorporation and bylaws do not contain any explicit provisions that would have an effect of delaying, deferring or preventing a change in control of us.

 

Exchange Listing

 

The shares of our common stock are listed on the OTCQB under the symbol “GNAL”.

 

Transfer Agent and Registrar

 

The transfer agent and registrar for our common stock is Action Stock Transfer LLC, 2469 E. Fort Union Blvd., Suite 214, Salt Lake City, Utah 84121. Telephone number 801-274-1088 .

 

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INDEMNIFICATION FOR SECURITIES ACT LIABILITIES

 

Nevada Revised Statutes, or NRS, Sections 78.7502 and 78.751 provide us with the power to indemnify any of our directors and officers. The director or officer must have conducted himself/herself in good faith and reasonably believe that his/her conduct was in, or not opposed to, our best interests. In a criminal action, the director, officer, employee or agent must not have had reasonable cause to believe his/her conduct was unlawful.

 

Under NRS Section 78.751, advances for expenses may be made by agreement if the director or officer affirms in writing that he/she believes he/she has met the standards and will personally repay the expenses if it is determined such officer or director did not meet the standards.

 

We are also permitted to apply for insurance on behalf of any director, officer, employee or other agent for liability arising out of his actions, whether or not the NRS would permit indemnification.

 

Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, or the Securities Act, may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act, and is therefore unenforceable.

 

Our By-laws require us to indemnify any of our officers or directors, and certain other persons, under certain circumstances against all expenses and liabilities incurred or suffered by such persons because of a lawsuit or similar proceeding to which the person is made a party by reason of a his being a director or officer of us or our subsidiaries, unless that indemnification is prohibited by law.

 

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PLAN OF DISTRIBUTION

 

The Selling Stockholder and any of its pledgees, assignees and successors-in-interest may, from time to time, sell shares of Common Stock offered by this prospectus, which we refer to as the Resale Shares, either on the OTCQB or any other stock exchange, market or trading facility on which the common stock is then traded or in private transactions. These sales may be at fixed or negotiated prices. The Selling Stockholder may use any one or more of the following methods when selling the Resale Shares:

 

  ordinary brokerage transactions and transactions in which a broker-dealer solicits purchasers;
     
  block trades in which a broker-dealer attempts to sell resale shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
     
  purchases by a broker-dealer as principal, for resale by the broker-dealer for its account;
     
  an exchange distribution in accordance with the rules of the applicable exchange;
     
  privately negotiated transactions;
     
  sale of a specified number of resale shares at a stipulated price per share, as a broker-dealer may agree upon with the Selling Stockholder from time to time;
     
  writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;
     
  a combination of any such methods of sale; or
     
  any other method permitted by applicable law.

 

The Selling Stockholder may sell resale shares in accordance with Rule 144 under the Securities Act of 1933, or the Securities Act, rather than under this prospectus.

 

Broker dealers engaged by the Selling Stockholder may arrange for other brokers dealers to participate in sales. Broker dealers may receive commissions or discounts from the Selling Stockholder (or, if any broker dealer acts as agent for the purchaser of resale shares, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this Prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance with FINRA Rule 2121.

 

The Selling Stockholder is, and any broker-dealer or agent that is involved in selling resale shares may be deemed to be, an “underwriter” within the meaning of Section 2(a)(11) of the Securities Act in connection with such sales. In such event, any commissions received by such a broker-dealer or agent and any profit on the resale of the resale shares purchased by the broker-dealer may be deemed to be underwriting commissions or discounts under the Securities Act. There is no underwriter (other than the Selling Stockholder and any broker-dealer or agent deemed to be an underwriter as described above) or coordinating broker acting in connection with the proposed sale of the resale shares by the Selling Stockholder. The Selling Stockholder has informed us that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute resale shares. In no event shall any broker-dealer receive fees, commissions and markups that, in the aggregate, would exceed eight percent (8%) of gross proceeds from a sale of resale shares.

 

Because the Selling Stockholder is an “underwriter” within the meaning of the Securities Act, it is subject to the prospectus delivery requirements of the Securities Act including Rule 172 thereunder.

 

We have agreed to keep this prospectus effective until the earlier of (i) the date on which the resale shares may be resold by the Selling Stockholder without registration and without regard to any time, volume or manner limitations by reason of Rule 144 under the Securities Act or any other rule of similar effect or (ii) all of the resale shares have been sold pursuant to this prospectus or Rule 144 under the Securities Act or any other rule of similar effect. The resale shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the resale shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.

 

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Expenses, Indemnification

 

We will not receive any of the proceeds from the sale of Resale Shares by the Selling Stockholder and will bear all expenses related to the registration of this offering, but will not pay for any commissions, fees or discounts, if any, relating to the sale of Resale Shares by the Selling Stockholder. We have agreed to indemnify the Selling Stockholder against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.

 

Supplements

 

In the event of a material change in the plan of distribution disclosed in this Prospectus, the Selling Stockholder will not be able to effect transactions in the resale shares pursuant to this prospectus until such time as a post-effective amendment to the registration statement is filed with, and declared effective by, the SEC.

 

Regulation M

 

We have informed the Selling Stockholder that it is required to comply with Regulation M promulgated under the Securities Exchange Act of 1934 with respect to any purchase or sale of our common stock. In general, Rule 102 under Regulation M prohibits any person connected with a distribution of our common stock from directly or indirectly bidding for, or purchasing for any account in which it has a beneficial interest, any of the resale shares or any right to purchase the resale shares, for a period of one trading day before and after completion of its participation in the distribution.

 

During any distribution period, Regulation M prohibits the Selling Stockholder and any other persons engaged in the distribution from engaging in any stabilizing bid or purchasing our common stock except for the purpose of preventing or retarding a decline in the open market price of the common stock. None of these persons may affect any stabilizing transaction to facilitate any offering at the market.

 

We have also advised the Selling Stockholder that it should be aware that the anti-manipulation provisions of Regulation M under the Exchange Act will apply to purchases and sales of common stock by the Selling Stockholder, and that there are restrictions on market-making activities by persons engaged in the distribution of the resale shares. Under Regulation M, the Selling Stockholder or its agents may not bid for, purchase, or attempt to induce any person to bid for or purchase, shares of our common stock while the Selling Stockholder is distributing resale shares. Regulation M may prohibit the Selling Stockholder from covering short sales by purchasing resale shares while the distribution is taking place, despite any contractual rights to do so under our agreement with the Selling Stockholder. We have advised the Selling Stockholder that it should consult with its own legal counsel to ensure compliance with Regulation M.

 

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SELLING STOCKHOLDER

 

The shares of Common Stock being offered by the Selling Stockholder are either beneficially owned by the Selling Stockholder, are issuable upon exercise of warrants held by the Selling Stockholder or may be issued to the Selling Stockholder pursuant to the SEDA. We are registering the shares of Common Stock in order to permit the Selling Stockholder to offer the shares for resale from time to time. Except as otherwise noted and except for the transactions described herein, the Selling Stockholder has not had any material relationship with us within the past three years.

 

The table below lists the Selling Stockholder and other information regarding the beneficial ownership of the shares of Common Stock by the Selling Stockholder. The second column lists the number of shares of Common Stock beneficially owned by the Selling Stockholder, based on its beneficial ownership as of October 18, 2018.

 

The third column lists the shares of Common Stock being offered by this prospectus by the Selling Stockholder.

 

In accordance with the terms of agreements with the Selling Stockholder, this prospectus generally covers the resale of (i) 500,000 Shares issued to the Selling Stockholder pursuant to the Purchase Agreement, (ii) 1,000,000 shares of Common Stock issuable upon exercise of warrants issued pursuant to the Purchase Agreement; (iii) 1,000,000 shares of Common Stock issued on October 12, 2018 upon exercise of warrants issued as a commitment fee pursuant to the SEDA; and (iv) up to 2,410,162 shares of Common Stock issuable to the Selling Stockholder pursuant to the SEDA . Because the exercise price of the warrants may be adjusted, the number of shares that will actually be issued may be more or less than the number of shares being offered by this prospectus. The fourth column assumes the sale of all of the shares offered by the Selling Stockholder pursuant to this prospectus.

 

Under the terms of the warrants, the Selling Stockholder may not exercise the warrants to the extent such exercise would cause such Selling Stockholder, together with its affiliates, to beneficially own a number of shares of Common Stock which would exceed 9.99% of our then outstanding shares of Common Stock following such exercise, excluding for purposes of such determination shares of Common Stock issuable upon exercise of the warrants which have not been exercised. The number of shares in the second column reflects this limitation. The Selling Stockholder may sell all, some or none of its shares in this offering. See “Plan of Distribution.”

 

Selling Stockholder   Shares Beneficially
Owned Before this
Offering
    Percentage of
Outstanding
Shares
Beneficially
Owned Before
this Offering*
    Shares to be Sold in
this Offering
    Percentage of
Outstanding
Shares
Beneficially
Owned After
this Offering*
 
YA II PN LTD. (1)     4,685,517 (2)     9.99 %(3)     3,910,162 (4)     1.69 %(4)
YA Global II SPV, LLC (5)     1,000,000     2.17 %     1,000,000 (4)     - (4)

 

*

Applicable percentage ownership is based on 46,066,564 shares of common stock outstanding as of October 18, 2018. “Beneficial ownership” includes shares for which an individual, directly or indirectly, has or shares voting or investment power, or both, and also includes options and/or warrants that are exercisable within 60 days of October 18, 2018. Unless otherwise indicated, all of the listed persons have sole voting and investment power over the shares listed opposite their names. Beneficial ownership as reported in the above table has been determined in accordance with Rule 13d-3 of the Exchange Act. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights.

   
(1) YA II PN, Ltd. is a Cayman Island exempt limited company. YA II PN, Ltd. is managed by Yorkville Advisors Global, LP. Investment decisions for Yorkville Advisors Global, LP are made by its portfolio manager. Based upon a Schedule 13G filed with the SEC on May 18, 2018. The mailing address for this Selling Stockholder is 1012 Springfield Avenue, Mountainside, New Jersey 07092. Matthew Beckman makes the investment decisions on behalf of this entity and may be deemed to beneficially own the securities held by this entity.
   
(2) Includes 2,650,000 shares of Common Stock beneficially owned directly by YA II PN, Ltd. and D-Beta One EQ, Ltd., plus a number of additional shares underlying warrants exercisable into shares of Common Stock such that the reporting person is deemed to be the beneficial owner, subject to a beneficial ownership limitation of 9.99%.
   
(3) Under the terms of the warrants, the Selling Stockholder may not exercise the warrants to the extent such exercise would cause such Selling Stockholder, together with its affiliates, to beneficially own a number of shares of Common Stock which would exceed 9.99% of our then outstanding shares of Common Stock following such exercise.
   
(4) Assumes the sale of all shares of Common Stock registered pursuant to this prospectus, although the Selling Stockholder is under no obligation to sell any shares of common stock at this time.
   
(5) YA Global II SPV, LLC is an affiliate of YA II PN, Ltd. All investment decisions and control of for YA Global II SPV, LLC are made and held by Yorkville Advisors Global, LP. Investment decisions for Yorkville Advisors Global, LP are made by its portfolio manager. Based upon a Schedule 13G filed with the SEC on May 18, 2018. The mailing address for this beneficial owner is 1012 Springfield Avenue, Mountainside, New Jersey 07092. Matthew Beckman makes the investment decisions on behalf of this entity and may be deemed to beneficially own the securities held by this entity.

 

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LEGAL MATTERS

 

Sichenzia Ross Ference LLP, New York, New York will issue an opinion with respect to the validity of the shares of common stock being offered hereby.

 

EXPERTS

 

The consolidated balance sheets of Generation Alpha, Inc., and subsidiaries as of December 31, 2017 and 2016 and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the years then ended have been audited by Weinberg & Company, P.A., independent registered public accounting firm, as stated in their report which is incorporated herein by reference. Such financial statements have been incorporated herein by reference in reliance on the report of such firm given upon their authority as experts in accounting and auditing.

 

WHERE YOU CAN FIND MORE INFORMATION

 

We are required to file annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any document filed by us at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our filings with the SEC are also available to the public at the SEC’s Internet web site at http://www.sec.gov .

 

We have filed a registration statement, of which this prospectus is a part, covering the securities offered hereby. As allowed by SEC rules, this prospectus does not include all of the information contained in the Registration Statement and the included exhibits, financial statements and schedules. You are referred to the Registration Statement, the included exhibits, financial statements and schedules for further information. This prospectus is qualified in its entirety by such other information.

 

We are subject to the information and periodic reporting requirements of the Exchange Act and, in accordance therewith, file periodic reports, proxy statements and other information with the SEC. Such periodic reports, proxy statements and other information are available for inspection and copying at the public reference room and website of the SEC referred to above. We maintain a website at www.solis-tek.com. The reference to our website address does not constitute incorporation by reference of the information contained on our website, and you should not consider the contents of our website in making an investment decision with respect to our common stock.

 

INCORPORATION OF CERTAIN INFORMATION BY REFERENCE

 

The SEC allows us to “incorporate by reference” the information we have filed with them, which means that we can disclose important information to you by referring you to those documents. The information we incorporate by reference is an important part of this prospectus, and information that we file later with the SEC will automatically update and supersede this information. The documents we are incorporating by reference are:

 

  Annual Report on Form 10-K for the year ended December 31, 2017, filed on April 2, 2018, as amended by our Annual Report on Form 10-K/A, filed on July 13, 2018;
     
 

Quarterly Reports on Form 10-Q for the quarters ended March 31, 2018 and June 30, 2018, filed on May 15, 2018 and August 14, 2018, respectively;

     
 

Current Reports on Form 8-K, filed on February 15, 2018, February 21, 2018, April 30, 2018, May 11, 2018, May 25, 2018, July 3, 2018 , August 23, 2018, August 31, 2018 and September 26, 2018;

     
  Definitive Information Statement on Schedule 14C, filed on July 13, 2018, as revised by the Definitive Information Statement on Schedule 14C, filed on July 17, 2018; and
     
  The description of our common stock contained in our Form 8-A, filed on April 22, 2009.

 

All documents we file with the SEC pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, except as to any portion of any report or documents that is not deemed filed under such provisions, (1) on or after the date of filing of the Registration Statement containing this prospectus and prior to the effectiveness of the Registration Statement and (2) on or after the date of this prospectus until the earlier of the date on which all of the securities registered hereunder have been sold or the Registration Statement of which this prospectus is a part has been withdrawn, shall be deemed incorporated by reference in this prospectus and to be a part of this prospectus from the date of filing of those documents and will be automatically updated and, to the extent described above, supersede information contained or incorporated by reference in this prospectus and previously filed documents that are incorporated by reference in this prospectus.

 

Nothing in this prospectus shall be deemed to incorporate information furnished but not filed with the SEC pursuant to Item 2.02, 7.01 or 9.01 of Form 8-K.

 

Upon written or oral request, we will provide without charge to each person to whom a copy of the prospectus is delivered a copy of the documents incorporated by reference herein (other than exhibits to such documents, unless such exhibits are specifically incorporated by reference herein). You may request a copy of these filings, at no cost, by writing or telephoning us at the following address: Generation Alpha, Inc., 853 Sandhill Avenue, Carson, California 90746, Attention: Secretary, telephone: (888) 998-8881. We maintain a website at http://www.solis-tek.com. The information on our website is not part of this prospectus. We have included our website address as a factual reference and do not intend for it to be an active link to our website.

 

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INDEX TO FINANCIAL STATEMENTS

 

GENERATION ALPHA, INC.

 

(FORMERLY SOLIS TEK, INC.)

 

For the Three and Six Months Ended June 30, 2018 and 2017    
Condensed consolidated balance sheets as of June 30, 2018 (unaudited) and December 31, 2017   F-2
Condensed consolidated statements of operations for the three and six months ended June 30, 2018 and 2017 (unaudited)   F-3
Condensed consolidated statement of shareholders’ (deficiency) equity for the six months ended June 30, 2018 (unaudited)   F-4
Condensed consolidated statements of cash flows for the six months ended June 30, 2018 and 2017 (unaudited)   F-5
Notes to condensed consolidated financial statements (unaudited)   F-6 - F-23

 

For the Years Ended December 31, 2017 and 2016    
Report of Independent Registered Public Accounting Firm   F-24
Consolidated balance sheets as of December 31, 2017 and 2016   F-25
Consolidated statements of operations for the years ended December 31, 2017 and 2016   F-26
Consolidated statements of shareholders’ equity (deficiency) for the years ended December 31, 2017, 2016 and 2015   F-27
Consolidated statements of cash flows for the years ended December 31, 2017 and 2016   F-28
Notes to consolidated financial statements   F-29 - F-46

 

F- 1
 

 

GENERATION ALPHA, INC.

(FORMERLY SOLIS TEK INC.)

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   

June 30, 2018

    December 31, 2017  
    (Unaudited)        
ASSETS                
Current Assets                
Cash   $ 2,843,996     $ 967,943  
Accounts receivable, net of allowance for doubtful accounts and returns of $284,532 and $396,499, respectively     196,783       417,484  
Inventories, net     1,607,212       1,684,463  
Advances to suppliers – formerly a related party     529,850       735,730  
Prepaid expenses and other current assets     205,168       134,374  
Total Current Assets     5,383,009       3,939,994  
                 
Property and equipment, net     153,980       138,243  
Intangible assets, net     1,437,174       -  
Other assets     102,580       37,980  
TOTAL ASSETS   $ 7,076,743     $ 4,116,217  
                 
LIABILITIES AND SHAREHOLDERS’ DEFICIT                
Current Liabilities                
Accounts payable and accrued expenses   $ 1,514,559     $ 1,124,349  
Due to former related party vendor     -       381,457  
Contract obligations, current portion     290,909       -  
Note payable - related parties     640,000       1,145,000  
Note payable to related party, current portion, net of discount of $1,247,032 and $0, respectively     252,968       -  
Convertible note payable to related party, current portion, net of discount of $0 and $1,055,556, respectively     -       194,444  
Due to related parties     118,210       146,534  
Capital lease obligations, current portion     1,883       9,665  
Loans payable, current portion     21,416       8,476  
Total Current Liabilities     2,839,945       3,009,925  
                 
Loans payable, net of current portion     857       17,481  
Contract obligations, net of current portion     481,909       -  
Convertible note payable, net of current portion, net of discount of $0 and $500,000, respectively     -       -  
Derivative liability     4,092,050       7,415,000  
Total liabilities     7,414,761       10,442,406  
                 
Series-A Convertible Preferred Shares , net of no discount and $351,000, no par value, none and 351,000 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively     -       -  
                 
Commitments and Contingencies                
                 
Shareholders’ Deficit                
Preferred stock, no par value, 20,000,000 shares authorized; no shares issued and outstanding at June 30, 2018 and December 31, 2017     -       -  
Common stock, $0.001 par value, 100,000,000 shares authorized; 44,826,564 and 38,522,034 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively     44,827       38,522  
Additional paid-in-capital     25,511,529       9,077,690  
Accumulated deficit     (25,894,374 )     (15,442,401 )
Total Shareholders’ Deficit     (338,018 )     (6,326,189 )
                 
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT   $ 7,076,743     $ 4,116,217  

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

F- 2
 

 

GENERATION ALPHA, INC.

(FORMERLY SOLIS TEK INC.)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

    Three months ended
June 30,
    Six months ended
June 30,
 
    2018     2017     2018     2017  
             
Sales   $ 701,626     $ 2,441,289     $ 1,713,375     $ 5,343,115  
Cost of goods sold (1)     584,916       1,521,410       1,118,841       3,302,714  
Gross profit     116,710       919,879       594,534       2,040,401  
                                 
Operating expenses                                
Selling, general and administrative expenses     2,650,018       2,391,231       6,098,289       7,155,886  
Research and development     62,706       82,500       114,584       165,270  
Excess cost of acquisition From a related party over historical basis     4,450,000       -       4,450,000       -  
Total operating expenses     7,162,724       2,473,731       10,662,873       7,321,156  
                                 
Loss from operations     (7,046,014 )     (1,553,852 )     (10,068,339 )     (5,280,755 )
                                 
Other income (expenses)                                
Financing costs (2)     (7,317,406 )     -       (7,317,406 )     -  
Change in fair value of derivative liability     4,181,874       -       6,811,926       -  
Gain on extinguishment of derivative liability     1,715,173       -       2,389,427       -  
Interest expense (3)     (1,611,695 )     (31,649 )     (2,264,381 )     (55,820 )
Total other income (expenses)     (3,032,054 )     (31,649 )     (380,434 )     (55,820 )
                                 
Loss before income taxes     (10,078,068 )     (1,585,501 )     (10,448,773 )     (5,336,575 )