UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

[X]

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED: ~~SEPTEMBER~~MARCH 3031, ~~2019~~2020

[ ]

TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File Number: 000-53635

GENERATION ALPHA, INC.

(Exact name of registrant as specified in its charter)

Nevada		20-8609439
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

~~853~~1689-A ~~Sandhill~~Arrow ~~Ave.~~Route

~~Carson~~Upland, CACalifornia ~~90746~~91786

(Address of principal executive offices) (Zip code)

(888) 998-8881

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 13 (a) of the Exchange Act. [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]

Securities registered pursuant to Section 12(b) of the Act: None.

The number of shares of registrant’s common stock outstanding as of ~~November~~May 1831, ~~2019~~2020 was 4651,~~320~~274,~~564~~297.

EXPLANATORY NOTE

As disclosed in a Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”), on May 8, 2020, we delayed the filing of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, due to the impact of the coronavirus COVID-19 (“COVID-19”) pandemic that made it more difficult, and therefore it has taken us more time, to finish our analysis and compile certain information necessary to make key assessments and estimates.

GENERATION ALPHA, INC.

INDEX

PART I.	FINANCIAL INFORMATION
	ITEM 1.	Financial Statements	3
		Condensed consolidated balance sheets as of September 30, 2019 (unaudited) and December 31, 2018	3
		Condensed Consolidated Balance Sheets as of March 31, 2020 (unaudited) and December 31, 2019	3
		Condensed consolidated statements of operations for the three and nine months ended September 30, 2019 and 2018 (unaudited)	4
		Condensed Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019 (unaudited)	4
		Condensed consolidated statement of stockholders’ equity for the three and nine months ended September 30, 2019 and 2018 (unaudited)	5-7
		Condensed Consolidated Statements of Stockholders’ Deficit for the three months ended March 31, 2020 and 2019 (unaudited)	5
		Condensed consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018 (unaudited)	8
		Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019 (unaudited)	6
		Notes to condensed consolidated financial statements (unaudited)	9-24
		Notes to Condensed Consolidated Financial Statements (unaudited)	7-15
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2516-3020
	ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	3020
	ITEM 4.	Controls and Procedures	3020-21
PART II.	OTHER INFORMATION
	ITEM 1.	Legal Proceedings	3122
	ITEM 1A.	Risk Factors	3122
	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3122
	ITEM 3.	Defaults Upon Senior Securities	3122
	ITEM 4.	Mine Safety Disclosures	3222
	ITEM 5.	Other Information	3222
	ITEM 6.	Exhibits	3222
	SIGNATURES		3323

PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements.

GENERATION ALPHA, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2019			December 31, 2018
	March 31, 2020			December 31, 2019
	(Unaudited)
ASSETS
Current Assets
Cash	$	66193,~~217~~000		$	~~886~~104,~~693~~000
Accounts receivable, net of allowance for doubtful accounts and returns of $112,000 and $144,668, respectively		132,919			91,208
Accounts receivable, net of allowance for doubtful accounts and returns of $47,000 and $112,000, respectively		81,000			-
Inventories, net		~~527~~303,~~192~~000			~~570~~390,~~187~~000
Prepaid expenses and other current assets		329,~~305~~000			~~255~~24,~~985~~000
Total Current Assets		~~758~~586,~~633~~000			1518,~~804,073~~000
Property and equipment, net		3020,~~262~~000			5622,~~761~~000
Right of use (“ROU”) asset, net, excluding amount related to disputed real property lease in Arizona (Note 6)		557,896			-
Right of use asset, net		428,000			427,000
Intangible assets acquired from related party, net		-			1,301,591
Other assets		11,000			10,000
Other assets		31,101			83,887
Total Assets	$	1,045,000		$	977,000
Total Assets	$	1,377,892		$	3,246,312
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current Liabilities
Accounts payable and accrued expenses	$	21,~~304~~766,~~598~~000		$	1,~~263~~584,~~364~~000
Due to former officer and shareholder		448,718			448,718
Legal settlements payable – past due		2,670,000			2,528,000
Lease payable, current portion, excluding amount related to disputed real property lease in Arizona (Note 6)		127,700			-
Leases payable, current portion		191,000			133,000
Contract obligations, current portion – past due		495,455			372,727
Contract obligations – past due		803,000			799,000
Note payable - related parties – past due		790,000			640,000
Notes payable to related parties – past due		790,000			790,000
Convertible note payable to related party, net of discount of $0 and $247,032, respectively		1,500,000			1,252,968
Convertible notes payable to related party, net of discount of $182,000 and $178,000, respectively		1,743,000			1,597,000
Accrued interest to related parties		~~136~~366,~~794~~000			~~125~~351,~~039~~000
Loans payable		~~106~~41,~~277~~000			264,~~548~~000
Total Current Liabilities		58,~~909~~370,~~542~~000			47,~~105~~846,~~364~~000
Lease payable, net of current portion, excluding amount related to disputed real property lease in Arizona (Note 6)		458,756			-
Leases payable, net of current portion		450,000			423,000
Contract obligations, net of current portion		298,839			408,681
Derivative liabilities		2,414,000			1,332,000
Derivative liabilities		117,892			2,160,806
Total Liabilities		11,234,000			9,601,000
Total Liabilities		6,785,029			6,674,851
Commitments and Contingencies
Shareholders’ Deficit
Preferred stock, no par value, 20,000,000 shares authorized; no shares issued and outstanding at September 30, 2019 and December 31, 2018		-			-
Preferred stock, no par value, 20,000,000 shares authorized; no shares issued and outstanding at March 31, 2020 and December 31, 2019		-			-
Common stock, $0.001 par value, 100,000,000 shares authorized; 46,320,564 and 45,794,564 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively		46,321			45,795
Common stock, $0.001 par value, 100,000,000 shares authorized; 51,274,297 and 46,820,564 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively		51,000			47,000
Additional paid-in-capital		29,306,739			29,042,072
Additional paid-in capital		31,808,000			31,739,000
Accumulated deficit		(3442,~~760~~048,~~197~~000	)		(3240,~~516~~410,~~406~~000	)
Total Shareholders’ Deficit		(510,~~407~~189,~~137~~000	)		(38,~~428~~624,~~539~~000	)
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT	$	1,~~377~~045,~~892~~000		$	3977,~~246,312~~000

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

GENERATION ALPHA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three months ended September 30,						Nine months ended September 30,
	Three months ended March 31,
	2019			2018			2019			2018
	2020			2019
Sales	$	~~475~~307,~~379~~000		$	~~851~~737,~~710~~000		$	~~1,895,116~~		$	~~2,565,085~~
Cost of goods sold		~~157~~195,~~808~~000			~~718~~575,~~139~~000			~~922,514~~			~~1,836,980~~
Gross profit		~~317~~112,~~571~~000			~~133~~162,~~571~~000			~~972,602~~			~~728,105~~
Operating expenses
Selling, general and administrative expenses		~~828~~361,~~610~~000			41,~~061~~396,~~370~~000			~~3,096,210~~			~~10,078,311~~
Research and development		3725,~~195~~000			379,~~332~~000			~~191,464~~			~~151,916~~
Loss on abandonment of leasehold improvements		-			-			217,562			-
Impairment of right of use asset		82,000			-
Impairment of intangible assets acquired from related party		-			-			1,138,892			-
Loss on abandonment of leasehold improvements		-			177,000
Amortization of license agreement		-			5481,~~233~~000			~~162,699~~			~~135,582~~
Excess cost of acquisition to related party over historical basis		-			-			-			4,450,000
Total operating expenses		468,000			1,663,000
Total operating expenses		865,805			4,152,935			4,806,827			14,815,809
Loss from operations		(356,000	)		(1,501,000	)
Loss from operations		(548,234	)		(4,019,364	)		(3,834,225	)		(14,087,704	)
Other expenses
Other income (expenses)
Financing costs (1)		(15,000	)		(129,000	)
Financing costs (1)		-			-			(129,384	)		(7,317,406	)
Change in fair value of derivative liability		(942,000	)		(98,000	)
Change in fair value of derivative liability		643,586			(2,525,234	)		2,172,298			4,286,692
Interest expense (2)		(325,000	)		(294,000	)
Gain on extinguishment of derivative liability		-			-			-			2,389,427
Total other expenses		(1,282,000	)		(521,000	)
Interest expense (2)		(103,494	)		(548,632	)		(452,480	)		(2,813,013	)
Net loss	$	(1,638,000	)	$	(2,022,000	)
Total other income (expenses)		540,092			(3,073,866	)		1,590,434			(3,454,300	)
BASIC AND DILUTED LOSS PER SHARE	$	(0.03	)	$	(0.04	)
Loss before income taxes		(8,142	)		(7,093,230	)		(2,243,791	)		(17,542,004	)
WEIGHTED - AVERAGE COMMON SHARES OUTSTANDING BASIC AND DILUTED		48,715,236			46,075,097
Provision for income taxes		-			-			-			3,200
(1) Included in financing costs are these amounts from a related party	$	15,000		$	129,000
Net loss	$	(8,142	)	$	(7,093,230	)	$	(2,243,791	)	$	(17,545,204	)
(2) Included in interest expense are these amounts from related parties	$	207,000		$	294,000
BASIC AND DILUTED LOSS PER SHARE	$	(0.00	)	$	(0.17	)	$	(0.05	)	$	(0.42	)
WEIGHTED - AVERAGE COMMON SHARES OUTSTANDING BASIC AND DILUTED		46,320,564			42,826,985			46,465,868			41,810,624
(1) Included in financing costs are these amounts from a related party	$	-		$	-		$	129,384		$	6,177,406
(2) Included in interest expense are these amounts from related parties	$	68,504		$	16,868		$	403,557		$	39,781

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

GENERATION ALPHA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

(UNAUDITED)

Three months ended September 30, 2019
					Additional
	Common Stock				Paid-in		Accumulated
	Shares		Amount		Capital		Deficit			Total
Balance, June 30, 2019 (Unaudited)		46,320,564	$	46,321	$	29,300,822	$	(34,752,055	)	$	(5,404,912	)
Fair value of vested stock options		-		-		5,917					5,917
Net loss								(8,142	)		(8,142	)
Balance, September 30, 2019 (Unaudited)		46,320,564	$	46,321	$	29,306,739	$	(34,760,197	)	$	(5,407,137	)

Three months ended March 31, 2020

Nine months ended September 30, 2019
					Additional
	Common Stock				Paid-in		Accumulated
	Shares		Amount		Capital		Deficit			Total
Balance, December 31, 2018		45,794,564	$	45,795	$	29,042,072	$	(32,516,406	)	$	(3,428,539	)
Balance, December 31, 2019		46,820,564	$	47,000	$	31,739,000	$	(40,410,000	)	$	(8,624,000	)
Fair value of common stock issued for services		426,000		426		177,424					177,850
Common shares issued on conversion of accrued interest on note payable		2,287,066		2,000		27,000					29,000
Fair value of common stock issued to directors and employees		100,000		100		62,900					63,000
Fair value of common stock issued to directors		2,166,667		2,000		21,000					23,000
Fair value of vested stock options		-		-		2421,~~343~~000					2421,~~343~~000
Net loss								(21,~~243~~638,~~791~~000	)		(21,~~243~~638,~~791~~000	)
Balance, September 30, 2019 (Unaudited)		46,320,564	$	46,321	$	29,306,739	$	(34,760,197	)	$	(5,407,137	)
Balance, March 31, 2020 (Unaudited)		51,274,297	$	51,000	$	31,808,000	$	(42,048,000	)	$	(10,189,000	)

Three months ended March 31, 2019

					Additional
	Common Stock				Paid-in		Accumulated
	Shares		Amount		Capital		Deficit			Total

Balance, December 31, 2018		45,794,564	$	46,000	$	29,042,000	$	(32,516,000	)	$	(3,428,000	)

Fair value of common stock issued for services		452,000		-		187,000					187,000

Fair value of common stock issued to directors		100,000		-		63,000					63,000

Fair value of vested stock options						11,000					11,000

Net loss								(2,022,000	)		(2,022,000	)

Balance, March 31, 2019 (Unaudited)		46,346,564	$	46,000	$	29,303,000	$	(34,538,000	)	$	(5,189,000	)

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

GENERATION ALPHA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

(UNAUDITED)

Three months ended September 30, 2018
					Additional
	Common Stock				Paid-in			Accumulated
	Shares		Amount		Capital			Deficit			Total
Balance, June 30, 2018 (Unaudited)		44,826,564	$	44,827	$	25,511,529		$	(25,894,375	)	$	(338,019	)
Fair value of common stock issued for services		40,000		40		(40	)					-
Fair value of common stock issued to directors and employees		200,000		200		266,778						266,978
Fair value of vested stock options						2,681,111						2,681,111
Net loss									(7,093,230	)		(7,093,230	)
Balance, September 30, 2018 (Unaudited)		45,066,564	$	45,067	$	28,459,378		$	(32,987,605	)	$	(4,483,160	)

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

GENERATION ALPHA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

(UNAUDITED)

Nine months ended September 30, 2018

					Additional
	Common Stock				Paid-in		Accumulated
	Shares		Amount		Capital		Deficit			Total
Balance, December 31, 2017		38,522,034	$	38,522	$	9,077,690	$	(15,442,401	)	$	(6,326,189	)
Net proceeds from sale of common stock		1,321,538		1,322		1,566,678					1,568,000
Fair value of common stock issued for services		1,310,000		1,310		1,635,490					1,636,800
Fair value of common stock issued to directors and employees		450,000		450		957,570					958,020
Shares issued on exercise of warrants		1,306,360		1,306		1,435,690					1,436,996
Shares issued on conversion convertible note payable		1,788,082		1,788		1,786,294					1,788,082
Shares issued on conversion of Series A Convertible Preferred Shares		368,550		369		368,181					368,550
Extinguishment of derivative liability						1,799,003					1,799,003
Fair value of warrants issued for financing costs						1,140,000					1,140,000
Fair value of warrants issued for acquisition of intangible assets from related party						5,450,000					5,450,000
Fair value of vested stock options						3,242,782					3,242,782
Net loss								(17,545,204	)		(17,545,204	)
Balance, September 30, 2018 (Unaudited)		45,066,564	$	45,067	$	28,459,378	$	(32,987,605	)	$	(4,483,160	)

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

GENERATIONAL ALPHA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine months ended September 30,
	Three Month Ended March 31,
	2019			2018
	2020			2019
Cash Flows from Operating Activities
Net loss	$	(21,~~243~~638,~~791~~000	)	$	(172,~~545~~022,~~204~~000	)
Adjustments to reconcile net loss to net cash used in operating activities
Provision for allowance for doubtful accounts and sales returns		(3265,~~668~~000	)		(~~302~~35,~~763~~000	)
Provision for inventory reserves		~~(672~~10,~~744~~000	)		~~347~~(74,~~828~~000	)
Depreciation and amortization		189,198			179,717
Depreciation		2,000			10,000
Depreciation of ROU asset		87,128			-
Amortization of right of use asset		6,000			28,000
Imputed interest contract obligation		12,886			8,590
Impairment of right of use asset		82,000			-
Amortization on convertible note payable		247,032			-
Amortization of intangible assets		-			81,000
Gain on sale of property and equipment		-			(2,400	)
Imputed interest contract obligation		4,000			4,000
Loss on abandonment of leasehold improvements		217,562			-
Amortization on convertible notes payable		146,000			247,000
Impairment of intangible assets		1,138,892			-
Loss on abandonment of leasehold improvements		-			177,000
Fair value of warrants issued to related party acquire licensing rights		-			4,450,000
Fair value of vested stock options		21,000			11,000
Fair value of vested stock options		24,343			3,242,782
Fair value of common stock issued for services		-			187,000
Fair value of common stock issued for services		177,850			1,636,800
Fair value of common stock issued to directors		23,000			63,000
Fair value of common stock issued to directors and employees		63,000			958,020
Financing costs		15,000			129,000
Fair value of warrants issued for financing costs		-			7,317,406
Change in the fair value of derivative liability		942,000			98,000
Amortization of debt discount		-			2,308,524
Changes in Assets and Liabilities
Amortization of Series A preferred shares discount		-			368,550
(Increase) Decrease in:
Financing costs		129,384			-
Accounts receivable		(16,000	)		(87,000	)
Change in the fair value of derivative liability		(2,172,298	)		(4,286,692	)
Legal settlements payable		142,000
Gain on extinguishment of derivative liability		-			(2,389,427	)
Inventories		77,000			216,000
Change in lease payable		(60,665	)		-
Prepaid expenses and other		15,000			(178,000	)
Changes in assets and liabilities
Other assets		(1,000	)		49,000
(Increase) decrease in:
(Decrease) Increase in:
Accounts receivable		(9,043	)		423,444
Accounts payable and accrued expenses		182,000			673,000
Inventories		715,739			179,262
Lease payable		(4,000	)		(1,000	)
Advances to suppliers		-			195,640
Accrued interest to related parties		44,000			3,000
Prepaid expenses and other		223,680			(112,949	)
Net cash used in operating activities		(13,000	)		(421,000	)
Other assets		52,786			(45,907	)
(Decrease) increase in:
Accounts payable and accrued expenses		1,043,331			753,553
Due to former related party vendor		-			(381,457	)
Accrued interest to related parties		11,755			(22,417	)
Net cash used in operating activities		(856,643	)		(2,719,100	)
Cash Flows from Investing Activities
Accounts receivable acquired on acquisition		-			250,000
Purchase of property and equipment		-			(176,000	)
Cash received on sale of property and equipment					28,500
Net cash used in investing activities		-			(176,000	)
Purchase of property and equipment		(217,562	)		(441,961	)
Net cash used in investing activities		(217,562	)		(163,461	)
Cash Flows from Financing Activities
Proceeds from sale of common stock		-			1,568,000
Proceeds from convertible notes payable related party, net of fees		125,000			-
Proceeds from exercise of warrants		-			1,436,996
Payments on loans payable		(23,000	)		(1,000	)
Proceeds from secured note payable					1,500,000
Net cash (used in) provided by financing activities		102,000			(1,000	)
Proceeds from notes payable related party		150,000			-
Net increase (decrease) in cash		89,000			(598,000	)
Payments on notes payable related party		-			(505,000	)
Cash beginning of period		104,000			887,000
Payments on capital lease obligations		-			(9,405	)
Cash end of period	$	193,000		$	289,000
Proceeds from loans payable		150,000			-
Interest paid	$	13,000		$	10,000
Payments on loans payable		(46,271	)		(22,574	)
Taxes paid	$	-		$	-
Net cash provided by financing activities		253,729			3,968,017
Net increase (decrease) in cash		(820,476	)		1,085,456
Cash beginning of period		886,693			967,943
Cash end of period	$	66,217		$	2,053,399
Interest paid	$	50,621		$	68,106
Taxes paid	$	-		$	3,200
Non-Cash Financing Activities
Recording of right to use asset and lease liability	$	~~659~~89,~~347~~000		$	-659,000
Extinguishment of derivative liability	$	-		$	1,799,003
Conversion of accrued interest to related parties for common stock	$	29,000		$	-
Common shares issued upon conversion of convertible note payable and accrued interest	$	-		$	1,788,082
Derivative liability recorded as a valuation discount	$	140,000
Common shares issued upon conversion of Series A preferred	$	-		$	368,550
Assets acquired from related party on issuance of warrants	$	-		$	1,750,000
Contract obligations incurred on acquisitions of license agreement	$	-		$	768,523

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

GENERATION ALPHA, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER~~FOR 30THE THREE MONTHS ENDED MARCH 31, ~~2019~~2020 AND ~~2018~~2019

(UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Generation Alpha, Inc. and its subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019.

History and Organization

Generation Alpha, Inc. (the “Company”) was originally incorporated under the laws of the State of Nevada on March 2, 2007 as Cinjet, Inc. (“Cinjet”). Effective September 1, 2015, Cinjet changed its corporate name to Solis Tek Inc. (“Solis Tek”). Effective September 25, 2018, Solis Tek changed its corporate name to Generation Alpha, Inc. Effective September 25, 2018, Generation Alpha, Inc. (f/k/a Solis Tek Inc.) (the “Company”) entered into an agreement and plan of merger (the “Merger Agreement”), whereby a wholly-owned subsidiary of the Company (the “Merger Sub”) was merged into the Company (the “Merger”). Upon consummation of the Merger, the separate existence of Merger Sub ceased ~~and the Company changed its name from Solis Tek to Generation Alpha, Inc~~. On June 23, 2015, the Company entered into an Agreement of Merger and Plan of Reorganization (the “Agreement”) with Solis Tek Inc., a California corporation (“STI”), and CJA Acquisition Corp., a California corporation and a wholly ~~owned~~ owned subsidiary of the Company (“Merger Sub”), providing for the merger of Merger Sub with and into STI (the “Merger”), with STI surviving the Merger as a wholly-owned subsidiary of the Company. The Merger was accounted for as a recapitalization of the Company with STI being deemed the accounting acquirer.

Overview of Business

The Company is afocused ~~vertically~~on ~~integrated~~the ~~technology innovator~~research, ~~developer~~design, ~~manufacturer~~development and ~~distributor~~manufacturing ~~focused~~of onadvanced, ~~bringing~~energy ~~products and~~efficient ~~solutions~~indoor tohorticulture ~~commercial and retail cannabis growers in both the medical and adult use recreational space in legal markets~~lighting, ~~across~~plant ~~the U.S. The Company’s lighting and~~ nutrient ~~customers include retail stores~~products, ~~distributors~~ and ~~commercial~~ancillary ~~growers in the United States and abroad~~equipment.

Going Concern

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying condensed consolidated financial statements, during the ~~nine~~three months ended ~~September~~March 3031, ~~2019~~2020, the Company incurred a net loss of of $21,~~243~~638,~~791~~000 and used cash in operations of $~~856~~13,~~643~~000, and had a shareholders’ deficit of $510,~~407~~189,~~137~~000 asat ofMarch ~~September 30~~31, ~~2019~~ 2020. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date of the financial statements being issued. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds and implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. In addition, the Company’s independent registered public accounting firm, in its report on the Company’s December 31, ~~2018~~2019 financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.

At ~~September~~March 3031, ~~2019~~2020, the Company had cash on hand in the amount of $66193,~~217. Subsequent to September 30, 2019, the Company received proceeds of $275,~~000 ~~(see Note 13) from the sale of a secured convertible note~~. Management estimates that the current funds on hand will be sufficient to continue operations through ~~January~~September 2020 . The continuation of the Company as a going concern is dependent upon its ability to obtain necessary debt or equity financing to continue operations until it begins generating positive cash flow. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on its operations, in the case of debt financing or cause substantial dilution for the Company’s ~~stock holders~~stockholders, in case or of equity financing.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation

The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries: STI; Solis Tek East, Corporation (“STE”), an entity incorporated under the laws of the State of New Jersey, Zelda Horticulture, Inc. (“Zelda”), an entity incorporated under the laws of the State of California, and YLK Partners NV, LLC (“YLK”), Generation Alpha Brands, Inc., Trilogy Dispensaries, Inc., Extracting Point, LLC (“Extracting Point”), and GrowPro Solutions, Inc., all entities formed under the laws of Nevada. Intercompany transactions and balances have been eliminated in consolidation.

~~Leases~~7

Prior to January 1, 2019, the Company accounted for leases under ASC 840, Accounting for Leases. Effective January 1, 2019, the Company adopted the guidance of ASC 842, Leases (“ASC 842”), which requires an entity to recognize a ROU asset and a lease liability for virtually all leases. The Company adopted ASC 842 using a modified retrospective approach. As a result, the comparative financial information has not been updated and the required disclosures prior to the date of adoption have not been updated and continue to be reported under the accounting standards in effect for those periods. The adoption of ASC 842 on January 1, 2019 resulted in the recognition of operating lease ROU assets and lease liabilities for operating leases of $659,347. There was no cumulative-effect adjustment to accumulated deficit. As discussed in Note 6, the Company did not record a ROU asset and lease liability for the net present value of future lease obligations for the lease of real property in Arizona.

Loss per Share Calculations

Basic earnings per share are computed by dividing net income (loss) available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed by dividing the net income applicable to common stock holders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued using the treasury stock method. Potential common shares are excluded from the computation when their effect is antidilutive. The dilutive effect of potentially dilutive securities is reflected in diluted net income per share if the exercise prices were lower than the average fair market value of common shares during the reporting period.

For the ~~nine~~three months ended ~~September~~March 3031, ~~2019~~2020, options to acquire 84,~~149~~433,~~391~~300 shares of common stock, warrants to acquire 1221,~~783~~283,140 ~~shares~~ shares of common stock, and 3267,~~000~~089,~~000~~041 shares to be issued upon conversion of our convertible ~~note~~notes have been excluded from the ~~calculation~~ calculation of weighted average common shares, as their effect would have been anti-dilutive. For the ~~nine~~three months ended ~~September 30~~March 31, ~~2018~~2019, options to acquire 78,~~784~~369,391 shares of common stock, ~~and~~ warrants to acquire 1312,783,140 shares of common stock, and 3,000,000 shares to be ~~potentially~~issued ~~issuable~~upon ~~under~~conversion of our convertible ~~note~~notes ~~agreements~~ have been excluded from the calculation of weighted average common ~~shares~~ ~~outstanding at September 30~~shares, ~~2018,~~ 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, ~~estimates for potential losses on lease abandonments, assumptions made in~~ valuing derivative liabilities, valuing equity instruments issued for services, and valuation allowance for deferred tax assets, among others. Actual results could differ from these estimates.

Segment Reporting

The Company operates in one segment for the manufacture and distribution of its products. In accordance with the “Segment Reporting” Topic of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and President, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products and services; and procurement, manufacturing and distribution processes. Since the Company operates in one segment, all financial information required by “Segment Reporting” can be found in the accompanying consolidated financial statements.

Revenue Recognition

The Company recognizes revenue in accordance with Accounting Standard Update (“ASU”) No. 2014-09. This ~~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.

Under this guidance, revenue is recognized when control of promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company reviews its sales transactions to identify contractual rights, performance obligations, and transaction prices, including the allocation of prices to separate performance obligations, if applicable. Revenue and ~~costs~~cost of sales are recognized once products are delivered to the customer’s control and performance obligations are satisfied.

All products sold by the Company are distinct individual products and consist of advanced energy efficient indoor horticulture lighting, plant nutrient products, and ancillary equipment. The products are offered for sale as finished goods only, and there are no performance obligations required post-shipment for customers to derive the expected value from them. Contracts with customers contain no incentives or discounts that could cause revenue to be allocated or adjusted over time.

The Company does not offer a general right of return on any of its sales and considers all sales as final. The Company generally provides a three-year warranty on its ballasts. However, the Company does not maintain a warranty reserve as the Company is able to chargeback its vendors for all warranty claims. As of ~~September~~March 3031, ~~2019~~2020 and December 31, ~~2018~~2019, the Company recorded reserves for returned ~~product~~ product in the amounts of $5011,~~781~~000 and $~~143~~60,~~947~~000, respectively, which reduced the accounts receivable balances as of those periods.

~~Inventories~~8

~~Inventories~~In ~~are stated at~~ the ~~lower~~following oftable, ~~cost~~revenue ~~or market. Cost~~ is ~~computed~~disaggregated onby amajor ~~first-in,~~product ~~first-out~~line ~~basis.~~for ~~The~~three ~~Company’s~~months ~~inventories~~ended ~~consist almost~~March ~~entirely of finished goods as of September 30, 2019 and December~~ 31, ~~2018. All sales during the periods ended September 30, 2019 and 2018 were from sales of our products.~~2020:

The Company provides inventory reserves based on excess and obsolete inventories determined primarily by future demand forecasts. The write down amount is measured as the difference between the cost of the inventory and 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. At September 30, 2019 and December 31, 2018, the reserve for excess and obsolete inventory was $238,033 and $910,778, respectively.

Sales Channels	Lighting		Plant Nutrients and Fertilizers		Total

Hydroponic resellers/retail	$	127,000	$	175,000	$	302,000
Direct to consumer/online		5,000		-		5,000
Total	$	132,000	$	175,000	$	307,000

In the following table, revenue is disaggregated by major product line for the three months ended March 31, 2019:

Sales Channels	Lighting		Plant Nutrients and Fertilizers		Total

Hydroponic resellers/retail	$	590,000	$	124,000	$	714,000
Direct to consumer/online		23,000		-		23,000
Total	$	613,000	$	124,000	$	737,000

Concentration Risks

The Company maintains the majority of its cash balances with one financial institution, in the form of demand deposits. ~~During the nine month period ended September 30~~Periodically, ~~2019 and~~ the ~~year ended December 31, 2018, the~~ Company had cash deposits that exceeded the federally insured limit of $250,000. The Company believes that no significant concentration of credit risk exists with respect to these cash balances because of its assessment of the creditworthiness and financial viability of the financial institution.

The Company’s ~~operates~~products inrequire ~~markets~~specific components that currently are ~~highly~~available ~~competitive~~from ~~and~~a ~~rapidly~~limited ~~changing.~~number ~~Significant~~of ~~technological~~sources. ~~changes,~~The ~~shifting customer~~Company ~~needs,~~purchases ~~the~~some ~~emergence~~ of ~~competitive~~its key products orand ~~services~~components ~~with~~from ~~new~~single ~~capabilities,~~vendors. ~~and~~During ~~other~~the ~~factors~~three ~~could~~months ~~negatively~~ended ~~impact~~March ~~the Company’s~~31, ~~operating~~2020 ~~results. State~~ and ~~federal~~2019, its ~~government~~ballasts, ~~laws~~lamps ~~could~~and ~~have~~reflectors, awhich ~~material~~comprised ~~adverse~~the ~~impact~~clear onmajority of the Company’s purchases during those periods, ~~future~~were ~~revenues~~each only purchased from one and ~~results~~three ofseparate ~~operations~~vendors, respectively.

The Company’s ~~products~~performs ~~require~~a ~~specific~~regular ~~components~~review ~~that~~of ~~currently~~customer ~~are~~activity ~~available~~and ~~from~~associated acredit ~~limited~~risks ~~number~~and ofdoes ~~sources.~~not ~~The~~require ~~Company~~collateral or other arrangements. ~~purchases~~One ~~some~~customer accounted for 30% of ~~its~~the ~~key~~Company’s ~~products~~revenue for the three months ended March 31, 2020, and ~~components~~one ~~from~~customer ~~single~~accounted for ~~vendors.~~13% ~~During~~of the ~~nine~~Company’s revenue for the three months ended ~~September~~March 3031, 2019. ~~and~~There ~~2018, its~~were ~~ballasts,~~no ~~lamps~~other ~~and~~customers ~~reflectors,~~that ~~which~~accounted for ~~comprised~~more ~~the~~than ~~majority~~10% of the Company’s ~~purchases~~revenue. ~~during~~Shipments ~~those~~to ~~periods,~~customers ~~were~~outside ~~each~~the United States comprised less than 5% of our ~~only~~sales ~~purchased~~for ~~from~~the ~~one~~three ~~separate~~months ~~vendor~~ended March 31, 2020 and 2019, respectively.

~~The~~As ~~Company performs a regular review~~ of ~~customer~~March ~~activity~~31, ~~and~~2020, ~~associated~~two ~~credit risks and does not require collateral or other arrangements. Two~~ customers accounted for 1834% and 1213% of the Company’s ~~revenue~~trade ~~for~~accounts ~~the~~receivable ~~three~~balance, ~~months~~and ~~ended~~as ~~September~~of December 3031, 2019, ~~and~~ two customers accounted for 1924% and ~~13% of the Company’s revenue for the three months ended September 30, 2018. No customer accounted for more than~~ 10% of the Company’s ~~revenue~~trade ~~for~~accounts ~~the~~receivable ~~nine months ended September 30, 2019, and one customer accounted for 12% of the Company’s revenue for the nine months ended September 30, 2018~~balance. ~~Shipments to customers outside the United States were less than 5% for both the three month periods ended September 30, 2019 and 2018.~~

AsFair ofValue September 30, 2019, three customers accounted for 15%, 14%, and 11% of the Company’s trade accounts receivable balance, and as of December 31, 2018, four customers accounted for 37%, 14%, 13% and 12% of the Company’s trade accounts receivable.measurements

Fair Value Measurements

The Company determines the fair value of its assets and liabilities based on the exchange price in U.S. dollars that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company uses a fair value hierarchy with three levels of inputs, of which the first two are considered observable and the last unobservable, to measure fair value:

● Level 1 — Quoted prices in active markets for identical assets or liabilities. ● Level 2 — Inputs, other than Level 1, that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. ● Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The carrying amounts of financial instruments such as cash, accounts receivable, inventories, and accounts payable and accrued liabilities, approximate the related fair values due to the short-term maturities of these instruments.

	●	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 fair value of the derivative liabilities of $117,892 and $2,160,806 at September 30, 2019 and December 31, 2018, respectively, was valued using Level 3 inputs.~~9

The carrying amounts of financial instruments such as cash, accounts receivable, inventories, accounts payable and accrued liabilities, and legal settlements payable, approximate the related fair values due to the short-term maturities of these instruments. The carrying values of notes payable approximate their fair values due to the fact that the interest rates on these obligations are based on prevailing market interest rates.

The fair value of the derivative liabilities of $2,414,000 and $1,332,000 at March 31, 2020 and December 31, 2019, respectively, was valued using Level 2 inputs.

Derivative Financial Instruments

The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

Intangible Assets

The Company accounts for intangible assets in accordance with the authoritative guidance issued by the Financial Accounting Standards Board (“FASB”). Intangibles are valued at their fair market value and are amortized taking into account the character of the acquired intangible asset and the expected period of benefit. The Company evaluates intangible assets for impairment, at a minimum, on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated undiscounted future cash flows. Recoverability of intangible assets is measured by comparing their net book value to the related projected undiscounted cash flows from these assets, considering a number of factors, including past operating results, budgets, economic projections, market trends and product development cycles. If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss.

At December 31, 2018, the Company had intangible assets of $1,301,591 that consisted of a license right. In June 2019, and based on management’s assessment, it was determined that the intangible asset was impaired, and an impairment charge was recorded for $1,138,892 during the nine month period ended September 30, 2019 (see Note 4).

Recently Issued Accounting Pronouncements

~~Recent~~In ~~accounting~~June ~~pronouncements~~2016, the FASB issued byASU ~~the~~2016-13, ~~FASB~~Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires entities to use a forward-looking approach based on current expected credit losses (“CECL”) to estimate credit losses on certain types of financial instruments, including ~~its~~trade ~~Emerging~~receivables. ~~Issues~~This ~~Task~~may ~~Force,~~result in the ~~American~~earlier ~~Institute~~recognition of ~~Certified~~allowances ~~Public~~for losses. ~~Accountants,~~ASU ~~and~~2016-13 is effective for the ~~Securities~~Company ~~and~~beginning ~~Exchange~~January ~~Commission~~1, ~~are~~2023, ~~not~~and ~~believed~~early byadoption ~~management~~is topermitted. ~~have~~The aCompany ~~material~~does not believe the potential impact onof the ~~Company’s present~~new orguidance ~~future~~and ~~consolidated~~related codification improvements will be material to its financial ~~statements~~position, results of operations and cash flows.

~~NOTE~~Other 3recent -accounting ~~PROPERTY~~pronouncements ~~AND~~issued ~~EQUIPMENT~~by the FASB, its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future financial statements.

~~Property~~NOTE ~~and~~3 ~~equipment~~– ~~consists~~CONTRACT ofOBLIGATION ~~the~~ACQUIRED ~~following~~FROM onRELATED ~~September 30, 2019 and December 31, 2018:~~PARTIES

	September 30, 2019			December 31, 2018
Leasehold improvements	$	7,000		$	7,000
Machinery and equipment		178,455			178,455
Computer equipment		10,908			10,908
Furniture and fixtures		39,560			39,560
		235,923			235,923
Less: accumulated depreciation		(205,661	)		(179,162	)
Property and equipment, net	$	30,262		$	56,761

In May 2018, the Company entered into an acquisition agreement with the members, which in the aggregate, owned 100% of the membership interests in YLK, a related party. The major asset of YLK is a Cultivation Management Services Agreement (the “Management Agreement”) with an Arizona licensee that was entered into on January 5, 2018. During the year ended December 31, 2019, the Company determined the acquired assets were fully impaired, and recorded an impairment charge accordingly. The Company has a continuing obligation under the Management Agreement of $799,000 (net of discount of $51,000) as of December 31, 2019. As of March 31, 2020, the remaining Management Agreement obligation was $803,000 (net of discount of $47,000) and is reflected as a current liability in the accompanying condensed consolidated balance sheet. As of March 31, 2020, the Company is past due on its installment payments obligations under the Management Agreement.

12NOTE 4 – NOTES PAYABLE TO RELATED PARTIES – PAST DUE

~~Depreciation~~Notes ~~expense~~payable ~~for~~to ~~the~~related ~~three~~parties ~~months~~consists ~~ended~~of ~~September~~the ~~30,~~following ~~2019~~at ~~and~~March ~~2018 was $7~~31,~~758~~ ~~and~~2020 ~~$13,066,~~ and ~~$26,499~~December ~~and $44~~31,~~134,~~ ~~respectively, for the nine months ended September 30,~~ 2019 ~~and 2018.~~:

During the nine months ended September 30, 2019, the Company incurred leasehold improvements of $217,562, and subsequently terminated its Arizona facility lease thereby abandoning $217,562 of leasehold improvements during the nine months ended September 30, 2019. The Company recorded the abandonment of leasehold improvements as a component of operating expense in the condensed consolidated statement of operations (see Note 6).

	March 31, 2020		December 31, 2019

Notes payable to officers/shareholders – past due (a)		600,000		600,000
Notes payable to related party – past due (b)		150,000		150,000
Notes payable to related parties – past due (c)		40,000		40,000
Total	$	790,000	$	790,000

~~NOTE 4~~a. –On ~~LICENSE~~May ~~AGREEMENT~~9, ~~ACQUIRED~~2016, ~~FROM~~the ~~RELATED~~Company ~~PARTIES~~entered into note payable agreements with Alan Lien and Alvin Hao, each a former officer and director, to borrow $300,000 under each individual note. Pursuant to the terms of each of these agreements, the Company borrowed $300,000 from each of Alan Lien and Alvin Hao. The notes accrue interest at a rate of 8% per annum, are unsecured and were due on or before May 31, 2018. The loans are currently past due. A total of $600,000 was due on the combined notes at March 31, 2020 and December 31, 2019, respectively.

~~License agreement acquired from related parties as of September 30, 2019 and December 31, 2018, consisted of the following:~~10

		As of
	b.	On May 8, 2019, the Company entered into a note agreement with the sister of Alvin Hao, a former officer and director, to borrow $150,000. The loan accrues interest at 8% per annum (12% on default), is unsecured and was due on November 8, 2019. The note is currently past due. A total of $150,000 was due on the loan as of March 31, 2020 and December 31, 2019.
		September 30, 2019			December 31, 2018
	c.	The Company entered into note agreements with the parents of Alan Lien, the Company’s Chief Executive Officer and one of its directors. The loans accrue interest at 10% per annum, are unsecured and were due on or before December 31, 2016. The loans are currently past due. A total of $40,000 was due on the loans as of March 31, 2020 and December 31, 2019.
License agreement		$	1,518,523		$	1,518,523
Accumulated amortization			(379,631	)		(216,932	)
Impairment charge			(1,138,892	)		-
Intangible assets, net		$	-		$	1,301,591

OnAt ~~May~~December 1031, ~~2018~~2019, ~~the~~accrued ~~Company~~interest ~~entered~~on ~~into an acquisition agreement (~~the ~~“Acquisition~~notes ~~Agreement”)~~payable ~~with~~to ~~the~~related ~~members~~parties ~~(the “Sellers”),~~balance ~~which~~was ~~in the aggregate~~$149,000 ~~owned~~and ~~100%~~included ~~of the membership interests~~ in ~~YLK.~~accrued interest ~~Pursuant~~ to ~~the~~related ~~Acquisition~~parties ~~Agreement, in~~on ~~consideration of~~ the ~~Company~~condensed ~~acquiring~~consolidated ~~all~~balance ofsheet. During the ~~outstanding~~three ~~membership~~months ~~interests~~ended ofMarch ~~YLK~~31, ~~the~~2020, ~~Company issued to~~ the ~~Sellers,~~Company aadded ~~total of 5~~$18,000~~,000~~ ~~warrants~~of ~~(the~~additional ~~“Warrants”)~~accrued ~~to purchase 5~~interest,~~000,000~~ ~~common~~and ~~shares,~~made atinterest anpayments ~~exercise price~~ of $~~0.01 per share. The Warrants are exercisable until May 9~~13,000, ~~2023.~~leaving ~~The~~an ~~aggregate~~accrued ~~fair~~interest ~~value~~on of the ~~Warrants issued as consideration for~~notes ~~the~~payable ~~acquisition~~to ~~was~~related ~~determined~~parties tobalance beof $5154,~~450,~~000 at March 31, 2020.

~~The~~NOTE ~~Sellers~~5 ~~were~~– ~~the~~LEASE ~~following, who were determined to be related parties:~~PAYABLE

~~(a)~~The Company LKleases ~~Ventures,~~its ~~LLC~~executive aoffices ~~Nevada~~and ~~limited~~warehouse ~~liability company~~space. ~~One-half~~The ofCompany ~~the~~analyzes ~~membership~~all ~~interests~~leases ofat LKinception ~~Ventures,~~to ~~LLC~~determine isif ~~owned by Alan Lien, Chief Executive Officer, President and~~ a ~~director~~ right-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;~~ use (~~b) MDM Cultivation LLC, a Delaware limited liability company. The members of MDM Cultivation are affiliates of YA II PN, Ltd. (~~“~~YA II PN~~ROU”) ~~and~~asset ~~D-Beta One EQ, Ltd., which presently hold (i) 2,258,382 shares of the Company’s common stock, (ii) warrants to purchase 11,200,000 shares of the Company’s common stock~~ and ~~(iii)~~lease aliability ~~secured~~should ~~promissory~~be ~~note~~recognized. ~~issued~~Leases ~~by the Company~~ with an ~~outstanding~~initial ~~principal~~term ~~amount~~ of ~~$1.5~~12 ~~million.~~months Inor ~~addition,~~less ~~YA II PN and the Company~~ are ~~parties~~not toincluded on ~~that SEDA, pursuant to which YA II PN has agreed to purchase up to $25.0 million of~~ the ~~Company’s~~condensed ~~common~~consolidated ~~stock,~~balance ~~subject to the terms and conditions thereof~~sheets. ~~MDM~~The ~~Cultivation~~lease ~~owned~~liability ~~45%~~is ofmeasured ~~the~~at ~~outstanding membership interests of YLK. MDM Cultivation was issued 2,250,000 Warrants under~~ the ~~Acquisition~~present ~~Agreement.~~value ~~As affiliates~~ of ~~MDM~~future ~~Cultivation,~~lease YApayments ~~II PN and D-Beta One EQ, Ltd. will be deemed to be the beneficial owners~~ as of the ~~2,250,000~~lease ~~Warrants~~commencement ~~in addition to the other shares and warrants presently held by them; and (c) Future Farm Technologies Inc~~date. of Vancouver British Columbia, Canada (“Future Farm Technologies”). Future Farm Technologies was issued 500,000 Warrants under the Acquisition Agreement for the 10% membership interests held in YLK.

~~The~~On ~~major~~March ~~asset~~6, of2018, ~~YLK is a Cultivation Management Services Agreement (~~the ~~“Management~~Company ~~Agreement”)~~entered ~~with~~into ana ~~Arizona~~lease ~~licensee (the~~for ~~“Arizona~~its ~~Licensee”)~~principal ~~that~~executive ~~was~~offices ~~entered~~and ~~into~~warehouse onlocated ~~January~~in 5Carson, ~~2018~~California. The NoCompany ~~operating~~occupies ~~activity~~a ~~existed~~17,640 ~~prior~~square tofoot ~~the~~facility ~~acquisition. The~~pursuant ~~Arizona Licensee is authorized~~ to ~~operate~~ a ~~medical~~five-year ~~marijuana~~lease ~~dispensary,~~ending ~~one~~on ~~(1)~~September ~~onsite~~30, ~~facility~~2023, ~~and~~with ~~one~~an ~~(1) offsite facility,~~unaffiliated ~~to produce~~party, ~~sell~~pursuant ~~and~~to ~~dispense~~which ~~medical~~it ~~marijuana~~pays ~~and~~$15,000 ~~manufactured~~per ~~and~~month ~~derivative~~in ~~products~~rental ~~that~~charges. ~~contain~~As ~~marijuana~~required ~~pursuant~~by toASC ~~Title 9;~~842, ~~Chapter~~the 17Company ofrecorded ~~the~~a ~~Arizona~~right ~~Department~~ of use ~~Health~~asset ~~Services~~and ~~(“AZDHS”)~~lease ~~Medical~~liability ~~Marijuana~~of ~~Program~~$659,000 ~~and~~at ~~Arizona~~January ~~Revised Statute~~1, §2019 ~~36-2801~~for etthe ~~seq.,~~net aspresent ~~amended~~value ~~from~~of ~~time~~future tolease ~~time.~~obligations ~~Pursuant~~related to the ~~Management~~Carson ~~Agreement,~~property. ~~YLK~~As ~~will~~of ~~provide~~December ~~the~~31, ~~management services for the offsite facility~~2019, onbalance ~~behalf~~ of ~~the~~right ~~Arizona~~of ~~Licensee.~~use ~~The~~asset ~~assets~~amounted ~~acquired~~to ~~also included a~~ $~~250~~527,000 ~~receivable from~~and ~~Future~~lease ~~Farm~~liability ~~Technologies~~amounted to $556,000.

AsIn ~~consideration~~January ~~for~~2020, the ~~exclusive~~Company ~~right~~vacated ofits ~~YLK~~office toand ~~manage~~warehouse ~~the~~in ~~Arizona~~Carson ~~Licensee’s~~and ~~facility~~is ~~pursuant~~currently trying to sublease the ~~Management~~said ~~Agreement;~~property. The ~~(i)~~Company ~~YLK~~remains ~~paid~~obligated ~~$750,000~~under toits ~~the~~Carson, ~~Arizona~~California ~~Licensee;~~lease, ~~(ii)~~until ~~YLK~~such ~~agreed~~time tothe ~~pay~~landlord anreleases ~~additional~~the ~~$250,000~~Company ~~within~~from 10the ~~days~~lease agreement. ~~after~~As ~~receipt~~ of the ~~AZDHS~~ ~~approval~~date toof ~~operate~~this report, the ~~facility;~~Company ~~and~~has ~~(iii)~~not ~~YLK~~been ~~agreed~~released tofrom ~~pay~~the alease ~~total of $600~~agreement,~~000,~~ ~~payable~~and inno 44lease ~~equal~~payments ~~monthly installments~~were ~~commencing~~made onduring ~~April~~the 1,three ~~2019~~months ~~(the~~ended ~~“Installment~~March ~~Payments”)~~31, 2020. ~~The~~As ~~term~~ of ~~the~~December ~~Management~~31, ~~Agreement~~2019, isthe ~~five~~Company ~~years.~~recorded ~~YLK has~~an ~~the~~impairment ~~option~~charge related to ~~extend~~ the ~~term~~of ~~for~~right anof ~~additional~~use ~~five~~asset ~~years~~amounting ~~with~~to ~~the payment of~~ $1100,000~~,000~~ atwhich ~~the~~reflected ~~commencement~~management’s best estimate of the ~~additional~~cost to sublease the ~~term~~premises. ~~and~~During athe ~~total~~period ofended $1March 31,~~000~~ 2020,~~000~~ ~~payable~~management inrevised ~~equal~~its ~~monthly~~estimate ~~installments~~and ~~over~~recorded ~~the~~an ~~extended~~additional ~~term~~impairment ofcharge to the ~~Management~~right ~~Agreement.~~of ~~Before the~~use ~~acquisition,~~asset ~~the~~amounting ~~Sellers~~to ~~paid~~ $~~750~~82,000, ~~per~~which was charged to operating expenses in the ~~terms~~consolidated statements of operations for the ~~Management~~period ~~Agreement~~ended March 31, 2020.

13On January 1, 2020, the Company relocated its principal executive offices and warehouse to 1689-A Arrow Rt., Upland, California, 91786. The Upland, California lease is for a 2,974 square foot facility pursuant to a four-year lease with an independent party ending on January 31, 2023, pursuant to which it pays $2,800 per month in rental charges. On January 1, 2020, the Company recognized an operating lease right of use asset and lease liability of $89,000, related to the Upland, California operating lease. During the three months ended March 31, 2020, the Company reflected amortization of the right of use assets of $6,000 related to its Upland, California operating lease, and recorded an impairment charge of $82,000 related to the abandoned Carson, California lease, resulting in a right of use asset balance of $428,000 as of March 31, 2020.

~~Through~~As ~~the~~of ~~acquisition~~December 31, ~~the~~2019, ~~Sellers’~~liabilities ~~rights~~recorded ~~and obligations~~ under ~~the~~operating ~~CMSA~~leases ~~transferred~~were ~~to the Company, including the payment of an additional~~ $~~250~~556,000. ~~within~~During ~~10 days after receipt of~~ the ~~AZDHS~~three ~~approval~~months toended ~~operate~~March ~~the~~31, ~~facility; and the Installment Payments.~~2020, As the ~~Installment~~Company ~~Payments~~added ~~totaling~~ $~~600~~89,000 ~~are~~in ~~noninterest~~lease ~~bearing,~~liabilities ~~the~~related ~~Company calculated the net present value of the Installment Payments~~ to beits ~~$518~~Upland,~~523~~ ~~(or~~California aoperating ~~discount of $81~~lease,~~477)~~ ~~based~~and onmade anlease ~~8% cost of capital (which is consistent with borrowing rate of the Company’s other notes). The Company recorded the aggregate present value of these~~ payments of $~~518~~4,~~523~~000 towards asits ~~part~~operating oflease ~~the acquisition~~liability. ~~cost~~As of ~~the~~March ~~Management Agreement~~31, ~~which will be amortized over five years~~2020, ~~the~~liabilities ~~length~~under ofoperating ~~the~~leases ~~Management~~amounted ~~Agreement. Amortization~~to ~~expense for three months ended September 30, 2019 and 2018, was~~ $~~0 and $54~~641,~~233~~000, ~~and~~of ~~for the nine months ended September~~which 30$191,000 ~~2019~~were ~~and~~reflected ~~2018,~~as ~~$162,699~~current ~~and $135,582, respectively~~due.

~~Since~~As ~~the~~of ~~assets,~~March ~~including a $250~~31,~~000~~ ~~balance due from Future Farm Technologies~~2020, ~~was acquired from related parties,~~ the ~~assets~~weighted ~~were recorded~~average atremaining ~~their~~lease ~~historical~~terms ~~acquisition~~for ~~cost~~operating oflease ~~$1,000,000~~are 3.19 ~~The Company issued 5~~years,~~000,000~~ ~~Warrants~~and to the ~~Sellers~~weighted ~~with~~average ~~an exercise~~discount ~~price~~rate offor ~~$0.01~~operating ~~and~~leases anis ~~expiration date of May 9, 2023~~10%. ~~Based~~Rent onexpense aduring ~~Black-Sholes Merton model,~~ the ~~Warrants~~three ~~were~~months ~~valued~~ended atMarch $531,~~450,000. Since~~ ~~the~~2020 ~~assets~~and ~~acquired~~2019 ~~were~~was ~~acquired from related parties, the difference of~~ $46,~~450,~~000 ~~between the fair value of the Warrants granted of $5,450,000~~ and ~~the historical acquisition cost of~~ $1165,000~~,000~~ ~~was recorded as related party compensation cost in the accompanying condensed consolidated statements of operations~~respectively. ~~The $250,000 receivable was received by the Company during the year ended December 31, 2018.~~

InNOTE June 2019, the Company determined that its intangible assets were impaired after assessing the impact of the Company’s current lack of liquidity, the recent lease abandonment of its planned Arizona cultivation facility (Note 6), ~~and~~– ~~the~~LEGAL ~~recent~~SETTLEMENTS ~~Deed~~PAYABLE in– ~~Lieu of~~PAST Foreclosure Release and Settlement Agreement with its Lender of a facility in Arizona (Note 9). The Company based on its assessment, recorded an impairment charge of $1,138,892, which is reflected in the nine month period ended September 30, 2019.DUE

As of December 31, ~~2018~~2019, the ~~remaining~~Company ~~Management Agreement obligation~~ was ~~$781,408~~obligated ~~(net~~to ofpay ~~discount of~~ $682,~~592)~~528,000, ~~for~~including ~~which~~accrued ~~$372~~interest,~~727 is~~ ~~reflected~~related asto ~~current~~legal ~~and~~settlements. ~~$408,681~~The legal ~~was~~settlements ~~reflected~~obligation ascarries ~~long~~interest ~~term~~at inrates ~~the~~ranging ~~accompanying~~from ~~condensed~~12% ~~consolidated~~to ~~balance sheet~~18%. AsDuring ~~of September 30, 2019,~~ the ~~remaining~~three ~~Management~~months ~~Agreement~~ended ~~obligation~~March ~~was~~31, 2020, $~~794~~7,~~294~~000 ~~(net~~ of ~~discount~~additional ofsettlement ~~$55,706)~~related ~~for which $495~~expenses,~~455 is~~ ~~reflected as current~~ and $~~298~~135,~~839~~000 ~~was~~of ~~reflected~~accrued asinterest ~~long~~were ~~term~~added, inleaving ~~the~~a ~~accompanying~~settlements ~~condensed~~payable ~~consolidated~~ balance of ~~sheet.~~$2,670,000 Asat ~~of September~~March 3031, ~~2019~~2020, ~~the~~which ~~Company~~was is past due ~~on its Installment Payments obligations under the Management Agreement~~.

~~NOTE 5 – NOTES PAYABLE TO RELATED PARTIES – PAST DUE~~11

~~Notes~~NOTE ~~payable~~7 to– ~~related~~LOANS ~~parties consists of the following at September 30, 2019 and December 31, 2018:~~PAYABLE

	September 30, 2019		December 31, 2018
Notes payable to officers/shareholders – past due (a)		600,000		600,000
Notes payable to related party – past due (b)		150,000		-
Notes payable to related parties – past due (c)		40,000		40,000
Total	$	790,000	$	640,000

On May 21, 2019, the Company entered into a loan agreement with Celtic Bank in the principal amount of $150,000 with interest at 40.44% per annum and due on May 21, 2020. The loan was guaranteed by Alvin Hao, a former officer of the Company. A total of $64,000 was owed on the loan as of December 31, 2019. During the three months ended March 31, 2020, the Company made principal payments of $23,000, leaving a total of $41,000 owed on the loan as of March 31, 2020.

a. On May 9, 2016, the Company entered into note 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, the Company borrowed $300,000 from each of Alan Lien and Alvin Hao. The notes accrue interest at a rate of 8% per annum, are unsecured and were due on or before May 31, 2018. The notes are currently past due. A total of $600,000 was due on the combined notes at September 30, 2019 and December 31, 2018, respectively. b. On May 8, 2019, the Company entered into a note agreement with the sister of Alvin Hao, an officer and director, to borrow $150,000. The loan accrues interest at 8% per annum, are unsecured and due on November 8, 2019. The note is currently past due. A total of $150,000 was due on the notes at September 30, 2019. c. The Company entered into note agreements with the parents of Alan Lien, the Company’s Chief Executive Officer and one of its directors. The loans accrue interest at 10% per annum, are unsecured and were due on or before December 31, 2016. The loans are currently past due. A total of $40,000 was due on the notes at September 30, 2019 and December 31, 2018, respectively.

As of September 30, 2019 and December 31, 2018, accrued interest on the notes payables to related parties was $136,794 and $125,039, respectively. During the nine months ended September 30, 2019, the Company added $44,852 of additional accrued interest and made interest payments of $33,097.

NOTE 6 – LEASE PAYABLE

The Company has one lease agreement for office spaces with a remaining lease terms of 3.75 years as of September 30, 2019. Leases with an initial term of 12 months or less are not recorded on the balance sheet. The Company accounts for the lease and non-lease components of its leases as a single lease component. Rent expense is recognized on a straight-line basis over the lease term.

Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Generally, the implicit rate of interest in arrangements is not readily determinable and the Company utilizes its incremental borrowing rate in determining the present value of lease payments. The Company’s incremental borrowing rate is a hypothetical rate based on its understanding of what its credit rating would be. The operating lease ROU asset includes any lease payments made and excludes lease incentives.

The components of rent expense and supplemental cash flow information related to leases for the period are as follows:

	Nine months ended September 30, 2019
Lease Cost
Operating lease cost (included in general and administration in the Company’s unaudited condensed statement of operations)	$	163,815
Other Information
Cash paid for amounts included in the measurement of lease liabilities for the first nine months of 2019	$	-
Weighted average remaining lease term – operating leases (in years)		4.0
Average discount rate – operating leases		10.0	%

The supplemental balance sheet information related to leases for the period is as follows:

	At September 30, 2019
Operating leases
Long-term ROU assets	$	557,896
Short-term operating lease liabilities	$	127,700
Long-term operating lease liabilities		458,756
Total operating lease liabilities	$	586,456

Maturities of the Company’s lease liabilities are as follows:

Year Ending	Operating Leases
2019 (remaining 3 months)	$	45,000
2020		182,250
2021		189,000
2022		189,000
2023		94,500
Total lease payments		699,750
Less: Imputed interest/present value discount		(113,294	)
Present value of lease liabilities	$	586,456

Rent expense for the three months ended September 30, 2019 and 2018 was $61,288 and $43,626, respectively, and $339,911 and $206,534, respectively, for the nine months ended September 30, 2019 and 2018.

Lease Abandonment

On April 19, 2018, the Company entered into an Option Agreement, or the Option, with MSCP, LLC, a non-affiliated Arizona limited liability company, or the Lessor, pursuant to which, the Company’s 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 per month with additional pro-rata net-lease charges. As consideration for the Option, the Company paid to Lessor, $160,000, or the Deposit.

On May 19, 2018, the Company exercised the Option and YLK executed the Lease, and the Deposit was treated a security deposit and rent advance, in accordance with the terms and conditions of the Lease. The Company is a guarantor of YLK’s obligations under the Lease, on behalf of Arizona Licensee.

As discussed in Note 9, the Company provided MSCP a notice of termination, and on February 15, 2019, MSCP, L.L.C (“MSCP”), filed suit in the Superior Court of Arizona, County of Maricopa, Case No. CV2019-001613 against the Company and YLK. The Company recently filed counterclaims against MSCP for fraud in the inducement, negligent misrepresentation, breach of the implied covenant of good faith and fair dealing, rescission of contract, unjust enrichment and punitive damages. The Company intends to vigorously defend this action. At the date of notice of termination, the Company had a remaining lease obligation of approximately $6,000,000. Due to the lease termination, the Company excluded the lease as a ROU asset and lease liabilities, and due to its counterclaims, is unable to determine and did not record, any estimate of liability at September 30, 2019.

ASC 842 requires the Company to record a ROU asset and lease liability of $4,839,000 at January 1, 2019 for the net present value of future lease obligations related to the Arizona property. However, due to actions of the lessor and upon advice of counsel, management believes that it is no longer obligated under the terms of the lease and accordingly has not recorded the asset and related liability. If the Company were obligated to the lessor, the assets and liabilities of the accompanying balance sheet would increase by $4,839,000, and such assets could be subject to an impairment charge of the same amount.

No liabilities have been provided for losses incurred on the Company’s early termination of the lease, as such amounts are not practicably determinable.

NOTE 7 – LOAN PAYABLE

Loan payable consisted of the following as of September 30, 2019 and December 31, 2018:

	September 30, 2019		December 31, 2018
Term loan (a)	$	106,277	$	-
Automobile loan (b)		-		2,548
Loans payable	$	106,277	$	2,548

	a.	On May 21, 2019, the Company entered into a loan agreement with Celtic Bank in the principal amount of $150,000 with interest at 40.44% per annum and due on May 21, 2020. The loan was guaranteed by Alvin Hao, an officer of the Company. During the nine months ended September 30, 2019, the Company made principal payments of $43,723, leaving a total of $106,277 owed on the loan as of September 30, 2019.
	b.	At December 31, 2018, $2,548 was due on a loan agreement for a purchased automobile. During the nine months ended September 30, 2019, the Company made payments of $2,548, and the loan was retired as of September 30, 2019.

NOTE 8 – CONVERTIBLE SECURED NOTE PAYABLE TO RELATED PARTY

Secured note payable to related party consists of the following as of ~~September~~March 3031, ~~2019~~2020 and December 31, ~~2018~~2019:

	September 30, 2019			December 31, 2018
	March 31, 2020			December 31, 2019
YA II PN, Ltd.	$	1,~~500~~900,000		$	1,~~500~~750,000
Less debt discount		-(157,000	)		(~~247~~153,~~032~~000	)
Secured note payable, net	$	1,~~500~~743,000		$	1,~~252~~597,~~968~~000

On May 10, 2018 and October 29, 2019, the Company issued aconvertible secured ~~debenture~~debentures (~~the~~ “~~2018 Note~~Notes”) to YA II PN Ltd. (“YA II PN”) in the principal ~~amount~~amounts of $1,500,000 and $275,000, respectively, with interest atrates of 8% ~~per~~and ~~annum (18~~10%, onrespectively, that ~~default)~~mature in June 2020 and ~~due~~April on2020, ~~February~~respectively. 9The Company is in discussion with YA II PN to extend the maturity date of the $275,000 ~~2019~~note. The ~~2018~~Notes provides a conversion right, in which the principal amount of the Note, ~~was~~together with any ~~amended~~accrued ~~effective~~but ~~February~~unpaid 9interest, ~~2019~~could ~~(see~~be ~~below).~~converted ~~The~~into ~~2018~~the ~~Note~~Company’s iscommon ~~secured~~stock byat ~~all~~a conversion price at 75% of the ~~assets~~lowest volume weighted average price (VWAP) of the Company’s ~~and~~Common ~~its~~Stock ~~subsidiaries.~~during the 10 trading days immediately preceding the conversion date. As part of the issuance, the Company also granted YA II PN 5-year warrants, which were modified, to purchase a total of 713,~~500~~000,000 shares of the Company at an exercise price of $0.05 per ~~the~~share, ~~following~~with ~~terms~~expiration dates ranging from May 2024 to December 2024.

	(a)	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;
	(b)	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, the Company has 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 the Company’s common stock is greater than $1.75 per share for the five (5) consecutive trading days immediately preceding the Company’s delivery of a notice of exercise. The Company has the right and option to compel YA II PN 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 the Company’s common stock is greater than $1.75 per share for the five (5) consecutive trading days immediately preceding the Company’s delivery of a notice of exercise.

On February 13, 2020, the Company issued a Note to YAII PN in the amount of $150,000. The Note bears interest at a rate of 10% per annum (15% on default) and has a maturity date of August 10, 2021. The Company received net proceeds of $125,000, net of closing costs of $25,000. The Note is secured by all the assets of the Company and its subsidiaries. The 2020 Note provides a conversion right, in which any portion of the principal amount of the 2020 Note, together with any accrued but unpaid interest, may be converted into the Company’s common stock at a conversion price equal to 75% of the lowest VWAP of the Company’s common stock during the ten (10) trading days immediately preceding the date of conversion, subject to adjustment. As such, the Company determined that the conversion feature created a derivative with a fair value of $140,000 at the date of issuance. The Company also granted YA II PN 5-year warrants to purchase a total of 3,000,000 shares of the Company at an exercise price of $0.05 per common share. The aggregate amount of the closing costs, and the fair value of the derivative liability, was $165,000, of which $150,000 was recorded as a valuation discount on the Note to be amortized over the life of the Note, and $15,000 was recorded as a financing cost during the three months ended March 31, 2020.

	(c)	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, the Company has 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 the Company’s common stock is greater than $2.00 per share for the five (5) consecutive trading days immediately preceding the Company’s delivery of a notice of exercise.
		The Company has the right and option to compel YA II PN 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 the Company’s common stock is greater than $2.00 per share for the five (5) consecutive trading days immediately preceding the Company’s delivery of a notice of exercise.
	(d)	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, the Company has 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 the Company’s common stock is greater than $1.50 per share for the five (5) consecutive trading days immediately preceding the Company’s delivery of a notice of exercise.
		The Company has the right and option to compel YA II PN 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 the Company’s common stock is greater than $2.50 per share for the five (5) consecutive trading days immediately preceding the Company’s delivery of a notice of exercise.

The unamortized balance of the valuation discounts was $153,000 at December 31, 2019. During the three months ended March 31, 2020, valuation discounts of $150,000 were added as discussed above, and amortization of valuation discount of $146,000 was recorded as an interest cost, leaving a $157,000 remaining unamortized balance of the valuation discount at March 31, 2020.

~~The Company determined that the exercises~~At ~~prices~~December of31, ~~the~~2019, ~~warrants~~accrued ~~were~~interest ~~not a fixed amount because they were subject to an adjustment based~~ on the ~~occurrence~~convertible ofsecured ~~future~~notes ~~events. As~~payable ~~such,~~to ~~the~~related ~~Company~~parties ~~determined that the reset feature~~ of ~~the warrants created a derivative with a fair value of~~ $7202,~~677,406 at~~000 ~~the~~was ~~date~~included ofin ~~issuance.~~accrued interest ~~The~~to ~~Company~~related ~~accounted~~parties ~~for~~on the ~~fair~~condensed ~~value~~consolidated ofbalance ~~the~~sheet. ~~derivative~~During ~~up to~~ the ~~face~~three ~~amount~~months ofended ~~the~~March ~~2018 Note of $1~~31,~~500,000~~ ~~as a valuation discount to be amortized over the life of the 2018 Note~~2020, ~~and the excess~~ interest of $629,~~177,406~~000 was ~~recorded~~converted ~~as a~~into ~~finance~~common ~~cost~~stock ~~during~~(see ~~the~~Note ~~nine months ended September 30~~10), ~~2018.~~and ~~During~~ the ~~nine~~Company ~~months~~added ~~ended September 30~~$39,000 ~~2019, amortization~~ of ~~valuation~~additional ~~discount~~accrued ~~was $247~~interest,~~032~~ ~~was recorded as~~ leaving an accrued interest ~~cost,~~to ~~leaving~~related noparties ~~remaining unamortized~~ balance of ~~the~~$212,000 ~~valuation discount~~ at ~~September~~March 3031, ~~2019~~2020.

17NOTE 9 – DERIVATIVE LIABILITY

Amendment to Secured Note Payable to Related Party

On February 25, 2019, the Company entered into an amendment agreement (the “Amendment”) with YA II PN, which amended (i) the secured promissory note in the principal face amount of $1.5 million issued on May 10, 2018 (the “Note”), (ii) a warrant, dated May 10, 2018 for 1,000,000 shares of the Company’s common stock at an exercise price of $1.50 (“Warrant #1”), (iii) a warrant, dated May 10, 2018 for 2,250,000 shares of the Company’s common stock at an exercise price of $1.50 (“Warrant #2”), (iv) a warrant, dated May 10, 2018 for 2,250,000 shares of the Company’s common stock at an exercise price of $1.50 (“Warrant #3”), and (v) a warrant, dated May 10, 2018 for 2,000,000 shares of the Company’s common stock at an exercise price of $1.50 (“Warrant #4”, and together with Warrant #1, Warrant #2 and Warrant #3, the “Warrants”).

Pursuant to the Amendment, the Note was amended to (i) extend the maturity date of the Note from February 9, 2019 to August 9, 2019 and (ii) provide a conversion right, in which the principal amount of the Note, together with any accrued but unpaid interest, could be converted into the Company’s common stock at a conversion price of $0.50 a share. The Note was not convertible previously.

In addition, pursuant to the Amendment, the Warrants were amended to (i) reduce the exercise price from $1.50 per share to $0.50, $0.75, $1.00 and $1.25 per share for Warrant #1, Warrant #2, Warrant #3 and Warrant #4, respectively, and (ii) remove in Warrant #2, Warrant #3 and Warrant #4, the Company’s right of redemption and right to compel exercise of such Warrants. The Company calculated the fair market value of the Warrants before and after the modifications above, and recorded the difference of $129,384 as a financing cost included in other expenses during the nine months ended September 30, 2019.

On October 29, 2019, the note was further amended to include an extended maturity date of June 30, 2020 (see Note 13).

NOTE 9 – ACQUISITION OF FACILITY, LOAN AGREEMENT, AND SUBSEQUENT SETTLEMENT

Acquisition of Facility

On April 2, 2019, the Company, through its newly-formed wholly-owned subsidiary Extracting Point, entered into an agreement to purchase real property located at 2601 West Holly Street in Phoenix, Arizona (the “Property”) for $3,500,000. The Property holds the approval and authorization for a Conditional Use Permit, which allows the Property to be used for the operation of a cultivation and infusion facility, allowing for the cultivation, harvesting, preparation, packaging and storing of medical cannabis, as well as extraction, refinement, infusion, production, preparation, packaging, and storage of manufactured and derivative oils, waxes, concentrates, edible and non-edible products that contain cannabis.

Loan Agreement

On April 2, 2019, Extracting Point entered into a loan agreement (the “Loan Agreement”) with Michael Cannon and Jennifer Cannon, Trustees of the Core 4 Trust Dated February 29, 2016 (the “Lender”), pursuant to which Extracting Point borrowed $3,500,000 from the Lender (the “Loan”). The Loan is evidenced by an installment note – interest included (the “Note”), guaranteed by the Company pursuant to a corporate guaranty (the “Guaranty”) and is secured by a first priority lien on the Property pursuant to a deed of trust and assignment of rents between Extracting Point and Thomas Title & Escrow, for the benefit of the Lender (the “Deed of Trust”). Extracting Point used the net proceeds from the Loan to acquire the Property.

The Note, together with accrued and unpaid interest, was due and payable on March 31, 2024 (the “Maturity Date”). Interest on the Note was to accrue at the rate of 10% per annum. For the first 12 months, Extracting Point was to pay the Lender interest only of $29,167 per month. After the first 12 months, Extracting Point was to pay the Lender principal and interest of $88,769 per month. Extracting Point had the right to prepay the Note at any time, however, Extracting Point agreed to pay the first 36 months of interest, even if the Note was repaid prior to that date.

As additional consideration for the issuance of the Loan, Extracting Point and the Company agreed to pay the Lender an amount equal to five percent (5%) of the management fees (the “Management Royalty”) received relating to the services rendered on the Property, for a period of three years from the date an “Approval to Operate” is granted by the Arizona Department of Health Services (such date, the “Commencement Date”). In the event that the Commencement Date has not occurred on or prior to April 2, 2021, then Extracting Point and the Company agreed to pay the Lender an amount equal to five percent (5%) of the fair market value of the rent of the Property as if the Property was fully occupied (the “Rental Royalty”), such payments to be made each month for a period of thirty-nine months, provided, that, if the Commencement Date occurs after the Rental Royalty has commenced, the Rental Royalty payments shall cease and the Management Royalty payments shall commence, and any amounts paid as a Rental Royalty shall be credited against any Management Royalty owed.

In connection with the Loan, the Company issued to the Lender a warrant (the “Warrant”) to purchase 1,000,000 shares of the Company’s common stock, exercisable for five years from issuance at an exercise price of $1.00 per share. The Warrant exercise price is subject to adjustment only in the event of a stock dividend or split.

Settlement Agreement

On May 24, 2019, the Company and Extracting Point entered into a Deed in Lieu of Foreclosure Release and Settlement Agreement (the “Settlement Agreement”) with the Lender. Pursuant to the Settlement Agreement, Extracting Point executed a Deed in Lieu of Foreclosure (the “Deed”), conveying the real property located at 2601 West Holly Street in Phoenix, Arizona to the Lender.

In exchange, the Lender agreed to release the Company and Extracting Point from all their obligations under the Loan Agreement, the Note, the Deed of Trust and the Guaranty. Pursuant to the Settlement Agreement, the Loan Agreement, the Note, the Deed of Trust and the Guaranty were terminated. In addition, the Warrant was returned to the Company and canceled.

Extracting Point was delinquent in payment under the Note, and the Lender informed Extracting Point and the Company that unless payment was made current or an agreement reached between the parties, the Lender would declare Extracting Point in default, call the entire Note due and payable, record a notice of default of the Deed of Trust, and take any other actions it deemed necessary or appropriate against the Company and Extracting Point.

NOTE 10 – DERIVATIVE LIABILITY

The FASB has issued authoritative guidance whereby instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The conversion prices and the exercise prices of the warrants described in Note 8 were not a fixed amount because they were either subject to an adjustment based on the occurrence of future offerings or events or they were variable. Since the number of shares is not explicitly limited, the Company is unable to conclude that enough authorized and unissued shares are available to settle the conversion option. In accordance with the FASB authoritative guidance, the conversion features have been characterized as derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.

~~As of September 30, 2019, and December 31, 2018, the derivative liabilities were valued using a Black Scholes Merton pricing model with the following assumptions:~~12

	September 30, 2019			December 31, 2018
Exercise Price	$	0.02 – 0.93		$	0.22 – 1.50
Stock Price	$	0.02		$	0.34
Risk-free interest rate		1.56	%		2.50	%
Expected volatility		153 – 163	%		137 – 147	%
Expected life (in years)		3.21 – 3.61			3.96 – 4.36
Expected dividend yield		0	%		0	%
Fair Value:	$	117,892		$	2,160,806

As of March 31, 2020 and December 31, 2019, the derivative liabilities were valued using a Black-Scholes Merton pricing model with the following assumptions:

	March 31, 2020			Issued During 2020			December 31, 2019

Exercise Price	$	.008		$	0.02		$	0.05
Stock Price	$	0.01		$	0.02		$	0.01
Risk-free interest rate		.140	%		1.46	%		1.55 – 1.60	%
Expected volatility		232-280	%		232	%		201-203	%
Expected life (in years)		1.0 – 1.5			1.5			0.33-0.50
Expected dividend yield		0	%		0	%		0	%

Fair Value: Conversion Feature	$	2,414,000		$	140,000		$	1,332,000

The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the historical volatility of its common stock to estimate the future volatility for its common stock. The expected life of the conversion feature of the notes was based on the remaining term of the notes. The expected dividend yield was based on the fact that the Company has not customarily paid dividends in the past and does not expect to pay dividends in the future.

The balance of the derivative liability at December 31, ~~2018~~2019 was $21,~~160~~332,~~806~~000. During the three ~~and nine~~ months ended ~~September~~March 3031, ~~2019~~ 2020, the Company recognized ~~$643,586~~derivative ~~and~~liabilities of $2140,~~172,298,~~000 ~~respectively,~~upon asissuance ~~other income, which represented the change in the fair value~~ of ~~the~~a ~~derivative~~secured ~~from~~convertible ~~the~~note ~~respective~~(see ~~prior~~Note ~~period. In addition~~8), ~~during the three~~ and ~~nine~~recognized ~~months ended September 30~~$942, ~~2019,~~000 ~~the~~as ~~Company~~other ~~recognized $0 and $129~~expense,~~384,~~ ~~respectively,~~ which represented athe change in the ~~terms~~fair value of ~~warrants,~~the ~~and~~derivative ~~was~~from ~~recorded~~the ~~as a~~respective ~~financing~~prior ~~cost and included in other expense~~period.

~~The~~NOTE ~~balance~~10 of– ~~the~~SHAREHOLDERS’ derivative liability at December 31, 2017 was $4,869,082. During the three months ended September 30, 2018, the Company recognized $2,525,234 as other expense, and during the nine months ended September 30, 2018, the Company recognized $4,286,692 as other income, which represented the change in the fair value of the derivative from the respective prior period. In addition, during the three and nine months ended September 30, 2018, the Company recognized $0 and $4,188,430, respectively, which represented the extinguishment of derivative liabilities, of which $0 and $2,389,437, respectively, was included in other income, and the remaining $1,799,003, was recorded to additional paid-in-capital. In addition, during the nine months ended September 30, 2018, the Company recognized derivative liabilities of $7,677,406 upon issuance of warrants.EQUITY

NOTE 11 – SHAREHOLDERS’ EQUITY

Common Shares Issued for Services

The Company entered into various consulting agreements with third parties (“Consultants”) pursuant to which these Consultants provided business development, sales promotion, introduction to new business opportunities, strategic analysis and, sales and marketing activities. During the nine months ended September 30, 2019 and 2018, the Company issued an aggregate of 426,000 and 1,310,000 shares of common stock, respectively, to these consultants with a fair value of $177,850 and $1,636,800 at the date of grant, respectively, which was recognized as compensation cost.

Common Shares Issued to Directors and Employees for services

On February 5, 2019, the Board of Directors of the Company increased the number of directors and appointed Mr. David Lenigas as a director of the Company, effective immediately. In connection with the appointment of Mr. Lenigas, the Company granted him 100,000 shares of common stock with a fair value of $63,000, or $0.63 per share, which vested immediately.

Effective February 5, 2019, the Company and Mr. Lenigas entered into a consulting agreement (the “Consulting Agreement”), pursuant to which the Company shall pay Mr. Lenigas a monthly consulting fee of $13,000 per calendar month for his marketing, branding, investor and public relations services. The Company also agreed, during the term of the Consulting Agreement, to issue Mr. Lenigas such number of shares of common stock equal to two percent of the total shares then issued and outstanding upon the Company’s common stock reaching a market capitalization (as defined in the Consulting Agreement) of $76 million for ten consecutive trading days, and an additional two percent for each additional $76 million market capitalization achieved for ten consecutive trading days, up to a market capitalization of $380 million. In addition, should the Company, during the consulting term or for a period of nine months thereafter, enter into a transaction that constitutes a change of control in which the enterprise value (as defined in the Consulting Agreement) of the Company equals or exceeds, $500 million, then the Company agreed to pay Mr. Lenigas a bonus equal to 5% of such enterprise value. The Consulting Agreement has a term of two years, and may be terminated by either party after one year upon 30 days’ prior written notice.

On September 4, 2019, Mr. Lenigas, notified the Company that he was resigning, effective immediately. As of September 4, 2019, none of the milestones have been met and therefore, no compensation expense has been recorded during the period ended September 30, 2019.

On August 22, 2018, the Board of Directors (the “Board”) of the Company appointed Mr. Peter Najarian and Ms. Tiffany Davis as directors of the Company, effective immediately. In connection with the appointments, the Company issued an aggregate of 200,000 shares of common stock valued at $148,000, or $0.74 per share, and recorded to stock-based compensation expense during the period ended September 30, 2018.

During the nine months ended September 30, 2018, the Company issued 250,000 shares of common stock to its executives valued at $958,000 and recorded an additional $356,042 of stock-based compensation expense related to the vesting of common shares previously issued to its executive and an employee.

Common Shares Issued for Cash

During the nine months ended September 30, 2018, the Company received proceeds of $1,068,000 from the issuance of 821,538 shares of common stock, at $1.30 per share, as part of a Regulation D offering, and the Company received proceeds of $500,000 from YA II PN from the sale of 500,000 shares of common stock at $1.00 per share.

Common Shares Issued on Conversion of Series A Convertible Preferred Stock

During the nine months ended September 30, 2018, the Company received notices of conversion to convert all of the outstanding Series A into common shares of the Company. Upon the conversion of the balance of the Series A, the Company issued 368,550 shares of common stock and no Series A were outstanding as of September 30, 2018. Upon conversion, the unamortized discount of $351,000 was reflected as an interest cost.

Common Shares Issued on Conversion of Convertible Note Payable

During the ~~nine~~three months ended ~~September~~March 3031, ~~2018~~2020, the Company was notified inby ~~writing~~YA ~~that~~II ~~the~~PN (see Note ~~holder~~8) ~~elected~~in towriting ~~convert~~of ~~all~~their ~~remaining outstanding~~election ~~principal~~to ~~and interest accrued, which included the conversion of~~ convert $129,~~750,~~000 of ~~principal and $38,082 of~~ interest~~. Upon~~ ~~the~~accrued ~~conversion~~into ~~of the Note~~2, ~~the Company issued an aggregate of 1~~287,~~788,082~~066 shares of ~~its common stock. The balance of~~ the ~~debt discount~~Company’s ofcommon at $~~1,555,556~~0.0127 ~~was~~per ~~recorded as an interest cost during the nine months ended September 30, 2018~~share.

20Common Shares Issued to Directors

The Company appointed certain directors and issued shares as part of their director compensation agreements. During the three months ended March 31, 2020, the Company issued an aggregate of 2,166,667 shares of common stock, with a fair value of $23,000 at date of grant, which was recognized as compensation cost.

Summary of Stock Options

A summary of stock options for the ~~nine~~three months ended ~~September~~March 3031, ~~2019~~2020, is as follows:

				Weighted
	Number			Average
	of			Exercise
	Options			Price
Balance outstanding, December 31, 2018		8,394,391		$	0.66
Balance outstanding, December 31, 2019		1,948,300			0.35
Options granted		-2,500,000			-0.01
Options exercised		-			-
Options expired or forfeited		(~~245~~15,000	)		(0.69	)
Balance outstanding, September 30, 2019		8,149,391		$	0.65
Balance outstanding, March 31, 2020		4,433,300		$	0.16
Balance exercisable, September 30, 2019		8,138,558		$	0.65
Balance exercisable, March 31, 2020		4,433,300		$	0.16

The Company recorded compensation expense pursuant to authoritative guidance provided by the ASC Topic 718 – Stock Compensation for the three and nine months ended September 30, 2019 of $5,917 and $24,343, respectively.13

InOn ~~August~~October ~~2018~~31, 2019, the Board of Directors of the Company ~~granted~~reappointed toMs. ~~its~~Tiffany ~~executives~~Davis as Chief Executive Officer, Chief Financial Officer and as a director, effective immediately. In connection with the appointment of Ms. Davis, Ms. Davis is entitled to receive stock options toof ~~purchase~~$25,000 anof ~~aggregate~~shares per quarter at the then closing market price on the last trading day at the end of 4each calendar quarter. Accordingly,~~034~~ Ms. Davis was granted 2,~~391~~500,000 ~~shares~~stock options at the closing market price of ~~Common~~$0.01 ~~Stock~~on March 31, 2020. ~~The~~ The fair value of the 2,500,000 stock options granted was determined to be $221,~~164~~000,~~755,~~ which was recorded to stock-based compensation ~~expense~~ expense during the ~~nine~~three ~~month~~months ~~period~~ ended ~~September~~March 3031, ~~2018~~2020. The ~~stock~~fair ~~options~~value ~~immediately~~of ~~vested~~options on the date of ~~issuance.~~grant Inwas ~~addition, Davis~~estimated ~~received~~using ~~fully~~the ~~vested~~Black-Scholes option ~~options~~pricing tomodel ~~purchase~~with ~~750,000~~the ~~shares~~following ofweighted ~~Common~~average ~~Stock,~~assumptions: ~~exercisable~~stock ~~for~~price ~~five~~of ~~years at~~ $0.9403, ~~per~~risk-free ~~share with~~interest arate ~~fair~~of ~~value~~1.51%, expected volatility of ~~$516~~155%,~~356~~ and an expected life of 3.0 years.

OnInformation ~~February~~relating 5,to ~~2018,~~outstanding ~~the~~options ~~Company~~at ~~terminated~~March ~~its employment agreement with Mr. Forchic~~31, ~~and per the terms of the employment agreement~~2020, ~~2,000,000~~ ~~unvested~~summarized ~~option~~by ~~immediately~~exercise ~~vested~~price, ~~resulting~~is inas ~~a stock-based compensation charge of $534,310 during the nine months ended September 30, 2018 (see Note 12).~~follows:

Information relating to outstanding options at September 30, 2019, summarized by exercise price, is as follows:

		Outstanding						Exercisable
						Weighted				Weighted
						Average				Average
Exercise Price Per Share		Shares		Life (Years)		Exercise Price		Shares		Exercise Price
$	0.01		2,500,000		5.00	$	0.01		2,500,000	$	0.01
$	0.03		833,300		4.59	$	0.03		833,300	$	0.03
$	0.46		100,000		3.70	$	0.46		100,000	$	0.46
$	0.60		1,000,000		2.86	$	0.60		1,000,000	$	0.60
			4,433,300		2.98	$	0.16		4,433,300	$	0.16

		Outstanding				Exercisable
						Weighted				Weighted
Exercise Price				Life		Average				Average
Per Share		Shares		(Years)		Exercise Price		Shares		Exercise Price
$	0.46	100,000		4.20		$	0.46	100,000		$	0.46
$	0.60		3,000,000		3.36	$	0.60		3,000,000	$	0.60
$	0.69		5,049,391		4.17	$	0.69		5,038,558	$	0.69
			8,149,391		3.86	$	0.65		8,138,558	$	0.65

As of March 31, 2020, the Company has no outstanding unvested options with future compensation costs. In addition, there will be future compensation related to the options to be awarded to Ms. Davis under her employment agreement discussed above. The weighted-average remaining contractual life of options outstanding and exercisable at March 31, 2020 was 2.98 years. Both the outstanding and exercisable stock options had no intrinsic value at March 31, 2020.

As of September 30, 2019, the Company has outstanding unvested options with future compensation costs of $24,343, which will be recorded as compensation cost as the options vest over their remaining average vesting period of 2.10 years. The weighted-average remaining contractual life of options outstanding and exercisable at September 30, 2019 was 3.86 years. Both the outstanding and exercisable stock options had no intrinsic value at September 30, 2019.

Summary of Warrants

A summary of warrants for the ~~nine~~year ~~months~~ ended ~~September~~December 3031, ~~2019~~2020, is as follows:

				Weighted
	Number			Average
	of			Exercise
	Warrants			Price
Balance outstanding, December 31, 2018		12,783,140		$	0.91
Balance outstanding, December 31, 2019		18,283,140			0.06
Warrants granted		13,000,000			10.0005
Warrants exercised		-			-
Warrants expired or forfeited		~~(1,000,000~~-	)		~~(1.00~~-	)
Balance outstanding, September 30, 2019		12,783,140		$	0.57
Balance outstanding, March 31, 2020		21,283,140		$	0.05
Balance exercisable, September 30 , 2019		12,783,140		$	0.57
Balance exercisable, March 31, 2020		21,283,140		$	0.05

Information relating to outstanding warrants at ~~September~~March 3031, ~~2019~~2020, summarized by exercise price, is as follows:

		Outstanding						Exercisable
						Weighted				Weighted
Exercise Price				Life		Average				Average
						Average				Average
Per Share		Shares		(Years)		Exercise Price		Shares		Exercise Price
Exercise Price Per Share		Shares		Life (Years)		Exercise Price		Shares		Exercise Price
$	0.01		5,000,000		3.6111	$	0.01		5,000,000	$	0.01
$	0.5005		116,000,000		34.6111	$	0.5005		116,000,000	$	0.5005
$	01.7510		2283,~~250,000~~140		32.6156	$	01.7510		2283,~~250,000~~140	$	01.7510
$	1.00		2,250,000		3.61	$	0.75		2,250,000	$	0.75
			21,283,140		4.08	$	0.05		21,283,140	$	0.05
$	1.10		283,140		3.06	$	1.10		283,140	$	1.10
$	1.25		2,000,000		3.61	$	1.25		2,000,000	$	1.25
			12,783,140		3.58	$	0.57		12,783,140	$	0.57

AsDuring ofthe ~~September~~three 30months ended March 31, ~~2019~~2020, the ~~outstanding~~Company ~~and~~issued ~~exercisable~~five-year warrants ~~had~~to anpurchase ~~intrinsic~~3,000,000 ~~value~~shares of common stock at an exercise price of $~~55,000~~0.05 as part of a secured convertible promissory note (see Note 8).

~~During~~The ~~the nine months ended September 30, 2018, the Company issued five~~weighted-~~year~~average ~~warrants~~remaining tocontractual ~~purchase~~life ~~5,000,000 shares~~ of ~~common stock at an exercise price of $0.01 as consideration for an acquisition. The Company also issued five-year~~ warrants tooutstanding ~~purchase~~and ~~7,500,000 shares~~exercisable ~~of common stock~~ at anMarch ~~exercise~~31, ~~price~~2020 ofwas $14.5008 ~~as part of a secured promissory note~~years. ~~Lastly,~~Both ~~in connection with~~ the ~~SEDA~~ ~~discussed~~outstanding ~~below,~~and ~~the~~exercisable ~~Company issued five-year~~ warrants tohad YAno IIintrinsic PNvalue toat ~~purchase~~March 131,~~000,000~~ ~~shares of common stock at an exercise price of $0~~2020.~~01 per share as a commitment fee.~~

~~During the nine months ended September 30, 2018, the Company issued 1,306,360 shares of its common stock on the conversion of warrants, at $1.10 per share, resulting in proceeds of $1,436,996.~~14

~~Standby~~NOTE ~~Equity~~11 ~~Distribution~~– ~~Agreement~~COMMITMENTS AND CONTINGENCIES

On April 16, 2018, the Company entered into a SEDA with YA II PN. The SEDA establishes what is sometimes termed an equity line of credit or an equity draw-down facility. The $25,000,000 facility may be drawn-down upon by the Company in installments, the maximum amount of each of which is limited to $1,000,000. For each share of common stock purchased under the SEDA, YA II PN will pay 90% of the lowest VWAP of the Company’s shares during the five trading days following the Company’s draw-down notice to YA II PN. The VWAP that will be used in the calculation will be that reported by Bloomberg, LLC, a third-party reporting service. In general, the VWAP represents the sum of the value of all the sales of the Company’s 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, the Company issued to YA II PN, a five-year Commitment Fee Warrant (the “Fee Warrant”) to purchase 1,000,000 shares of the Company’s common stock at $0.01 per share. The aggregate fair value of the Fee Warrant granted was determined to be $1,140,000 and recorded as a financing costs in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2018.

NOTE 12 – COMMITMENTS

Technology License Agreement

The Company entered into a technology license agreement with a third-party vendor for consulting services. Under the agreement, the Company will pay the vendor a minimum consulting amount of $100,000 per year, plus a royalty of 7% of all net sales of the vendor’s products above $1,~~428~~429,~~571~~000 per calendar year. For ~~each of~~ the three ~~and nine~~ months ended ~~September~~March 3031, ~~2019~~2020 and ~~2018~~2019, $25,000 and $~~70,000,~~0 ~~respectively,~~ was recorded as research and development expense under the agreement on the ~~Condensed~~condensed ~~Consolidated Statements~~consolidated statements of ~~Operations~~operations related to the minimum annual fee, respectively. For each of three months ended March 31, 2020 and 2019, no royalty was recorded as cost of goods sold on the Condensed Consolidated Statements of Operations. A total of $~~133~~216,~~333~~000 and $58191,~~333~~000 was owed under the amended agreement at ~~each~~March ~~of September 30~~31, ~~2019~~2020 and December 31, ~~2018~~2019, respectively.

Litigation

~~Employment~~On ~~Matters~~September 25, 2018, Matthew Geschke (the “Plaintiff”) filed a breach of contract case against the Company in the San Diego Superior Court of San Diego, California, under case number 37-2018-00031350-CU-OE-NC. The Plaintiff claims damages of $335,000 for breach of an employment contract when the Company terminated the Plaintiff’s employment agreement on February 22, 2018. The case is in the early discovery phase of litigation and no trial date has been set yet. The Company believes the case is without merit and intends to vigorously define this case.

~~On September 25, 2018, Matthew Geschke (the “Plaintiff”) filed a breach of contract case against the Company in the San Diego Superior Court of San Diego, California, under case number 37~~COVID-2018-00031350-CU-OE-NC. The Plaintiff claims damages of $335,000 for breach of an employment contract when the Company terminated the Plaintiff’s employment agreement on February 22, 2018. The case is in the early discovery phase of litigation and no trial date has been set yet. The Company believes the case is without merit, and intends to vigorously define this case.19

OnThe ~~September~~outbreak ~~27,~~of ~~2019~~communicable diseases, ~~Dennis~~such ~~Forchic~~as ~~(the “Plaintiff”) filed~~ a ~~breach~~new ofvirus ~~contract~~known ~~case~~as ~~against~~ the ~~Company~~Coronavirus ~~in the Los Angeles Superior Court of Los Angeles~~(COVID-19), ~~California,~~could ~~under~~result ~~case~~in ~~number~~a ~~19STCV34592,~~widespread ~~alleging~~health crisis that ~~the~~could ~~Company~~adversely ~~wrongfully~~affect ~~terminated the~~general ~~Plaintiff’s~~commercial ~~employment~~activity ~~agreement~~and onour ~~February~~business. 5,An ~~2018.~~outbreak ~~The~~of ~~Plaintiff~~communicable ~~claims~~diseases ~~damages~~in ofthe ~~$646,000~~region that ~~for~~the ~~unpaid~~Company ~~severance, unpaid~~operates ~~reimbursed~~or ~~expenses,~~regions ~~and~~from ~~unpaid~~which ~~health~~its ~~benefits.~~customers Intravel ~~addition,~~from ~~the~~or ~~Plaintiff~~through, ~~claims~~or ~~damages~~the ~~for~~perception ~~failing~~that tosuch ~~compensate~~an ~~Plaintiff~~outbreak ~~for~~could 3occur,~~000,000~~ ~~stock~~and ~~options~~the ~~which~~measures ~~vested~~taken onby ~~termination.~~the ~~The~~governments ~~case~~of iscountries inaffected, ~~the~~including ~~early~~restricting ~~discovery~~air ~~phase~~travel ~~of litigation~~ and noother ~~trial date~~means ~~has~~of ~~been~~transportation, ~~set~~imposing ~~yet.~~quarantines ~~The~~and ~~Company~~curfews ~~believes~~and requiring the ~~case~~closure isof ~~without~~the ~~merit,~~Company’s ~~and~~offices ~~intends~~or toother ~~vigorously define this case. The Company~~businesses, ~~has~~including ~~recorded~~office ~~$448~~buildings,~~719 related~~ totheatres, ~~this~~retail ~~matter~~stores ~~as Due to former officer~~ and ~~shareholder~~other oncommercial ~~the Condensed Consolidated Balance Sheet~~venues, ascould ~~well~~adversely asaffect the 3Company’s business,~~000,000~~ financial ~~stock~~condition ~~options~~or asresults ~~described~~of ~~in Note 11~~operations.

~~Lease~~NOTE ~~Abandonment~~12 – SUBSEQUENT EVENTS

On ~~February~~May 158, ~~2019~~2020, ~~MSCP,~~the ~~L.L.C~~Company ~~(“MSCP”),~~obtained ~~filed~~a ~~suit~~Paycheck inProtection ~~the~~Program ~~Superior~~loan ~~Court~~in ofthe ~~Arizona,~~amount ~~County~~ of ~~Maricopa~~$205,000 ~~Case~~pursuant ~~No. CV2019-001613~~to ~~against~~ the ~~Company~~Coronavirus Aid, Relief, and ~~YLK.~~Economic ~~The~~Security ~~case~~Act ~~arises from YLK’s alleged breach of a certain lease agreement dated May 19, 2018~~ (the “~~Lease~~CARES Act”),. ~~for~~Interest on the ~~lease~~loan ofis ~~certain real property located~~ at ~~4301~~the W.rate ~~Buckeye~~of ~~Road,~~1% ~~Phoenix,~~per ~~Arizona 85043 (the “Premises”)~~year, ~~between MSCP~~ and ~~YLK,~~all ~~which the Company guaranteed. MSCP filed the lawsuit after YLK provided~~loan apayments ~~notice~~are ofdeferred ~~termination~~ for, ~~amongst~~six ~~other reasons~~months, ~~MSCP’s~~at ~~failure~~which totime ~~disclose~~the ~~various~~balance ~~material~~is ~~information~~payable ~~regarding code, safety, structural and other issues~~ in ~~the~~18 ~~Premises~~monthly ~~that~~installments ~~rendered~~if ~~the~~not ~~Premises~~forgiven ~~unsuitable~~in ~~for~~accordance with ~~use, unless~~ the ~~Company~~CARES ~~undertook significant~~Act and ~~extraneous~~the ~~costs~~terms ~~that~~of ~~were not contemplated under~~ the ~~Lease~~promissory tonote ~~remedy~~executed ~~said~~by ~~issues~~the Company in ~~and~~connection ~~outside~~with of the ~~Premises~~loan. ~~MSCP’s~~ ~~complaint~~As ~~alleged~~required, ~~counts~~the Company ~~for~~intends ~~breach~~to ofuse ~~lease~~the ~~and~~Paycheck ~~waste~~Protection ~~and~~Program ~~breach~~loan ofproceeds ~~guaranty.~~for ~~MSCP~~payroll, ishealthcare ~~seeking compensatory damages~~benefits, ~~rents~~ ~~and other charges due under the lease~~rents, and ~~attorney’s fees and costs~~utilities. The Company ~~just~~will ~~recently~~apply ~~filed~~for ~~its~~forgiveness ~~answer~~for ~~denying~~ the ~~allegations~~portion asof ~~well~~the asloan ~~having~~proceeds ~~filed~~used ~~counterclaims~~during ~~for fraud in~~ the ~~inducement,~~next ~~negligent~~two ~~misrepresentation~~months, ~~breach~~as ofpermitted under the ~~implied~~CARES ~~covenant~~Act ~~of good faith~~ and ~~fair~~the ~~dealing,~~terms ~~rescission~~ of ~~contract,~~the ~~unjust~~loan. ~~enrichment~~Any ~~and~~remaining ~~punitive~~loan ~~damages;~~proceeds ~~and~~will ~~the~~continue ~~Company intends~~ to ~~vigorously~~be ~~defend~~used ~~this~~as ~~action.~~required, Atfor ~~the date of notice of termination~~payroll, ~~the Company had a remaining lease obligation of~~healthcare ~~approximately~~benefits, $6rents,~~000,000.~~ Noand ~~liabilities~~utilities ~~have~~to ~~been~~support ~~provided for losses incurred on~~ the Company’s ~~early termination of the lease, as such amounts are not practicably determinable~~operations.

~~Breach~~On June 7, 2020, the Company obtained an Economic Injury Disaster Loan from the United States Small Business Administration in the amount of ~~Contract~~ $150,000. Interest on the loan is at the rate of 3.75% per year, and all loan payments are deferred for twelve months, at which time the balance is payable in monthly installments of $731 over a 30 year term. The loan is secured by all of the Company’s assets.

On August 7, 2019, Rose Law Group PC (“RLG”) filed a breach of contract case against the Company in the Superior Court of the State of Arizona, County of Maricopa, Case No. CV2019-008484 against us. RLG alleges breach of a contract to pay RLG for legal representation, and requested a judgement for $143,836, which is included in accounts payable and accrued expenses on the accompanying balance sheet. 15

On September 12, 2019, DPA, Inc., or DPA, filed suit in the Superior Court of Arizona, County of Maricopa, Case No. CV2019-008265 against us. The plaintiff alleges the Company breached an agreement to pay DPA for architectural design services related to a facility in Arizona and has requested a judgment for $251,923 plus interest, which is included in accounts payable and accrued expenses on the accompanying balance sheet. On September 18, 2019, the DPA was awarded judgement against the Company for $251,923 plus interest at 18% per annum from June 6, 2019 until paid.

NOTE 13 – SUBSEQUENT EVENTS

Reappointment of Tiffany Davis

On October 31, 2019, the Board of Directors (the “Board”) of the Company reappointed Ms. Tiffany Davis as Chief Executive Officer, Chief Financial Officer and as a director, effective immediately. In connection with the appointment of Ms. Davis, the Company granted her options to purchase 833,333 shares of common stock, which vested immediately, expire five years from the date of issuance, and are exercisable at a price of $0.03 per share, and she is entitled to receive equity compensation of $25,000 of shares per quarter at the then closing market price on the last trading day at the end of each calendar quarter.

Appointment of George O’Leary

On October 31, 2019, the Board of the Company appointed Mr. George O’Leary as a director and Executive Chairman of the Company. In connection with the appointment of Mr. O’Leary, the Company granted him 500,000 shares of common stock, which vested immediately, and he is entitled to receive equity compensation of $15,000 of shares per quarter thereafter as well as $5,000 per month as determined by the Board.

Secured Convertible Note to Related Party

On October 29, 2019, the Company issued a secured debenture (the “2019 Note”) to YA II PN Ltd. (“YA II PN”), a related party, in the principal amount of $275,000 with interest at 10% per annum and due on April 29, 2020. The 2019 Note is convertible into the Company’s common stock at 75% of the lowest volume weighted average price (VWAP) of the Company Common Stock during the 10 trading days immediately preceding the conversion date.

Second Amendment to Secured Note Payable to Related Party

On October 29, 2019, the Company entered into a second amendment agreement (the “Second Amendment”) with YA II PN, which amended (i) the secured promissory note in the principal face amount of $1.5 million issued on May 10, 2018. Pursuant to the Amendment, the Note was amended to (i) extend the maturity date of the Note from August 9, 2019 to June 30, 2020 and (ii) provide a conversion right, in which the principal amount of the Note, together with any accrued but unpaid interest, could be converted into the Company’s common stock at a conversion price at 75% of the lowest volume weighted average price (VWAP) of the Company Common Stock during the 10 trading days immediately preceding the conversion date. The Note was convertible previously at $0.50 per share.

In addition, pursuant to the Second Amendment, the Warrants were amended to (i) reduce the exercise price from $1.50 per share to $0.50, $0.75, $1.00 and $1.25 per share for Warrant #1, Warrant #2, Warrant #3 and Warrant #4, respectively, and (ii) remove in Warrant #2, Warrant #3 and Warrant #4, the Company’s right of redemption and right to compel exercise of such Warrants.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Management’s current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue,” or similar words. Those statements include statements regarding the intent, belief or current expectations of us and members of our management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.

Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission. Important factors currently known to Management could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions. Factors that could cause differences include, but are not limited to, expected market demand for our products, fluctuations in pricing for materials, and competition.

Business Overview

~~The~~We are ~~Company~~focused ison athe ~~vertically integrated technology innovator~~research, ~~developer~~design, ~~manufacturer~~development and ~~distributor~~manufacturing ~~focused~~of onadvanced, ~~bringing~~energy efficient indoor horticulture lighting, plant nutrient products, and ~~solutions~~ancillary equipment. Our vision is to ~~commercial~~apply ~~and~~the ~~retail cannabis~~latest ~~growers~~advances in ~~both~~high ~~the~~efficiency ~~medical~~lighting and ~~adult~~controls technology ~~use~~as ~~recreational~~well ~~space~~as ineffective ~~legal~~manufacturing ~~markets~~techniques ~~across~~to ~~the~~deliver ~~U.S.~~highly ~~The~~differentiated ~~Company’s~~ lighting and nutrient ~~customers~~products ~~include~~with clear ~~retail~~benefits ~~stores,~~at ~~distributors~~competitive ~~and~~prices ~~commercial~~to ~~growers in~~ the ~~United~~greenhouse ~~States~~ and ~~abroad~~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~~lamp ~~Products~~products, a line of reflectors, high intensity lighting accessories and a new line of LED lighting technologies.

Previously, we attempted to expand our operations in cannabis cultivation and processing management services. In 2018, we acquired YLK Partners AZ, LLC, or YLK Partners, an Arizona-based company to provide turn-key services for the management, administration, and operation of a medical marijuana cultivation and processing facility. YLK had a cultivation management services agreement with an Arizona licensee. In 2019, we purchased real property in Phoenix, Arizona for $3,500,000, which property held the approval and authorization for a Conditional Use Permit, which allows the property to be used for the operation of a cultivation and infusion facility, allowing for the cultivation, harvesting, preparation, packaging and storing of medical cannabis, as well as extraction, refinement, infusion, production, preparation, packaging, and storage of manufactured and derivative oils, waxes, concentrates, edible and non-edible products that contain cannabis. Later in 2019, we conveyed the property to our lender in full settlement of the outstanding amounts we borrowed to acquire the property. For various reasons, we decided to abandon the expanded business lines and to re-focus on our core business of lights and nutrients.

Known Trends and Uncertainties

In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. The responses by federal, state and local governments to restrict public gatherings and travel rapidly grew to include stay-at-home orders, school closures and mandatory restrictions on non-essential businesses and services that has adversely affected workforces, economies, and financial markets resulting in a significant economic downturn. In particular, on March 19, 2020, California Governor Gavin Newsom issued an executive order requiring all California residents to stay home, making it the first state to impose that strict mandate on all residents to counteract a looming surge of new infections. The Company’s executive offices are located in Upland, California. While we currently believe we are an “essential” business, we have been following the recommendations of local health authorities to minimize exposure risk for our employees, including temporary closures of our offices and having employees work remotely to the extent possible. The order, which has subsequently been modified to provide for a gradual re-opening of businesses and travel, is to remain in place until further notice. While California is currently in early stage 2 (out of 4 stages) of re-opening, there is no known timeframe as to when California may move to stage 3, and there remains a risk that California may regress.

While this disruption is currently expected to be temporary, there is considerable uncertainty around the duration. We are actively monitoring the COVID-19 situation and its impact in the markets we serve. We are taking all precautionary measures as directed by health authorities and local and national governments. Due to continuing uncertainties regarding the ultimate scope and trajectory of COVID-19’s spread and evolution, it is impossible to predict the total impact that the pandemic will have on our business. If public and private entities continue to implement restrictive measures, the material adverse effect on our business, results of operations, financial condition and cash flows could persist.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act provides opportunities for additional liquidity, loan guarantees, and other government programs to support companies affected by the COVID-19 pandemic and their employees. On May 8, 2020, we obtained a Paycheck Protection Program loan in the amount of $205,000 pursuant to the CARES Act (the “PPP Loan”). Interest on the PPP Loan is at the rate of 1% per year, and all PPP Loan payments are deferred for six months, at which time the balance is payable in 18 monthly installments if not forgiven in accordance with the CARES Act and the terms of the promissory note we executed in connection with the PPP Loan. As required, we intend to use the PPP Loan proceeds for payroll, healthcare benefits, rents, and utilities. We will apply for forgiveness for the portion of the PPP Loan proceeds used during the next two months, as permitted under the CARES Act and the terms of the PPP Loan. Any remaining loan proceeds will continue to be used as required, for payroll, healthcare benefits, rents, and utilities to support our operations.

We continue to review and consider any available potential benefit under the CARES Act for which we qualify. We cannot predict the manner in which such benefits or any of the other benefits described herein will be allocated or administered and we cannot assure you that we will be able to access such benefits in a timely manner or at all. If the U.S. government or any other governmental authority agrees to provide such aid under the CARES Act or any other crisis relief assistance it may impose certain requirements on the recipients of the aid, including restrictions on executive officer compensation, dividends, prepayment of debt, limitations on debt and other similar restrictions that will apply for a period of time after the aid is repaid or redeemed in full.

Results of Operations

Results of Operations for the ~~Three~~three ~~Months~~months ~~Ended~~ended ~~September~~March 3031, ~~2019~~2020 ~~Compared~~compared to the ~~Three~~three ~~Months~~months ~~Ended~~ended ~~September~~March 3031, ~~2018~~2019.

Revenue and Cost of Goods Sold

Revenue for the three months ended ~~September 30~~March 31, ~~2019~~2020 and ~~2018~~2019 was $~~475~~307,~~379~~000 and $~~851~~737,~~710~~000, respectively, a decrease of $~~376~~430,~~331~~000, or 4458%. The decrease was due to ~~several~~two ~~negative~~ significant factors during ~~the~~three ~~third~~months ~~quarter~~ended ofMarch ~~2019~~31, 2020, as compared to the ~~third~~prior ~~quarter~~year period. Those factors were: 1) a failed expansion of ~~2018~~operations into cannabis cultivation and processing management services, which diverted resources and management attention; and 2) stagnation of the cannabis industry in terms of new markets and granting of new cultivation licenses, which resulted in few new companies obtaining licenses to legally grow cannabis, which ultimately resulted in a lack of orders for our lights.

~~Such~~Cost ~~factors~~of ~~included~~sales ~~market~~for ~~instability~~the ~~and~~three ~~uncertainty,~~months ~~reports~~ended ofMarch ~~over-capacity~~31, 2020 and ~~price~~2019, ~~declines~~was at$195,000 ~~the~~and ~~wholesale~~$575,000, ~~level~~respectively. ~~This state~~Gross ofprofit ~~ambiguity~~for ~~as to~~ the ~~number~~three months ofended ~~licenses~~March 31, ~~announced~~2020 ~~cultivations~~and ~~in the building-out process~~2019, ~~demand~~was ~~on a state-by-state level~~$112,000 and ~~lead~~$162,000, ~~time~~respectively. toAs ~~production~~a ~~and~~percentage ~~profitability~~of ~~has~~revenue, ~~put~~gross aprofit ~~general~~for ~~pall on~~ the three ~~marketplace~~months asended ~~exhibited~~March in31, ~~our~~2020 ~~sales~~was 36%, ~~and is~~compared ~~also~~to ~~reflected~~22% infor the ~~sales~~three ofmonths ~~competitive~~ended ~~U.S.~~March ~~based~~31, ~~companies~~2019. ~~Additionally,~~The asincrease ~~the~~in ~~new~~gross ~~legal adult use recreational States~~profit ~~come~~and onour ~~stream~~gross -margin ~~the~~percentage ~~requirements~~was ~~for~~primarily ~~testing,~~due ~~oversight,~~to ~~and~~our ~~tightening~~decrease ofin ~~the~~reserves ~~regulatory~~for ~~environment~~inventory ~~caused~~obsolescence aand ~~pause~~change in ~~the expansion~~product ~~timetable~~mix ~~of many new licensees~~sold.

Cost of sales for the three months ended September 30, 2019 and 2018 was $157,808 and $718,139, respectively. Gross profit for the three months ended September 30, 2019 and 2018, was $317,571 and $133,571, respectively. As a percentage of revenue, gross profit for the three months ended September 30, 2019 was 67%, compared to 16% for the three months ended September 30, 2018. The increase in gross profit and our gross margin percentage was primarily due to our decrease in reserves for inventory obsolescence and change in product mix sold.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses for the three months ended ~~September~~March 3031, ~~2019~~2020 and ~~2018~~2019 ~~was~~were $~~828~~361,~~610~~000 and $41,~~061~~396,~~370~~000, respectively, a decrease of $31,~~232~~035,~~760~~000, or 8074%. ~~For~~Our the three months ended September 30, 2019, stock-based compensation expense decreased $2,942,172 to $5,917, compared to $2,948,089 for the prior year period. Excluding stock-based compensation expense, our SG&A expenses decreased ~~$290,588~~primarily due ~~primarily~~ to reductions in the number of employees, benefits, and professional fees.

Research and Development Expenses

Research and development (“R&D”) expenses for the three months ended ~~September~~March 3031, ~~2019~~2020 and ~~2018~~2019 was ~~comparable~~$25,000 atand $379,~~195~~000, respectively, ~~and~~an increase of $3716,~~332~~000, ~~respectively~~or 177%. The increase in R&D expenses was related to a royalty fee as part of a technology license agreement, which was not recorded in the prior year period.

~~Other Income and Expenses~~17

~~Other~~Impairment ~~income for the three months ended September 30, 2019 was $540,092, compared to other expense~~ of ~~$3,073,866~~Right ~~for the three months ended September 30, 2018. The change in balance was due to the difference in the change in fair value~~ of ~~derivative~~Use liability of $3,168,820 offset by a decrease in financing costs of $445,318, which included the amortization of discounts to interest expense during the three months ended September 30, 2018 of $500,000, which did not exist during the current year period. The remaining increase in interest expense over the prior year period was due to our increase in borrowings.Asset

~~Net~~Impairment ~~Loss~~of right of use asset for the three months ended March 31, 2020 was $82,000. In March 2020, we determined that our right of use asset was impaired and recorded an impairment charge accordingly. (See Note 3 to the accompanying condensed consolidated financial statements). No similar activity occurred during the prior year period.

Net loss for the three months ended September 30, 2019 was $8,142, compared to a net loss of $7,093,230 for the three months ended September 30, 2018. The decrease in net loss was primarily due to the change in fair value of derivative liability, along with decreased operating expenses, as discussed above.

Results of Operations for the Nine Months Ended September 30, 2019 Compared to the Nine Months Ended September 30, 2018.

Revenue and Cost of Goods Sold

Revenue for the nine months ended September 30, 2019 and 2018 was $1,895,116 and $2,565,085, respectively, a decrease of $669,969, or 26%. The decrease was due to several negative factors during the first nine months of 2019, as compared to the first nine months of 2018.

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 our sales, and is also reflected in the sales of competitive U.S. based companies. Additionally, as the new legal adult use recreational States come on stream - the requirements for testing, oversight, and tightening of the regulatory environment caused a pause in the expansion timetable of many new licensees.

Cost of sales for the nine months ended September 30, 2019 and 2018 was $922,514 and $1,836,980, respectively. Gross profit for the nine months ended September 30, 2019 and 2018, was $972,602 and $728,105, respectively. As a percentage of revenue, gross profit for the nine months ended September 30, 2019 was 51%, compared to 28% for the nine months ended September 30, 2018. The increase in gross profit and our gross margin percentage was primarily due to our decrease in reserves for inventory obsolescence and change in product mix sold.

Selling, General and Administrative Expenses

SG&A expenses for the nine months ended September 30, 2019 and 2018 was $3,096,210 and $10,078,311, respectively, a decrease of $6,982,101, or 69%. For the nine months ended September 30, 2019, stock-based compensation expense decreased $5,572,409 to $265,193, compared to $5,837,602 for the prior year period. Excluding stock-based compensation expense, our SG&A decreased $1,409,692 due primarily to reductions in the number of employees, benefits, and professional fees.

Research and Development Expenses

R&D expenses for the nine months ended September 30, 2019 and 2018 was $191,464 and $151,916, respectively, an increase of $39,548, or 26%. The increase in R&D expenses was primarily due to increased royalty expense.

Excess Cost of Acquisition to Related Party over Historical Basis

Excess cost of acquisition to related party over historical basis for the nine months ended September 30, 2018 was $4,450,000, representing a non-cash charge related to our acquisition of YLK Partners NV from related parties on May 10, 2018 (See Note 4 to the accompanying condensed consolidated financial statements). No similar activity occurred during the nine months ended September 30, 2019.

Impairment of Intangible Assets

Impairment of intangible assets for the nine months ended September 30, 2019 was $1,138,892. In June 2019, we determined that our intangible assets were impaired and recorded an impairment charge accordingly. No similar activity occurred during the nine months ended September 30, 2018.

Loss on Abandonment of Leasehold Improvements

Loss on abandonment of leasehold improvement for the ~~nine~~three months ended ~~September~~March 3031, 2019 was $~~217~~177,~~562~~000. In February 2019, we terminated our Arizona facility lease, thereby abandoning $~~217~~177,~~562~~000 of leasehold improvements during the ~~nine~~three months ended ~~September~~March 3031, 2019. No similar activity occurred during the ~~prior~~current year period.

Other Income and Expenses

Other ~~income~~expense for the ~~nine~~three months ended ~~September~~March 3031, 2020 and 2019 was $1,~~590~~282,~~434,~~000 ~~compared~~and ~~to other expense of~~ $3521,~~454~~000,~~300~~ ~~for the nine months ended September 30, 2018~~respectively. The ~~change~~increase ~~in balance~~ was due to the difference in the change in fair value of derivative liability of $2844,~~114~~000,~~394,~~ ~~offset~~decreased ~~by the change in~~ financing costs of $7114,~~188~~000,~~082,~~ and aincreased ~~change in amortization of discounts to~~ interest expense of $231,~~430,042.~~000 ~~The remaining increase in interest expense increased over the prior year period was~~ due to our ~~increase~~increased indebt ~~borrowings~~levels.

Net ~~loss~~Loss

~~Net~~Our net loss for the ~~nine~~three months ended ~~September~~March 3031, 2020 and 2019 was $21,~~243~~638,~~791,~~000 ~~compared~~and ~~to a net loss of~~ $172,~~545~~022,~~204 for the nine months ended September 30~~000, ~~2018~~respectively. The decrease in net loss was ~~primarily~~ due to ~~financing costs and excess cost of acquisition to related party incurred during~~ the ~~nine~~decrease ~~months~~in ~~ended~~SG&A ~~September 30~~expenses, ~~2018~~offset ~~that~~by ~~were not present during~~ the ~~nine~~increase ~~months~~in ~~ended~~other ~~September 30, 2019, along with decreased SG&A~~ expenses~~, as discussed above~~.

Liquidity and Capital Resources

Cash and Liquidity

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. Significant factors in the management of liquidity are funds generated by operations, levels of accounts receivable and accounts payable and capital expenditures.

Cash ~~flows~~Flows ~~used~~Used in ~~operating~~Operating ~~activities~~Activities

During the ~~nine~~three months ended ~~September~~March 3031, 2020 and 2019, we used cash in operating activities of $~~856~~13,~~643,~~000 ~~compared~~and ~~to cash used in operating activities of~~ $2421,~~719~~000,~~100~~ ~~during the nine months ended September 30, 2018~~respectively. During the ~~nine~~three months ended ~~September~~March 3031, ~~2019~~2020, cash was primarily used to fund our operating loss of $21,~~243~~638,~~791~~000, partially offset by anon-cash related ~~$1,055,558~~items ~~increase~~such inas ~~accounts~~the ~~payable~~impairment ~~and accrued~~of ~~expenses,~~right ~~$1,138,892~~of ~~intangible~~use asset, ~~impairment~~financing ~~charge~~costs, aand ~~$715,739~~the ~~decrease~~change in ~~inventories,~~the afair ~~$247,032~~value ~~discount~~of onderivative ~~convertible~~liabilities. ~~note~~Non-cash ~~payable~~items during the three months ended March 31, 2020 in aggregate were $~~217~~1,~~562~~192,000. ~~loss~~The onremaining ~~abandonment~~change ofwas ~~leasehold~~due ~~improvements,~~to a $~~177~~142,~~850~~000 increase ofin ~~fair~~legal ~~value~~settlements ofpayable, ~~common~~a ~~stock~~$182,000 ~~issued~~increase ~~for~~in ~~services~~accounts payable and accrued expenses, and a $~~129~~141,~~384~~000 ofchange ~~financing~~in our ~~costs~~remaining working capital accounts.

Cash ~~flows~~Flows ~~used~~Used in ~~investing~~Investing ~~activities~~Activities

During the ~~nine~~three months ended ~~September~~March 3031, ~~2019~~2020 ~~we used $217,562 in cash from investing activities to purchase property~~ and ~~equipment. During the nine months ended September 30~~2019, ~~2018~~we ~~investing activities~~ used $~~163,461~~0 inand ~~cash resulting from~~ $~~250~~176,000 ~~of accounts receivable acquired on acquisition~~, ~~$28~~respectively,~~500~~ ~~received~~in oncash ~~sale~~from ~~property~~investing ~~and~~activities ~~equipment, offset by $441,961 of cash used~~ to purchase property and equipment.

Cash ~~flows~~Flows ~~provided~~Provided by ~~financing~~(Used ~~activities~~in) Financing Activities

During the ~~nine~~three months ended ~~September~~March 3031, ~~2019~~2020, we generated cash from financing activities of $~~253~~102,~~729~~000, compared to cash ~~generated~~used ~~by financing~~in financing activities of $31,~~968,017~~000 for the ~~nine~~three months ended ~~September~~March 3031, ~~2018~~2019. During the ~~nine~~three months ended ~~September~~March 3031, ~~2019~~2020, we received ~~$150,000 from the issuance~~ proceeds of ~~a note payable to related party, we received~~ $~~150~~125,000 ~~from a loan~~, ~~and~~net ~~we made payments on our loans payable totaling $46,271. During the nine months ended September 30, 2018, we raised $1,568,000 from the sale~~ of ~~common~~ ~~stock,~~fees ~~received proceeds~~ of $125,~~500,~~000, from a secured convertible note payable, ~~raised~~offset by $123,~~436,996~~000 ~~from the exercise~~ of ~~warrants, made~~ payments ~~of $505,000~~ on our notes payable to related parties. During the three months ended March 31, ~~and~~2019, we made payments on ~~loans~~a ~~payable~~loan ~~and capital lease obligation~~ totaling $311,~~979~~000.

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying condensed consolidated financial statements, during the ~~nine~~three months ended ~~September~~March 3031, ~~2019~~2020, we incurred ana ~~operating~~net loss of $21,~~243~~638,~~791,~~000 and used cash in operations of $~~856~~13,~~643~~000, and had a ~~stockholders~~shareholders’ deficit of $510,~~407~~189,~~137~~000 asat ofMarch ~~September 30~~31, ~~2019~~2020. These factors raise substantial doubt about our ability to continue as a going concern within one year after the date of the financial ~~statements~~ statements being issued. Our ability to continue as a going concern is dependent upon our ability to raise additional funds and ~~implement~~ 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 September 30, 2019, we had cash on hand in the amount of $66,217. Subsequent to September 30, 2019, the Company received proceeds of $275,000 from the sale of a secured convertible note (see Note 13 of the accompanying condensed consolidated financial statements). Management estimates that the current funds on hand will be sufficient to continue operations through January 2020. 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 stock holders, in case or equity financing.18

~~Lease~~At ~~Abandonment~~March 31, 2020, we had cash on hand in the amount of $193,000. Management estimates that the current funds on hand will be sufficient to continue operations through September 2020. 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 stockholders, in case of equity financing.

AsHistorically, ~~discussed~~we inhave ~~Notes~~financed 6our ~~and~~operations 12primarily ofthrough ~~the~~private ~~accompanying~~sales ~~condensed~~of ~~consolidated~~common ~~financial statements~~stock, wea ~~provided~~line ~~MSCP~~of credit, ~~L.L.C~~loans ~~(“MSCP”)~~ from a ~~notice~~third ofparty ~~termination~~financial institutions, ~~and~~related onparties, ~~February~~and ~~15,~~operations. ~~2019,~~We ~~MSCP~~anticipate ~~filed~~that ~~suit~~our inprimary ~~the~~capital ~~Superior~~source ~~Court~~will ofbe ~~Arizona,~~from ~~County~~the issuance of ~~Maricopa, Case~~notes ~~No.~~payable ~~CV2019-001613~~or ~~against~~the usproceeds ~~and~~from ~~YLK.~~the Wesale ~~recently~~of ~~filed~~our ~~counterclaims~~common ~~against~~stock. ~~MSCP~~If ~~for~~our ~~fraud~~sales ingoals ~~the~~do ~~inducement,~~not ~~negligent~~materialize ~~misrepresentation~~as planned, ~~breach~~ ofwe ~~the~~believe ~~implied~~that ~~covenant~~we can ofreduce ~~good~~our ~~faith~~operating costs and ~~fair~~achieve ~~dealing,~~positive ~~rescission~~cash offlow ~~contract,~~from ~~unjust~~operations. ~~enrichment~~However, ~~and~~we ~~punitive~~may ~~damages. We~~not ~~intend~~generate tosufficient ~~vigorously~~revenues from ~~defend~~product ~~this~~sales ~~action.~~in At the ~~date~~future ofto ~~notice~~achieve ofprofitable ~~termination,~~operations. If we ~~had~~are anot ~~remaining~~able ~~lease~~to ~~obligation~~achieve ofprofitable ~~approximately~~operations at some $6point in the future,~~000,000.~~ ~~Due~~we may have insufficient working capital to maintain our ~~counterclaims,~~operations as we ~~are~~presently ~~unable~~intend to ~~determine~~conduct ~~and~~them or ~~did~~to ~~not~~fund ~~record~~our expansion, anmarketing, ~~estimate~~and ofproduct ~~liability~~development atplans. ~~September~~There ~~30,~~can be no assurance that we will be able to obtain such ~~2019~~financing on acceptable terms, or at all.

NoNotes ~~amounts~~Payable ~~have~~to ~~been~~Related provided in the financial statements for the ROU asset and related lease liability. Further, no liability has been provided for any damages arising from the early termination of the lease, as such amounts, if any, are not practicably determinable.Parties

28On May 9, 2016, we entered into note payable agreements with Alan Lien and Alvin Hao, former officers and directors, to borrow $300,000 under each individual note. Pursuant to the terms of each of these agreements, we borrowed $300,000 from each of Alan Lien and Alvin Hao. The notes accrue interest at a rate of 8% per annum, are unsecured and were due on or before May 31, 2018. The notes are currently past due. A total of $600,000 was due on the combined notes at March 31, 2020 and December 31, 2019.

~~Notes~~On ~~Payable~~May –8, ~~Related~~2019, ~~Parties~~we entered into a note agreement with the sister of Alvin Hao, a former officer and director, to borrow $150,000. The loan accrues interest at 8% per annum, are unsecured and due on November 8, 2019. The note is currently past due. A total of $150,000 was due on the note at March 31, 2020 and December 31, 2019.

OnWe ~~May 9, 2016, we~~ entered into note ~~payable~~ agreements with ~~Alan~~the ~~Lien~~parents ~~and~~of ~~Alvin~~Alan ~~Hao~~Lien, ~~each~~a anformer 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~~loans accrue interest at ~~a rate of 8~~10% per annum, are unsecured and were due on or before ~~May~~December 31, ~~2018~~2016. The ~~notes~~ loans are currently past due. A total of $~~600~~40,000 was due on the ~~combined~~loans ~~notes~~ at each of ~~September~~March 3031, ~~2019~~2020 and December 31, ~~2018~~2019.

OnSecured ~~May~~Convertible 8,Notes 2019, we entered into a note agreement with the sister of Alvin Hao, an officer and director, to borrow $150,000. The loan accrues interest at 8% per annum, are unsecured and due on November 8, 2019. The note is currently past due. A total of $150,000 was due on the note at September 30, 2019.Payable

WeOn ~~entered~~May ~~into~~10, ~~note~~2018, ~~agreements~~we ~~with~~issued ~~the~~a ~~parents~~secured ofdebenture ~~Alan~~(the ~~Lien,~~“2018 ~~our~~Note”) ~~Chief~~to ~~Executive~~YA ~~Officer~~II ~~and~~PN ~~one~~in ofthe ~~our~~principal ~~directors.~~amount ~~The~~of ~~loans~~$1,500,000 ~~accrue~~with interest at 108% per annum, ~~are~~(18% ~~unsecured~~on default) and ~~were~~ due on orJune ~~before~~30, ~~December~~2020, 31and provide a conversion right, ~~2016.~~in Awhich ~~total~~the principal amount of ~~$40~~the 2018 Note,~~000~~ ~~was~~together ~~due~~with onany ~~the~~accrued ~~loans~~but unpaid interest, could be converted into our common stock at a conversion price at ~~each~~75% of ~~September~~the ~~30,~~lowest ~~2019~~volume ~~and~~weighted ~~December~~average ~~31,~~price ~~2018~~(VWAP) of our common stock during the 10 trading days immediately preceding the conversion date. ~~The~~A ~~loans~~total ~~are~~of ~~currently~~$1,698,000, ~~past~~including accrued interest, was due on the 2018 Note as of March 31, 2020.

~~Convertible~~On October 29, 2019, we issued a convertible secured debenture (the “2019 Note”) ~~Payable~~to YA II PN in the principal amount of $275,000 with interest at 10% per annum (15% on default) and due on April 29, 2020. The 2019 Note provides a conversion right, in which the principal amount of the Note, together with any accrued but unpaid interest, could be converted into our common stock at a conversion price at 75% of the lowest volume weighted average price (VWAP) of our common stock during the 10 trading days immediately preceding the conversion date. A total of $287,000, including accrued interest, was due on the 2019 Note as of March 31, 2020.

On ~~May~~February 1013, ~~2018~~2020, we issued a secured convertible debenture (the “~~2018~~2020 Note”) ~~to YA II PN~~ in the principal amount of $1150,~~500,~~000 ~~with~~ with interest at 810% per annum (1815% on default) and due on ~~February~~August 910, ~~2019~~2021. The ~~2018~~2020 Note ~~was~~provides ~~amended~~a ~~effective~~conversion ~~February 9~~right, ~~2019~~in ~~for~~ which any ~~the~~portion ~~maturity~~of ~~date~~the ~~was~~principal ~~extended~~amount toof ~~August~~the 92020 Note, ~~2019~~together ~~and~~with ~~could~~any accrued but unpaid interest, may be converted into our common stock at a conversion price ofequal ~~$0.50 a~~to ~~share~~75% ~~(see Note 8~~ of the ~~accompanying~~lowest ~~condensed~~VWAP ~~consolidated~~of ~~financial~~our ~~statements).~~common ~~The~~stock ~~2018~~during ~~Note~~the isten ~~secured~~(10) bytrading ~~all~~days ~~our assets~~immediately ~~and~~preceding ~~our~~the ~~subsidiaries.~~date Onof ~~October 29~~conversion, ~~2019,~~subject ~~the~~to ~~note~~adjustment. ~~was~~A ~~further~~total ~~amended~~of to$152,000, ~~include~~including anaccrued ~~extended~~interest, ~~maturity~~was ~~date~~due ofon ~~June~~the ~~30,~~ 2020 ~~(see~~ Note 13as of ~~the~~March ~~accompanying~~31, ~~condensed consolidated financial statements)~~2020.

~~Term Loan~~19

OnTerm May 21, 2019, we entered into a loan agreement with Celtic Bank in the principal amount of $150,000 with interest at 40.44% per annum and due on May 21, 2020. The loan was guaranteed by Alvin Hao, one of our officers. We have made a principal payment of $43,273, leaving a total of $106,277 owed on the loan as of September 30, 2019.Loans

~~Standby~~On ~~Equity~~May ~~Distribution~~21, ~~Agreement~~2019, we entered into a loan agreement with Celtic Bank in the principal amount of $150,000 with interest at 40.44% per annum and due on May 21, 2020. The loan was guaranteed by Alvin Hao, one of our former officers. We have made principal payment of $111,675, leaving a total of $38,325 due on the term loan as of May 31, 2020.

On ~~April~~May 168, ~~2018~~2020, we ~~entered~~obtained ~~into~~ a ~~Standby~~Paycheck ~~Equity~~Protection ~~Distribution~~Program ~~Agreement,~~loan ~~or SEDA, with YA II PN. The SEDA establishes what is sometimes termed an equity line of credit or an equity draw-down facility. The $25,000,000 facility may be drawn-down upon by us~~ in ~~installments,~~ the ~~maximum~~ amount of ~~each of which is limited to~~ $1205,000~~,000.~~ ~~For~~pursuant ~~each~~to ~~share~~the ofCoronavirus ~~common~~Aid, ~~stock purchased under~~Relief, ~~the~~and ~~SEDA,~~Economic YASecurity IIAct ~~PN will pay 90% of~~ (the ~~lowest~~“CARES ~~VWAP~~Act”). ofInterest ~~our~~on ~~shares during~~ the ~~five~~loan ~~trading~~is ~~days~~at ~~following our draw-down notice to YA II PN. The VWAP that will be used in~~ the ~~calculation~~rate ~~will~~of be1% ~~that~~per ~~reported by Bloomberg~~year, ~~LLC,~~and aall ~~third-party~~loan ~~reporting service.~~payments Inare ~~general,~~deferred ~~the~~for ~~VWAP~~six ~~represents~~months, ~~the~~at ~~sum~~which oftime the ~~value~~balance ofis ~~all~~payable ~~the~~in ~~sales~~18 ofmonthly ~~our~~installments ~~common~~if ~~stock~~not ~~for~~forgiven ain ~~given~~accordance ~~day (~~with the ~~total~~CARES ~~shares~~Act ~~sold in~~and ~~each trade times~~ the ~~sales~~terms ~~price per share~~ of the ~~common~~promissory ~~stock~~note ~~for~~we ~~that~~executed ~~trade),~~in ~~divided~~connection bywith the ~~total number of shares sold on that day~~loan.

On June 7, 2020, we obtained an Economic Injury Disaster Loan from the United States Small Business Administration in the amount of $150,000. Interest on the loan is at the rate of 3.75% per year, and all loan payments are deferred for twelve months, at which time the balance is payable in monthly installments of $731 over a 30 year term. The loan is secured by all of our assets.

Critical Accounting Policies

The Securities and Exchange Commission (“SEC”) defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Not all of the accounting policies require management to make difficult, subjective or complex judgments or estimates. However, the following policies could be deemed to be critical within the SEC definition.

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.

Recent Accounting Pronouncements

See Note 2 of the condensed consolidated financial statements for management’s discussion of recent accounting pronouncements.

Off-Balance Sheet Arrangements

We do not have any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operations, liquidity or capital expenditures.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not required under Regulation S-K for “smaller reporting companies.”

Item 4. Controls and Procedures.

Evaluation of disclosure controls and procedures.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Based on management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2019, our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. 20

Based on management’s evaluation, we concluded that, as of the date of this report, our remediation efforts continue related to each of the material weaknesses that we have identified in our internal control over financial reporting, and additional time and resources will be required in order to fully address these material weaknesses. We have not been able to complete all actions necessary and test the remediated controls in a manner that would enable us to conclude that such controls are effective. We are committed to implementing the necessary controls to remediate the material weaknesses described below as our resources permit. These material weaknesses will not be considered remediated until (1) the new processes are designed, appropriately controlled and implemented for a sufficient period of time and (2) we have sufficient evidence that the new processes and related controls are operating effectively. The following material weaknesses in our internal control over financial reporting were identified by management as of March 31, 2020:

Ineffective Control Environment. The Company did not maintain an effective control environment, which is the foundation necessary for effective internal control over financial reporting. Specifically, the Company (i) did not maintain a functioning independent audit committee; (ii) did not have its Board of Directors review and approve significant transactions; (iii) had an insufficient number of personnel appropriately qualified to perform control design, execution and monitoring activities; (iv) had an insufficient number of personnel with an appropriate level of U.S. GAAP knowledge and experience and ongoing training in the application of U.S. GAAP and SEC disclosure requirements commensurate with the Company’s financial reporting requirements; (v) had inadequate segregation of duties consistent with control objectives; and (vi) lack of written documentation of the Company’s key internal control policies and procedures over financial reporting. The Company is required under Section 404 of the Sarbanes-Oxley Act to have written documentation of key internal controls over financial reporting. The Company did not formally document policies and controls to enable management and other personnel to understand and carry out their internal control responsibilities including the lack of closing checklists, budget-to-actual analyses, balance sheet variation analysis, and pro-forma financial statements. Additionally, the Company did not have an adequate process in place to complete its testing and assessment of the design and operating effectiveness of internal control over financial reporting in a timely manner;

Ineffective controls over financial statement close and reporting process. The Company did not maintain effective controls over its financial statement close and reporting process. Specifically, the Company: (i) had insufficient preparation and review procedures for disclosures accompanying the Company’s financial statements; and (ii) did not provide reasonable assurance that accounts were complete and accurate and agreed to detailed support and that reconciliations of accounts were properly performed, reviewed and approved; and

Insufficient segregation of duties in our finance and accounting functions due to limited personnel. We do not have sufficient segregation of duties within accounting functions. During the quarter ended March 31, 2020, we had limited personnel that performed nearly all aspects of our financial reporting process, including, but not limited to, access to the underlying accounting records and systems, the ability to post and record journal entries and responsibility for the preparation of the financial statements. Due to the fact that these duties were often performed by the same person, this creates a lack of review over the financial reporting process that would likely result in a failure to detect errors in spreadsheets, calculations, or assumptions used to compile the financial statements and related disclosures as filed with the SEC. These control deficiencies could result in a material misstatement to our interim or annual financial statements that would not be prevented or detected.

Changes in internal control over financial reporting.

~~The~~There ~~loss~~were ofno ~~Company~~changes ~~personnel,~~in ~~including~~our ~~the~~internal ~~only~~control ~~independent~~over ~~director~~financial ofreporting ~~the~~that ~~Company,~~ occurred during the quarter ended ~~September 30~~March 31, ~~2019~~2020 that have materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting.

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PART II

Item 1. Legal Proceedings.

Information regarding reportable legal proceedings is contained in Part I, Item 3, “Legal Proceedings,” in our Annual Report on Form 10-K for the year ended December 31, ~~2018~~2019. ~~Other~~There ~~than disclosed below, there~~ have been no material changes to the legal proceedings previously disclosed in the Annual Report on Form 10-K, which are incorporated by reference herein.

Employment Matters

On September 27, 2019, Dennis Forchic (the “Plaintiff”) filed a breach of contract case against the Company in the Los Angeles Superior Court of Los Angeles, California, under case number 19STCV34592, alleging that the Company wrongfully terminated the Plaintiff’s employment agreement on February 5, 2018. The Plaintiff claims damages of $646,000 for unpaid severance, unpaid reimbursed expenses, and unpaid health benefits. In addition, the Plaintiff claims damages for failing to compensate Plaintiff for 3,000,000 stock options which vested on termination. The case is in the early discovery phase of litigation and no trial date has been set yet. The Company believes the case is without merit, and intends to vigorously define this case. The Company has recorded $448,719 related to this matter as Due to former officer and shareholder on the Condensed Consolidated Balance Sheet, as well as the 3,000,000 stock options as described in Note 11.

Lease Abandonment

On February 15, 2019, MSCP, L.L.C (“MSCP”), filed suit in the Superior Court of Arizona, County of Maricopa, Case No. CV2019-001613 against the Company and YLK. The case arises from YLK’s alleged breach of a certain lease agreement dated May 19, 2018 (the “Lease”), for the lease of certain real property located at 4301 W. Buckeye Road, Phoenix, Arizona 85043 (the “Premises”), between MSCP and YLK, which the Company guaranteed. MSCP filed the lawsuit after YLK provided a notice of termination for, amongst other reasons, MSCP’s failure to disclose various material information regarding code, safety, structural and other issues in the Premises that rendered the Premises unsuitable for use, unless the Company undertook significant and extraneous costs that were not contemplated under the Lease to remedy said issues in and outside of the Premises. MSCP’s complaint alleged counts for breach of lease and waste and breach of guaranty. MSCP is seeking compensatory damages, rents and other charges due under the lease, and attorney’s fees and costs. The Company just recently filed its answer denying the allegations as well as having filed counterclaims for fraud in the inducement, negligent misrepresentation, breach of the implied covenant of good faith and fair dealing, rescission of contract, unjust enrichment and punitive damages; and the Company intends to vigorously defend this action.

No amounts have been provided in the financial statements for the ROU asset and related lease liability. Further, no liability has been provided for any damages arising from the early termination of the lease, as such amounts, if any, are not practicably determinable.

Breach of Contract

On June 12, 2019, DPA, Inc., or DPA, filed suit in the Superior Court of Arizona, County of Maricopa, Case No. CV2019-008265 against the Company. The plaintiff alleges the Company breached an agreement to pay DPA for architectural design services related to a facility in Arizona and has requested a judgment for $251,923 plus interest, which is included in accounts payable and accrued expenses on the accompanying balance sheet. On September 18, 2019, the DPA was awarded judgement against the Company for $251,923 plus interest at 18% per annum from June 6, 2019 until paid.

On August 7, 2019, Rose Law Group PC (“RLG”) filed a breach of contract case against the Company in the Superior Court of the State of Arizona, County of Maricopa, Case No. CV2019-008484 against the Company. RLG alleges breach of a contract to pay RLG for legal representation, and requested a judgement for $143,836, which is included in accounts payable and accrued expenses on the accompanying balance sheet.

Item 1A. Risk Factors.

Not required under Regulation S-K for “smaller reporting companies.”

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit Number		Description of Exhibit
31.1		Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101		The following materials from Generation Alpha, Inc.’s Quarterly Report on Form 10-Q for the quarter ended ~~September~~March 3031, ~~2019~~2020, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Stockholders’ Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Condensed Consolidated Financial Statements.

3222

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	GENERATION ALPHA, INC.
Date: November 19, 2019	By:	/s/ Tiffany Davis
Date: June 23, 2020	By:	/s/ Tiffany Davis
		Tiffany Davis
		Chief Executive Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)

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Filing Compare · Generation Alpha, Inc.