~~GENERATION ALPHA, INC.~~

~~CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT~~

~~(UNAUDITED)~~

Three months ended June 30, 2018

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

Balance, March 31, 2018 (Unaudited) 41,230,982 $ 41,231 $ 14,483,968 $ (15,813,106 ) $ (1,287,907 )

Net proceeds from sale of common stock 500,000 500 499,500 500,000

Fair value of common stock issued for services 805,000 805 917,795 918,600

Fair value of common stock issued to employees - - 190,625 190,625

Shares issued on exercise of warrants 450,000 450 494,550 495,000

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 52,500 53 52,447 52,500

Extinguishment of derivative liability 496,350 496,350

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

Net loss (10,081,268 ) (10,081,268 )

Balance, June 30, 2018 (Unaudited) 44,826,564 $ 44,827 $ 25,511,529 $ (25,894,374 ) $ (338,018 )

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

~~GENERATION ALPHA, INC.~~

~~CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT~~

~~(UNAUDITED)~~

Six months ended June 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 1,270,000 1,270 1,635,530 1,636,800

Fair value of common stock issued to employees 250,000 250 690,792 691,042

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 to former chief executive officer 561,671 561,671

Net loss (10,451,973 ) (10,451,973 )

Balance, June 30, 2018 (Unaudited) 44,826,564 $ 44,827 $ 25,511,529 $ (25,894,374 ) $ (338,018 )

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

GENERATIONAL ALPHA, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Six Month Ended June 30,						Six Month Ended June 30,
	2019			2018			2020			2019

Cash Flows from Operating Activities
Net loss	$	(2,235,649	)	$	(10,451,973	)	$	(3,058,000	)	$	(2,236,000	)
Adjustments to reconcile net loss to net cash used in operating activities
Provision for allowance for doubtful accounts and sales returns		(48,477	)		(111,967	)		(96,000	)		(48,000	)
Provision for inventory reserves		(490,578	)		196,367			(4,000	)		(491,000	)
Depreciation and amortization		181,620			112,417			4,000			182,000
Depreciation of ROU asset		57,395			-
Amortization of right of use asset								12,000			57,000
Impairment of right of use asset								82,000			-
Imputed interest contract obligation		8,590			4,295			8,000			9,000
Amortization on convertible note payable		247,032			-
Amortization on convertible notes payable								216,000			247,000
Loss on abandonment of leasehold improvements		217,562			-			-			218,000
Impairment of intangible assets		1,138,892			-
Fair value of warrants issued to related party acquire licensing rights		-			4,450,000
Impairment of intangible asset								-			1,139,000
Fair value of vested stock options		18,426			561,671			46,000			18,000
Fair value of common stock issued for services		177,850			1,636,800			-			178,000
Fair value of common stock issued to directors and employees		63,000			691,042
Fair value of warrants issued for financing costs		-			7,317,406
Amortization of debt discount		-			1,808,524
Amortization of Series A preferred shares discount		-			368,550
Fair value of common stock issued to directors								52,000			63,000
Financing costs		129,384			-			15,000			129,000
Change in the fair value of derivative liability		(1,528,712	)		(6,811,926	)		1,525,000			(1,529,000	)
Gain on extinguishment of derivative liability		-			(2,389,427	)
Change in lease payable		(30,678	)		-
Changes in assets and liabilities
(Increase) decrease in:
Changes in Assets and Liabilities
(Increase) Decrease in:
Accounts receivable		(90,884	)		332,668			49,000			(91,000	)
Legal settlements payable								679,000			-
Inventories		532,093			(119,116	)		180,000			532,000
Advances to suppliers		-			205,880
Prepaid expenses and other		113,583			(70,794	)		(8,000	)		114,000
Other assets		48,800			(64,600	)		(1,000	)		49,000
(Decrease) increase in:
(Decrease) Increase in:
Accounts payable and accrued expenses		764,631			428,292			104,000			765,000
Due to former related party vendor		-			(381,457	)
Lease payable								(10,000	)		(31,000	)
Accrued interest to related parties		8,765			(28,324	)		94,000			9,000
Net cash used in operating activities		(717,355	)		(2,315,672	)		(111,000	)		(717,000	)

Cash Flows from Investing Activities
Accounts receivable acquired on acquisition		-			250,000
Purchase of property and equipment		(217,562	)		(46,805	)		-			(218,000	)
Net cash (used in) provided by investing activities		(217,562	)		203,195
Net cash used in investing activities								-			(218,000	)

Cash Flows from Financing Activities
Proceeds from sale of common stock		-			1,568,000
Proceeds from exercise of warrants		-			1,436,996
Proceeds from secured note payable					1,500,000
Proceeds from notes payable related party		150,000			-
Payments on notes payable related party		-			(505,000	)
Payments on capital lease obligations		-			(7,782	)
Proceeds from convertible notes payable related party, net of fees								125,000			-
Proceeds from loans payable		150,000			-			355,000			150,000
Proceeds from note payable related party								-			150,000
Payments on loans payable		(11,764	)		(3,684	)		(26,000	)		(12,000	)
Net cash provided by financing activities		288,236			3,988,530			454,000			288,000

Net increase (decrease) in cash		(646,681	)		1,876,053			343,000			(647,000	)
Cash beginning of period		886,693			967,943			104,000			887,000
Cash end of period	$	240,012		$	2,843,996		$	447,000		$	240,000

Interest paid	$	19,200		$	56,344		$	42,000		$	19,000
Taxes paid	$	-		$	-		$	-		$	-

Non-Cash Financing Activities
Recording of right to use asset and lease liability	$	659,347		$	-		$	89,000		$	659,000
Extinguishment of derivative liability	$	-		$	1,799,003
Common shares issued upon conversion of convertible note payable and accrued interest	$	-		$	1,788,082
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	$	-		$	1,768,523
Conversion of accrued interest to related parties for common stock							$	29,000		$	-
Derivative liability recorded as a valuation discount							$	140,000

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

GENERATION ALPHA INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, ~~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 six months ended June 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, ~~the Company~~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.~~ceased. On June 23, 2015, the Company entered into an Agreement of Merger and Plan of Reorganization (the “Agreement”) with Solis Tek Inc., a California corporation (“STI”), and CJA Acquisition Corp., a California corporation and a wholly owned subsidiary of the Company (“Merger Sub”), providing for the merger of Merger Sub with and into STI (the “Merger”), with STI surviving the Merger as a wholly-owned subsidiary of the Company. The Merger was accounted for as a recapitalization of the Company with STI being deemed the accounting acquirer.

Overview of Business

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

COVID-19 Considerations

In the quarter ended June 30, 2020, the COVID-19 pandemic did not have a material net impact on our operating results. In the future, the pandemic may cause reduced demand for our products if, for example, the pandemic results in a recessionary economic environment which negatively effects the consumers who purchase our products.

Our ability to operate without significant negative operational impact from the COVID-19 pandemic will in part depend on our ability to protect our employees and our supply chain. The Company has endeavored to follow the recommended actions of government and health authorities to protect our employees. For the three months ended June 30, 2020, we maintained the consistency of our operations during the onset of the COVID-19 pandemic. However, the uncertainty resulting from the pandemic could result in an unforeseen disruption to our workforce and supply chain (for example an inability of a key supplier or transportation supplier to source and transport materials) that could negatively impact our operations.

Through June 30, 2020, the COVID-19 pandemic has not negatively impacted the Company’s liquidity position as of such date. Through June 30, 2020, the Company continues to generate cash flows to meet its short-term liquidity needs, and it expects to maintain access to the capital markets. The Company has not observed any material impairments of its assets or a significant change in the fair value of its assets due to the COVID-19 pandemic.

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 six months ended June 30, ~~2019,~~2020, the Company incurred a net loss of ~~$2,235,649~~$3,058,000 and used cash in operations of ~~$717,355~~$111,000, and had a shareholders’ deficit of ~~$5,404,912 as of~~$11,555,000 at June 30, ~~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 June 30, ~~2019,~~2020, the Company had cash on hand in the amount of ~~$240,012.~~$447,000. Management estimates that the current funds on hand will be sufficient to continue operations through ~~September 2019.~~March 2021. The continuation of the Company as a going concern is dependent upon its ability to obtain necessary debt or equity financing to continue operations until it begins generating positive cash flow. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on its operations, in the case of debt financing or cause substantial dilution for the Company’s ~~stock holders,~~shareholders, in case orof 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~~

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 of 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 six months ended June 30, 2020, options to acquire 5,995,800 shares of common stock, warrants to acquire 21,283,140 shares of common stock, and 187,773,607 shares to be issued upon conversion of our convertible notes have been excluded from the calculation of weighted average common shares, as their effect would have been anti-dilutive. For the six months ended June 30, 2019, options to acquire 8,314,391 shares of common stock, warrants to acquire 12,783,140 shares of common stock, and 3,000,000 shares to be issued upon conversion of our convertible note have been excluded from the calculation of weighted average common shares, as their effect would have been anti-dilutive. For the six months ended June 30, 2018, options to acquire 3,000,000 shares of common stock and warrants to acquire 13,783,140 shares of common stock and shares potentially issuable under our convertible note agreements have been excluded from the calculation of weighted average common shares outstanding at June 30, 2018, as their effect would have been anti-dilutive.

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the ~~U.S~~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 June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, the Company recorded reserves for returned product in the amounts of ~~$52,149~~less than $1,000 and ~~$143,947,~~$60,000, respectively, which reduced the accounts receivable balances as of those periods.

~~Inventories~~In the following table, revenue is disaggregated by major product line for three months ended June 30, 2020:

Sales Channels	Lighting		Plant Nutrients and Fertilizers		Total

Hydroponic resellers/retail	$	57,000	$	213,000	$	270,000
Direct to consumer/online		6,000		-		6,000
Total	$	63,000	$	213,000	$	276,000

~~Inventories are stated at~~

In the ~~lower of cost or market. Cost~~following table, revenue is ~~computed on a first-in, first-out basis. The Company’s inventories consist almost entirely of finished goods as of~~disaggregated by major product line for the three months ended June 30, ~~2019 and December 31, 2018.~~2019:

Sales Channels	Lighting		Plant Nutrients and Fertilizers		Total

Hydroponic resellers/retail	$	528,000	$	155,000	$	683,000
Direct to consumer/online		-		-		-
Total	$	528,000	$	155,000	$	683,000

~~The Company provides inventory reserves based on excess and obsolete inventories determined primarily~~

In the following table, revenue is disaggregated 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~~major product line 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. Atsix months ended June 30, ~~2019 and December 31, 2018,~~2020:

Sales Channels	Lighting		Plant Nutrients and Fertilizers		Total

Hydroponic resellers/retail	$	184,000	$	388,000	$	572,000
Direct to consumer/online		11,000		-		11,000
Total	$	195,000	$	388,000	$	583,000

In the ~~reserve~~following table, revenue is disaggregated by major product line for ~~excess and obsolete inventory was $420,200 and $910,778, respectively.~~the six months ended June 30, 2019:

Sales Channels	Lighting		Plant Nutrients and Fertilizers		Total

Hydroponic resellers/retail	$	1,118,000	$	279,000	$	1,397,000
Direct to consumer/online		23,000		-		23,000
Total	$	1,141,000	$	279,000	$	1,420,000

Concentration Risks

The Company maintains the majority of its cash balances with one financial institution, in the form of demand deposits. ~~During the six month period ended June 30, 2019 and the year ended December 31, 2018,~~Periodically, 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 operates in markets that are highly competitive and rapidly changing. Significant technological changes, shifting customer needs, the emergence of competitive products or services with new capabilities, and other factors could negatively impact the Company’s operating results. State and federal government laws could have a material adverse impact on the Company’s future revenues and results of operations.

~~The~~ Company’s products require specific components that currently are available from a limited number of sources. The Company purchases some of its key products and components from single vendors. During the six months ended June 30, ~~2019~~2020 and ~~2018,~~2019, its ballasts, lamps and reflectors, which comprised the clear majority of the Company’s purchases during those periods, were each only purchased from one and three separate ~~vendor.~~vendors, respectively.

The Company performs a regular review of customer activity and associated credit risks and does not require collateral or other arrangements. NoOne customer accounted for 16% of the Company’s revenue for the three months ended June 30, 2020, and no customer accounted for more than 10% of the Company’s revenue for the three months ended June 30, ~~2019, and two~~2019. Five customers accounted for ~~29%~~24%, 15%, 11%, 11%, and ~~10%~~11% of the Company’s revenue for the ~~three~~six months ended June 30, ~~2018. No~~2020, and no customer accounted for more than 10% of the Company’s revenue for the six months ended June 30, ~~2019, and one customer~~2019. There were no other customers that accounted for ~~12%~~more than 10% of the Company’s ~~revenue for the six months ended June 30, 2018.~~revenue. Shipments to customers outside the United States ~~were~~comprised less than 5% of our sales for ~~both~~ the three ~~month periods~~and six months ended June 30, ~~2019~~2020 and ~~2018.~~2019.

As of June 30, ~~2019, one customer~~2020, four customers accounted for ~~11%~~29%, 21%, 20% and 13% of the Company’s trade accounts receivable balance, and as of December 31, ~~2018, four~~2019, two customers accounted for ~~37%, 14%, 13%~~24% and ~~12%~~10% of the Company’s trade accounts ~~receivable.~~receivable balance.

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, 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 ~~$761,478~~$2,997,000 and ~~$2,160,806~~$1,332,000 at June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, was valued using Level 32 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 bythe 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 three and six month period ended June 30, 2019 (see Note 4).

Recently Issued Accounting Pronouncements

~~Recent~~In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires entities to use a forward-looking approach based on current expected credit losses (“CECL”) to estimate credit losses on certain types of financial instruments, including trade receivables. This may result in the earlier recognition of allowances for losses. ASU 2016-13 is effective for the Company beginning January 1, 2023, and early adoption is permitted. The Company does not believe the potential impact of the new guidance and related codification improvements will be material to its financial position, results of operations and cash flows.

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

NOTE 3 ~~- PROPERTY AND EQUIPMENT~~

~~Property and equipment consists of the following June 30, 2019 and December 31, 2018:~~

June 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 (198,083 ) (179,162 )
Property and equipment, net $ 37,840 $ 56,671

~~Depreciation expense for the three months ended June 30, 2019 and 2018 was $9,130 and $13,158, and $18,921 and $31,068, respectively, for the six months ended June 30, 2019 and 2018.~~

During the six months ended June 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 six months ended June 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).

~~NOTE 4~~ – ~~LICENSE AGREEMENT~~CONTRACT OBLIGATION ACQUIRED FROM RELATED PARTIES

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

As of
June 30, 2019 December 31, 2018
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

OnIn May ~~10,~~ 2018, the Company entered into an acquisition agreement ~~(the “Acquisition Agreement”)~~ with the members, ~~(the “Sellers”),~~ which in the aggregate, owned 100% of the membership interests in ~~YLK. Pursuant to the Acquisition Agreement, in consideration of the Company acquiring all of the outstanding membership interests of~~ YLK, ~~the Company issued to the Sellers,~~ a total of 5,000,000 warrants (the “Warrants”) to purchase 5,000,000 common shares, at an exercise price of $0.01 per share. The Warrants are exercisable until May 9, 2023. The aggregate fair value of the Warrants issued as consideration for the acquisition was determined to be $5,450,000.

~~The Sellers were the following, who were determined to be~~ related ~~parties:~~

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

	~~(b)~~	MDM Cultivation LLC, a Delaware limited liability company. The members of MDM Cultivation are affiliates of YA II PN, Ltd. (“YA II PN”) and 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) a secured promissory note issued by the Company with an outstanding principal amount of $1.5 million. In addition, YA II PN and the Company are parties to that SEDA, pursuant to which YA II PN has agreed to purchase up to $25.0 million of the Company’s common stock, subject to the terms and conditions thereof. MDM Cultivation owned 45% of the outstanding membership interests of YLK. MDM Cultivation was issued 2,250,000 Warrants under the Acquisition Agreement. As affiliates of MDM Cultivation, YA II PN and D-Beta One EQ, Ltd. will be deemed to be the beneficial owners of the 2,250,000 Warrants in addition to the other shares and warrants presently held by them; and

	~~(c)~~	Future Farm Technologies Inc. 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 major asset of YLK is a Cultivation Management Services Agreement (the “Management Agreement”) with an Arizona licensee ~~(the “Arizona Licensee”)~~ that was entered into on January 5, 2018. No operating activity existed prior to the acquisition. The Arizona Licensee is authorized to operate a medical marijuana dispensary, one (1) onsite facility and one (1) offsite facility, to produce, sell and dispense medical marijuana and manufactured and derivative products that contain marijuana pursuant to Title 9; Chapter 17 of the Arizona Department of Health Services (“AZDHS”) Medical Marijuana Program and Arizona Revised Statute § 36-2801 et seq., as amended from time to time. Pursuant to the Management Agreement, YLK will provide the management services for the offsite facility, on behalf of the Arizona Licensee. The assets acquired also included a $250,000 receivable from Future Farm Technologies.

As consideration for the exclusive right of YLK to manage the Arizona Licensee’s facility pursuant to the Management Agreement; (i) YLK paid $750,000 to the Arizona Licensee; (ii) YLK agreed to pay an additional $250,000 within 10 days after receipt of the AZDHS approval to operate the facility; and (iii) YLK agreed to pay a total of $600,000, payable in 44 equal monthly installments commencing on April 1, 2019 (the “Installment Payments”). The term of the Management Agreement is five years. YLK has the option to extend the term for an additional five years with the payment of $1,000,000 at the commencement of the additional term and a total of $1,000,000 payable in equal monthly installments over the extended term of the Management Agreement. Before the acquisition, the Sellers paid $750,000 per the terms of the Management Agreement.

Through the acquisition, the Sellers’ rights and obligations under the CMSA transferred to the Company, including the payment of an additional $250,000 within 10 days after receipt of the AZDHS approval to operate the facility; and the Installment Payments. As the Installment Payments totaling $600,000 are noninterest bearing, the Company calculated the net present value of the Installment Payments to be $518,523 (or a discount of $81,477) based on an 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 $518,523 as part of the acquisition cost of the Management Agreement, which will be amortized over five years, the length of the Management Agreement. Amortization expense for three months ended June 30, 2019 and 2018, was $81,349 and $162,699, and for the six months ended June 30, 2019 and 2018, $81,349 and $81,349, respectively.

Since the assets, including a $250,000 balance due from Future Farm Technologies, was acquired from related parties, the assets were recorded at their historical acquisition cost of $1,000,000. The Company issued 5,000,000 Warrants to the Sellers with an exercise price of $0.01 and an expiration date of May 9, 2023. Based on a Black-Sholes Merton model, the Warrants were valued at $5,450,000. Since the assets acquired were acquired from related parties, the difference of $4,450,000 between the fair value of the Warrants granted of $5,450,000 and the historical acquisition cost of $1,000,000 was recorded as related party compensation cost in the accompanying condensed consolidated statements of operations. The $250,000 receivable was received by the Company duringDuring the year ended December 31, ~~2018.~~

~~In June~~ 2019, the Company determined ~~that its intangible~~the acquired assets were fully 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 recent Deed in Lieu of 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 accordingly. The Company has a continuing obligation under the Management Agreement of ~~$1,138,892 during the three and six month periods ended June 30, 2019.~~

As$799,000 (net of discount of $51,000) as of December 31, ~~2018,~~2019. As of June 30, 2020, the remaining Management Agreement obligation was ~~$781,408~~$807,000 (net of discount of ~~$68,592) for which $372,727~~$43,000) and is reflected as a current ~~and $408,681 was reflected as long term~~liability in the accompanying condensed consolidated balance sheet. As of June 30, 2018, the remaining Management Agreement obligation was $789,998 (net of discount of $60,002) for which $454,545 is reflected as current and $335,453 was reflected as long term in the accompanying condensed consolidated balance sheet. As of June 30, 2019,2020, the Company is past due on its ~~Installment Payments~~installment payments obligations under the Management Agreement.

NOTE 54 – NOTES PAYABLE TO RELATED PARTIES – PAST DUE

Notes payable to related parties consists of the following at June 30, ~~2019~~2020 and December 31, ~~2018:~~2019:

	June 30, 2019		December 31, 2018		June 30, 2020		December 31, 2019

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

	a.	On May 9, 2016, the Company entered into note payable agreements with Alan Lien and Alvin Hao, each ana 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 atas of June 30, ~~2019~~2020 and December 31, ~~2018, respectively.~~2019.

	b.	On May 8, 2019, the Company entered into a note agreement with the sister of Alvin Hao, ana former officer and director, to borrow $150,000. The loan accrues interest at 8% per annum ~~are~~(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 ~~notes at~~loan as of June 30, 2020 and December 31, 2019.

	c.	The Company entered into note agreements with the parents of Alan Lien, ~~the Company’s Chief Executive Officer~~a former officer and ~~one of its directors.~~director. 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~~loans as of June 30, ~~2019~~2020 and December 31, ~~2018, respectively.~~2019.

~~As of June 30, 2019 and~~At December 31, ~~2018,~~2019, accrued interest on the notes ~~payables~~payable to related parties balance was ~~$133,804~~$149,000 and ~~$125,039, respectively.~~included in accrued interest to related parties on the condensed consolidated balance sheet. During the six months ended June 30, ~~2019,~~2020, the Company added ~~$27,964~~$35,000 of additional accrued interest, and made interest payments of ~~$19,200.~~$20,000, leaving an accrued interest on the notes payable to related parties balance of $164,000 at June 30, 2020.

NOTE 65 – LEASE PAYABLE

The Company ~~has one~~leases its executive offices and warehouse space. The Company analyzes all leases at inception to determine if a right of use (“ROU”) asset and lease ~~agreement for office spaces with a remaining lease terms of 4 years as of June 30, 2019.~~liability should be recognized. Leases with an initial term of 12 months or less are not ~~recorded~~included on the condensed consolidated balance ~~sheet.~~sheets. The ~~Company accounts for the~~ lease ~~and non-lease components of its leases as a single lease component. Rent expense~~liability is ~~recognized on a straight-line basis over the lease term.~~

~~Operating lease ROU assets and liabilities are recognized~~measured at ~~commencement date based on~~ the present value of future lease payments ~~over~~as of 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.commencement date.

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

Six Months Ended
June 30, 2019

Lease Cost
Operating lease cost (included in general and administration in the Company’s unaudited condensed statement of operations) $ 89,492

Other Information
Cash paid for amounts included in the measurement of lease liabilities for the first six 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 June 30, 2019
Operating leases
Long-term ROU assets $ 587,629

Short-term operating lease liabilities $ 124,560
Long-term operating lease liabilities 491,883
Total operating lease liabilities $ 616,443

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

Year Ending Operating Leases
2019 (remaining 6 months) $ 90,000
2020 182,250
2021 189,000
2022 189,000
2023 94,500
Total lease payments 744,750
Less: Imputed interest/present value discount (128,307 )
Present value of lease liabilities $ 616,443

~~Rent expense for the three months ended June 30, 2019 and 2018 was $63,413 and $91,172, respectively, and $278,623 and $162,908, respectively, for the six months ended June 30, 2019 and 2018.~~

~~Lease Abandonment~~

On ~~April 19,~~March 6, 2018, the Company entered into a lease for its principal executive offices and warehouse located in Carson, California. The Company occupies a 17,640 square foot facility pursuant to a five-year lease ending on September 30, 2023, with an ~~Option Agreement, or the Option, with MSCP, LLC, a non-affiliated Arizona limited liability company, or the Lessor,~~unaffiliated party, 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 $101,500it pays $15,000 per month ~~with additional pro-rata net-lease~~in rental 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 10, 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 June 30, 2019.

As required by ASC 842, the Company ~~must record a~~recorded an ROU asset and lease liability of ~~$4,839,000~~$659,000 at January 1, 2019 for the net present value of future lease obligations related to the ~~Arizona~~Carson property. ~~However, due~~As of December 31, 2019, balance of ROU asset amounted to ~~actions~~$527,000 and lease liability amounted to $556,000.

In January 2020, the Company vacated its office and warehouse in Carson and is currently trying to sublease the said property. The Company remains obligated under its Carson, California lease, until such time the landlord releases the Company from the lease agreement. As of December 31, 2019, the Company recorded an impairment charge related to the ROU asset amounting to $100,000, which reflected management’s best estimate of the ~~lessor and upon advice of counsel, management believes that it is no longer obligated under~~cost to sublease the ~~terms~~premises. As of the ~~lease and accordingly~~date of this report, the Company has not been released from the lease agreement, and no lease payments were made during the six months ended June 30, 2020. During the six months ended June 30, 2020, management revised its estimate and recorded ~~the asset and related liability. If the Company were obligated~~an additional impairment charge to the ~~lessor,~~ROU asset amounting to $82,000, which was charged to operating expenses in the ~~assets and liabilities~~consolidated statements of operations for the ~~accompanying balance sheet would increase by $4,839,000, and such assets could be subject to an impairment change of the same amount.~~six months ended June 30, 2020.

~~No liabilities have been provided~~On January 1, 2020, the Company relocated its principal executive offices and warehouse to 1689-A Arrow Rt., Upland, California, 91786. The Upland, California lease is for ~~losses incurred~~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’s early termination~~Company recognized an operating lease ROU asset and lease liability of $89,000, related to the Upland, California operating lease. During the six months ended June 30, 2020, the Company reflected amortization of the ROU assets of $12,000 related to its Upland, California operating lease, and recorded an impairment charge of $82,000 related to the abandoned Carson, California lease, resulting in an ROU asset balance of $422,000 as ~~such amounts~~of June 30, 2020.

As of December 31, 2019, liabilities recorded under operating leases were $556,000. During the six months ended June 30, 2020, the Company added $89,000 in lease liabilities related to its Upland, California operating lease, and made lease payments of $10,000 towards its operating lease liability. As of June 30, 2020, liabilities under operating leases amounted to $635,000, of which $225,000 were reflected as current due.

As of June 30, 2020, the weighted average remaining lease terms for operating lease are ~~not practicably determinable.~~2.96 years, and the weighted average discount rate for operating leases is 10%. Rent expense during the three and six months ended June 30, 2020 and 2019 was $6,000 and $18,000, and $63,000 and $279,000, respectively.

NOTE 6 – LEGAL OBLIGATIONS PAYABLE – PAST DUE

As of December 31, 2019, the Company was obligated to pay $2,550,000, including accrued interest, related to legal settlements. The legal settlements obligation carries interest at rates ranging from 12% to 18%.

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. The Plaintiff claimed damages for breach of an employment contract when the Company terminated the Plaintiff’s employment agreement on February 22, 2018. On June 26, 2020, the Plaintiff was awarded a default judgment against the Company in the amount of $448,000. In addition, during the six months ended June 30, 2020, $7,000 of additional settlement related expenses, and $224,000 of accrued interest were added, leaving a settlements payable balance of $3,229,000 at June 30, 2020, which was past due (see Note 12).

NOTE 7 – ~~LOAN~~LOANS PAYABLE

~~Loan~~Notes payable ~~consisted~~consists of the following ~~as of~~at June 30, ~~2019~~2020 and December 31, ~~2018:~~2019:

June 30, 2019 December 31, 2018

Term loan (a) $ 139,591 $ -
Automobile loan (b) 1,193 2,548
Loans payable $ 140,784 $ 2,548

	June 30, 2020			December 31, 2019

Notes payable to Celtic Bank – past due (a)	$	38,000		$	64,000
SBA Paycheck Protection Program loan (b)		205,000			-
SBA Economic Injury Disaster Loan (c)		150,000			-
Total loans payable	$	393,000		$	64,000
Loans payable, current portion		(38,000	)		(64,000	)
Loans payable, net of current portion		355,000			-

	a.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, ana former officer of the Company. ~~Prior to~~A total of $64,000 was owed on the loan as of December 31, 2019. During the six months ended June 30, ~~2019,~~2020, the Company made a principal ~~payment~~payments of ~~$10,409,~~$26,000, leaving a total of ~~$139,591~~$38,000 owed on the loan as of June 30, ~~2019.~~2020. The loan is currently past due.

	b.b)	~~At December 31, 2018, $2,548~~On May 7, 2020, the Company was ~~due on~~granted a loan (the “PPP loan”) from Wells Fargo Bank in the aggregate amount of $205,000, pursuant to the Paycheck Protection Program (the “PPP”) under the CARES Act.

		The PPP loan agreement ~~for~~is dated May 8, 2020, matures on May 7, 2022, bears interest at a ~~purchased automobile. During~~rate of 1% per annum, with the first six months ~~ended June 30, 2019,~~of interest deferred, and is unsecured and guaranteed by the U.S. Small Business Administration. The loan term may be extended to May 7, 2025, if mutually agreed to by the Company ~~made payments~~and lender. We applied ASC 470, Debt, to account for the PPP loan. The PPP loan may be prepaid at any time prior to maturity with no prepayment penalties. Funds from the PPP loan may only be used for qualifying expenses as described in the CARES Act, including qualifying payroll costs, qualifying group health care benefits, qualifying rent and debt obligations, and qualifying utilities. The Company intends to use the entire loan amount for qualifying expenses. Under the terms of ~~$859, leaving~~the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses. The Company intends to apply for forgiveness of the PPP loan with respect to these qualifying expenses, however, we cannot assure that such forgiveness of any portion of the PPP loan will occur. As for the potential loan forgiveness, once the PPP loan is, in part or wholly, forgiven and a ~~total~~legal release is received, the liability would be reduced by the amount forgiven and a gain on extinguishment would be recorded. The terms of ~~$1,689 owed on~~ the PPP loan provide for customary events of default including, among other things, payment defaults, breach of representations and warranties, and insolvency events. The Company was in compliance with the terms of the PPP loan as of June 30, ~~2019.~~2020.

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

NOTE 8 – CONVERTIBLE SECURED ~~NOTE~~NOTES PAYABLE TO RELATED PARTY

Secured ~~note~~notes payable to related party consists of the following as of June 30, ~~2019~~2020 and December 31, ~~2018:~~2019:

	June 30, 2019		December 31, 2018			June 30, 2020			December 31, 2019

YA II PN, Ltd.	$	1,500,000	$	1,500,000		$	1,925,000		$	1,775,000
Less debt discount		-		(247,032	)		(112,000	)		(178,000	)
Secured note payable, net	$	1,500,000	$	1,252,968		$	1,813,000		$	1,597,000

On May 10, 2018 and October 29, 2019, the Company issued aconvertible secured ~~debenture (the “2018 Note”~~debentures (“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 annum (18% on default)~~ and ~~due on February 9, 2019.~~10%, respectively, that matured in June 2020 and April 2020, respectively. The 2018 Note was amended effective February 9, 2019 (see below). The 2018 Note is secured by all the assets of the Company and its subsidiaries. As part of the issuance, the Company also granted YA II PN 5-year warrants to purchase a total of 7,500,000 shares of the Company per the following terms.

	~~(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.

	~~(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.

notes are currently past due. The Company determined that the exercises prices of the warrants were not a fixed amount because they were subject to an adjustment based on the occurrence of future events. As such, the Company determined that the conversion feature and the warrants created a derivative with a fair value of $7,677,406 at the date of issuance. The Company accounted for the fair value of the derivative up to the face amount of the 2018 Note of $1,500,000 as a valuation discount to be amortized over the life of the 2018 Note, and the excess of $6,177,406 was recorded as a finance cost for the twelve months ended December 31, 2018. During the six months ended June 30, 2019, amortization of valuation discount was $247,032 was recorded as an interest cost, leaving no remaining unamortized balance of the valuation discount at June 30, 2019.

~~Amendment to Secured Note Payable to Related Party~~

~~On February 25, 2019, the Company entered into an amendment agreement (the “Amendment”)~~is in discussion 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~~Notes. The Notes provides 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 ~~$0.50~~the lowest volume weighted average price (VWAP) of the Company’s Common Stock 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 13,000,000 shares of the Company at an exercise price of $0.05 per share, with expiration dates ranging from May 2024 to December 2024.

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 ~~Note was not convertible previously.~~

~~In addition, pursuant to~~aggregate amount of the ~~Amendment,~~closing costs, and 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~~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 ~~after the modifications above, and~~$15,000 was recorded ~~the difference of $129,384~~ as a financing cost ~~included in other expenses~~ during the six months ended June 30, ~~2019.~~2020.

The ~~Note~~unamortized balance of the valuation discounts was ~~not repaid~~$178,000 at December 31, 2019. During the six months ended June 30, 2020, valuation discounts of $150,000 were added as discussed above, and amortization of ~~August 9, 2019, and has subsequently become past due.~~valuation discount of $216,000 was recorded as an interest cost, leaving a $112,000 remaining unamortized balance of the valuation discount at June 30, 2020.

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

~~Acquisition of Facility~~

~~On April 2,~~At December 31, 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 –accrued 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~~convertible secured notes payable to ~~a deed~~related parties 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~~$202,000 was included in accrued interest to ~~acquire the Property.~~

~~The Note, together with accrued and unpaid interest, was due and payable on March 31, 2024 (the “Maturity Date”). Interest~~related parties on the ~~Note was to accrue at~~condensed consolidated balance sheet. During the ~~rate of 10% per annum. For the first 12~~six 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~~ended June 30, 2020, interest of ~~$88,769 per month. Extracting Point had the right to prepay the~~$29,000 was converted into common stock (see 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~~10), and the Company ~~agreed~~added $79,000 of additional accrued interest, leaving an accrued interest to ~~pay the Lender an amount equal to five percent (5%)~~related parties balance 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-six 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.$252,000 at June 30, 2020.

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 109 – 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 78 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 June 30, ~~2019,~~2020 and December 31, ~~2018,~~2019, the derivative liabilities were valued using a ~~Black Scholes~~Black-Scholes Merton pricing model with the following assumptions:

	June 30, 2019			December 31, 2018			June 30, 2020			Issued During 2020			December 31, 2019

Exercise Price	$	0.06 – 0.95		$	0.22 – 1.50		$	0.012		$	0.02		$	0.05
Stock Price	$	0.12		$	0.34		$	0.017		$	0.02		$	0.01
Risk-free interest rate		1.71	%		2.50	%		.160	%		1.46	%		1.55 – 1.60	%
Expected volatility		140 – 156	%		137 – 147	%		312-321	%		232	%		201-203	%
Expected life (in years)		3.31 – 3.86			3.96 – 4.36			1.0 – 1.1			1.5			0.33-0.50
Expected dividend yield		0	%		0	%		0	%		0	%		0	%

Fair Value:	$	761,478		$	2,160,806
Fair Value: Conversion Feature							$	2,997,000		$	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 ~~$2,160,806.~~$1,332,000. During the ~~three and~~ six months ended June 30, ~~2019,~~2020, the Company recognized ~~$1,627,056~~derivative liabilities of $140,000 upon issuance of a secured convertible note (see Note 8), and ~~$1,528,712, respectively,~~recognized $1,525,000 as other ~~income,~~expense, which represented the change in the fair value of the derivative from the respective prior period. In addition, during the three and six months ended June 30, 2019, the Company recognized $0 and $129,384, respectively, which represented a change in the terms of warrants, and was recorded as a financing cost and included in other expense.

The balance of the derivative liability at December 31, 2017 was $4,869,082. During the three and six months ended June 30, 2018, the Company recognized $4,181,874 and $6,811,926, respectively, 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 six months ended June 30, 2018, the Company recognized $2,211,533 and 4,188,430, respectively, which represented the extinguishment of derivative liabilities, of which $1,715,173 and $2,389,437, respectively, was included in other income, and the remaining $496,350 and $1,799,003, respectively, was recorded to additional paid-in-capital. In addition, during the six months ended June 30, 2018, the Company recognized derivative liabilities of $7,677,406 upon issuance of warrants.

NOTE 1110 – 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 six months ended June 30, 2019 and 2018, the Company issued an aggregateon Conversion of 426,000 and 1,270,000 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.

~~Director Appointment and Consulting Agreement~~

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 six 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. As of June 30, 2019, none of the milestones have been met and therefore, no compensation expense has been recorded during the period ended June 30, 2019.

~~Common Shares Issued for Cash~~Convertible Note Payable

During the six months ended June 30, ~~2018,~~2020, 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~~was notified by YA II PN ~~from the sale~~(see Note 8) in writing of ~~500,000~~their election to convert $29,000 of interest accrued into 2,287,066 shares of the Company’s common ~~stock~~ at ~~$1.00~~$0.0127 per share.

Common Shares Issued to ~~Employees for Services~~Directors

The Company appointed certain directors and issued shares as part of their director compensation agreements. During the six months ended June 30, 2018, the Company issued 250,000 shares of common stock to its executives valued at $335,000 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 on Conversion of Series A Convertible Preferred Stock~~

During the six months ended June 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 June 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 six months ended June 30, 2018, the Company was notified in writing that the Note holder elected to convert all remaining outstanding principal and interest accrued, which included the conversion of $1,750,000 of principal and $38,082 of interest. Upon the conversion of the Note,2020, the Company issued an aggregate of ~~1,788,082~~2,631,290 shares of ~~its~~ common ~~stock. The balance~~stock, with a fair value of ~~the debt discount~~$52,000 at date of ~~$1,555,556~~grant, which was ~~recorded~~recognized as ~~an interest cost during the six months ended June 30, 2018.~~compensation cost.

Summary of Stock Options

A summary of stock options for the six months ended June 30, ~~2019,~~2020, is as follows:

				Weighted					Weighted
	Number			Average		Number			Average
	of			Exercise		of			Exercise
	Options			Price		Options			Price
Balance outstanding, December 31, 2018		8,394,391		$	0.66
Balance outstanding, December 31, 2019							1,948,300			0.35
Options granted		-			-		4,062,500			0.01
Options exercised		-			-		-			-
Options expired or forfeited		(80,000	)		0.69		(15,000	)		(0.69	)
Balance outstanding, June 30, 2019		8,314,391		$	0.65
Balance exercisable, June 30, 2019		8,169,391		$	0.65
Balance outstanding, June 30, 2020							5,995,800		$	0.12
Balance exercisable, June 30, 2020							5,995,800		$	0.12

On October 31, 2019, the Board of Directors 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, Ms. Davis is entitled to receive stock options 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. Accordingly, Ms. Davis was granted 2,500,000 stock options at the closing market price of $0.01 on March 31, 2020, and 1,562,500 stock options at the closing market price of $0.016 on June 30, 2020. The ~~Company~~fair value of the 4,062,500 stock options granted was determined to be $46,000, of which $25,000 and $46,000 was recorded to stock-based compensation expense ~~pursuant to authoritative guidance provided by the ASC Topic 718 –~~~~Stock Compensation~~~~for~~during the three and six months ended June 30, ~~2019 and 2018 of $7,371 and $18,426, and $0 and $561,671,~~2020, respectively.

On February 5, 2018, the Company terminated its employment agreement with Mr. Forchic, and per the terms of the employment agreement, 2,000,000 unvested option immediately vested, resulting in a stock-based compensation charge of $534,310 during the six months ended June 30, 2018.

Information relating to outstanding options at June 30, ~~2019,~~2020, summarized by exercise price, is as follows:

		Outstanding				Exercisable							Outstanding						Exercisable
						Weighted				Weighted							Weighted				Weighted
						Average				Average							Average				Average
Exercise Price Per Share	Exercise Price Per Share	Shares		Life (Years)		Exercise Price		Shares		Exercise Price		Exercise Price Per Share	Shares		Life (Years)		Exercise Price		Shares		Exercise Price
$	0.46		100,000		4.45	$	0.46		100,000	$	0.46	0.01		2,500,000		4.75	$	0.01		2,500,000	$	0.01
$	0.60		3,000,000		3.61	$	0.60		3,000,000	$	0.60	0.02		1,562,500		5.00	$	0.02		1,562,500	$	0.02
$	0.69		5,214,391		4.42	$	0.69		5,069,391	$	0.69	0.03		833,300		4.34	$	0.03		833,300	$	0.03
$												0.46		100,000		3.34	$	0.46		100,000	$	0.46
$												0.60		1,000,000		2.61	$	0.60		1,000,000	$	0.60
			8,314,391		4.12	$	0.65		8,169,391	$	0.65			5,995,800		2.54	$	0.12		5,995,800	$	0.12

As of June 30, ~~2019,~~2020, the Company has no outstanding unvested options with future compensation ~~costs of $80,577, which~~costs. In addition, there will be ~~recorded as~~future compensation ~~cost as~~related to the options ~~vest over their remaining average vesting period of 2.40 years.~~to be awarded to Ms. Davis under her employment agreement discussed above. The weighted-average remaining contractual life of options outstanding and exercisable at June 30, ~~2019~~2020 was ~~4.12~~2.54 years. Both the outstanding and exercisable stock options had noan intrinsic value of $15,000 at June 30, ~~2019.~~2020.

Summary of Warrants

A summary of warrants for the six months ended June 30, ~~2019,~~2020, is as follows:

				Weighted					Weighted
	Number			Average			Number		Average
	of			Exercise			of		Exercise
	Warrants			Price			Warrants		Price
Balance outstanding, December 31, 2018		12,783,140		$	0.91
Balance outstanding, December 31, 2019								18,283,140		0.06
Warrants granted		1,000,000			1.00			3,000,000		0.05
Warrants exercised		-			-			-		-
Warrants expired or forfeited		(1,000,000	)		(1.00	)		-		-
Balance outstanding, June 30, 2019		12,783,140		$	0.57
Balance exercisable, June 30 , 2019		12,783,140		$	0.57
Balance outstanding, June 30, 2020								21,283,140	$	0.05
Balance exercisable, June 30, 2020								21,283,140	$	0.05

Information relating to outstanding warrants at June 30, ~~2019~~2020, summarized by exercise price, is as follows:

		Outstanding				Exercisable							Outstanding						Exercisable
						Weighted				Weighted							Weighted				Weighted
						Average				Average							Average				Average
Exercise Price Per Share	Exercise Price Per Share	Shares		Life (Years)		Exercise Price		Shares		Exercise Price		Exercise Price Per Share	Shares		Life (Years)		Exercise Price		Shares		Exercise Price
$	0.01		5,000,000		3.86	$	0.01		5,000,000	$	0.01	0.01		5,000,000		2.86	$	0.01		5,000,000	$	0.01
$	0.50		500,000		3.86	$	0.50		500,000	$	0.50	0.05		16,000,000		4.16	$	0.05		16,000,000	$	0.05
$	0.75		2,250,000		3.86	$	0.75		2,250,000	$	0.75	1.10		283,140		2.31	$	1.10		283,140	$	1.10
$	1.00		2,250,000		3.86	$	0.75		2,250,000	$	0.75
$	1.10		283,140		3.31	$	1.10		283,140	$	1.10
$	1.25		2,000,000		3.86	$	1.25		2,000,000	$	1.25
			12,783,140		3.84	$	0.57		12,783,140	$	0.57			21,283,140		3.83	$	0.05		21,283,140	$	0.05

~~As of~~During the six months ended June 30, ~~2019,~~2020, the Company issued five-year warrants to purchase 3,000,000 shares of common stock at an exercise price of $0.05 as part of a secured convertible promissory note (see Note 8).

The weighted-average remaining contractual life of warrants outstanding and exercisable at June 30, 2020 was 3.83 years. Both the outstanding and exercisable warrants had an intrinsic value of ~~$544,000.~~

~~During the six months ended~~$30,000 at June 30, 2018, the Company issued five-year warrants to purchase 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 to purchase 7,500,000 shares of common stock at an exercise price of $1.50 as part of a secured promissory note. Lastly, in connection with the SEDA discussed below, the Company issued five-year warrants to YA II PN to purchase 1,000,000 shares of common stock at an exercise price of $0.01 per share as a commitment fee.

~~During the six months ended June 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.~~

~~Standby Equity Distribution Agreement~~

~~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 six months ended June 30, 2018.2020.

NOTE 1211 – COMMITMENTS AND CONTINGENCIES

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 ~~$1,428,571~~$1,429,000 per calendar year. For the three and six months ended June 30, 2020 $25,000 and $50,000, respectively, and for each of the three and six months ended June 30, 2019, ~~and 2018, $41,667 and~~ $50,000 ~~respectively,~~ was recorded as research and development expense under the agreement on the ~~Condensed Consolidated Statements~~condensed consolidated statements of ~~Operations~~operations related to the minimum annual fee. For each of six months ended June 30, 2020 and 2019, no royalty was recorded as cost of goods sold on the Condensed Consolidated Statements of Operations. A total of ~~$108,333~~$289,000 and ~~$58,333~~$239,000 was owed under the amended agreement at ~~each of~~ June 30, ~~2019~~2020 and December 31, ~~2018, respectively.~~2019, respectively, and is included in accounts payable and accrued liabilities on the accompanying condensed consolidated balance sheets.

Litigation

On ~~June~~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.~~California. The Plaintiff ~~claims~~claimed damages of $335,000 for breach of an employment contract when the Company ~~terminating~~terminated the Plaintiff’s employment agreement on February 22, 2018. ~~The case is in~~On June 26, 2020, 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 February 15, 2019, MSCP, L.L.C (“MSCP”), filed suit in the Superior Court of Arizona, County of Maricopa, Case No. CV2019-001613~~Plaintiff was awarded a default judgment 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~~amount 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 for damages, if any, resulting from early termination of the Arizona lease as such amounts are not practicably determinable.~~$448,000 (see Note 6).

~~On June~~NOTE 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~~– SUBSEQUENT EVENTS

In July 2020, the Company ~~breached an agreement to pay DPA for architectural design services~~entered into two settlement agreements related to legal judgements discussed in Note 6. The aggregate of $463,000 of legal settlement were settled for $36,000 in cash, and one million shares of common stock valued at $17,000. In July 2020, the Company recorded a ~~facility in Arizona and has requested~~gain on settlement of $410,000 related to these settlements.

In July 2020, the Company entered into a ~~judgment~~settlement agreement with a vendor for ~~$251,923.45 plus interest.~~an outstanding accounts payable account. The vendor agreed to settle their accounts payable balance of $61,000 for $9,000. In July 2020, the Company ~~has not filed~~recorded a ~~response yet, as the time to respond~~gain on settlement of $52,000 related to the ~~complaint has not passed, but the Company denies the material allegations of this complaint and intend to vigorously defend this action.~~settlement.

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

We are focused on ~~(i) acquiring facilities and licenses in states that permit medical cannabis, in order to operate cannabis cultivation and processing facilities, and (ii)~~ the research, design, development and manufacturing of advanced, energy efficient indoor horticulture lighting, plant nutrient products, and ancillary equipment. Our vision is to apply the latest advances in high efficiency lighting and controls technology as well as effective manufacturing techniques to deliver highly differentiated lighting and nutrient products with clear benefits at competitive prices to the greenhouse and indoor horticulture markets.

In 2018, we acquired YLK Partners to provide turn-key services to other companies in the cannabis industry, whereby we handle the management, administration, and operation of a medical marijuana cultivation and processing facility. The Arizona Licensee is authorized to operate a medical marijuana dispensary, one (1) onsite facility and one (1) offsite facility, to produce, sell and dispense medical marijuana and manufactured and derivative products that contain marijuana pursuant to Title 9; Chapter 17 of the AZDHS, Medical Marijuana Program and Arizona Revised Statute § 36-2801 et seq., as amended from time to time. Pursuant to the Management Agreement, YLK will provide the management services for the offsite facility, on behalf of the Arizona Licensee.

Our subsidiary, Solis Tek, Inc., a California corporation, was formed in June of 2010. Its operations consist of designing, developing and sourcing of a line of Solis Tek Digital Ballasts intended for use in high intensity lighting systems used for horticulture. An electrical ballast is a device intended to limit the amount of current in an electric circuit. A familiar and widely used example is the inductive ballast used in fluorescent lamps, which limits the current through the tube, which would otherwise rise to destructive levels due to the tube’s negative resistance characteristic. Since the commencement of operations, our product line has evolved from digital ballasts to a line of lighting products including a line of specialty ballasts ranging from 400 watts to 1,000 watts with various features, our ~~Lamp Products,~~lamp 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 May 7, 2020, we were granted a loan (the “PPP loan”) from Wells Fargo Bank in the aggregate amount of $205,000, pursuant to the Paycheck Protection Program (the “PPP”) under the CARES Act. The PPP loan agreement is dated May 8, 2020, matures on May 7, 2022, bears interest at a rate of 1% per annum, with the first six months of interest deferred, and is unsecured and guaranteed by the U.S. Small Business Administration. The loan term may be extended to May 7, 2025, if mutually agreed to by us and lender. We applied ASC 470, Debt, to account for the PPP loan. The PPP loan may be prepaid at any time prior to maturity with no prepayment penalties. Funds from the PPP loan may only be used for qualifying expenses as described in the CARES Act, including qualifying payroll costs, qualifying group health care benefits, qualifying rent and debt obligations, and qualifying utilities. We intend to use the entire loan amount for qualifying expenses. Under the terms of the PPP, certain amounts of the loan may be forgiven if they are used for qualifying expenses. We intend to apply for forgiveness of the PPP loan with respect to these qualifying expenses, however, we cannot assure that such forgiveness of any portion of the PPP loan will occur. As for the potential loan forgiveness, once the PPP loan is, in part or wholly, forgiven and a legal release is received, the liability would be reduced by the amount forgiven and a gain on extinguishment would be recorded. The terms of the PPP loan provide for customary events of default including, among other things, payment defaults, breach of representations and warranties, and insolvency events. We were in compliance with the terms of the PPP loan as of June 30, 2020.

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.

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~~operations for the ~~Three Months Ended~~three months ended June 30, ~~2019 Compared~~2020 compared to the ~~Three Months Ended~~three months ended June 30, ~~2018.~~2019.

Revenue and Cost of Goods Sold

Revenue for the three months ended June 30, 2020 and 2019 was $276,000 and ~~2018 was $682,855 and $701,626,~~$683,000, respectively, a decrease of ~~$18,771,~~$407,000, or 3%60%. The decrease was due to ~~several negative~~two significant factors during ~~the second quarter of 2019,~~three months ended June 30, 2020, as compared to the ~~second quarter~~prior year period. Those factors were: 1) a failed expansion of ~~2018.~~

~~Such factors included market instability~~operations into cannabis cultivation and ~~uncertainty, reports of over-capacity~~processing management services, which diverted resources 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,~~management attention; 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 tightening2) stagnation of the ~~regulatory environment caused a pause~~cannabis industry in ~~the expansion timetable~~terms of ~~many~~ new ~~licensees.~~

~~Specific reasons to beset our revenue included a change~~markets and granting of message and direction. We had previously been a retail driven company servicing our 500+ hydro-stores targeting the home and hobbyist growers. While we continue to service those valued retail customers, we have repositioned a segment of our sales force to nationwide commercial cultivation account managers and have re-programed the sales team, changed pricing and changed marketing strategies. Our recent shift to convert to a commercial mindset, also altered our inventory strategy to longer fulfillment and lead times. For the first time, our product engineers and sales team are also offering specific consulting services into every aspect of a new cultivation ~~including environmental requirements as well as full build-out and growing ancillary services, up~~licenses, which resulted in few new companies obtaining licenses to ~~and including production requirements and specifications.~~legally grow cannabis, which ultimately resulted in a lack of orders for our lights.

Cost of sales for the three months ended June 30, 2020 and 2019 was $134,000 and ~~2018 was $189,368 and $584,916,~~$190,000, respectively. Gross profit for the three months ended June 30, 2020 and 2019, was $142,000 and ~~2018, was $493,487 and $116,710,~~$493,000, respectively. As a percentage of revenue, gross profit for the three months ended June 30, ~~2019~~2020 was ~~72%~~51%, compared to ~~17%~~72% for the three months ended June 30, ~~2018.~~2019. The ~~increase~~decrease 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 June 30, 2020 and 2019 were $260,000 and ~~2018 was $872,729 and $2,650,018,~~$873,000, respectively, a decrease of ~~$1,777,289,~~$613,000, or ~~67%~~70%. For the three months ended June 30, 2019, stock-based compensation expense decrease $1,101,854 to $7,371, compared to $1,109,225 for the prior year period. Excluding stock-based compensation expense, ourOur SG&A expenses decreased ~~$675,435~~primarily due to ~~a decrease~~reductions in ~~salaries~~the number of employees, benefits, and ~~benefits,~~ professional ~~fees, and decreased operating expenses to support our current level of business.~~fees.

Research and Development Expenses

Research and development (“R&D”) expenses for the three months ended June 30, 2020 and 2019 was $25,000 and ~~2018 was $145,392 and $62,706,~~$145,000, respectively, ~~an increase~~a decrease of ~~$82,686,~~$120,000, or ~~132%~~83%. The ~~increase~~decrease in R&D expenses was primarily due to ~~increased~~decreased royalty expense.

~~Excess Cost of Acquisition to Related Party over Historical Basis~~Legal Judgment

~~Excess cost~~On September 25, 2018, Matthew Geschke (the “Plaintiff”) filed a breach of ~~acquisition to related party over historical basis~~contract case against us in the San Diego Superior Court of San Diego, California. The Plaintiff claimed damages for breach of an employment contract when we terminated the ~~three months ended~~Plaintiff’s employment agreement on February 22, 2018. On June ~~30, 2018~~26, 2020, the Plaintiff was ~~$4,450,000, representing~~awarded a ~~non-cash charge related to our acquisition~~default judgment against us in the amount of ~~YLK Partners NV from related parties on May 10, 2018 (See Note 4 to the accompanying condensed consolidated financial statements).~~

~~Impairment of Intangible Assets~~

Impairment of intangible assets for the three months ended June 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 three months ended June 30, 2018.$448,000.

Loss on Abandonment of Leasehold Improvements

Loss on abandonment of leasehold improvement for the three months ended June 30, 2019 was ~~$40,905.~~$41,000. In February 2019, we terminated our Arizona facility lease, thereby abandoning ~~$40,905~~$41,000 of leasehold improvements during the three months ended June 30, 2019. No similar activity occurred during the ~~prior~~current year period.

Impairment of Intangible Assets

Impairment of intangible assets for the three months ended June 30, 2019 was $1,139,000. In June 2019, we determined that our intangible assets were impaired and recorded an impairment charge accordingly. No similar activity occurred during the current year period.

Other Income and Expenses

Other ~~income~~expense for the three months ended June 30, ~~2019~~2020 was ~~$1,571,835,~~$829,000, as compared to other ~~expense~~income of ~~$3,032,054~~1,572,000 for the three months ended June 30, ~~2018.~~2019. The ~~change in balance~~decrease was due to the difference in the change in fair value of derivative liability of $2,554, 818 offset by a decrease in financing costs of $1,556,474. During the three months ended June 30, 2018, we recorded a gain on the extinguishment of derivatives of $1,715,173, offset by financing costs of $7,317,406,$2,210,000 and ~~the amortization of discounts to~~increased interest expense of ~~$1,569,357, all of which did not exist during the current year period.~~$191,000 due to our increased debt levels.

Net Loss

~~Net~~Our net loss for the three months ended June 30, 2020 and 2019 was ~~$213,946, compared to a~~$1,420,000 and $214,000, respectively. The increase in net loss was due primarily to the change in other income and expenses, offset by the decrease in loss from operations.

Results of ~~$10,081,068~~operations for the ~~three~~six months ended June 30, ~~2018. The decrease in net loss was primarily due~~2020 compared to ~~financing costs and excess cost of acquisition to related party incurred during~~ the ~~three~~six months ended June 30, ~~2018 that were not present during the three months ended June 30, 2019, along with decreased operating expenses, as discussed above.~~

~~Results of Operations for the Six Months Ended June 30, 2019 Compared to the Six Months Ended June 30, 2018.~~2019.

Revenue and Cost of Goods Sold

Revenue for the six months ended June 30, 2020 and 2019 was $583,000 and ~~2018 was $1,419,737 and $1,713,375,~~$1,420,000, respectively, a decrease of ~~$293,638,~~$837,000, or ~~17%~~59%. The decrease was due to ~~several negative~~two significant factors during the ~~first~~ six months ~~of 2019,~~ended June 30, 2020, as compared to the ~~first six months~~prior year period. Those factors were: 1) a failed expansion of ~~2018.~~

Cost of sales for the six months ended June 30, 2020 and 2019, was $329,000 and ~~2018 was $764,706 and $1,118,841,~~$765,000, respectively. Gross profit for the six months ended June 30, 2020 and 2019, was $254,000 and ~~2018, was $655,031 and $594,534,~~$655,000, respectively. As a percentage of revenue, gross profit for the six months ended June 30, ~~2019~~2020 was ~~46%~~44%, compared to ~~35%~~46% for the six months ended June 30, ~~2018.~~2019. The ~~increase~~decrease 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 six months ended June ~~30,~~3, 2020 and 2019 were $621,000 and ~~2018 was $2,267,601 and $6,016,940,~~$2,268,000, respectively, a decrease of ~~$3,749,339,~~$1,647,000, or ~~62%~~73%. For the six months ended June 30, 2019, stock-based compensation expense decreased $2,630,237 to $259,276, compared to $2,889,513 for the prior year period. Excluding stock-based compensation expense, ourOur SG&A expenses decreased ~~$1,119,103~~primarily due to reductions in the ~~recording~~number of ~~a $449,000 severance obligation to our former Chief Executive Officer during the prior year period. The remaining difference of $670,013 is from a decrease in salaries~~employees, benefits, and ~~benefits,~~ professional ~~fees, and decreased operating expenses to support our current level of business.~~fees.

Research and Development Expenses

R&D expenses for the six months ended June 30, 2020 and 2019 were $50,000 and ~~2018 was $154,269 and $114,584,~~$154,000, respectively, ~~an increase~~a decrease of ~~$39,685,~~$104,000, or ~~35%~~68%. The ~~increase~~decrease in R&D expenses was primarily due to ~~increased~~decreased royalty expense.

~~Excess Cost of Acquisition to Related Party over Historical Basis~~Legal Judgment

~~Excess cost~~On September 25, 2018, the Plaintiff filed a breach of ~~acquisition to related party over historical basis~~contract case against us in the San Diego Superior Court of San Diego, California. The Plaintiff claimed damages for breach of an employment contract when we terminated the Plaintiff’s employment agreement on February 22, 2018. On June 26, 2020, the Plaintiff was awarded a default judgment against us in the amount of $448,000.

Impairment of Right of Use (ROU”) Asset

Impairment of ROU asset for the six months ended June 30, ~~2018~~2020 was ~~$4,450,000, representing a non-cash~~$82,000. In March 2020, we determined that our ROU asset was impaired and recorded an impairment charge ~~related to our acquisition of YLK Partners NV from related parties on May 10, 2018~~accordingly. (See Note 45 to the accompanying condensed consolidated financial statements).

~~Impairment of Intangible Assets~~

Impairment of intangible assets for the six months ended June 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 ~~six months ended June 30, 2018.~~prior year period.

Loss on Abandonment of Leasehold Improvements

Loss on abandonment of leasehold improvement for the six months ended June 30, 2019 was ~~$217,562.~~$218,000. In February 2019, we terminated our Arizona facility lease, thereby abandoning ~~$217,562~~$218,000 of leasehold improvements during the six months ended June 30, 2019. No similar activity occurred during the ~~prior~~current year period.

Impairment of Intangible Assets

Impairment of intangible assets for the six months ended June 30, 2019 was $1,139,000. In June 2019, we determined that our intangible assets were impaired and recorded an impairment charge accordingly. No similar activity occurred during the current year period.

Other Income and Expenses

Other ~~income~~expense for the six months ended June 30, ~~2019~~2020 was ~~$1,050,342,~~$2,111,000, as compared to other ~~expense~~income of ~~$380,434~~1,051,000 for the six months ended June 30, ~~2018.~~2019. The ~~change in balance~~decrease was due to the difference in the change in fair value of derivative liability of ~~$5,283,214, as well as,~~$3,054,000, increased interest expense of $222,000 due to our increased debt levels and the ~~recording of a gain on the change~~decrease in ~~fair value of derivative liability of $6,811,926 and a gain on the extinguishment of derivatives of $2,389,427, offset by~~ financing costs of $7,317,406, and the amortization of discounts to interest expense of $2,177,074, all of which did not exist during the current year period. The remaining increase in interest expense increased over the prior year period was due to our increase in borrowings.$114,000.

Net ~~loss~~Loss

~~Net~~Our net loss for the six months ended June 30, 2020 and 2019 was ~~$2,235,649, compared to a net loss of $10,451,973 for the six months ended June 30, 2018.~~$3,058,000 and $2,236,000, respectively. The ~~decrease~~increase in net loss was due primarily ~~due~~ to ~~financing costs~~the change in other income and ~~excess cost of acquisition to related party incurred during~~expenses, offset by the ~~six months ended June 30, 2018 that were not present during the six months ended June 30, 2019, along with decreased SG&A expenses, as discussed above.~~decrease in loss from operations.

Liquidity and Capital Resources

Cash and Liquidity

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

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

During the six months ended June 30, 2020 and 2019, we used cash in operating activities of ~~$717,355, compared to cash used in operating activities of $2,315,672 during the six months ended June 30, 2018.~~$111,000 and $717,000, respectively. During the six months ended June 30, ~~2019,~~2020, cash was primarily used to fund our operating loss of ~~$2,235,649,~~$3,058,000, partially offset by non-cash related items such as the impairment of ROU asset, financing costs, and the change in the fair value of derivative liabilities. Non-cash items during the six months ended June 30, 2020 in aggregate were $1,859,000. The remaining changes were due to a ~~$1,138,892 intangible asset impairment charge, $764,631~~$679,000 increase in legal settlements payable, a $104,000 increase in accounts payable and accrued expenses, and a ~~$532,093 decrease~~$305,000 change in inventories, a $247,032 discount on convertible note payable, $217,562 loss on abandonment of leasehold improvements, $177,850 of fair value of common stock issued for services and $129,384 of financing costs.our remaining working capital accounts.

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

During the six months ended June 30, 2020 and 2019, we used ~~$217,562~~$0 and $218,000, respectively, in cash from investing activities to purchase property and equipment. During the six months ended June 30, 2018 investing activities provided $203,195 in cash resulting from $250,000 of accounts receivable acquired on acquisition, offset by $46,805 of cash used to purchase property and equipment.

Cash ~~flows provided~~Flows Provided by ~~financing activities~~Financing Activities

During the six months ended June 30, 2020 and 2019, we generated cash from financing activities of ~~$288,236 compared to cash generated by financing activities of $3,988,530 for~~$454,000 and $288,000, respectively. During the six months ended June 30, ~~2018.~~2020, we received proceeds of $125,000, net of fees of $25,000, from a secured convertible note payable, $355,000 from loans payable, offset by $26,000 of payments on our notes payable to related parties. During the six months ended June 30, 2019, we received $150,000 from the issuance of a note payable to related party, we received $150,000 from a loan, and we made payments on our loans payable totaling $11,764. During the six months ended June 30, 2018, we raised $1,568,000 from the sale of common stock, received proceeds of $1,500,000 from a secured note payable, raised $1,436,996 from the exercise of warrants, made payments of $505,000 on our notes payable to related parties, and made payments on loans payable and capital lease obligation totaling $11,466.$12,000.

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 six months ended June 30, ~~2019,~~2020, we incurred ~~an operating~~a net loss of ~~$2,235,649,~~$3,058,000 and used cash in operations of ~~$717,355~~$111,000 and had a ~~stockholders’~~shareholders’ deficit of ~~$5,404,912 as of~~$11,555,000 at June 30, ~~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 being issued. Our ability to continue as a going concern is dependent upon our ability to raise additional funds and implement our business plan. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. In addition, our independent registered public accounting firm, in its report on our December 31, 2019 financial statements, has raised substantial doubt about our ability to continue as a going concern.

At June 30, ~~2019,~~2020, we had cash on hand in the amount of ~~$240,012.~~$447,000. Management estimates that the current funds on hand will be sufficient to continue operations through ~~September 30, 2019.~~March 2021. 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,~~shareholders, in case orof equity financing.

~~Lease Abandonment~~

~~As discussed in Notes 6~~Historically, we have financed our operations primarily through private sales of common stock, a line of credit, loans from a third party financial institutions, related parties, and 12operations. We anticipate that our primary capital source will be from the issuance of notes payable or the ~~accompanying condensed consolidated financial statements,~~proceeds from the sale of our common stock. However, we ~~provided MSCP, L.L.C (“MSCP”) a notice of termination, and on February 15, 2019, MSCP filed suit~~may not generate sufficient revenues from product sales in the ~~Superior Court of Arizona, County of Maricopa, Case No. CV2019-001613 against us and YLK. We recently filed counterclaims against MSCP for fraud~~future to achieve profitable operations. If we are not able to achieve profitable operations at some point in the ~~inducement, negligent misrepresentation, breach of the implied covenant of good faith and fair dealing, rescission of contract, unjust enrichment and punitive damages. We~~future, we may have insufficient working capital to maintain our operations as we presently intend to ~~vigorously defend this action. At the date of notice of termination,~~conduct them or to fund our expansion, marketing, and product development plans. There can be no assurance that we ~~had a remaining lease obligation of approximately $6,000,000. Due~~will be able to ~~our counterclaims, we are unable to determine and did not record, an estimate of liability~~obtain such financing on acceptable terms, or at ~~June 30, 2019.~~

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.all.

Notes Payable –to Related Parties

On May 9, 2016, we entered into note payable agreements with Alan Lien and Alvin Hao, ~~each an officer~~former officers and ~~director,~~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 ~~loans~~notes are currently past due. A total of $600,000 was due on the combined notes at ~~each of~~ June 30, ~~2019~~2020 and December 31, ~~2018.~~2019.

On May 8, 2019, we entered into a note agreement with the sister of Alvin Hao, ana former officer and director, to borrow $150,000. The loan accrues interest at 8% per annum, are unsecured and due on November 8, 2019. The note is currently past due. A total of $150,000 was due on the note at June 30, 2020 and December 31, 2019.

We entered into note agreements with the parents of Alan Lien, ~~our Chief Executive Officer~~a former officer and ~~one of our directors.~~director. 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 at each of June 30, ~~2019~~2020 and December 31, ~~2018. The loans are currently past due.~~

~~Convertible Note Payable~~2019.

Secured Convertible Notes Payable

On May 10, 2018, we issued a secured debenture (the “2018 Note”) to YA II PN in the principal amount of $1,500,000 with interest at 8% per annum (18% on default) and due on ~~February 9, 2019. The~~June 30, 2020, and provide a conversion right, in which the principal amount of the 2018 Note, ~~was amended effective February 9, 2019 for which the maturity date was extended to August 9, 2019 and~~together with any accrued but unpaid interest, could be converted into our common stock at a conversion price ~~of $0.50 a share (see Note 8~~at 75% of the ~~accompanying condensed consolidated financial statements).~~lowest volume weighted average price (VWAP) of our common stock during the 10 trading days immediately preceding the conversion date. A total of $1,728,000, including accrued interest, was due on the 2018 Note as of June 30, 2020. The 2018 Note is past due.

On October 29, 2019, we issued a convertible secured ~~by all~~debenture (the “2019 Note”) to YA II PN in the principal amount of $275,000 with interest at 10% per annum (15% on default) and due on April 29, 2020. 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 ~~assets and~~common stock at a conversion price at 75% of the lowest volume weighted average price (VWAP) of our ~~subsidiaries. The 2018~~common stock during the 10 trading days immediately preceding the conversion date. A total of $293,000, including accrued interest, was due on the 2019 Note ~~was not repaid~~ as of ~~August 9,~~June 30, 2020. The 2019 ~~and has subsequently become~~Note is past due.

On February 13, 2020, we issued a secured convertible debenture (the “2020 Note”) in the principal amount of $150,000 with interest at 10% per annum (15% on default) and due on August 10, 2021. The 2020 Note provides a conversion right, in which any portion of the principal amount of the 2020 Note, together with any accrued but unpaid interest, may be converted into our common stock at a conversion price equal to 75% of the lowest VWAP of our common stock during the ten (10) trading days immediately preceding the date of conversion, subject to adjustment. A total of $156,000, including accrued interest, was due on the 2020 Note as of June 30, 2020.

Term ~~Loan~~Loans

On May 21, 2019, we entered into a loan agreement with Celtic Bank in the principal amount of $150,000 (the “Celtic Loan”) 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 a principal payment of ~~$10,409,~~$112,000, leaving a total of ~~$139,591 owed~~$38,000 due on the term loan as of June 30, 2020. The Celtic Loan is past due.

On May 8, 2020, we obtained a Paycheck Protection Program loan in the amount of $205,000 pursuant to the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Interest on the loan asis at the rate of ~~August 12, 2019.~~

~~Standby Equity Distribution Agreement~~1% per year, and all 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 loan.

On ~~April 16, 2018,~~June 7, 2020, we ~~entered into a Standby Equity Distribution Agreement, or SEDA, with YA II PN. The SEDA establishes what is sometimes termed~~obtained an ~~equity line of credit or an equity draw-down facility. The $25,000,000 facility may be drawn-down upon by us~~Economic Injury Disaster Loan from the United States Small Business Administration in ~~installments,~~ the ~~maximum~~ amount of ~~each~~$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 ~~limited to $1,000,000. For each share~~payable in monthly installments of ~~common stock purchased under the SEDA, YA II PN will pay 90% of the lowest VWAP~~$731 over a 30 year term. The loan is secured by all of our shares during the five trading days following our 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 our common stock for a given day (the total shares sold in each trade times the sales price per share of the common stock for that trade), divided by the total number of shares sold on that day.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~~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 June 30, ~~2019, our~~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 ~~controls~~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 ~~are designed at~~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 ~~reasonable assurance level~~timely manner;

Ineffective controls over financial statement close and ~~are~~reporting process. The Company did not maintain effective tocontrols 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 ~~information we are required~~accounts were complete and accurate and agreed 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,~~detailed support and that ~~such information is accumulated~~reconciliations of accounts were properly performed, reviewed and ~~communicated~~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 June 30, 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 ~~management, including our chief executive officer and chief~~interim or annual financial ~~officer, as appropriate, to allow timely decisions regarding required disclosure.~~statements that would not be prevented or detected.

Changes in internal control over financial reporting.

There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, ~~2019~~2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II

Item 1. Legal Proceedings.

~~Information regarding reportable legal proceedings is~~For information that updates the disclosures set forth under Part I, Item 3, “Legal Proceedings” in our 2019 Annual Report, refer to Note 6, Legal Settlements Payable – Past Due, and Note 12, Subsequent Events, to the Condensed Consolidated Financial Statements contained in Part I, Item 3, “Legal Proceedings,” in our Annual Report on Form 10-K for the year ended December 31, 2018. Other than disclosed below, there have been no material changes to the legal proceedings previously disclosed in the Annual Report on Form 10-K, 1 of this report, which are incorporated herein by ~~reference herein.~~

~~On June 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 we breached an agreement to pay DPA for architectural design services related to a facility in Arizona and has requested a judgment for $251,923.45 plus interest. We have not filed a response yet, as the time to respond to the complaint has not passed, but we deny the material allegations of this complaint and intend to vigorously defend this action.reference.

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.~~For information regarding senior securities that are currently in default, please refer to Note 8, Convertible Secured Note Payable to Related Party, to the Condensed Consolidated Financial Statements contained in Part I, Item 1 of this report, which is incorporated herein by reference.

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 June 30, ~~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,~~Shareholders’ Deficit, (iv) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Condensed Consolidated Financial Statements.

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: August 14, ~~2019~~2020	By:	/s/ ~~Alan Lien~~Tiffany Davis
		~~Alan Lien~~Tiffany Davis
		Chief Executive ~~Officer and Chief Financial~~ Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)

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

Large accelerated filer	[ ]	Accelerated filer	[ ]
Non-accelerated filer	[X]	Smaller reporting company	[X]
		Emerging growth company	[ ]

PART I.	FINANCIAL INFORMATION

	ITEM 1.	Financial Statements

		Condensed ~~consolidated balance sheets~~Consolidated Balance Sheets as of June 30, ~~2019~~2020 (unaudited) and December 31, ~~2018~~2019	3

		Condensed ~~consolidated statements~~Consolidated Statements of ~~operations~~Operations for the three and six months ended June 30, 2020 and 2019 ~~and 2018~~ (unaudited)	4

		Condensed ~~consolidated statement~~Consolidated Statements of ~~stockholders’ equity~~Shareholders’ Deficit for the three and six months ended June 30, 2020 and 2019 ~~and 2018~~ (unaudited)	5 ~~– 7~~

		Condensed ~~consolidated statements~~Consolidated Statements of ~~cash flows~~Cash Flows for the six months ended June 30, 2020 and 2019 ~~and 2018~~ (unaudited)	86

		Notes to ~~condensed consolidated financial statements~~Condensed Consolidated Financial Statements (unaudited)	~~9-22~~7-17

	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~23-28~~18-24

	ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	2825

	ITEM 4.	Controls and Procedures	2925

PART II.	OTHER INFORMATION

	ITEM 1.	Legal Proceedings	30
	~~ITEM 1A.~~	~~Risk Factors~~	30
	~~ITEM 2.~~	~~Unregistered Sales of Equity Securities and Use of Proceeds~~	30
	~~ITEM 3.~~	~~Defaults Upon Senior Securities~~	30
	~~ITEM 4.~~	~~Mine Safety Disclosures~~	30
	~~ITEM 5.~~	~~Other Information~~	30
	~~ITEM 6.~~	~~Exhibits~~	3026

	ITEM 1A.	Risk Factors	26

	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26

	ITEM 3.	Defaults Upon Senior Securities	26

	ITEM 4.	Mine Safety Disclosures	26

	ITEM 5.	Other Information	26

	ITEM 6.	Exhibits	26

	SIGNATURES		3127

	June 30, 2019			December 31, 2018			June 30, 2020			December 31, 2019
	(Unaudited)						(Unaudited)
ASSETS
Current Assets
Cash	$	240,012		$	886,693		$	447,000		$	104,000
Accounts receivable, net of allowance for doubtful accounts and returns of $96,191 and $144,668, respectively		230,569			91,208
Accounts receivable, net of allowance for doubtful accounts and returns of $16,000 and $112,000, respectively								47,000			-
Inventories, net		528,672			570,187			214,000			390,000
Prepaid expenses and other current assets		142,402			255,985			32,000			24,000
Total Current Assets		1,141,655			1,804,073			740,000			518,000

Property and equipment, net		37,840			56,761			18,000			22,000
Right of use (“ROU”) asset, net, excluding amount related to disputed real property lease in Arizona (Note 6)		587,629			-
Intangible assets acquired from related party, net		-			1,301,591
Right of use asset, net								422,000			427,000
Other assets		35,087			83,887			11,000			10,000
Total Assets	$	1,802,211		$	3,246,312		$	1,191,000		$	977,000

LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current Liabilities
Accounts payable and accrued expenses	$	2,025,898		$	1,263,364		$	1,666,000		$	1,562,000
Due to former officer and shareholder		448,718			448,718
Lease payable, current portion, excluding amount related to disputed real property lease in Arizona (Note 6)		124,560			-
Contract obligations, current portion		454,545			372,727
Note payable - related parties		790,000			640,000
Convertible note payable to related party, net of discount of $0 and $247,032, respectively		1,500,000			1,252,968
Legal obligations payable – past due								3,229,000			2,550,000
Leases payable, current portion								225,000			133,000
Contract obligations acquired from related parties – past due								807,000			799,000
Notes payable to related parties – past due								790,000			790,000
Convertible notes payable to related party, net of discount of $112,000 and $178,000, respectively								1,813,000			1,597,000
Accrued interest to related parties		133,804			125,039			416,000			351,000
Loans payable		140,784			2,548			38,000			64,000
Total Current Liabilities		5,618,309			4,105,364			8,984,000			7,846,000

Lease payable, net of current portion, excluding amount related to disputed real property lease in Arizona (Note 6)		491,883			-
Contract obligations, net of current portion		335,453			408,681
Leases payable, net of current portion								410,000			423,000
Loans payable, net of current portion								355,000			-
Derivative liabilities		761,478			2,160,806			2,997,000			1,332,000
Total Liabilities		7,207,123			6,674,851			12,746,000			9,601,000

Commitments and Contingencies

Shareholders’ Deficit
Preferred stock, no par value, 20,000,000 shares authorized; no shares issued and outstanding at June 30, 2019 and December 31, 2018		-			-
Common stock, $0.001 par value, 100,000,000 shares authorized; 46,320,564 and 45,794,564 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively		46,321			45,795
Additional paid-in-capital		29,300,822			29,042,072
Preferred stock, no par value, 20,000,000 shares authorized; no shares issued and outstanding at June 30, 2020 and December 31, 2019								-			-
Common stock, $0.001 par value, 100,000,000 shares authorized; 51,738,920 and 46,820,564 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively								52,000			47,000
Additional paid-in capital								31,861,000			31,739,000
Accumulated deficit		(34,752,055	)		(32,516,406	)		(43,468,000	)		(40,410,000	)
Total Shareholders’ Deficit		(5,404,912	)		(3,428,539	)		(11,555,000	)		(8,624,000	)

TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT	$	1,802,211		$	3,246,312		$	1,191,000		$	977,000

Three months ended June 30, 2019

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

Balance, March 31, 2019 (Unaudited)		46,346,564		$	46,347		$	29,302,551		$	(34,538,109	)	$	(5,189,211	)

Fair value of common stock issued for services		(26,000	)		(26	)		(9,100	)					(9,126	)

Fair value of vested stock options								7,371						7,371

Net loss											(213,946	)		(213,946	)

Balance, June 30, 2019 (Unaudited)		46,320,564		$	46,321		$	29,300,822		$	(34,752,055	)	$	(5,404,912	)

	Three months ended June 30,						Six months ended June 30,						Three months ended June 30,						Six months ended June 30,
	2019			2018			2019			2018			2020			2019			2020			2019

Sales	$	682,855		$	701,626		$	1,419,737		$	1,713,375		$	276,000		$	683,000		$	583,000		$	1,420,000
Cost of goods sold		189,368			584,916			764,706			1,118,841			134,000			190,000			329,000			765,000
Gross profit		493,487			116,710			655,031			594,534			142,000			493,000			254,000			655,000

Operating expenses
Selling, general and administrative expenses		872,729			2,568,669			2,267,600			6,016,940			260,000			873,000			621,000			2,268,000
Research and development		145,392			62,706			154,269			114,584			25,000			145,000			50,000			154,000
Legal judgment														448,000			-			448,000			-
Impairment of right of use asset														-			-			82,000			-
Loss on abandonment of leasehold improvements		40,905			-			217,562			-			-			41,000			-			218,000
Impairment of intangible assets acquired from related party		1,138,892			-			1,138,892			-			-			1,139,000			-			1,139,000
Amortization of license agreement		81,350			81,349			162,699			81,349			-			81,000			-			163,000
Excess cost of acquisition to related party over historical basis		-			4,450,000			-			4,450,000
Total operating expenses		2,279,268			7,162,724			3,941,022			10,662,873			733,000			2,279,000			1,201,000			3,942,000

Loss from operations		(1,785,781	)		(7,046,014	)		(3,285,991	)		(10,068,339	)		(591,000	)		(1,786,000	)		(947,000	)		(3,287,000	)

Other income (expenses)
Financing costs (1)		-			(7,317,406	)		(129,384	)		(7,317,406	)		-			-			(15,000	)		(129,000	)
Change in fair value of derivative liability		1,627,056			4,181,874			1,528,712			6,811,926			(583,000	)		1,627,000			(1,525,000	)		1,529,000
Gain on extinguishment of derivative liability		-			1,715,173			-			2,389,427
Interest expense (2)		(55,221	)		(1,611,695	)		(348,986	)		(2,264,381	)		(246,000	)		(55,000	)		(571,000	)		(349,000	)
Total other income (expenses)		1,571,835			(3,032,054	)		1,050,342			(380,434	)		(829,000	)		1,572,000			(2,111,000	)		1,051,000

Loss before income taxes		(213,946	)		(10,078,068	)		(2,235,649	)		(10,448,773	)

Provision for income taxes		-			3,200			-			3,200

Net loss	$	(213,946	)	$	(10,081,268	)	$	(2,235,649	)	$	(10,451,973	)	$	(1,420,000	)	$	(214,000	)	$	(3,058,000	)	$	(2,236,000	)

BASIC AND DILUTED LOSS PER SHARE	$	(0.00	)	$	(0.24	)	$	(0.05	)	$	(0.25	)	$	(0.03	)	$	(0.00	)	$	(0.06	)	$	(0.05	)

WEIGHTED - AVERAGE COMMON SHARES OUTSTANDING BASIC AND DILUTED		46,320,564			42,370,311			46,198,509			41,820,127			51,162,447			46,320,564			50,216,412			46,198,509

(1) Included in financing costs are these amounts from a related party	$	-		$	137,080		$	129,384		$	549,802		$	-		$	-		$	15,000		$	129,000
(2) Included in interest expense are these amounts from related parties	$	45,060		$	16,868		$	334,503		$	39,781		$	128,000		$	45,000		$	330,000		$	335,000

Six months ended June 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	)

Fair value of common stock issued for services		426,000		426		177,424					177,850

Fair value of common stock issued to directors		100,000		100		62,900					63,000

Fair value of vested stock options						18,426					18,426

Net loss								(2,235,649	)		(2,235,649	)

Balance, June 30, 2019 (Unaudited)		46,320,564	$	46,321	$	29,300,822	$	(34,752,055	)	$	(5,404,912	)

Three months ended June 30, 2018

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

Balance, March 31, 2018 (Unaudited)		41,230,982	$	41,231	$	14,483,968	$	(15,813,106	)	$	(1,287,907	)

Net proceeds from sale of common stock		500,000		500		499,500					500,000

Fair value of common stock issued for services		805,000		805		917,795					918,600

Fair value of common stock issued to employees		-		-		190,625					190,625

Shares issued on exercise of warrants		450,000		450		494,550					495,000

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		52,500		53		52,447					52,500

Extinguishment of derivative liability						496,350					496,350

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

Net loss								(10,081,268	)		(10,081,268	)

Balance, June 30, 2018 (Unaudited)		44,826,564	$	44,827	$	25,511,529	$	(25,894,374	)	$	(338,018	)

Six months ended June 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		1,270,000		1,270		1,635,530					1,636,800

Fair value of common stock issued to employees		250,000		250		690,792					691,042

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 to former chief executive officer						561,671					561,671

Net loss								(10,451,973	)		(10,451,973	)

Balance, June 30, 2018 (Unaudited)		44,826,564	$	44,827	$	25,511,529	$	(25,894,374	)	$	(338,018	)

	June 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		(198,083	)		(179,162	)
Property and equipment, net	$	37,840		$	56,671

	As of
	June 30, 2019			December 31, 2018
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

	Six Months Ended June 30, 2019
Lease Cost
Operating lease cost (included in general and administration in the Company’s unaudited condensed statement of operations)	$	89,492

Other Information
Cash paid for amounts included in the measurement of lease liabilities for the first six months of 2019	$	-
Weighted average remaining lease term – operating leases (in years)		4.0
Average discount rate – operating leases		10.0	%

	At June 30, 2019
Operating leases
Long-term ROU assets	$	587,629

Short-term operating lease liabilities	$	124,560
Long-term operating lease liabilities		491,883
Total operating lease liabilities	$	616,443

Year Ending	Operating Leases
2019 (remaining 6 months)	$	90,000
2020		182,250
2021		189,000
2022		189,000
2023		94,500
Total lease payments		744,750
Less: Imputed interest/present value discount		(128,307	)
Present value of lease liabilities	$	616,443

	June 30, 2019		December 31, 2018

Term loan (a)	$	139,591	$	-
Automobile loan (b)		1,193		2,548
Loans payable	$	140,784	$	2,548