10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2018

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

For the transition period from __________ to __________

Commission File Number: 000-53635

GENERATION ALPHA, INC.

(Exact name of registrant as specified in its charter)

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

853 Sandhill Ave.

Carson, CA 90746

(Address of principal executive offices) (Zip code)

(888) 998-8881

(Registrant’s telephone number, including area code)

Solis Tek Inc.

(Former name, former address and former fiscal year, if changed since last report)

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

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

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act.          [  ]

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

The number of shares of registrant’s common stock outstanding as of November 9, 2018 was 46,066,564.

GENERATION ALPHA, INC.

INDEX

PART I.	FINANCIAL INFORMATION		3
	ITEM 1.	Financial Statements	3
		Condensed consolidated balance sheets as of September 30, 2018 (unaudited) and December 31, 2017	3
		Condensed consolidated statements of operations for the three and nine months ended September 30, 2018 and 2017 (unaudited)	4
		Condensed consolidated statement of shareholders’ deficit for the nine months ended September 30, 2018 (unaudited)	5
		Condensed consolidated statements of cash flows for the nine months ended September 30, 2018 and 2017 (unaudited)	6
		Notes to condensed consolidated financial statements (unaudited)	7-22
	ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23-29
	ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk	29
	ITEM 4.	Controls and Procedures	29-30
PART II.	OTHER INFORMATION		31
	ITEM 1.	Legal Proceedings	31
	ITEM 1A.	Risk Factors	31
	ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31
	ITEM 3.	Defaults Upon Senior Securities	31
	ITEM 4.	Mine Safety Disclosures	31
	ITEM 5.	Other Information	31
	ITEM 6.	Exhibits	31
	SIGNATURES		32

2

PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements.

GENERATION ALPHA, INC.

(FORMERLY SOLIS TEK INC.)

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2018			December 31, 2017
		(Unaudited)
ASSETS
Current Assets
Cash	$	2,053,399		$	967,943
Accounts receivable, net of allowance for doubtful accounts and returns of $22,288 and $396,499, respectively		296,803			417,484
Inventories, net		1,157,373			1,684,463
Advances to suppliers – formerly a related party		540,090			735,730
Prepaid expenses and other current assets		247,323			134,374
Total Current Assets		4,294,988			3,939,994
Property and equipment, net		509,969			138,243
Intangible assets acquired from related party, net		1,382,941			-
Other assets		83,887			37,980
TOTAL ASSETS	$	6,271,785		$	4,116,217
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current Liabilities
Accounts payable and accrued expenses	$	1,839,820		$	1,124,349
Due to former related party vendor		-			381,457
Contract obligations, current portion		331,818			-
Note payable - related parties		640,000			1,145,000
Note payable to related party, current portion, net of discount of $747,032 and $0, respectively		752,968			-
Convertible note payable to related party, current portion, net of discount of $0 and $1,055,556, respectively		-			194,444
Due to related parties		124,117			146,534
Capital lease obligations, current portion		260			9,665
Loans payable, current portion		3,383			8,476
Total Current Liabilities		3,692,366			3,009,925
Loans payable, net of current portion		-			17,481
Contract obligations, net of current portion		445,295			-
Convertible note payable, net of current portion, net of discount of $0 and $500,000, respectively		-			-
Derivative liability		6,617,284			7,415,000
Total liabilities		10,754,945			10,442,406
Series-A Convertible Preferred Shares, net of no discount and $351,000, no par value, none and 351,000 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively		-			-
Commitments and Contingencies
Shareholders’ Deficit
Preferred stock, no par value, 20,000,000 shares authorized; no shares issued and outstanding at September 30, 2018 and December 31, 2017		-			-
Common stock, $0.001 par value, 100,000,000 shares authorized; 45,066,564 and 38,522,034 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively		45,067			38,522
Additional paid-in-capital		28,459,378			9,077,690
Accumulated deficit		(32,987,605	)		(15,442,401	)
Total Shareholders’ Deficit		(4,483,160	)		(6,326,189	)
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT	$	6,271,785		$	4,116,217

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

3

GENERATION ALPHA, INC.

(FORMERLY SOLIS TEK INC.)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Sales	$	851,710		$	1,993,865		$	2,565,085		$	7,336,980
Cost of goods sold (1)		718,139			1,322,497			1,836,980			4,625,210
Gross profit		133,571			671,368			728,105			2,711,770
Operating expenses
Selling, general and administrative expenses		4,115,603			2,050,189			10,213,893			9,206,076
Research and development		37,332			82,500			151,916			247,770
Excess cost of acquisition from a related party over historical basis		-			-			4,450,000			-
Total operating expenses		4,152,935			2,132,689			14,815,809			9,453,846
Loss from operations		(4,019,364	)		(1,461,321	)		(14,087,704	)		(6,742,076	)
Other income (expenses)
Financing costs (2)		-			-			(7,317,406	)		-
Change in fair value of derivative liability		(2,525,234	)		-			4,286,692			-
Gain on extinguishment of derivative liability		-			-			2,389,427			-
Interest expense (3)		(548,632	)		(28,190	)		(2,813,013	)		(84,010	)
Total other expenses		(3,073,866	)		(28,190	)		(3,454,300	)		(84,010	)
Loss before income taxes		(7,093,230	)		(1,489,511	)		(17,542,004	)		(6,826,086	)
Provision for income taxes		-			-			3,200			4,113
Net loss	$	(7,093,230	)	$	(1,489,511	)	$	(17,545,204	)	$	(6,830,199	)
BASIC AND DILUTED LOSS PER SHARE	$	(0.17	)	$	(0.04	)	$	(0.42	)	$	(0.18	)
WEIGHTED - AVERAGE COMMON SHARES OUTSTANDING BASIC AND DILUTED		42,826,985			37,079,972			41,810,624			37,482,508
(1) Included in cost of goods sold are these amounts from a former related party	$	137,080		$	977,784		$	549,802		$	3,607,090
(2) Included in financing costs are these amounts from a related party		-			-			6,177,406			-
(3) Included in interest expense are these amounts from related parties	$	16,868		$	45,205		$	39,781		$	81,986

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

4

GENERATION ALPHA, INC.

(FORMERLY SOLIS TEK INC.)

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

(UNAUDITED)

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

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

5

GENERATION ALPHA, INC.

(FORMERLY SOLIS TEK INC.)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended September 30,
	2018			2017
	(Unaudited)			(Unaudited)
Cash Flows from Operating Activities
Net loss	$	(17,545,204	)	$	(6,830,199	)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities
Provision for allowance for doubtful accounts and sales returns		(302,763	)		75,333
Provision for inventory reserves		347,828			-
Depreciation and amortization		179,717			53,111
Imputed interest on contractual obligation		8,590			-
Gain on sale of property and equipment		(2,400	)
Fair value of warrants issued to related party in excess of basis of acquired licensing rights		4,450,000			-
Fair value of vested stock options		3,242,782			204,449
Fair value of common stock issued for services		1,636,800			2,096,597
Fair value of common stock issued to directors and employees		958,020			2,835,000
Fair value of warrants issued for financing costs		7,317,406			-
Common stock purchased by officer at discount		-			300,000
Amortization of debt discount		2,308,524			-
Amortization of Series-A preferred shares discount		368,550			-
Change in the fair value of derivative liability		(4,286,692	)		-
Gain on extinguishment of derivative liability		(2,389,427	)		-
Changes in Assets and Liabilities
(Increase) Decrease in:
Accounts receivable		423,444			(312,071	)
Inventories		179,262			1,111,166
Advances to suppliers		195,640			-
Prepaid expenses and other		(112,949	)		(158,978	)
Other assets		(45,907	)		-
(Decrease) Increase in:
Accounts payable and accrued expenses		753,553			387,571
Due to former related party vendor		(381,457	)		(685,108	)
Due to related parties		(22,417	)		26,067
Net Cash Used in Operating Activities		(2,719,100	)		(897,062	)
Cash Flows from Investing Activities
Collection of receivable acquired as part of acquisition		250,000			-
Cash received on sale of property and equipment		28,500			-
Purchase of property and equipment		(441,961	)		(3,200	)
Net Cash Used in Investing Activities		(163,461	)		(3,200	)
Cash Flows from Financing Activities
Proceeds from sale of common stock		1,568,000			455,000
Proceeds from sale of common stock to officer		-			100,000
Proceeds from exercise of warrants		1,436,996			-
Proceeds from secured note payable		1,500,000			-
Proceeds from notes payable related parties		-			300,000
Payments on notes payable related party		(505,000	)		(20,000	)
Payments on capital lease obligations		(9,405	)		(10,245	)
Payments on loans payable		(22,574	)		(6,147	)
Net Cash Provided by Financing Activities		3,968,017			818,608
Net increase (decrease) in cash		1,085,456			(81,654	)
Cash beginning of period		967,943			275,783
Cash end of period	$	2,053,399		$	194,129
Interest paid	$	68,106		$	25,327
Taxes paid	$	3,200		$	3,200
Non-Cash Financing Activities
Extinguishment of derivative liability	$	1,799,003		$	-
Change in the fair value of derivative liability	$	4,286,692		$	-
Common shares issued upon conversion of convertible note payable and accrued interest	$	1,788,082		$	-
Common shares issued upon conversion of Series-A convertible preferred shares	$	368,550		$	-
Assets acquired from related party on issuance of warrants	$	1,750,000		$	-
Contract obligations incurred on acquisitions of license agreement	$	768,523		$	-

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

6

GENERATION ALPHA, INC.

(FORMERLY SOLIS TEK INC.)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2018 AND 2017 (UNAUDITED)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Generation Alpha, Inc. and its subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

History and Organization

Generation Alpha, Inc. (the “Company”) was originally incorporated under the laws of the State of Nevada on March 2, 2007 as Cinjet, Inc. (“Cinjet”). Effective September 1, 2015, Cinjet changed its corporate name to Solis Tek Inc. (“Solis Tek”). Effective September 25, 2018, Solis Tek changed its corporate name to Generation Alpha, Inc. 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.

Name Change and Merger Agreement

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.

As permitted by Chapter 92A.180 of Nevada Revised Statutes, the purpose of the Merger was to effect a change of the Company’s name from “Solis Tek Inc.” to “Generation Alpha, Inc.” On September 24, 2018, the Company filed articles of merger with the Secretary of State of Nevada, which were effective September 25, 2018, to effect the Merger, and the Company’s Articles of Incorporation were deemed amended to reflect the change in the Company’s corporate name (the “Name Change”).

In connection with the foregoing, the Company filed an Issuer Company-Related Action Notification Form with the Financial Industry Regulatory Authority (“FINRA”), requesting confirmation of the Name Change and also to request the change of the Company’s ticker symbol from “SLTK” to “GNAL” (the “Symbol Change”).

The Name Change and Symbol Change do not affect the rights of the Company’s security holders. The Company’s securities will continue to be quoted on the OTC Markets. Following the Name Change, the stock certificates, which reflect the former name of the Company, will continue to be valid. Certificates reflecting the Name Change will be issued in due course as old stock certificates are tendered for exchange or transfer to the Company’s transfer agent.

Overview of Business

The Company is a vertically integrated technology innovator, developer, manufacturer and distributor focused on bringing 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. For nearly a decade, growers have used the Company’s lighting solutions to increase yield, lower costs and grow better to maximize their return on investment. More recently, the Company’s Zelda Horticulture nutrient division has provided an expanding product mix to the Company’s offerings. The Company’s lighting and nutrient customers include retail stores, distributors and commercial growers in the United States and abroad. In early 2018, the Company announced its expansion into the “touch-the-plant” side of the cannabis business with its present build-out of an existing facility in Phoenix, Arizona to be utilized as both a cultivation site and processing platform. This operation is under a contract with an Arizona licensee and is expected to be revenue generating in early 2019.

7

Going Concern

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying condensed consolidated financial statements, during the nine months ended September 30, 2018, the Company incurred an operating loss of $14,087,704, used cash in operations of $2,719,100 and had a shareholders’ deficit of $4,483,160 as of September 30, 2018. 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, 2017 consolidated financial statements, raised substantial doubt about the Company’s ability to continue as a going concern.

At September 30, 2018, the Company had cash on hand in the amount of $2,053,399. On April 16, 2018, the Company entered in a Standby Equity Distribution Agreement (“SEDA”) that may provide it with additional funds (See Note 12). Management estimates that the current funds on hand will be sufficient to continue operations through December 2018. 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 shareholders, in case of equity financing.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation

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

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

For the nine months ended September 30, 2018, options to acquire 7,784,391 shares of common stock and warrants to acquire 13,783,140 shares of common stock have been excluded from the calculation of weighted average common shares outstanding at September 30, 2018, as their effect would have been anti-dilutive. For the nine months ended September 30, 2017, options to acquire 3,000,000 shares of common stock have been excluded from the calculation of weighted average common shares outstanding at September 30, 2017, as their effect would have been anti-dilutive.

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in valuing our allowances for doubtful accounts, reserves for inventory obsolescence, impairment testing of long lived assets, valuing equity instruments issued for services and valuation allowance for deferred tax assets, among others. Actual results could differ from these estimates.

8

Revenue Recognition

In September 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 regarding revenue recognition. The new standard provides authoritative guidance clarifying the principles for recognizing revenue and developing a common revenue standard for U.S. generally accepted accounting principles. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in the exchange for those goods or services. The ASU became effective January 1, 2018. Due to the nature of the products sold by the Company, the adoption of the new standard has had no quantitative effect on the financial statements. However, the guidance requires additional disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized.

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

Under the new guidance, revenue is recognized when control of promised goods or services is transferred to 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 of sales are recognized once products are delivered to the customer’s control and performance obligations are satisfied.

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

The Company does not offer a general right of return on any of its sales and considers all sales as final. The Company generally provides a three-year warranty on its ballasts. However, the Company does not maintain a warranty reserve as the Company is able to chargeback its vendors for all warranty claims. As of September 30, 2018 and December 31, 2017, the Company recorded reserves for returned product in the amounts of $116,857 and $114,119, respectively, which reduced the accounts receivable balances as of those periods.

Concentration Risks

The Company maintains the majority of its cash balances with one financial institution, in the form of demand deposits. At September 30, 2018 and December 31, 2017, 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 nine months ended September 30, 2018 and 2017, its ballasts, lamps and reflectors, which comprised the majority of the Company’s purchases during those periods, were each only purchased from one separate vendor. The ballast vendor is a former related party (see Note 5).

The Company performs a regular review of customer activity and associated credit risks and does not require collateral or other arrangements. Two customers accounted for 19.0% and 13.0%, respectively, of the Company’s revenue for the three months ended September 30, 2018, and for the three months ended September 30, 2017, no customer accounted for more than 10% of the Company’s revenue. Shipments to customers outside the United States comprised 3.3% and 0.1% for the three months ended September 30, 2018 and 2017, respectively. One customer accounted for 12.1% of the Company’s revenue for the nine months ended September 30, 2018, and for the nine months ended September 30, 2017, no customer accounted for more than 10% of the Company’s revenue. Shipments to customers outside the United States comprised 4.7% and 2.6% for the nine months ended September 30, 2018 and 2017, respectively.

9

As of September 30, 2018, one customer accounted for 12.9% of the Company’s trade accounts receivable balance, and as of December 31, 2017, four customers accounted for 17.1%, 14.8%, 14.5% and 14.3%, respectively, of the Company’s trade accounts 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, approximate the related fair values due to the short-term maturities of these instruments.

The fair value of the derivative liabilities of $6,617,284 and $7,415,000 at September 30, 2018 and December 31, 2017, respectively, was valued using Level 2 inputs.

Derivative Financial Instruments

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

Intangible Assets

The Company accounts for intangible assets in accordance with the authoritative guidance issued by the 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 September 30, 2018, the Company had intangible assets of $1,382,941 (see Note 4) that consist of a license right. Management believes there were no indications of impairment based on management’s assessment of these assets at that date. Factors the Company considers important that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of the use of its assets or the strategy for the Company’s overall business, and significant negative industry or economic trends. If current economic conditions worsen causing a decrease in anticipated revenues and/or increased costs, the Company may have to record an impairment to its intangible assets.

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Recently Issued Accounting Pronouncements

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

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

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

NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following September 30, 2018 and December 31, 2017:

	September 30, 2018			December 31, 2017
Machinery and equipment	$	198,455		$	234,706
Computer equipment		12,448			12,448
Furniture and fixtures		82,779			97,451
Leasehold improvements		431,819			7,000
		725,501			351,605
Less: accumulated depreciation		(215,532	)		(213,362	)
Property and equipment, net	$	509,969		$	138,243

Depreciation expense for the three and nine months ended September 30, 2018 was $13,066 and $44,134, respectively, and depreciation expense for the three and nine months ended September 30, 2017 was $17,480 and $53,111, respectively. During the nine months ended September 30, 2018, the Company sold certain of its property and equipment for $28,500. The book value of the property and equipment was $26,100, resulting in a gain on the sale of property and equipment of $2,400.

Property and equipment include assets acquired under capital leases of $64,632 and $64,632 at September 30, 2018 and December 31, 2017, respectively.

NOTE 4 – LICENSE AGREEMENT ACQUIRED FROM RELATED PARTIES

License agreement acquired from related parties as of September 30, 2018 and December 31, 2017, consisted of the following:

	As of
	September 30, 2018			December 31, 2017
License agreement	$	1,518,523		$	-
Accumulated amortization		(135,582	)		-
Intangible assets, net	$	1,382,941		$	-

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

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 one of the YLK investors.

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 amount of these payments of $1,518,523 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 both the three and nine months ended September 30, 2018 was $54,235 and $135,584, 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 during the nine month period ended September 30, 2018.

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As of September 30, 2018, the remaining Management Agreement obligation was $777,113 (net of discount of $72,887), for which $331,818 was reflected as current and $445,295 was reflected as long term in the accompanying condensed consolidated balance sheet.

NOTE 5 - RELATED PARTY TRANSACTIONS

Supplier (Former Related Party)

A family member of an officer/shareholder owned a minority interest in a company in China, which is the sole supplier of ballasts to the Company. Purchases from the supplier for the three and nine months ended September 30, 2018 totaled approximately $381,000 and $1,478,000, and $1,411,000 and $2,913,000, respectively, for the three and nine months ended September 30, 2017. The Company believes purchase prices from this vendor approximated what the Company would have to pay from an independent third party vendor. In 2017, the Company determined that due to a change in relationship status, this vendor that was formerly considered a related party, was deemed to no longer be a related party. At September 30, 2018 and December 31, 2017, the Company owed the former related party $0 and $381,457, respectively. At September 30, 2018 and December 31, 2017, the Company had made advanced deposit payments to this vendor for $540,090 and $735,730, respectively, which will be applied to purchase inventory upon delivery.

Due to Related Parties

As of September 30, 2018 and December 31, 2017, the Company owed related parties $124,117 and $146,534, respectively. The balances are interest owed on notes payable to related parties (see Note 6). During the nine months ended September 30, 2018, the Company added $52,889 of additional accrued interest and made interest payments of $75,306.

NOTE 6 – NOTES PAYABLE TO RELATED PARTIES

Notes payable to related parties consists of the following at September 30, 2018 and December 31, 2017:

	September 30, 2018		December 31, 2017
Notes payable to officers/shareholders (a)	$	-	$	195,000
Notes payable to officers/shareholders (b)		600,000		600,000
Notes payable to related parties (c)		-		300,000
Notes payable to related parties (d)		40,000		50,000
Total	$	640,000	$	1,145,000

a.	On July 1, 2012, the Company entered into a notes payable agreement with Lydia Hao, who is the mother of Alvin Hao, the Company’s executive vice president and a director. The maximum borrowings allowed under the note are $200,000. Through December 31, 2013, the note bore interest at 20% per annum. Beginning on January 1, 2014, the interest rate on the note was reduced to 8% per annum. The note is due 30 days after demand. Amounts owed on the note balance were $195,000 at December 31, 2017. During the nine months ended September 30, 2018, the Company made payments of $195,000 and the notes were retired.
b.	On May 9, 2016, the Company entered into note payable agreements with Alan Lien and Alvin Hao, each an officer and director, to borrow $300,000 under each individual note. Pursuant to the terms of each of these agreements, the Company borrowed $300,000 from each of Alan Lien and Alvin Hao. The notes accrue interest at a rate of 8% per annum, are unsecured and were due on or before May 31, 2018. The loans are currently past due. A total of $600,000 was due on the combined notes at September 30, 2018 and December 31, 2017, respectively.
c.	In February 2017, the Company executed two separate promissory notes and borrowed $300,000 from the relatives of Alan Lien, the Company’s Chief Executive Officer and one of its directors. The notes are unsecured, payable on demand and carry an interest rate of 14% per annum. A total of $300,000 was outstanding on the combined notes at December 31, 2017. During the nine months ended September 30, 2018, the Company made payments of $300,000 and the notes were retired.
d.	The Company entered into note agreements with the parents of Alan Lien, the Company’s Chief Executive Officer and one of its directors. The loans accrue interest at 10% per annum, are unsecured and were due on or before December 31, 2016. A total of $50,000 was due on the loans as of each of December 31, 2017 and 2016. During the nine months ended September 30, 2018, the Company made payments of $10,000, leaving a balance due of $40,000 as of September 30, 2018. The loans are currently past due.

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NOTE 7 – LOANS PAYABLE

Loans payable consist of the following as of September 30, 2018 and December 31, 2017:

	September 30, 2018			December 31, 2017
Automobile loans	$	3,383		$	25,957
Less: current portion		(3,383	)		(8,476	)
Non-current portion	$	-		$	17,481

In 2015, the Company entered into two loan agreements to purchase automobiles. The combined principal amount of the loans was $44,093 and they mature by November 2021. During the nine months ended September 30, 2018, the Company made payments of $22,574, which included payment in full on one of its automobile loans, leaving one remaining loan. A total of $3,383 and $25,957 was owed on the loans as of September 30, 2018 and December 31, 2017, respectively.

NOTE 8 – SECURED NOTE PAYABLE TO RELATED PARTY

Secured note payable to related party consists of the following as of September 30, 2018 and December 31, 2017:

	September 30, 2018			December 31, 2017
YA II PN, Ltd.	$	1,500,000		$	-
Less debt discount		(747,032	)		-
Secured note payable, net	$	752,968		$	-

On May 10, 2018, the Company issued a secured debenture (the “2018 Note”) to YA II PN in the principal amount of $1,500,000 with interest at 8% per annum (18% on default) and due on February 9, 2019. The 2018 Note 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 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.

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(d)

A warrant, or Warrant #4, to purchase 2,000,000 shares of common stock at an exercise price of $1.50 per share for a term expiring on May 10, 2023. At any time, the Company has the right and option to purchase any unexercised shares of common stock underlying Warrant #4 for a purchase price of $0.03 per share so purchased if and only if the average VWAP (as reported by Bloomberg, LP) of the Company’s common stock is greater than $1.50 per share for the five (5) consecutive trading days immediately preceding the Company’s delivery of a notice of exercise.

The Company has the right and option to compel YA II PN to exercise and purchase the shares of common stock underlying Warrant #4 on the terms set forth in Warrant #4 if and only if the average VWAP of the Company’s common stock is greater than $2.50 per share for the five (5) consecutive trading days immediately preceding the Company’s delivery of a notice of exercise.

The 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 nine months ended September 30, 2018.

During the nine months ended September 30, 2018, amortization of debt discount was $752,968 and was recorded as an interest cost. The unamortized balance of the debt discount was $747,032 as of September 30, 2018.

NOTE 9 – CONVERTIBLE NOTE PAYABLE TO RELATED PARTY

Convertible note payable to related party consist of the following as of September 30, 2018 and December 31, 2017:

	September 30, 2018		December 31, 2017
YA II PN, Ltd.	$	-	$	1,750,000
Less debt discount		-		(1,555,556	)
Convertible note payable, net	$	-	$	194,444

On November 8, 2017, the Company issued a secured convertible debenture (the “2017 Note”) to YA II PN in the principal amount of $1,750,000 with interest at 5% per annum (15% on default) and due 18 months from closing. The 2017 Note is secured by all the assets of the Company and its subsidiaries. The 2017 Note is convertible into common stock of the Company at $1.00 per share (the “Conversion Price”), subject to adjustment based on upon the Company’s trading price. As part of the issuance, the Company also granted YA II PN a 5-year warrant to purchase 1,137,500 shares of the Company at $1.10 per share

The Company paid 5% of aggregate funding as a commitment fee to YA II PN and $15,000 towards due diligence and structuring fee. The Company netted $1,647,500 after fees and expenses of $102,500.

The Company determined that since the adjustment to the Conversion Price of the 2017 Note had no floor, the Company could no longer determine if it had enough authorized shares to fulfil the conversion obligation. Furthermore, 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 offerings or events. As such, the Company determined that the conversion feature and the warrants created a derivative with a fair value of $3,767,724 at the date of issuance. The Company accounted for the fair value of the derivative up to the face amount of the 2017 Note of $1,750,000 as a valuation discount to be amortized over the life of the 2017 Note, and the excess of $2,017,724 being recorded as a finance cost during the year ended December 31, 2017.

The unamortized balance of the debt discount was $1,555,556 as of December 31, 2017. In April 2018, YA II PN notified the Company in writing that it elected to convert all remaining outstanding principal and interest accrued and otherwise payable under the 2017 Note, which included the conversion of $1,750,000 of principal and $38,082 of interest. Upon the conversion of the 2017 Note, the Company issued an aggregate of 1,788,082 shares of its common stock to YA II PN and the 2017 Note and the security agreement were both terminated and all security interest and liens under the security agreement were released and terminated. The balance of the debt discount of $1,555,556 was recorded as an interest cost during the period ended September 30, 2018.

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NOTE 10 – SERIES-A CONVERTIBLE PREFERRED STOCK AND WARRANTS

Series-A Convertible Preferred Shares consisted of the following as of September 30, 2018 and December 31, 2017:

	September 30, 2018		December 31, 2017
5% Series-A preferred stock, $0.0001 par value, none and 351,000 shares issued and outstanding as of September 30, 2018 and December 31, 2017	$	-	$	351,000
Discount relating to fair value of conversion feature and warrants granted upon issuance		-		(351,000	)
Preferred stock	$	-	$	-

In October 2017, the Company conducted a private offering to raise up to $3,000,000 in convertible Preferred Series-A stock. Each unit consisted of (i) three shares of Series-A Convertible Preferred Stock of the Company (the “Series-A”) and (ii) a warrant to purchase 1,936 shares of the Company’s common stock at $1.25 per share (the “Series-A Warrants”). Each Series-A share is convertible into such number of share of common stock of the Company equal to the stated value of $1,050 divided by the conversion price. The conversion price is the lesser of $1.00 per share or 80% of the VWAP of the 10 trading days prior to conversion. The Series A shares also contained a number of automatic conversion features based on achievement of market and other conditions. On October 24, 2017 FirstFire Global Opportunities Fund LLC (“FirstFire”) purchased 117 Units, which consisted of 351,000 Series-A shares and Series-A Warrants to purchase 283,140 shares of common stock for $351,000. The Company received a total of $295,410 after fees and expenses. The Series-A offering was terminated after this issuance.

As part of the issuance, the Company initially granted Series-A Warrants to purchase 226,512 shares of common stock to FirstFire. The Company subsequently issued 56,628 additional Series-A Warrants to FirstFire as part of the offering, bringing the total Series-A Warrants issued to them to 283,140. The Series-A Warrants are exercisable at $1.25 per share and will expire in five years. The exercise price, and the number of warrants to be issued, are subject to adjustment. The exercise price of the Series-A Warrants is subject to a reset provision (down round protection) in the event the Company issues similar debt or equity instruments with a price lower than $1.25 per share. The number of Series-A Warrants shall also be increased upon the occurrence of certain events.

The Company considered the accounting guidance and determined the appropriate treatment is to account the Series-A conversion feature as a liability since the instrument is convertible into a variable number of shares (i.e. the conversion price continuously reset) and that the Company could no longer determine if it had enough authorized shares to fulfil the conversion obligation. Furthermore, the Company determined that the exercise price of the Series A Warrants were not a fixed amount because they were subject to an adjustment based on the occurrence of future offerings or events. As such, the Company determined that the conversion feature of the Series-A preferred stock had a fair value of $564,000 at issuance, and the fair value of 283,140 Series-A Warrants had a fair value of $338,358 at issuance, which created a derivative with an aggregate fair value of $902,358 at the date of issuance. The Company accounted for the fair value of the derivative up to the face amount of the preferred as a reduction of the fair value of the preferred stock of $295,410, and the excess of $606,948 was recorded as a deemed dividend and a charge to paid in capital during the year ended December 31, 2017.

In November 2017, FirstFire informed the Company that it was exercising its right to participate in the YA II PN debt offering described in Note 7. However, YA II PN refused and threatened to back out of the offering if FirstFire was included in it. The YA II PN debt offering was consummated without FirstFire. In December 2017, as a settlement with FirstFire for not to exercising its right to participate in the YA II PN debt offering, the Company granted FirstFire warrants to purchase 166,860 shares of common stock at $1.00 per share. The warrant contained “down-round/reset” provisions (both exercise price and number of shares) in the event the Company issues similar instrument at a price lower than $1.25 per shares, and as such, is subject to derivative liability accounting. The Company determined that the issuance of these additional warrants was part of a negotiated settlement with FirstFire, and recorded the fair value of the warrants of $199,000 as a liability and as a financing cost during the year ended December 31, 2017.

The Company also considered the guidance of ASC 480-10-S99-3A, and determined that as redemption is outside control of the issuer as the conversion price not fixed, such preferred shares should be recognized outside of permanent equity.

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

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NOTE 11 – 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 notes, Series-A preferred stock, and warrants described in Notes 8, 9 and 10 were not a fixed amount because they were either subject to an adjustment based on the occurrence of future offerings or events or they were variable. Since the number of shares is not explicitly limited, the Company is unable to conclude that enough authorized and unissued shares are available to settle the conversion option. In accordance with the FASB authoritative guidance, the conversion features have been characterized as derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.

As of September 30, 2018, and December 31, 2017, the derivative liabilities were valued using either a probability weighted average Monte Carlo pricing model or the Black Scholes pricing model with the following assumptions:

	September 30, 2018			Issued During 2018			December 31, 2017
Exercise Price	$	0.49 – 1.50		$	1.50		$	1.10 – 1.25
Stock Price	$	0.95		$	1.09		$	2.23
Risk-free interest rate		2.91-2.94	%		2.83	%		1.76-2.20	%
Expected volatility		126 – 138	%		171	%		172	%
Expected life (in years)		4.06 – 4.61			5.0			1.30 – 5.00
Expected dividend yield		0	%		0	%		0	%
Warrants	$	6,617,284		$	7,677,406		$	3,000,000
Convertible debt		-			-			3,633,000
Series-A Preferred Stock		-			-			782,000
Fair Value:	$	6,617,284		$	7,677,406		$	7,415,000

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.

During the nine months ended September 30, 2018, the Company recognized $4,286,692 as other income, which represented the change in the fair value of the derivative from the respective prior period. In addition, during the nine months ended September 30, 2018, the Company recognized $4,188,430, which represented the extinguishment of derivative liabilities, of which $2,389,437, was included in other income, and the remaining $1,799,003 was recorded to additional paid-in-capital. In addition, the Company recognized derivative liabilities of $7,677,406 upon issuance of warrants (see Note 8).

NOTE 12 – SHAREHOLDERS’ EQUITY

Common shares issued for cash

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

Common shares issued for services

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

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Common shares issued to directors and employees for services

Board of Directors Appointments

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

Executive Employment Agreements

On February 14, 2018, the Company entered into a three-year employment agreement with Tiffany Davis as the Company’s Chief Operating Officer. As part of the employment agreement, Ms. Davis was granted 1,000,000 shares of the Company’s common stock, of which 250,000 shares vested and were issued on the signing of the employment agreement and 250,000 shares vest annually on the anniversary of the employment agreement. The fair value of the shares on the date of grant was $1,340,000, of which $335,000 was recorded as stock-based compensation expense on the date of grant, and the remaining $1,005,000 was to be amortized ratably over the three-year vesting period, of which $173,353 was recorded as stock-based compensation expense during the nine months ended September 30, 2018. As discussed in Note 13 below, on August 22, 2018, Ms. Davis entered into an employment agreement that superseded and replaced this employment agreement.

Former Chief Compliance Officer

On December 27, 2017, the Company entered into a four-year employment agreement with Stanley L. Teeple as the Company’s Chief Compliance Officer. As part of the Employment Agreement, Mr. Teeple was granted 1,000,000 shares of the Company’s common stock, of which 250,000 shares vested and were issued on the signing of the employment agreement and 250,000 shares vest annually on the anniversary of the employment agreement. The fair value of the shares on the date of grant was $1,710,000, of which $427,500 was recorded as stock-based compensation during the year ended December 31, 2017, and $285,000 was recorded as stock-based compensation during the nine months ended September 30, 2018. Stanley Teeple resigned as the Company’s Chief Compliance Officer, Secretary and Senior Vice President, effective August 31, 2018, and the obligation to issue the remaining 750,000 shares and corresponding remaining future amortization of stock-based compensation ceased.

Former Chief Executive Officer

On January 6, 2017, the Company extended an offer to Dennis G. Forchic to become the Company’s Chief Executive Officer. Mr. Forchic accepted the offer and contracts were executed on March 27, 2017. As part of the Employment Agreement, the Company issued a total of 5,411,765 shares valued at $2,760,000. In addition, Mr. Forchic purchased an additional 784,314 shares valued at $400,000 for a consideration of $100,000. The fair value of the shares on the date of grant over consideration received was $300,000, which was recorded as stock compensation expense during the nine months ended September 30, 2017. In addition, Mr. Forchic was granted an option to purchase 3,000,000 shares at $0.60 per share, with 33.3% of these shares vesting on the one year anniversary of the date of grant and the remainder vesting in equal installments at the end of each month over the next three years. The options were valued at $835,767 using a Black Scholes options pricing model and was being amortized as an expense over the vesting period. The unamortized portion of this award as of December 31, 2017 was $561,671.

On February 5, 2018, the Company terminated its employment agreement with Mr. Dennis G. Forchic, its Chief Executive Officer and a member of the Company’s Board of Directors. In accordance with the severance terms of his Employment Agreement: (i) all 3,000,000 Options previously granted to Mr. Forchic were terminated as they had not vested; (ii) the Company will pay Mr. Forchic at the annual rate of $162,000 per annum, from February 5, 2018 through the fourth anniversary date of the Employment Agreement; and, (iii) the Company will reimburse Mr. Forchic for each month until the fourth anniversary of January 6, 2017, an amount equal to 50% of Employee’s health care coverage, to the extent such coverage was in place as at February 5, 2018.

During the nine months ended September 30, 2018, the Company recorded a charge of $561,671 of stock-based compensation related to the immediate vesting of 2,000,000 previously unvested stock options, and $449,000 related to Mr. Forchic’s remaining salary obligation. The total charge of $1,010,671 is included in selling, general and administrative expenses in the accompanying condensed consolidated financial statements.

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Employee Employment Agreement

In November 2015, the Company entered into a four-year employment agreement with one of its employees, in which the employee was granted 500,000 shares of the Company’s common stock. The shares vest equally in six-month periods over the four years. The fair value of the shares on the date of grant was $400,000, which was being amortized ratably over the four-year service period. This employee was terminated February 27, 2018, and the remaining 250,000 share obligation ceased. The amount amortized as stock-based compensation expense during the nine months ended September 30, 2018 was $16,667.

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 nine months ended September 30, 2018. Subsequent to September 30, 2018, the Fee Warrant was exercised (see Note 14).

The Company cannot sell shares of common stock to YA II PN under the SEDA until a registration statement is declared effective by the Securities and Exchange Commission.

Summary of Stock Options

A summary of stock options for the nine months ended September 30, 2018, is as follows:

			Weighted
	Number		Average
	of		Exercise
	Options		Price
Balance outstanding, December 31, 2017		3,000,000	$	0.60
Options granted		4,784,391		0.77
Options exercised		-		-
Options expired or forfeited		-		-
Balance outstanding, September 30, 2018		7,784,391	$	0.71
Balance exercisable, September 30, 2018		7,784,391	$	0.71

Information relating to outstanding options at September 30, 2018, summarized by exercise price, is as follows:

		Outstanding						Exercisable
						Weighted				Weighted
						Average				Average
Exercise Price Per Share		Shares		Life (Years)		Exercise Price		Shares		Exercise Price
$	0.60		3,000,000		4.36	$	0.60		3,000,000	$	0.60
$	0.74		4,034,391		4.89	$	0.74		4,034,391	$	0.74
$	0.94		750,000		4.91	$	0.94		750,000	$	0.94
			7,784,391		4.72	$	0.71		7,784,391	$	0.71

In August 2018, the Company granted to its executives, Lien and Davis, stock options to purchase an aggregate of 4,034,391 shares of Common Stock (see Note 13 Executive Agreements). The fair value of the stock options granted was determined to be $2,164,755, which was recorded to stock-based compensation expense during the nine month period ended September 30, 2018. The stock options immediately vested on the date of issuance. The fair value of the stock options was calculated using the Black-Scholes option pricing model using the following assumptions – stock price of $0.74; exercise price of $0.74; expected life of 3 years; volatility of 123.1%; dividend rate of 0.0% and discount rate of 2.7%. In addition, pursuant to the agreements, on the first, second and third anniversaries, (i) Lien shall receive options to purchase 3% of the total number of shares of common stock then outstanding and (ii) Davis shall receive options to purchase 2%, 2% and 3%, respectively, of the total number of shares of common stock then outstanding, with all such options having an exercise price equal to the closing price of the Company’s common stock on the trading day prior to such anniversary and exercisable for five years from issuance. In addition, Davis received fully vested options to purchase 750,000 shares of Common Stock, exercisable for five years at $0.94 per share with a fair value of $516,356.

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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 $561,671 during the nine month period ended September 30, 2018.

As of September 30, 2018, the Company had no outstanding unvested options with future compensation costs. However, there will be future compensation related to the options to be awarded to Lien and Davis under their employment agreements discussed above. The weighted-average remaining contractual life of options outstanding and exercisable at September 30, 2018 was 4.72 years. The intrinsic value of both outstanding and exercisable options at September 30, 2018 was $1,889,000.

Summary of Warrants

A summary of warrants for the nine months ended September 30, 2018, is as follows:

				Weighted
	Number			Average
	of			Exercise
	Warrants			Price
Balance outstanding, December 31, 2017		1,589,500		$	1.10
Warrants granted		13,500,000			0.84
Warrants exercised		(1,306,360	)		1.10
Warrants expired or forfeited		-			-
Balance outstanding, September 30, 2018		13,783,140		$	0.84
Balance exercisable, September 30, 2018		13,783,140		$	0.84

Information relating to outstanding warrants at September 30, 2018, summarized by exercise price, is as follows:

		Outstanding						Exercisable
						Weighted				Weighted
						Average				Average
Exercise Price Per Share		Shares		Life (Years)		Exercise Price		Shares		Exercise Price
$	0.01		6,000,000		4.61	$	0.01		6,000,000	$	0.01
$	1.10		283,140		4.06	$	1.10		283,140	$	1.10
$	1.50		7,500,000		4.61	$	1.50		7,500,000	$	1.50
			13,783,140		4.59	$	0.84		13,783,140	$	0.84

During the nine month period ended September 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 (see Note 4). 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 (see Note 8). Lastly, in connection with the SEDA discussed above, 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 nine months ended September 30, 2018, the Company issued 1,306,360 shares of its common stock on the conversion of warrants, at $1.10 per share, resulting in proceeds of $1,436,996.

The weighted-average remaining contractual life of warrants outstanding and exercisable at September 30, 2018 was 4.59 years. The intrinsic value of both outstanding and exercisable warrants at September 30, 2018 was $5,628,000.

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NOTE 13- COMMITMENTS

Operating Leases

California Facility (West Coast Facility)

The Company’s principal executive offices and warehouse are located at 853 Sandhill Avenue, Carson, California, 90746. The Company occupies a 17,640 square foot facility pursuant to a five-year lease with an independent party ending on September 30, 2023, with an unaffiliated party, pursuant to which it pays $15,000 per month in rental charges.

Closure of New Jersey Facility (East Coast Facility)

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

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

Arizona Property

On April 19, 2018, the Company entered into an Option Agreement, or the Option, with MSCP, LLC, a non-affiliated Arizona limited liability company, or the Lessor, pursuant to which, the Company’s subsidiary was granted an option to enter into a certain Lease Agreement, or the Lease, for the real property, including the structure and all improvements, identified in the Option, or the Premises. The Premises consists of 70,000 square feet of space and is to be used for the sole purpose of providing services related to the management, administration and operation of a cultivation and processing facility, or the Facility, on behalf of an Arizona limited liability company operating as a nonprofit organization, or the Arizona Licensee, which has been allocated a Medical Marijuana Dispensary Registration Certificate by the Arizona Department of Health Services. The activities within the Facility shall be limited to the cultivation, processing, production and packaging of medical marijuana and manufactured and derivative products which contain medical marijuana, with no right to sell or dispense any such plants or products. The Lease is for a 5-year initial term, or the Term, with an option to renew for an additional 5 year term. The base rent for the initial year of the Term is $101,500 per month with additional pro-rata net-lease charges. As consideration for the Option, the Company paid to Lessor, $160,000, or the Deposit.

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

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 per calendar year. For each of the three and nine months ended September 30, 2018 and 2017, $25,000 and $75,000, respectively, was recorded as research and development expense under the agreement on the Condensed Consolidated Statements of Operations related to the minimum annual fee. For the three and nine months ended September 30, 2018 and 2017, $0 and $0, and $4,126 and $25,160, respectively, was recorded as cost of goods sold on the Condensed Consolidated Statements of Operations related to the royalty. A total of $140,713 and $165,553 was owed under the amended agreement at September 30, 2018 and December 31, 2017, respectively.

Executive Employment Agreements

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

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

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

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

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

NOTE 14 – SUBSEQUENT EVENTS

On October 12, 2018, the Company issued 1,000,000 shares of common stock to YA Global II SPV LLC (“YA Global”), which shares were issued upon YA Global exercising the warrants issued on April 15, 2018, as a commitment fee in connection with the Standby Equity Distribution Agreement (see Note 12). YA Global paid the Company $10,000, or $0.01 per share, in full settlement of the exercise price.

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

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

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

We believe that almost all of the end users that use our products are using the equipment for the growing of cannabis. Currently, there are thirty (30) States and the District of Columbia that have laws and/or regulation that recognize in one form or another, legitimate medical uses for cannabis and consumer use of cannabis in connection with medical treatment. In addition, the States of Colorado, Washington, Alaska, Oregon, California, Massachusetts, Nevada, Maine, Vermont and the District of Columbia have approved the recreational use of cannabis. Many other states are considering legislation to similar effect. Active enforcement of the current federal regulatory position on cannabis on a regional or national basis may directly and adversely affect the willingness of our end user customers to continue to grow cannabis. Active enforcement of the current federal regulatory position on cannabis may thus directly and adversely affect revenues and profits.

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

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

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

Recent Developments

Effective September 25, 2018, we changed our corporate name from “Solis Tek Inc.” to “Generation Alpha, Inc.” and our stock symbol from “SLTK” to “GNAL”.

On April 19, 2018, we entered into an Option Agreement, or the Option, with MSCP, LLC, a non-affiliated Arizona limited liability company, or the Lessor, pursuant to which, our subsidiary was granted an option to enter into a certain Lease Agreement, or the Lease, for the real property, including the structure and all improvements, identified in the Option, or the Premises. The Premises consists of 70,000 square feet of space and is to be used for the sole purpose of providing services related to the management, administration and operation of a cultivation and processing facility, or the Facility, on behalf of an Arizona limited liability company operating as a nonprofit organization, or the Arizona Licensee, which has been allocated a Medical Marijuana Dispensary Registration Certificate by the Arizona Department of Health Services. The activities within the Facility shall be limited to the cultivation, processing, production and packaging of medical marijuana and manufactured and derivative products which contain medical marijuana, with no right to sell or dispense any such plants or products. The Lease is for a 5-year initial term, or the Term, with an option to renew for an additional 5 year term. The base rent for the initial year of the Term is $101,500 per month with additional pro-rata net-lease charges. As consideration for the Option, we paid to Lessor, $160,000, or the Deposit.

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

The cultivation and processing facility, currently under build-out construction, is anticipated to become revenue generating in early 2019. We control all facets of the operational, management, and sales side of the business and intends to sell to a number of Arizona license holders. We also intend to get into the infrastructure and equipment supply business to become a one-stop-shop for new cultivations, with such items a grow tables, environmental equipment, and processing equipment.

Results of Operations

Results of Operations for the Three Months Ended September 30, 2018 Compared to the Three Months Ended September 30, 2017

Revenue and Cost of Goods Sold

Revenue for the three months ended September 30, 2018 and 2017 was $851,710 and $1,993,865, respectively, a decrease of $1,142,155, or 57%. The decrease was due to several negative factors during the third quarter of 2018, as compared to the third quarter of 2017.

Such factors included market instability and uncertainty, reports of over-capacity and price declines at the wholesale level. In addition, a change in U.S. federal regulation policy, with U.S. Attorney General Jeff Sessions rescinding the Cole Memorandum and giving the U.S. attorneys “free-reign” to set enforcement priorities, resulted in a very negative tone and caused hesitation from buyers in the cannabis industry. Industry-wide build-outs slowed and were pushed-out.

Specific reasons to beset to Generation Alpha, included a change at the Chief Executive Officer level and change of message and direction. We previously were a retail driven company servicing our 500+ hydro-stores targeting the home and hobbyist growers. In 2018, we restructured our sales force to five nationwide commercial cultivation account managers and reset the sales team, as well as changed pricing and marketing strategies. Our shift to focus on larger commercial markets also altered our inventory strategy to longer fulfillment and lead times.

Cost of sales for the three months ended September 30, 2018 and 2017 was $718,139 and $1,322,497, respectively. Gross profit for the three months ended September 30, 2018 and 2017, was $133,571 and $671,368, respectively. The decrease in gross profit of $537,797, or 80%, was primarily due to our decrease in revenue. As a percentage of revenue, gross profit for the three months ended September 30, 2018 was 16% compared to 34% for the prior year period. The decrease in gross profit percentage was due to an increase in our reserve for excess and obsolete inventories and the change in product mix sold.

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Selling, General and Administrative Expenses

Selling, general and administrative, or SG&A, expenses for the three months ended September 30, 2018 and 2017 were $4,115,603 and $2,050,189, respectively, an increase of $2,065,414, or 101%. For the three months ended September 30, 2018, stock-based compensation expense increased $2,391,894 to $2,948,089, compared to $556,195 for the prior year period. Excluding stock-based compensation expense, our SG&A decreased $326,480, or 22%, due to savings realized from the recent closure of our east coast facility and our continuing efforts to reduce our overall expenses.

Research and Development Expenses

Research and development, or R&D, expenses for the three months ended September 30, 2018 and 2017 were $37,332 and $82,500, respectively, a decrease of $45,168, or 55%. The decrease in R&D expenses was primarily due to decreased employee compensation and royalty expense.

Other Income and Expenses

Other expense for the three months ended September 30, 2018 was $3,073,866, as compared to other expense of $28,190 for the three months ended September 30, 2017. The increase in other expense was due to the recording of an expense on the change in fair value of derivative liability of $2,525,234, and the amortization of discounts to interest expense of $500,000, all of which did not exist during the prior year period. The remaining increase in interest expense over the prior year period by $20,442 was due to our increase in borrowings.

Net loss

Net loss for the three months ended September 30, 2018 was $7,093,230, compared to a net loss of $1,489,511 for the three months ended September 30, 2017. The increase in net loss was due to the increase in other expenses, increased SG&A expenses, and decreased revenues and gross profit, as discussed above.

Results of Operations for the Nine months Ended September 30, 2018 compared to the Nine months Ended September 30, 2017

Revenue and Cost of Goods Sold

Revenue for the nine months ended September 30, 2018 and 2017 was $2,565,085 and $7,336,980, respectively, a decrease of $4,771,895, or 65%. The decrease was due to several negative factors during the first nine months of 2018, as compared to the prior year period.

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

Specific reasons to beset to Generation Alpha, included a change at the Chief Executive Officer level and change of message and direction. Generation Alpha 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, Generation Alpha has repositioned a segment of its sales force to nationwide commercial cultivation account managers and has re-programed the sales team, changed pricing and changed marketing strategies. Its recent shift to convert to a commercial mindset, also altered its inventory strategy to longer fulfillment and lead times. For the first time, our product engineers and sales team are also offering specific consulting services into every aspect of a new cultivation including environmental requirements as well as full build-out and growing ancillary services up to and including production requirements and specifications.

Cost of sales for the nine months ended September 30, 2018 and 2017, was $1,836,980 and $4,625,210, respectively. Gross profit for the nine months ended September 30, 2018 and 2017 was $728,105 and $2,711,770, respectively. The decrease in gross profit of $1,983,664, or 73%, was primarily due to our decrease in revenue. As a percentage of revenue, gross profit for the nine months ended September 30, 2018 was 28%, compared to 37% for the nine months ended September 30, 2017. The decrease in gross profit percentage was due to an increase in our reserve for excess and obsolete inventories and the change in product mix sold.

25

Selling, General and Administrative Expenses

SG&A expenses for the nine months ended September 30, 2018 and 2017 was $10,213,893 and $9,206,076, respectively, an increase of $1,007,817, or 11%. For the nine months ended September 30, 2018, stock-based compensation expense increased $401,556 to $5,837,602, compared to $5,436,046 for the prior year period. Excluding stock-based compensation expense, our SG&A increased $606,261, due to the recording of a $449,000 severance obligation to our former Chief Executive Officer (see Note 12 of the accompanying condensed consolidated financial statements), an increase in salaries and benefits, professional fees, and general operating expenses to support our operations.

Research and Development Expenses

R&D expenses for the nine months ended September 30, 2018 and 2017 were $151,916 and $247,770, respectively, a decrease of $95,854, or 39%. The decrease in R&D expenses was primarily due to decreased employee compensation and royalty expense.

Excess Cost of Acquisition to Related Party over Historical Basis

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

Other Income and Expenses

Other expense for the nine months ended September 30, 2018 was $3,454,300, as compared to other expense of $84,010 for the nine months ended September 30, 2017. The increase in other expense was due to the recording of a gain on the change in fair value of derivative liability of $4,286,692 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 $2,677,074, all of which did not exist during the prior year period. The remaining increase in interest expense increased due to our increase in borrowings.

Net loss

Net loss for the nine months ended September 30, 2018 was $17,545,204, compared to a net loss of $6,830,199 for the nine months ended September 30, 2017. The increase in net loss was due to the increase in other expenses, increased SG&A expenses, and decreased revenues and gross profit as discussed above.

Liquidity and Capital Resources

Cash and Liquidity

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

Cash Flows Used in Operating Activities

During the nine months ended September 30, 2018, we used cash in operating activities of $2,719,100, compared to cash used in operating activities of $897,062 during the nine months ended September 30, 2017. Cash was primarily used to fund our operating loss during each period.

Cash Flows Used in Investing Activities

During the nine months ended September 30, 2018, we used $163,461 in cash flows from investment activities, representing the collection of an acquired receivable of $250,000, cash received on the sale of property and equipment of $28,500, offset by $441,961 used to purchase property and equipment. During the nine months ended September 30, 2017, we used $3,200 in cash from investing activities to purchase property and equipment.

26

Cash Flows Provided by Financing Activities

During the nine months ended September 30, 2018, we generated cash from financing activities of $3,968,017, compared to cash provided by financing activities of $818,608 for the nine months ended September 30, 2017. During the nine months ended September 30, 2018, we raised $1,568,000 from the sale of common stock, received $1,436,996 from the exercise of warrants, received proceeds of $1,500,000 from a secured note payable, made payments of $505,000 on our notes payable to related parties, and made payments on loans payable and capital lease obligation totaling $31,979. During the nine months ended September 30, 2017, we raised $555,000 through an issuance of common stock, received proceeds from notes payable to related parties of $300,000, of which $20,000 was used to pay notes payable to related parties, and made payments on loans payable and capital lease obligation totaling $16,392.

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 consolidated financial statements, during the nine months ended September 30, 2018, we incurred an operating loss of $14,087,704 and used cash in operations of $2,719,100, and as of September 30, 2018, we had a shareholders’ deficit of $4,483,160. These factors raise substantial doubt about our ability to continue as a going concern within one year after the date of the financial statements being issued. Our ability to continue as a going concern is dependent upon our ability to raise additional funds and implement our business plan. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

At September 30, 2018, we had cash on hand in the amount of $2,053,399. On April 16, 2018, we entered in a Standby Equity Distribution Agreement, or SEDA (See Note 12 of the accompanying condensed consolidated financial statements). Management estimates that the current funds on hand will be sufficient to continue operations through December 2018. Our continuation as a going concern is dependent upon our ability to obtain necessary debt or equity financing to continue operations until we begin generating positive cash flow. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our shareholders, in case or equity financing.

Historically, we have financed our operations primarily through private sales of common stock, a line of credit, loans from a third party financial institutions, related parties, and operations. We anticipate that we will obtain positive cash flow from operations commencing in the third quarter of 2019. If our sales goals do not materialize as planned, we believe that we can reduce our operating costs and achieve positive cash flow from operations. However, we may not generate sufficient revenues from product sales in the future to achieve profitable operations. If we are not able to achieve profitable operations at some point in the future, we may have insufficient working capital to maintain our operations as we presently intend to conduct them or to fund our expansion, marketing, and product development plans.

Notes Payable

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

On May 9, 2016, we also entered into notes payable agreements with Alan Lien and Alvin Hao, each an officer, to borrow $300,000 under each individual note. Pursuant to the terms of each of these agreements, we borrowed $300,000 from each of Alan Lien and Alvin Hao. The notes accrue interest at a rate of 8% per annum, are unsecured and were due on or before May 31, 2018. The loans are currently past due. A total of $600,000 was due on the combined notes at September 30, 2018 and December 31, 2017, respectively.

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

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

27

Private Placement Offering

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

Proceeds from Sale of Common Stock

During the nine months ended September 30, 2018, we raised a total of $500,000 through an issuance of 500,000 shares of common stock at $1.00 per share.

Proceeds from Exercise of Warrants

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

Proceeds from Secured Note Payable

During the nine months ended September 30, 2018, we received proceeds of $1,500,000 on the issuance of a secured note payable for $1,500,000 (see Note 8 of the accompanying Condensed Consolidated Financial Statements).

Standby Equity Distribution Agreement

On April 16, 2018, we entered into a SEDA with YA II PN, Ltd., or YA II PN. The SEDA establishes what is sometimes termed an equity line of credit or an equity draw-down facility. The $25,000,000 facility may be drawn-down upon by us in installments, the maximum amount of each of which is limited to $1,000,000. For each share of common stock purchased under the SEDA, YA II PN will pay 90% of the lowest volume weighted average price, or VWAP, of our shares of common stock 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.

In connection with the SEDA, we issued to YA II PN, a five year commitment fee warrant to purchase 1,000,000 shares of our common stock at $0.01 per share.

We cannot sell shares of common stock to YA II PN under the SEDA until a registration statement registering shares for sale is declared effective by the Securities and Exchange Commission, or SEC.

Convertible Debenture Termination

During the nine months ended September 30, 2018, YA II PN (see Note 9 of the accompanying condensed consolidated financial statements) notified us in writing that it elected to convert all remaining outstanding principal and interest accrued and otherwise payable under a convertible debenture, which included the conversion of $1,750,000 of principal and $38,082 of interest. Upon the conversion of the debenture, we issued an aggregate of 1,788,082 shares of our common stock. Upon the conversion, the debenture and the security agreement were both terminated in accordance with their respective terms effective as of April 18, 2018, and all security interest and liens under the security agreement were released and terminated.

Series A Preferred Stock Conversion

On April 24, 2018, we received a notice of conversion from the holder of our Series-A Convertible Preferred Stock, or Series-A (see Note 10 of the accompanying condensed consolidated financial statements), pursuant to which the Series-A holder elected to convert all of the remaining outstanding Series-A into shares of our common stock. Upon the conversion of the balance of the Series-A, we issued 52,500 shares of common stock and no Series-A were outstanding.

Critical Accounting Policies

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

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Allowance for Doubtful Accounts

The allowance for doubtful accounts is based on the Company’s assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, the age of the accounts receivable balances, credit quality, economic conditions that may affect a customer’s ability to pay and expected default frequency rates. Trade receivables are written off at the point when they are considered uncollectible.

Inventories

The Company provides inventory reserves based on excess and obsolete inventories determined primarily by future demand forecasts. The write down amount is measured as the difference between the cost of the inventory and market based upon assumptions about future demand and charged to the provision for inventory, which is a component of cost of sales. At the point of the loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.

Recent Accounting Pronouncements

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

Off-Balance Sheet Arrangements

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

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

Item 4. Controls and Procedures.

Evaluation of disclosure controls and procedures.

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

Based on management’s evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2018, as a result of the material weaknesses described below, our disclosure controls and procedures are not designed at a reasonable assurance level and are ineffective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. The material weaknesses, which relate to internal control over financial reporting, that were identified are:

a)

Due to our small size, we did not have sufficient personnel in our accounting and financial reporting functions. As a result, we were not able to achieve adequate segregation of duties and were not able to provide for adequate review of the financial statements. This control deficiency, which is pervasive in nature, results in a reasonable possibility that material misstatements of the consolidated financial statements will not be prevented or detected on a timely basis; and

b)

Lack of a functioning audit committee due to a lack of independent board members, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures.

We do not believe the material weaknesses described above caused any meaningful or significant misreporting of our financial condition and results of operations for the three months ended September 30, 2018.

29

Management has retained an outside, independent financial consultant to record and review all financial data, as well as prepare our financial reports, in order to mitigate this weakness. Although management will periodically re-evaluate this situation, at this point it considers that the risk associated with such lack of segregation of duties and the potential benefits of adding employees to segregate such duties are not cost justified. We intend to hire additional accounting personnel to assist with financial reporting as soon as our finances will allow.

We plan to appoint one or more outside directors to our Board of Directors who shall be appointed to an audit committee resulting in a fully functioning audit committee who will undertake the oversight in the establishment and monitoring of required internal controls and procedures such as reviewing and approving estimates and assumptions made by management when funds are available to us.

Changes in internal control over financial reporting.

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

30

PART II

Item 1. Legal Proceedings.

We are currently not a party to any material legal proceedings or claims.

Item 1A. Risk Factors.

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

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information.

None.

Item 6. Exhibits.

Exhibit Number	Description of Exhibit
31.1	Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following materials from Generation Alpha, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, formatted in XBRL (Extensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (iii) the Condensed Consolidated Statements of Stockholders’ Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Condensed Consolidated Financial Statements.

31

SIGNATURES

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

	GENERATION ALPHA, INC.
Date: November 13, 2018	By:	/s/ Alan Lien
		Alan Lien
		Chief Executive Officer and Chief Financial Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)

32

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Alan Lien, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Generation Alpha, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonable likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: November 13, 2018

/s/ ALAN LIEN

Alan Lien

Chief Executive Officer

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, Alan Lien, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Generation Alpha, Inc.;
2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonable likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.

Date: November 13, 2018

/s/ ALAN LIEN

Alan Lien

Chief Financial Officer

EX-32.1

EXHIBIT 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

I, Alan Lien, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Generation Alpha, Inc. on Form 10-Q for the fiscal quarter ended September 30, 2018 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in this Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Generation Alpha, Inc.

	By:	/s/ ALAN LIEN
Date: November 13, 2018	Name:	Alan Lien
	Title:	Chief Executive Officer and Chief Financial Officer

A signed original of this written statement required by Section 906 has been provided to Generation Alpha, Inc. and will be retained by Generation Alpha, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

The foregoing certifications are not deemed filed with the Securities and Exchange Commission for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (Exchange Act), and are not to be incorporated by reference into any filing of Generation Alpha, Inc. under the Securities Act of 1933, as amended, or the Exchange Act, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

XML

Document and Entity Information - shares	9 Months Ended
	Sep. 30, 2018	Nov. 09, 2018
Document And Entity Information
Entity Registrant Name	Generation Alpha, Inc.
Entity Central Index Key	0001398137
Document Type	10-Q
Document Period End Date	Sep. 30, 2018
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Small Business Flag	true
Entity Emerging Growth Company	false
Entity Ex Transition Period	false
Entity Common Stock, Shares Outstanding		46,066,564
Trading Symbol	GNAL
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2018

XML

Condensed Consolidated Balance Sheets - USD ($)	Sep. 30, 2018	Dec. 31, 2017
Current Assets
Cash	$ 2,053,399	$ 967,943
Accounts receivable, net of allowance for doubtful accounts and returns of $22,288 and $396,499, respectively	296,803	417,484
Inventories, net	1,157,373	1,684,463
Advances to suppliers - formerly a related party	540,090	735,730
Prepaid expenses and other current assets	247,323	134,374
Total Current Assets	4,294,988	3,939,994
Property and equipment, net	509,969	138,243
Intangible assets acquired from related party, net	1,382,941
Other assets	83,887	37,980
TOTAL ASSETS	6,271,785	4,116,217
Current Liabilities
Accounts payable and accrued expenses	1,839,820	1,124,349
Due to former related party vendor		381,457
Contract obligations, current portion	331,818
Note payable - related parties	640,000	1,145,000
Note payable to related party, current portion, net of discount of $747,032 and $0, respectively	752,968
Convertible note payable to related party, current portion, net of discount of $0 and $1,055,556, respectively		194,444
Due to related parties	124,117	146,534
Capital lease obligations, current portion	260	9,665
Loans payable, current portion	3,383	8,476
Total Current Liabilities	3,692,366	3,009,925
Loans payable, net of current portion		17,481
Contract obligations, net of current portion	445,295
Convertible note payable, net of current portion, net of discount of $0 and $500,000, respectively
Derivative liability	6,617,284	7,415,000
Total liabilities	10,754,945	10,442,406
Series-A Convertible Preferred Shares, net of no discount and $351,000, no par value, none and 351,000 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively
Commitments and Contingencies
Shareholders' Deficit
Preferred stock, no par value, 20,000,000 shares authorized; no shares issued and outstanding at September 30, 2018 and December 31, 2017
Common stock, $0.001 par value, 100,000,000 shares authorized; 45,066,564 and 38,522,034 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively	45,067	38,522
Additional paid-in-capital	28,459,378	9,077,690
Accumulated deficit	(32,987,605)	(15,442,401)
Total Shareholders' Deficit	(4,483,160)	(6,326,189)
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT	$ 6,271,785	$ 4,116,217

XML

Condensed Consolidated Balance Sheets (Parenthetical) - USD ($)	Sep. 30, 2018	Dec. 31, 2017
Accounts receivable, allowance for doubtful accounts	$ 22,288	$ 396,499
Note payable related party discount, current	747,032	0
Convertible note payable related party discount, current	0	1,055,556
Convertible note payable discount, non current	$ 0	$ 500,000
Preferred stock, no par value
Preferred stock, shares authorized	20,000,000	20,000,000
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value	$ 0.001	$ 0.001
Common stock, shares authorized	100,000,000	100,000,000
Common stock, shares issued	45,066,564	38,522,034
Common stock, shares outstanding	45,066,564	38,522,034
Series-A Convertible Preferred Shares [Member]
Series A convertible preferred shares, discount		$ 351,000
Series A convertible preferred shares, no par value
Series A convertible preferred shares, shares issued		351,000
Series A convertible preferred shares, shares outstanding		351,000

XML

Condensed Consolidated Statements of Operations (Unaudited) - USD ($)		3 Months Ended		9 Months Ended
		Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Income Statement [Abstract]
Sales		$ 851,710	$ 1,993,865	$ 2,565,085	$ 7,336,980
Cost of goods sold	[1]	718,139	1,322,497	1,836,980	4,625,210
Gross profit		133,571	671,368	728,105	2,711,770
Operating expenses
Selling, general and administrative expenses		4,115,603	2,050,189	10,213,893	9,206,076
Research and development		37,332	82,500	151,916	247,770
Excess cost of acquisition from a related party over historical basis				4,450,000
Total operating expenses		4,152,935	2,132,689	14,815,809	9,453,846
Loss from operations		(4,019,364)	(1,461,321)	(14,087,704)	(6,742,076)
Other income (expenses)
Financing costs	[2]			(7,317,406)
Change in fair value of derivative liability		(2,525,234)		4,286,692
Gain on extinguishment of derivative liability				2,389,427
Interest expense	[3]	(548,632)	(28,190)	(2,813,013)	(84,010)
Total other expenses		(3,073,866)	(28,190)	(3,454,300)	(84,010)
Loss before income taxes		(7,093,230)	(1,489,511)	(17,542,004)	(6,826,086)
Provision for income taxes				3,200	4,113
Net loss		$ (7,093,230)	$ (1,489,511)	$ (17,545,204)	$ (6,830,199)
BASIC AND DILUTED LOSS PER SHARE		$ (0.17)	$ (0.04)	$ (0.42)	$ (0.18)
WEIGHTED - AVERAGE COMMON SHARES OUTSTANDING BASIC AND DILUTED		42,826,985	37,079,972	41,810,624	37,482,508

[1] Included in cost of goods sold are these amounts from a former related party

[2] Included in financing costs are these amounts from a related party

[3] Included in interest expense are these amounts from related parties

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Condensed Consolidated Statements of Operations (Unaudited) (Parenthetical) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Income Statement [Abstract]
Cost of goods sold from related party	$ 137,080	$ 977,784	$ 549,802	$ 3,607,090
Financing costs to related party			6,177,406
Interest expense to related parties	$ 16,868	$ 45,205	$ 39,781	$ 81,986

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

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Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($)		9 Months Ended
		Sep. 30, 2018	Sep. 30, 2017
Cash Flows from Operating Activities
Net loss		$ (17,545,204)	$ (6,830,199)
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities
Provision for allowance for doubtful accounts and sales returns		(302,763)	75,333
Provision for inventory reserves		347,828
Depreciation and amortization		179,717	53,111
Imputed interest on contractual obligation		8,590
Gain on sale of property and equipment		(2,400)
Fair value of warrants issued to related party in excess of basis of acquired licensing rights		4,450,000
Fair value of vested stock options		3,242,782	204,449
Fair value of common stock issued for services		1,636,800	2,096,597
Fair value of common stock issued to directors and employees		958,020	2,835,000
Fair value of warrants issued for financing costs	[1]	7,317,406
Common stock purchased by officer at discount			300,000
Amortization of debt discount		2,308,524
Amortization of Series-A preferred shares discount		368,550
Change in the fair value of derivative liability		(4,286,692)
Gain on extinguishment of derivative liability		(2,389,427)
(Increase) Decrease in:
Accounts receivable		423,444	(312,071)
Inventories		179,262	1,111,166
Advances to suppliers		195,640
Prepaid expenses and other		(112,949)	(158,978)
Other assets		(45,907)
(Decrease) Increase in:
Accounts payable and accrued expenses		753,553	387,571
Due to former related party vendor		(381,457)	(685,108)
Due to related parties		(22,417)	26,067
Net Cash Used in Operating Activities		(2,719,100)	(897,062)
Cash Flows from Investing Activities
Collection of receivable acquired as part of acquisition		250,000
Cash received on sale of property and equipment		28,500
Purchase of property and equipment		(441,961)	(3,200)
Net Cash Used in Investing Activities		(163,461)	(3,200)
Cash Flows from Financing Activities
Proceeds from sale of common stock		1,568,000	455,000
Proceeds from sale of common stock to officer			100,000
Proceeds from exercise of warrants		1,436,996
Proceeds from secured note payable		1,500,000
Proceeds from notes payable related parties			300,000
Payments on notes payable related party		(505,000)	(20,000)
Payments on capital lease obligations		(9,405)	(10,245)
Payments on loans payable		(22,574)	(6,147)
Net Cash Provided by Financing Activities		3,968,017	818,608
Net increase (decrease) in cash		1,085,456	(81,654)
Cash beginning of period		967,943	275,783
Cash end of period		2,053,399	194,129
Interest paid		68,106	25,327
Taxes paid		3,200	3,200
Non-Cash Financing Activities
Extinguishment of derivative liability		1,799,003
Change in the fair value of derivative liability		4,286,692
Common shares issued upon conversion of convertible note payable and accrued interest		1,788,082
Common shares issued upon conversion of Series-A convertible preferred shares		368,550
Assets acquired from related party on issuance of warrants		1,750,000
Contract obligations incurred on acquisitions of license agreement		$ 768,523

[1] Included in financing costs are these amounts from a related party

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Basis of Presentation

9 Months Ended

Sep. 30, 2018

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Basis of Presentation

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Generation Alpha, Inc. and its subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all normal recurring adjustments considered necessary for a fair presentation have been included. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018.

History and Organization

Generation Alpha, Inc. (the “Company”) was originally incorporated under the laws of the State of Nevada on March 2, 2007 as Cinjet, Inc. (“Cinjet”). Effective September 1, 2015, Cinjet changed its corporate name to Solis Tek Inc. (“Solis Tek”). Effective September 25, 2018, Solis Tek changed its corporate name to Generation Alpha, Inc. 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.

Name Change and Merger Agreement

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.

As permitted by Chapter 92A.180 of Nevada Revised Statutes, the purpose of the Merger was to effect a change of the Company’s name from “Solis Tek Inc.” to “Generation Alpha, Inc.” On September 24, 2018, the Company filed articles of merger with the Secretary of State of Nevada, which were effective September 25, 2018, to effect the Merger, and the Company’s Articles of Incorporation were deemed amended to reflect the change in the Company’s corporate name (the “Name Change”).

In connection with the foregoing, the Company filed an Issuer Company-Related Action Notification Form with the Financial Industry Regulatory Authority (“FINRA”), requesting confirmation of the Name Change and also to request the change of the Company’s ticker symbol from “SLTK” to “GNAL” (the “Symbol Change”).

The Name Change and Symbol Change do not affect the rights of the Company’s security holders. The Company’s securities will continue to be quoted on the OTC Markets. Following the Name Change, the stock certificates, which reflect the former name of the Company, will continue to be valid. Certificates reflecting the Name Change will be issued in due course as old stock certificates are tendered for exchange or transfer to the Company’s transfer agent.

Overview of Business

The Company is a vertically integrated technology innovator, developer, manufacturer and distributor focused on bringing 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. For nearly a decade, growers have used the Company’s lighting solutions to increase yield, lower costs and grow better to maximize their return on investment. More recently, the Company’s Zelda Horticulture nutrient division has provided an expanding product mix to the Company’s offerings. The Company’s lighting and nutrient customers include retail stores, distributors and commercial growers in the United States and abroad. In early 2018, the Company announced its expansion into the “touch-the-plant” side of the cannabis business with its present build-out of an existing facility in Phoenix, Arizona to be utilized as both a cultivation site and processing platform. This operation is under a contract with an Arizona licensee and is expected to be revenue generating in early 2019.

Going Concern

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying condensed consolidated financial statements, during the nine months ended September 30, 2018, the Company incurred an operating loss of $14,087,704, used cash in operations of $2,719,100 and had a shareholders’ deficit of $4,483,160 as of September 30, 2018. 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, 2017 consolidated financial statements, raised substantial doubt about the Company’s ability to continue as a going concern.

At September 30, 2018, the Company had cash on hand in the amount of $2,053,399. On April 16, 2018, the Company entered in a Standby Equity Distribution Agreement (“SEDA”) that may provide it with additional funds (See Note 12). Management estimates that the current funds on hand will be sufficient to continue operations through December 2018. 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 shareholders, in case of equity financing.

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Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2018

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

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”), and entity incorporated under the laws of the State of California, and YLK Partners NV, LLC (“YLK”), an entity formed under the laws of Nevada. Intercompany transactions and balances have been eliminated in consolidation.

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

For the nine months ended September 30, 2018, options to acquire 7,784,391 shares of common stock and warrants to acquire 13,783,140 shares of common stock have been excluded from the calculation of weighted average common shares outstanding at September 30, 2018, as their effect would have been anti-dilutive. For the nine months ended September 30, 2017, options to acquire 3,000,000 shares of common stock have been excluded from the calculation of weighted average common shares outstanding at September 30, 2017, as their effect would have been anti-dilutive.

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in valuing our allowances for doubtful accounts, reserves for inventory obsolescence, impairment testing of long lived assets, valuing equity instruments issued for services and valuation allowance for deferred tax assets, among others. Actual results could differ from these estimates.

Revenue Recognition

In September 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 regarding revenue recognition. The new standard provides authoritative guidance clarifying the principles for recognizing revenue and developing a common revenue standard for U.S. generally accepted accounting principles. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in the exchange for those goods or services. The ASU became effective January 1, 2018. Due to the nature of the products sold by the Company, the adoption of the new standard has had no quantitative effect on the financial statements. However, the guidance requires additional disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized.

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

Under the new guidance, revenue is recognized when control of promised goods or services is transferred to 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 of sales are recognized once products are delivered to the customer’s control and performance obligations are satisfied.

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

The Company does not offer a general right of return on any of its sales and considers all sales as final. The Company generally provides a three-year warranty on its ballasts. However, the Company does not maintain a warranty reserve as the Company is able to chargeback its vendors for all warranty claims. As of September 30, 2018 and December 31, 2017, the Company recorded reserves for returned product in the amounts of $116,857 and $114,119, respectively, which reduced the accounts receivable balances as of those periods.

Concentration Risks

The Company maintains the majority of its cash balances with one financial institution, in the form of demand deposits. At September 30, 2018 and December 31, 2017, 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 nine months ended September 30, 2018 and 2017, its ballasts, lamps and reflectors, which comprised the majority of the Company’s purchases during those periods, were each only purchased from one separate vendor. The ballast vendor is a former related party (see Note 5).

The Company performs a regular review of customer activity and associated credit risks and does not require collateral or other arrangements. Two customers accounted for 19.0% and 13.0%, respectively, of the Company’s revenue for the three months ended September 30, 2018, and for the three months ended September 30, 2017, no customer accounted for more than 10% of the Company’s revenue. Shipments to customers outside the United States comprised 3.3% and 0.1% for the three months ended September 30, 2018 and 2017, respectively. One customer accounted for 12.1% of the Company’s revenue for the nine months ended September 30, 2018, and for the nine months ended September 30, 2017, no customer accounted for more than 10% of the Company’s revenue. Shipments to customers outside the United States comprised 4.7% and 2.6% for the nine months ended September 30, 2018 and 2017, respectively.

As of September 30, 2018, one customer accounted for 12.9% of the Company’s trade accounts receivable balance, and as of December 31, 2017, four customers accounted for 17.1%, 14.8%, 14.5% and 14.3%, respectively, of the Company’s trade accounts 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, approximate the related fair values due to the short-term maturities of these instruments.

The fair value of the derivative liabilities of $6,617,284 and $7,415,000 at September 30, 2018 and December 31, 2017, respectively, was valued using Level 2 inputs.

Derivative Financial Instruments

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

Intangible Assets

The Company accounts for intangible assets in accordance with the authoritative guidance issued by the 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 September 30, 2018, the Company had intangible assets of $1,382,941 (see Note 4) that consist of a license right. Management believes there were no indications of impairment based on management’s assessment of these assets at that date. Factors the Company considers important that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of the use of its assets or the strategy for the Company’s overall business, and significant negative industry or economic trends. If current economic conditions worsen causing a decrease in anticipated revenues and/or increased costs, the Company may have to record an impairment to its intangible assets.

Recently Issued Accounting Pronouncements

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

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

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

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Property and Equipment

9 Months Ended

Sep. 30, 2018

Property, Plant and Equipment [Abstract]

Property and Equipment

NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following September 30, 2018 and December 31, 2017:

	September 30, 2018			December 31, 2017
Machinery and equipment	$	198,455		$	234,706
Computer equipment		12,448			12,448
Furniture and fixtures		82,779			97,451
Leasehold improvements		431,819			7,000
		725,501			351,605
Less: accumulated depreciation		(215,532	)		(213,362	)
Property and equipment, net	$	509,969		$	138,243

Depreciation expense for the three and nine months ended September 30, 2018 was $13,066 and $44,134, respectively, and depreciation expense for the three and nine months ended September 30, 2017 was $17,480 and $53,111, respectively. During the nine months ended September 30, 2018, the Company sold certain of its property and equipment for $28,500. The book value of the property and equipment was $26,100, resulting in a gain on the sale of property and equipment of $2,400.

Property and equipment include assets acquired under capital leases of $64,632 and $64,632 at September 30, 2018 and December 31, 2017, respectively.

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License Agreement Acquired from Related Parties

9 Months Ended

Sep. 30, 2018

License Agreement Acquired From Related Parties

License Agreement Acquired from Related Parties

NOTE 4 – LICENSE AGREEMENT ACQUIRED FROM RELATED PARTIES

License agreement acquired from related parties as of September 30, 2018 and December 31, 2017, consisted of the following:

	As of
	September 30, 2018			December 31, 2017
License agreement	$	1,518,523		$	-
Accumulated amortization		(135,582	)		-
Intangible assets, net	$	1,382,941		$	-

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

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 one of the YLK investors.

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 amount of these payments of $1,518,523 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 both the three and nine months ended September 30, 2018 was $54,235 and $135,584, 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 during the nine month period ended September 30, 2018.

As of September 30, 2018, the remaining Management Agreement obligation was $777,113 (net of discount of $72,887), for which $331,818 was reflected as current and $445,295 was reflected as long term in the accompanying condensed consolidated balance sheet.

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Related Party Transactions

9 Months Ended

Sep. 30, 2018

Related Party Transactions [Abstract]

Related Party Transactions

NOTE 5 - RELATED PARTY TRANSACTIONS

Supplier (Former Related Party)

A family member of an officer/shareholder owned a minority interest in a company in China, which is the sole supplier of ballasts to the Company. Purchases from the supplier for the three and nine months ended September 30, 2018 totaled approximately $381,000 and $1,478,000, and $1,411,000 and $2,913,000, respectively, for the three and nine months ended September 30, 2017. The Company believes purchase prices from this vendor approximated what the Company would have to pay from an independent third party vendor. In 2017, the Company determined that due to a change in relationship status, this vendor that was formerly considered a related party, was deemed to no longer be a related party. At September 30, 2018 and December 31, 2017, the Company owed the former related party $0 and $381,457, respectively. At September 30, 2018 and December 31, 2017, the Company had made advanced deposit payments to this vendor for $540,090 and $735,730, respectively, which will be applied to purchase inventory upon delivery.

Due to Related Parties

As of September 30, 2018 and December 31, 2017, the Company owed related parties $124,117 and $146,534, respectively. The balances are interest owed on notes payable to related parties (see Note 6). During the nine months ended September 30, 2018, the Company added $52,889 of additional accrued interest and made interest payments of $75,306.

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Notes Payable to Related Parties

9 Months Ended

Sep. 30, 2018

Debt Disclosure [Abstract]

Notes Payable to Related Parties

NOTE 6 – NOTES PAYABLE TO RELATED PARTIES

Notes payable to related parties consists of the following at September 30, 2018 and December 31, 2017:

	September 30, 2018		December 31, 2017
Notes payable to officers/shareholders (a)	$	-	$	195,000
Notes payable to officers/shareholders (b)		600,000		600,000
Notes payable to related parties (c)		-		300,000
Notes payable to related parties (d)		40,000		50,000
Total	$	640,000	$	1,145,000

a.	On July 1, 2012, the Company entered into a notes payable agreement with Lydia Hao, who is the mother of Alvin Hao, the Company’s executive vice president and a director. The maximum borrowings allowed under the note are $200,000. Through December 31, 2013, the note bore interest at 20% per annum. Beginning on January 1, 2014, the interest rate on the note was reduced to 8% per annum. The note is due 30 days after demand. Amounts owed on the note balance were $195,000 at December 31, 2017. During the nine months ended September 30, 2018, the Company made payments of $195,000 and the notes were retired.
b.	On May 9, 2016, the Company entered into note payable agreements with Alan Lien and Alvin Hao, each an officer and director, to borrow $300,000 under each individual note. Pursuant to the terms of each of these agreements, the Company borrowed $300,000 from each of Alan Lien and Alvin Hao. The notes accrue interest at a rate of 8% per annum, are unsecured and were due on or before May 31, 2018. The loans are currently past due. A total of $600,000 was due on the combined notes at September 30, 2018 and December 31, 2017, respectively.
c.	In February 2017, the Company executed two separate promissory notes and borrowed $300,000 from the relatives of Alan Lien, the Company’s Chief Executive Officer and one of its directors. The notes are unsecured, payable on demand and carry an interest rate of 14% per annum. A total of $300,000 was outstanding on the combined notes at December 31, 2017. During the nine months ended September 30, 2018, the Company made payments of $300,000 and the notes were retired.
d.	The Company entered into note agreements with the parents of Alan Lien, the Company’s Chief Executive Officer and one of its directors. The loans accrue interest at 10% per annum, are unsecured and were due on or before December 31, 2016. A total of $50,000 was due on the loans as of each of December 31, 2017 and 2016. During the nine months ended September 30, 2018, the Company made payments of $10,000, leaving a balance due of $40,000 as of September 30, 2018. The loans are currently past due.

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Loans Payable

9 Months Ended

Sep. 30, 2018

Debt Disclosure [Abstract]

Loans Payable

NOTE 7 – LOANS PAYABLE

Loans payable consist of the following as of September 30, 2018 and December 31, 2017:

	September 30, 2018			December 31, 2017
Automobile loans	$	3,383		$	25,957
Less: current portion		(3,383	)		(8,476	)
Non-current portion	$	-		$	17,481

In 2015, the Company entered into two loan agreements to purchase automobiles. The combined principal amount of the loans was $44,093 and they mature by November 2021. During the nine months ended September 30, 2018, the Company made payments of $22,574, which included payment in full on one of its automobile loans, leaving one remaining loan. A total of $3,383 and $25,957 was owed on the loans as of September 30, 2018 and December 31, 2017, respectively.

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Secured Note Payable to Related Party

9 Months Ended

Sep. 30, 2018

Debt Disclosure [Abstract]

Secured Note Payable to Related Party

NOTE 8 – SECURED NOTE PAYABLE TO RELATED PARTY

Secured note payable to related party consists of the following as of September 30, 2018 and December 31, 2017:

	September 30, 2018			December 31, 2017
YA II PN, Ltd.	$	1,500,000		$	-
Less debt discount		(747,032	)		-
Secured note payable, net	$	752,968		$	-

On May 10, 2018, the Company issued a secured debenture (the “2018 Note”) to YA II PN in the principal amount of $1,500,000 with interest at 8% per annum (18% on default) and due on February 9, 2019. The 2018 Note 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 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.

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 nine months ended September 30, 2018.

During the nine months ended September 30, 2018, amortization of debt discount was $752,968 and was recorded as an interest cost. The unamortized balance of the debt discount was $747,032 as of September 30, 2018.

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Convertible Note Payable to Related Party

9 Months Ended

Sep. 30, 2018

Debt Disclosure [Abstract]

Convertible Note Payable to Related Party

NOTE 9 – CONVERTIBLE NOTE PAYABLE TO RELATED PARTY

Convertible note payable to related party consist of the following as of September 30, 2018 and December 31, 2017:

	September 30, 2018		December 31, 2017
YA II PN, Ltd.	$	-	$	1,750,000
Less debt discount		-		(1,555,556	)
Convertible note payable, net	$	-	$	194,444

On November 8, 2017, the Company issued a secured convertible debenture (the “2017 Note”) to YA II PN in the principal amount of $1,750,000 with interest at 5% per annum (15% on default) and due 18 months from closing. The 2017 Note is secured by all the assets of the Company and its subsidiaries. The 2017 Note is convertible into common stock of the Company at $1.00 per share (the “Conversion Price”), subject to adjustment based on upon the Company’s trading price. As part of the issuance, the Company also granted YA II PN a 5-year warrant to purchase 1,137,500 shares of the Company at $1.10 per share

The Company paid 5% of aggregate funding as a commitment fee to YA II PN and $15,000 towards due diligence and structuring fee. The Company netted $1,647,500 after fees and expenses of $102,500.

The Company determined that since the adjustment to the Conversion Price of the 2017 Note had no floor, the Company could no longer determine if it had enough authorized shares to fulfil the conversion obligation. Furthermore, 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 offerings or events. As such, the Company determined that the conversion feature and the warrants created a derivative with a fair value of $3,767,724 at the date of issuance. The Company accounted for the fair value of the derivative up to the face amount of the 2017 Note of $1,750,000 as a valuation discount to be amortized over the life of the 2017 Note, and the excess of $2,017,724 being recorded as a finance cost during the year ended December 31, 2017.

The unamortized balance of the debt discount was $1,555,556 as of December 31, 2017. In April 2018, YA II PN notified the Company in writing that it elected to convert all remaining outstanding principal and interest accrued and otherwise payable under the 2017 Note, which included the conversion of $1,750,000 of principal and $38,082 of interest. Upon the conversion of the 2017 Note, the Company issued an aggregate of 1,788,082 shares of its common stock to YA II PN and the 2017 Note and the security agreement were both terminated and all security interest and liens under the security agreement were released and terminated. The balance of the debt discount of $1,555,556 was recorded as an interest cost during the period ended September 30, 2018.

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Series-A Convertible Preferred Stock and Warrants

9 Months Ended

Sep. 30, 2018

Equity [Abstract]

Series-A Convertible Preferred Stock and Warrants

NOTE 10 – SERIES-A CONVERTIBLE PREFERRED STOCK AND WARRANTS

Series-A Convertible Preferred Shares consisted of the following as of September 30, 2018 and December 31, 2017:

	September 30, 2018		December 31, 2017
5% Series-A preferred stock, $0.0001 par value, none and 351,000 shares issued and outstanding as of September 30, 2018 and December 31, 2017	$	-	$	351,000
Discount relating to fair value of conversion feature and warrants granted upon issuance		-		(351,000	)
Preferred stock	$	-	$	-

In October 2017, the Company conducted a private offering to raise up to $3,000,000 in convertible Preferred Series-A stock. Each unit consisted of (i) three shares of Series-A Convertible Preferred Stock of the Company (the “Series-A”) and (ii) a warrant to purchase 1,936 shares of the Company’s common stock at $1.25 per share (the “Series-A Warrants”). Each Series-A share is convertible into such number of share of common stock of the Company equal to the stated value of $1,050 divided by the conversion price. The conversion price is the lesser of $1.00 per share or 80% of the VWAP of the 10 trading days prior to conversion. The Series A shares also contained a number of automatic conversion features based on achievement of market and other conditions. On October 24, 2017 FirstFire Global Opportunities Fund LLC (“FirstFire”) purchased 117 Units, which consisted of 351,000 Series-A shares and Series-A Warrants to purchase 283,140 shares of common stock for $351,000. The Company received a total of $295,410 after fees and expenses. The Series-A offering was terminated after this issuance.

As part of the issuance, the Company initially granted Series-A Warrants to purchase 226,512 shares of common stock to FirstFire. The Company subsequently issued 56,628 additional Series-A Warrants to FirstFire as part of the offering, bringing the total Series-A Warrants issued to them to 283,140. The Series-A Warrants are exercisable at $1.25 per share and will expire in five years. The exercise price, and the number of warrants to be issued, are subject to adjustment. The exercise price of the Series-A Warrants is subject to a reset provision (down round protection) in the event the Company issues similar debt or equity instruments with a price lower than $1.25 per share. The number of Series-A Warrants shall also be increased upon the occurrence of certain events.

The Company considered the accounting guidance and determined the appropriate treatment is to account the Series-A conversion feature as a liability since the instrument is convertible into a variable number of shares (i.e. the conversion price continuously reset) and that the Company could no longer determine if it had enough authorized shares to fulfil the conversion obligation. Furthermore, the Company determined that the exercise price of the Series A Warrants were not a fixed amount because they were subject to an adjustment based on the occurrence of future offerings or events. As such, the Company determined that the conversion feature of the Series-A preferred stock had a fair value of $564,000 at issuance, and the fair value of 283,140 Series-A Warrants had a fair value of $338,358 at issuance, which created a derivative with an aggregate fair value of $902,358 at the date of issuance. The Company accounted for the fair value of the derivative up to the face amount of the preferred as a reduction of the fair value of the preferred stock of $295,410, and the excess of $606,948 was recorded as a deemed dividend and a charge to paid in capital during the year ended December 31, 2017.

In November 2017, FirstFire informed the Company that it was exercising its right to participate in the YA II PN debt offering described in Note 7. However, YA II PN refused and threatened to back out of the offering if FirstFire was included in it. The YA II PN debt offering was consummated without FirstFire. In December 2017, as a settlement with FirstFire for not to exercising its right to participate in the YA II PN debt offering, the Company granted FirstFire warrants to purchase 166,860 shares of common stock at $1.00 per share. The warrant contained “down-round/reset” provisions (both exercise price and number of shares) in the event the Company issues similar instrument at a price lower than $1.25 per shares, and as such, is subject to derivative liability accounting. The Company determined that the issuance of these additional warrants was part of a negotiated settlement with FirstFire, and recorded the fair value of the warrants of $199,000 as a liability and as a financing cost during the year ended December 31, 2017.

The Company also considered the guidance of ASC 480-10-S99-3A, and determined that as redemption is outside control of the issuer as the conversion price not fixed, such preferred shares should be recognized outside of permanent equity.

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

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Derivative Liability

9 Months Ended

Sep. 30, 2018

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Liability

NOTE 11 – 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 notes, Series-A preferred stock, and warrants described in Notes 8, 9 and 10 were not a fixed amount because they were either subject to an adjustment based on the occurrence of future offerings or events or they were variable. Since the number of shares is not explicitly limited, the Company is unable to conclude that enough authorized and unissued shares are available to settle the conversion option. In accordance with the FASB authoritative guidance, the conversion features have been characterized as derivative liabilities to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.

As of September 30, 2018, and December 31, 2017, the derivative liabilities were valued using either a probability weighted average Monte Carlo pricing model or the Black Scholes pricing model with the following assumptions:

	September 30, 2018			Issued During 2018			December 31, 2017
Exercise Price	$	0.49 – 1.50		$	1.50		$	1.10 – 1.25
Stock Price	$	0.95		$	1.09		$	2.23
Risk-free interest rate		2.91-2.94	%		2.83	%		1.76-2.20	%
Expected volatility		126 – 138	%		171	%		172	%
Expected life (in years)		4.06 – 4.61			5.0			1.30 – 5.00
Expected dividend yield		0	%		0	%		0	%
Warrants	$	6,617,284		$	7,677,406		$	3,000,000
Convertible debt		-			-			3,633,000
Series-A Preferred Stock		-			-			782,000
Fair Value:	$	6,617,284		$	7,677,406		$	7,415,000

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.

During the nine months ended September 30, 2018, the Company recognized $4,286,692 as other income, which represented the change in the fair value of the derivative from the respective prior period. In addition, during the nine months ended September 30, 2018, the Company recognized $4,188,430, which represented the extinguishment of derivative liabilities, of which $2,389,437, was included in other income, and the remaining $1,799,003 was recorded to additional paid-in-capital. In addition, the Company recognized derivative liabilities of $7,677,406 upon issuance of warrants (see Note 8).

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Shareholders' Equity

9 Months Ended

Sep. 30, 2018

Equity [Abstract]

Shareholders' Equity

NOTE 12 – SHAREHOLDERS’ EQUITY

Common shares issued for cash

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

Common shares issued for services

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

Common shares issued to directors and employees for services

Board of Directors Appointments

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

Executive Employment Agreements

On February 14, 2018, the Company entered into a three-year employment agreement with Tiffany Davis as the Company’s Chief Operating Officer. As part of the employment agreement, Ms. Davis was granted 1,000,000 shares of the Company’s common stock, of which 250,000 shares vested and were issued on the signing of the employment agreement and 250,000 shares vest annually on the anniversary of the employment agreement. The fair value of the shares on the date of grant was $1,340,000, of which $335,000 was recorded as stock-based compensation expense on the date of grant, and the remaining $1,005,000 was to be amortized ratably over the three-year vesting period, of which $173,353 was recorded as stock-based compensation expense during the nine months ended September 30, 2018. As discussed in Note 13 below, on August 22, 2018, Ms. Davis entered into an employment agreement that superseded and replaced this employment agreement.

Former Chief Compliance Officer

On December 27, 2017, the Company entered into a four-year employment agreement with Stanley L. Teeple as the Company’s Chief Compliance Officer. As part of the Employment Agreement, Mr. Teeple was granted 1,000,000 shares of the Company’s common stock, of which 250,000 shares vested and were issued on the signing of the employment agreement and 250,000 shares vest annually on the anniversary of the employment agreement. The fair value of the shares on the date of grant was $1,710,000, of which $427,500 was recorded as stock-based compensation during the year ended December 31, 2017, and $285,000 was recorded as stock-based compensation during the nine months ended September 30, 2018. Stanley Teeple resigned as the Company’s Chief Compliance Officer, Secretary and Senior Vice President, effective August 31, 2018, and the obligation to issue the remaining 750,000 shares and corresponding remaining future amortization of stock-based compensation ceased.

Former Chief Executive Officer

On January 6, 2017, the Company extended an offer to Dennis G. Forchic to become the Company’s Chief Executive Officer. Mr. Forchic accepted the offer and contracts were executed on March 27, 2017. As part of the Employment Agreement, the Company issued a total of 5,411,765 shares valued at $2,760,000. In addition, Mr. Forchic purchased an additional 784,314 shares valued at $400,000 for a consideration of $100,000. The fair value of the shares on the date of grant over consideration received was $300,000, which was recorded as stock compensation expense during the nine months ended September 30, 2017. In addition, Mr. Forchic was granted an option to purchase 3,000,000 shares at $0.60 per share, with 33.3% of these shares vesting on the one year anniversary of the date of grant and the remainder vesting in equal installments at the end of each month over the next three years. The options were valued at $835,767 using a Black Scholes options pricing model and was being amortized as an expense over the vesting period. The unamortized portion of this award as of December 31, 2017 was $561,671.

On February 5, 2018, the Company terminated its employment agreement with Mr. Dennis G. Forchic, its Chief Executive Officer and a member of the Company’s Board of Directors. In accordance with the severance terms of his Employment Agreement: (i) all 3,000,000 Options previously granted to Mr. Forchic were terminated as they had not vested; (ii) the Company will pay Mr. Forchic at the annual rate of $162,000 per annum, from February 5, 2018 through the fourth anniversary date of the Employment Agreement; and, (iii) the Company will reimburse Mr. Forchic for each month until the fourth anniversary of January 6, 2017, an amount equal to 50% of Employee’s health care coverage, to the extent such coverage was in place as at February 5, 2018.

During the nine months ended September 30, 2018, the Company recorded a charge of $561,671 of stock-based compensation related to the immediate vesting of 2,000,000 previously unvested stock options, and $449,000 related to Mr. Forchic’s remaining salary obligation. The total charge of $1,010,671 is included in selling, general and administrative expenses in the accompanying condensed consolidated financial statements.

Employee Employment Agreement

In November 2015, the Company entered into a four-year employment agreement with one of its employees, in which the employee was granted 500,000 shares of the Company’s common stock. The shares vest equally in six-month periods over the four years. The fair value of the shares on the date of grant was $400,000, which was being amortized ratably over the four-year service period. This employee was terminated February 27, 2018, and the remaining 250,000 share obligation ceased. The amount amortized as stock-based compensation expense during the nine months ended September 30, 2018 was $16,667.

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 nine months ended September 30, 2018. Subsequent to September 30, 2018, the Fee Warrant was exercised (see Note 14).

The Company cannot sell shares of common stock to YA II PN under the SEDA until a registration statement is declared effective by the Securities and Exchange Commission.

Summary of Stock Options

A summary of stock options for the nine months ended September 30, 2018, is as follows:

			Weighted
	Number		Average
	of		Exercise
	Options		Price
Balance outstanding, December 31, 2017		3,000,000	$	0.60
Options granted		4,784,391		0.77
Options exercised		-		-
Options expired or forfeited		-		-
Balance outstanding, September 30, 2018		7,784,391	$	0.71
Balance exercisable, September 30, 2018		7,784,391	$	0.71

Information relating to outstanding options at September 30, 2018, summarized by exercise price, is as follows:

		Outstanding						Exercisable
						Weighted				Weighted
						Average				Average
Exercise Price Per Share		Shares		Life (Years)		Exercise Price		Shares		Exercise Price
$	0.60		3,000,000		4.36	$	0.60		3,000,000	$	0.60
$	0.74		4,034,391		4.89	$	0.74		4,034,391	$	0.74
$	0.94		750,000		4.91	$	0.94		750,000	$	0.94
			7,784,391		4.72	$	0.71		7,784,391	$	0.71

In August 2018, the Company granted to its executives, Lien and Davis, stock options to purchase an aggregate of 4,034,391 shares of Common Stock (see Note 13 Executive Agreements). The fair value of the stock options granted was determined to be $2,164,755, which was recorded to stock-based compensation expense during the nine month period ended September 30, 2018. The stock options immediately vested on the date of issuance. The fair value of the stock options was calculated using the Black-Scholes option pricing model using the following assumptions – stock price of $0.74; exercise price of $0.74; expected life of 3 years; volatility of 123.1%; dividend rate of 0.0% and discount rate of 2.7%. In addition, pursuant to the agreements, on the first, second and third anniversaries, (i) Lien shall receive options to purchase 3% of the total number of shares of common stock then outstanding and (ii) Davis shall receive options to purchase 2%, 2% and 3%, respectively, of the total number of shares of common stock then outstanding, with all such options having an exercise price equal to the closing price of the Company’s common stock on the trading day prior to such anniversary and exercisable for five years from issuance. In addition, Davis received fully vested options to purchase 750,000 shares of Common Stock, exercisable for five years at $0.94 per share with a fair value of $516,356.

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 $561,671 during the nine month period ended September 30, 2018.

As of September 30, 2018, the Company had no outstanding unvested options with future compensation costs. However, there will be future compensation related to the options to be awarded to Lien and Davis under their employment agreements discussed above. The weighted-average remaining contractual life of options outstanding and exercisable at September 30, 2018 was 4.72 years. The intrinsic value of both outstanding and exercisable options at September 30, 2018 was $1,889,000.

Summary of Warrants

A summary of warrants for the nine months ended September 30, 2018, is as follows:

				Weighted
	Number			Average
	of			Exercise
	Warrants			Price
Balance outstanding, December 31, 2017		1,589,500		$	1.10
Warrants granted		13,500,000			0.84
Warrants exercised		(1,306,360	)		1.10
Warrants expired or forfeited		-			-
Balance outstanding, September 30, 2018		13,783,140		$	0.84
Balance exercisable, September 30, 2018		13,783,140		$	0.84

Information relating to outstanding warrants at September 30, 2018, summarized by exercise price, is as follows:

		Outstanding						Exercisable
						Weighted				Weighted
						Average				Average
Exercise Price Per Share		Shares		Life (Years)		Exercise Price		Shares		Exercise Price
$	0.01		6,000,000		4.61	$	0.01		6,000,000	$	0.01
$	1.10		283,140		4.06	$	1.10		283,140	$	1.10
$	1.50		7,500,000		4.61	$	1.50		7,500,000	$	1.50
			13,783,140		4.59	$	0.84		13,783,140	$	0.84

During the nine month period ended September 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 (see Note 4). 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 (see Note 8). Lastly, in connection with the SEDA discussed above, 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 nine months ended September 30, 2018, the Company issued 1,306,360 shares of its common stock on the conversion of warrants, at $1.10 per share, resulting in proceeds of $1,436,996.

The weighted-average remaining contractual life of warrants outstanding and exercisable at September 30, 2018 was 4.59 years. The intrinsic value of both outstanding and exercisable warrants at September 30, 2018 was $5,628,000.

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Commitments

9 Months Ended

Sep. 30, 2018

Commitments and Contingencies Disclosure [Abstract]

Commitments

NOTE 13- COMMITMENTS

Operating Leases

California Facility (West Coast Facility)

The Company’s principal executive offices and warehouse are located at 853 Sandhill Avenue, Carson, California, 90746. The Company occupies a 17,640 square foot facility pursuant to a five-year lease with an independent party ending on September 30, 2023, with an unaffiliated party, pursuant to which it pays $15,000 per month in rental charges.

Closure of New Jersey Facility (East Coast Facility)

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

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

Arizona Property

On April 19, 2018, the Company entered into an Option Agreement, or the Option, with MSCP, LLC, a non-affiliated Arizona limited liability company, or the Lessor, pursuant to which, the Company’s subsidiary was granted an option to enter into a certain Lease Agreement, or the Lease, for the real property, including the structure and all improvements, identified in the Option, or the Premises. The Premises consists of 70,000 square feet of space and is to be used for the sole purpose of providing services related to the management, administration and operation of a cultivation and processing facility, or the Facility, on behalf of an Arizona limited liability company operating as a nonprofit organization, or the Arizona Licensee, which has been allocated a Medical Marijuana Dispensary Registration Certificate by the Arizona Department of Health Services. The activities within the Facility shall be limited to the cultivation, processing, production and packaging of medical marijuana and manufactured and derivative products which contain medical marijuana, with no right to sell or dispense any such plants or products. The Lease is for a 5-year initial term, or the Term, with an option to renew for an additional 5 year term. The base rent for the initial year of the Term is $101,500 per month with additional pro-rata net-lease charges. As consideration for the Option, the Company paid to Lessor, $160,000, or the Deposit.

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

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 per calendar year. For each of the three and nine months ended September 30, 2018 and 2017, $25,000 and $75,000, respectively, was recorded as research and development expense under the agreement on the Condensed Consolidated Statements of Operations related to the minimum annual fee. For the three and nine months ended September 30, 2018 and 2017, $0 and $0, and $4,126 and $25,160, respectively, was recorded as cost of goods sold on the Condensed Consolidated Statements of Operations related to the royalty. A total of $140,713 and $165,553 was owed under the amended agreement at September 30, 2018 and December 31, 2017, respectively.

Executive Employment Agreements

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

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

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

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

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

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Subsequent Events

9 Months Ended

Sep. 30, 2018

Subsequent Events [Abstract]

Subsequent Events

NOTE 14 – SUBSEQUENT EVENTS

On October 12, 2018, the Company issued 1,000,000 shares of common stock to YA Global II SPV LLC (“YA Global”), which shares were issued upon YA Global exercising the warrants issued on April 15, 2018, as a commitment fee in connection with the Standby Equity Distribution Agreement (see Note 12). YA Global paid the Company $10,000, or $0.01 per share, in full settlement of the exercise price.

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2018

Accounting Policies [Abstract]

Basis of Consolidation

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”), and entity incorporated under the laws of the State of California, and YLK Partners NV, LLC (“YLK”), an entity formed under the laws of Nevada. Intercompany transactions and balances have been eliminated in consolidation.

Loss Per Share Calculations

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

For the nine months ended September 30, 2018, options to acquire 7,784,391 shares of common stock and warrants to acquire 13,783,140 shares of common stock have been excluded from the calculation of weighted average common shares outstanding at September 30, 2018, as their effect would have been anti-dilutive. For the nine months ended September 30, 2017, options to acquire 3,000,000 shares of common stock have been excluded from the calculation of weighted average common shares outstanding at September 30, 2017, as their effect would have been anti-dilutive.

Use of Estimates

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the U.S requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the financial statement date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in valuing our allowances for doubtful accounts, reserves for inventory obsolescence, impairment testing of long lived assets, valuing equity instruments issued for services and valuation allowance for deferred tax assets, among others. Actual results could differ from these estimates.

Revenue Recognition

Revenue Recognition

In September 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09 regarding revenue recognition. The new standard provides authoritative guidance clarifying the principles for recognizing revenue and developing a common revenue standard for U.S. generally accepted accounting principles. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in the exchange for those goods or services. The ASU became effective January 1, 2018. Due to the nature of the products sold by the Company, the adoption of the new standard has had no quantitative effect on the financial statements. However, the guidance requires additional disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized.

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

Under the new guidance, revenue is recognized when control of promised goods or services is transferred to 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 of sales are recognized once products are delivered to the customer’s control and performance obligations are satisfied.

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

The Company does not offer a general right of return on any of its sales and considers all sales as final. The Company generally provides a three-year warranty on its ballasts. However, the Company does not maintain a warranty reserve as the Company is able to chargeback its vendors for all warranty claims. As of September 30, 2018 and December 31, 2017, the Company recorded reserves for returned product in the amounts of $116,857 and $114,119, respectively, which reduced the accounts receivable balances as of those periods.

Concentration Risks

Concentration Risks

The Company maintains the majority of its cash balances with one financial institution, in the form of demand deposits. At September 30, 2018 and December 31, 2017, 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 nine months ended September 30, 2018 and 2017, its ballasts, lamps and reflectors, which comprised the majority of the Company’s purchases during those periods, were each only purchased from one separate vendor. The ballast vendor is a former related party (see Note 5).

The Company performs a regular review of customer activity and associated credit risks and does not require collateral or other arrangements. Two customers accounted for 19.0% and 13.0%, respectively, of the Company’s revenue for the three months ended September 30, 2018, and for the three months ended September 30, 2017, no customer accounted for more than 10% of the Company’s revenue. Shipments to customers outside the United States comprised 3.3% and 0.1% for the three months ended September 30, 2018 and 2017, respectively. One customer accounted for 12.1% of the Company’s revenue for the nine months ended September 30, 2018, and for the nine months ended September 30, 2017, no customer accounted for more than 10% of the Company’s revenue. Shipments to customers outside the United States comprised 4.7% and 2.6% for the nine months ended September 30, 2018 and 2017, respectively.

As of September 30, 2018, one customer accounted for 12.9% of the Company’s trade accounts receivable balance, and as of December 31, 2017, four customers accounted for 17.1%, 14.8%, 14.5% and 14.3%, respectively, of the Company’s trade accounts receivable balance.

Fair Value Measurements

Fair Value Measurements

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

● Level 1 — Quoted prices in active markets for identical assets or liabilities.

● Level 2 — Inputs, other than Level 1, that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

● Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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

The fair value of the derivative liabilities of $6,617,284 and $7,415,000 at September 30, 2018 and December 31, 2017, respectively, was valued using Level 2 inputs.

Derivative Financial Instruments

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

Intangible Assets

Intangible Assets

The Company accounts for intangible assets in accordance with the authoritative guidance issued by the 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 September 30, 2018, the Company had intangible assets of $1,382,941 (see Note 4) that consist of a license right. Management believes there were no indications of impairment based on management’s assessment of these assets at that date. Factors the Company considers important that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of the use of its assets or the strategy for the Company’s overall business, and significant negative industry or economic trends. If current economic conditions worsen causing a decrease in anticipated revenues and/or increased costs, the Company may have to record an impairment to its intangible assets.

Recently Issued Accounting Pronouncements

Recently Issued Accounting Pronouncements

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

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

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

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Property and Equipment (Tables)

9 Months Ended

Sep. 30, 2018

Property, Plant and Equipment [Abstract]

Schedule of Property and Equipment

Property and equipment consists of the following September 30, 2018 and December 31, 2017:

	September 30, 2018			December 31, 2017
Machinery and equipment	$	198,455		$	234,706
Computer equipment		12,448			12,448
Furniture and fixtures		82,779			97,451
Leasehold improvements		431,819			7,000
		725,501			351,605
Less: accumulated depreciation		(215,532	)		(213,362	)
Property and equipment, net	$	509,969		$	138,243

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License Agreement Acquired from Related Parties (Tables)

9 Months Ended

Sep. 30, 2018

License Agreement Acquired From Related Parties

Schedule of License Agreement Acquired from Related Parties

License agreement acquired from related parties as of September 30, 2018 and December 31, 2017, consisted of the following:

	As of
	September 30, 2018			December 31, 2017
License agreement	$	1,518,523		$	-
Accumulated amortization		(135,582	)		-
Intangible assets, net	$	1,382,941		$	-

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Notes Payable to Related Parties (Tables)

9 Months Ended

Sep. 30, 2018

Debt Disclosure [Abstract]

Schedule of Notes Payable to Related Parties

Notes payable to related parties consists of the following at September 30, 2018 and December 31, 2017:

	September 30, 2018		December 31, 2017
Notes payable to officers/shareholders (a)	$	-	$	195,000
Notes payable to officers/shareholders (b)		600,000		600,000
Notes payable to related parties (c)		-		300,000
Notes payable to related parties (d)		40,000		50,000
Total	$	640,000	$	1,145,000

a.	On July 1, 2012, the Company entered into a notes payable agreement with Lydia Hao, who is the mother of Alvin Hao, the Company’s executive vice president and a director. The maximum borrowings allowed under the note are $200,000. Through December 31, 2013, the note bore interest at 20% per annum. Beginning on January 1, 2014, the interest rate on the note was reduced to 8% per annum. The note is due 30 days after demand. Amounts owed on the note balance were $195,000 at December 31, 2017. During the nine months ended September 30, 2018, the Company made payments of $195,000 and the notes were retired.
b.	On May 9, 2016, the Company entered into note payable agreements with Alan Lien and Alvin Hao, each an officer and director, to borrow $300,000 under each individual note. Pursuant to the terms of each of these agreements, the Company borrowed $300,000 from each of Alan Lien and Alvin Hao. The notes accrue interest at a rate of 8% per annum, are unsecured and were due on or before May 31, 2018. The loans are currently past due. A total of $600,000 was due on the combined notes at September 30, 2018 and December 31, 2017, respectively.
c.	In February 2017, the Company executed two separate promissory notes and borrowed $300,000 from the relatives of Alan Lien, the Company’s Chief Executive Officer and one of its directors. The notes are unsecured, payable on demand and carry an interest rate of 14% per annum. A total of $300,000 was outstanding on the combined notes at December 31, 2017. During the nine months ended September 30, 2018, the Company made payments of $300,000 and the notes were retired.
d.	The Company entered into note agreements with the parents of Alan Lien, the Company’s Chief Executive Officer and one of its directors. The loans accrue interest at 10% per annum, are unsecured and were due on or before December 31, 2016. A total of $50,000 was due on the loans as of each of December 31, 2017 and 2016. During the nine months ended September 30, 2018, the Company made payments of $10,000, leaving a balance due of $40,000 as of September 30, 2018. The loans are currently past due.

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Loans Payable (Tables)

9 Months Ended

Sep. 30, 2018

Debt Disclosure [Abstract]

Schedule of Loans Payable

Loans payable consist of the following as of September 30, 2018 and December 31, 2017:

	September 30, 2018			December 31, 2017
Automobile loans	$	3,383		$	25,957
Less: current portion		(3,383	)		(8,476	)
Non-current portion	$	-		$	17,481

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Secured Note Payable to Related Party (Tables)

9 Months Ended

Sep. 30, 2018

Debt Disclosure [Abstract]

Schedule of Secured Notes Payable to Related Party

Secured note payable to related party consists of the following as of September 30, 2018 and December 31, 2017:

	September 30, 2018			December 31, 2017
YA II PN, Ltd.	$	1,500,000		$	-
Less debt discount		(747,032	)		-
Secured note payable, net	$	752,968		$	-

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Convertible Note Payable to Related Party (Tables)

9 Months Ended

Sep. 30, 2018

Debt Disclosure [Abstract]

Schedule of Convertible Notes Payable to Related Party

Convertible note payable to related party consist of the following as of September 30, 2018 and December 31, 2017:

	September 30, 2018		December 31, 2017
YA II PN, Ltd.	$	-	$	1,750,000
Less debt discount		-		(1,555,556	)
Convertible note payable, net	$	-	$	194,444

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Series-A Convertible Preferred Stock and Warrants (Tables)

9 Months Ended

Sep. 30, 2018

Equity [Abstract]

Schedule of Series-A Convertible Preferred Shares Subscription Agreement

Series-A Convertible Preferred Shares consisted of the following as of September 30, 2018 and December 31, 2017:

	September 30, 2018		December 31, 2017
5% Series-A preferred stock, $0.0001 par value, none and 351,000 shares issued and outstanding as of September 30, 2018 and December 31, 2017	$	-	$	351,000
Discount relating to fair value of conversion feature and warrants granted upon issuance		-		(351,000	)
Preferred stock	$	-	$	-

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Derivative Liability (Tables)

9 Months Ended

Sep. 30, 2018

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Schedule of Derivative Liability Weighted Average Assumption

As of September 30, 2018, and December 31, 2017, the derivative liabilities were valued using either a probability weighted average Monte Carlo pricing model or the Black Scholes pricing model with the following assumptions:

	September 30, 2018			Issued During 2018			December 31, 2017
Exercise Price	$	0.49 – 1.50		$	1.50		$	1.10 – 1.25
Stock Price	$	0.95		$	1.09		$	2.23
Risk-free interest rate		2.91-2.94	%		2.83	%		1.76-2.20	%
Expected volatility		126 – 138	%		171	%		172	%
Expected life (in years)		4.06 – 4.61			5.0			1.30 – 5.00
Expected dividend yield		0	%		0	%		0	%
Warrants	$	6,617,284		$	7,677,406		$	3,000,000
Convertible debt		-			-			3,633,000
Series-A Preferred Stock		-			-			782,000
Fair Value:	$	6,617,284		$	7,677,406		$	7,415,000

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Shareholders' Equity (Tables)

9 Months Ended

Sep. 30, 2018

Equity [Abstract]

Summary of Stock Options Activity

A summary of stock options for the nine months ended September 30, 2018, is as follows:

			Weighted
	Number		Average
	of		Exercise
	Options		Price
Balance outstanding, December 31, 2017		3,000,000	$	0.60
Options granted		4,784,391		0.77
Options exercised		-		-
Options expired or forfeited		-		-
Balance outstanding, September 30, 2018		7,784,391	$	0.71
Balance exercisable, September 30, 2018		7,784,391	$	0.71

Schedule of Options Outstanding and Exercisable

Information relating to outstanding options at September 30, 2018, summarized by exercise price, is as follows:

		Outstanding						Exercisable
						Weighted				Weighted
						Average				Average
Exercise Price Per Share		Shares		Life (Years)		Exercise Price		Shares		Exercise Price
$	0.60		3,000,000		4.36	$	0.60		3,000,000	$	0.60
$	0.74		4,034,391		4.89	$	0.74		4,034,391	$	0.74
$	0.94		750,000		4.91	$	0.94		750,000	$	0.94
			7,784,391		4.72	$	0.71		7,784,391	$	0.71

Schedule of Stock Warrants Activity

Information relating to outstanding warrants at September 30, 2018, summarized by exercise price, is as follows:

		Outstanding						Exercisable
						Weighted				Weighted
						Average				Average
Exercise Price Per Share		Shares		Life (Years)		Exercise Price		Shares		Exercise Price
$	0.01		6,000,000		4.61	$	0.01		6,000,000	$	0.01
$	1.10		283,140		4.06	$	1.10		283,140	$	1.10
$	1.50		7,500,000		4.61	$	1.50		7,500,000	$	1.50
			13,783,140		4.59	$	0.84		13,783,140	$	0.84

Schedule of Warrants Outstanding and Exercisable

Information relating to outstanding warrants at June 30, 2018, summarized by exercise price, is as follows:

		Outstanding						Exercisable
						Weighted				Weighted
						Average				Average
Exercise Price Per Share		Shares		Life (Years)		Exercise Price		Shares		Exercise Price
$	0.01		6,000,000		4.86	$	0.01		6,000,000	$	0.01
$	1.10		283,140		4.31	$	1.10		283,140	$	1.10
$	1.50		7,500,000		4.86	$	1.50		7,500,000	$	1.50
			13,783,140		4.85	$	0.84		13,783,140	$	0.84

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Basis of Presentation (Details Narrative) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017	Dec. 31, 2016
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Operating loss	$ (4,019,364)	$ (1,461,321)	$ (14,087,704)	$ (6,742,076)
Cash in operations			2,719,100	897,062
Stockholders' deficit	4,483,160		4,483,160		$ 6,326,189
Cash on hand	$ 2,053,399	$ 194,129	$ 2,053,399	$ 194,129	$ 967,943	$ 275,783

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Summary of Significant Accounting Policies (Details Narrative) - USD ($)	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017
Reserve of returned products	$ 116,857		$ 116,857		$ 114,119
Federally insured limit	250,000		250,000		250,000
Intangible assets	1,382,941		1,382,941
Fair Value, Inputs, Level 2 [Member]
Fair value of the derivative liabilities	$ 6,617,284		$ 6,617,284		$ 7,415,000
United States [Member]
Concentration risks percentage	3.30%	0.10%	4.70%	2.60%
Sales Revenue, Net [Member]
Concentration risks percentage		10.00%	10.00%
Sales Revenue, Net [Member] | Customer One [Member]
Concentration risks percentage	19.00%
Sales Revenue, Net [Member] | Customer Two [Member]
Concentration risks percentage	13.00%
Sales Revenue, Net [Member] | One Customer [Member]
Concentration risks percentage			12.10%
Accounts Receivable [Member] | Customer One [Member]
Concentration risks percentage			12.90%		17.10%
Accounts Receivable [Member] | Customer Two [Member]
Concentration risks percentage					14.80%
Accounts Receivable [Member] | Customer Three [Member]
Concentration risks percentage					14.50%
Accounts Receivable [Member] | Customer Four [Member]
Concentration risks percentage					14.30%
Options [Member]
Anti-dilutive shares excluded from calculation of weighted average common shares			$ 7,784,391	$ 3,000,000
Warrants [Member]
Anti-dilutive shares excluded from calculation of weighted average common shares			$ 13,783,140

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Property and Equipment (Details Narrative) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017
Property, Plant and Equipment [Abstract]
Depreciation expense	$ 13,066	$ 17,480	$ 44,134	$ 53,111
Sale of property and equipment			28,500
Book value of property and equipment	26,100		26,100
Gain on the sale of property and equipment			2,400
Property and equipment include assets acquired under capital leases	$ 64,632		$ 64,632		$ 64,632

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Property and Equipment - Schedule of Property and Equipment (Details) - USD ($)	Sep. 30, 2018	Dec. 31, 2017
Property and equipment, gross	$ 725,501	$ 351,605
Less: accumulated depreciation and amortization	(215,532)	(213,362)
Property and equipment, net	509,969	138,243
Machinery and Equipment [Member]
Property and equipment, gross	198,455	234,706
Computer Equipment [Member]
Property and equipment, gross	12,448	12,448
Furniture and Fixtures [Member]
Property and equipment, gross	82,779	97,451
Leasehold Improvements [Member]
Property and equipment, gross	$ 431,819	$ 7,000

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License Agreement Acquired from Related Parties (Details Narrative)		3 Months Ended		9 Months Ended
	May 10, 2018 USD ($) Integer $ / shares shares	Sep. 30, 2018 USD ($) $ / shares shares	Sep. 30, 2017 USD ($)	Sep. 30, 2018 USD ($) $ / shares shares	Sep. 30, 2017 USD ($)	Dec. 31, 2017 USD ($)	Nov. 08, 2017 $ / shares	Oct. 31, 2017 $ / shares
Class of warrant share | shares		900,000		900,000
Warrant exercise price | $ / shares		$ 1.10		$ 1.10				$ 1.25
Accounts receivable acquired on acquisition				$ 250,000
Net of discount of intangible assets		$ 72,887		72,887
Acquisition cost of agreement		1,518,523		1,518,523
Accumulated amortization		54,235		135,584
Due from related party		250,000		250,000
Excess cost of acquisition to related party over historical basis				4,450,000
Contract obligation		777,113		777,113
Contract obligations, current		331,818		331,818
Contract obligations, non current		$ 445,295		445,295
YLK investors [Member]
Accounts receivable acquired on acquisition				250,000
Warrants [Member]
Fair value of warrants				$ 338,358
YA II PN, Ltd. Advisors Global, LP [Member]
Warrant exercise price | $ / shares							$ 1.10
Future Farm Technologies, Inc [Member]
Due from related party	$ 250,000
Historical acquisition cost	$ 1,000,000
Acquisition Agreement [Member] | YLK Partners NV, LLC [Member]
Equity ownership percentage	100.00%
Class of warrant share | shares	5,000,000
Warrant exercise price | $ / shares	$ 0.01
Warrant exercisable date	May 09, 2023
Acquisition Agreement [Member] | YLK Partners NV, LLC [Member] | Warrants [Member]
Class of warrant share | shares	5,000,000
Fair value of warrants	$ 5,450,000
Acquisition Agreement [Member] | LK Ventures, LLC [Member]
Equity ownership percentage	45.00%
Class of warrant share | shares	2,250,000
Acquisition Agreement [Member] | MDM Cultivation LLC [Member]
Equity ownership percentage	45.00%
Class of warrant share | shares	11,200,000
Stock issued during period, shares | shares	2,258,382
Stock issued during period, value	$ 1,500,000
Class of warrant issued, share | shares	2,250,000
Acquisition Agreement [Member] | MDM Cultivation LLC [Member] | Warrants [Member]
Class of warrant share | shares	2,250,000
Acquisition Agreement [Member] | Future Farm Technologies, Inc [Member] | Warrants [Member]
Equity ownership percentage	10.00%
Class of warrant issued, share | shares	500,000
Warrant expiration date	May 09, 2023
Excess cost of acquisition to related party over historical basis	$ 4,450,000
Standby Equity Distribution Agreement [Member] | YA II PN, Ltd. Advisors Global, LP [Member]
Stock issued during period, value	$ 25,000,000
Cultivation Management Services Agreement [Member]
Agreement description	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).
License fee	$ 600,000
Installment payments	518,523
Net of discount of intangible assets	81,477
Acquisition cost of agreement	1,518,523
Cultivation Management Services Agreement [Member] | Arizona Department of Health Services [Member]
License fee	$ 250,000
Cultivation Management Services Agreement [Member] | YLK Partners NV, LLC [Member]
Agreement description	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").
License fee	$ 600,000
Number of installments | Integer	44
Agreement term	5 years
Options to extend the term of agreement	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.
Installment payments	$ 1,000,000
Cultivation Management Services Agreement [Member] | YLK Partners NV, LLC [Member] | Arizona Licensee [Member]
License fee	750,000
Cultivation Management Services Agreement [Member] | YLK Partners NV, LLC [Member] | Arizona Department of Health Services [Member]
License fee	$ 250,000

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License Agreement Acquired from Related Parties - Schedule of License Agreement Acquired from Related Parties (Details) - USD ($)	Sep. 30, 2018	Dec. 31, 2017
License Agreement Acquired From Related Parties
License agreement	$ 1,518,523
Accumulated amortization	(135,582)
Intangible assets, net	$ 1,382,941

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Related Party Transactions (Details Narrative) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017
Related Party Transactions [Abstract]
Purchases from related party	$ 381,000	$ 1,411,000	$ 1,478,000	$ 2,913,000
Company owed former related party					$ 381,457
Advanced deposit payments	540,090		540,090		735,730
Due to shareholders	124,117		124,117		$ 146,534
Additional accrued interest	$ 16,868	$ 45,205	52,889
Interest payment			$ 75,306

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Notes Payable to Related Parties - Schedule of Notes Payable to Related Parties (Details) - USD ($)		Sep. 30, 2018	Dec. 31, 2017
Note payable, net		$ 640,000	$ 1,145,000
Notes Payable to Officers/Shareholders [Member]
Note payable, net	[1]		195,000
Notes Payable to Officers/Shareholders 1 [Member]
Note payable, net	[2]	600,000	600,000
Notes Payable to Related Parties [Member]
Note payable, net	[3]		300,000
Notes Payable to Related Parties 1 [Member]
Note payable, net	[4]	$ 40,000	$ 50,000

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

[2] On May 9, 2016, the Company entered into note payable agreements with Alan Lien and Alvin Hao, each an officer and director, to borrow $300,000 under each individual note. Pursuant to the terms of each of these agreements, the Company borrowed $300,000 from each of Alan Lien and Alvin Hao. The notes accrue interest at a rate of 8% per annum, are unsecured and were due on or before May 31, 2018. The loans are currently past due. A total of $600,000 was due on the combined notes at September 30, 2018 and December 31, 2017, respectively.

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

[4] The Company entered into note agreements with the parents of Alan Lien, the Company's Chief Executive Officer and one of its directors. The loans accrue interest at 10% per annum, are unsecured and were due on or before December 31, 2016. A total of $50,000 was due on the loans as of each of December 31, 2017 and 2016. During the nine months ended September 30, 2018, the Company made payments of $10,000, leaving a balance due of $40,000 as of September 30, 2018. The loans are currently past due.

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Notes Payable to Related Parties - Schedule of Notes Payable to Related Parties (Details) (Parenthetical) - USD ($)		9 Months Ended
	May 09, 2016	Sep. 30, 2018	Dec. 31, 2017	Feb. 28, 2017	Dec. 31, 2016	Jan. 01, 2014	Dec. 31, 2013	Jul. 01, 2012
Note payable		$ 640,000	$ 1,145,000
Interest rate on notes						8.00%	20.00%
Note payable, current		752,968
Due to related parties			381,457
Lydia Hao [Member]
Note payable		195,000	195,000					$ 200,000
Mr. Lien [Member]
Note payable		$ 40,000		$ 300,000
Interest rate on notes				14.00%
Purchases from related party	$ 300,000
Percentage of accrued interest	8.00%	10.00%
Debt instruments maturity	May 31, 2018	Dec. 31, 2016
Note payable, current		$ 300,000	300,000
Due to related parties			50,000		$ 50,000
Repayments of notes payable		10,000
Mr. Hao [Member]
Purchases from related party	$ 300,000
Percentage of accrued interest	8.00%
Debt instruments maturity	May 31, 2018
Mr. Lien and Mr.Hao [Member]
Note payable, current		$ 600,000	$ 600,000

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Loans Payable (Details Narrative) - USD ($)	9 Months Ended		12 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2015	Dec. 31, 2017
Debt repayment	$ 22,574	$ 6,147
Due to related parties				$ 381,457
Loan Agreement to Purchase an Automobile [Member]
Loan principal amount			$ 44,093
Line of credit expiration date			Nov. 30, 2021
Debt repayment	22,574
Due to related parties	$ 3,383			$ 25,957

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Loans Payable - Schedule of Loans Payable (Details) - USD ($)	Sep. 30, 2018	Dec. 31, 2017
Less: current portion	$ (3,383)	$ (8,476)
Non-current portion		17,481
Automobile Loans [Member]
Loan Payable	$ 3,383	$ 25,957

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Secured Note Payable to Related Party (Details Narrative) - USD ($)	May 10, 2018	Sep. 30, 2018	Dec. 31, 2017	Nov. 08, 2017	Oct. 31, 2017	Jan. 01, 2014	Dec. 31, 2013
Interest rate						8.00%	20.00%
Warrants to purchase number of shares					1,936
Warrant exercise price		$ 1.10			$ 1.25
Warrants		$ 6,617,284	$ 3,000,000
Secured note payable, net		752,968
Debt discount		(1,555,556)
Warrant One [Member]
Warrants to purchase number of shares	1,000,000
Warrant exercise price	$ 1.50
Warrant expiration date	May 10, 2023
Warrant Two [Member]
Warrants to purchase number of shares	2,250,000
Warrant exercise price	$ 1.50
Warrant expiration date	May 10, 2023
Purchase price of share	$ 0.03
Price per share	$ 1.75
Warrant Three [Member]
Warrants to purchase number of shares	2,250,000
Warrant exercise price	$ 1.50
Warrant expiration date	May 10, 2023
Purchase price of share	$ 0.03
Price per share	$ 2.00
Warrant Four [Member]
Warrants to purchase number of shares	2,000,000
Warrant exercise price	$ 1.50
Warrant expiration date	May 10, 2023
Purchase price of share	$ 0.03
Price per share	$ 1.50
In Case of Default [Member]
Interest rate	18.00%			15.00%
YA II PN, Ltd. [Member]
Convertible notes payable	$ 1,500,000	$ 1,500,000
Interest rate	8.00%
Debt maturity date	Feb. 09, 2019
Warrant term	5 years	5 years
Warrants to purchase number of shares	7,500,000	1,000,000
Warrant exercise price		$ 0.01
Price per share		$ 1.00
Warrants	$ 7,677,406
Finance cost	$ 6,177,406
Secured note payable, net		$ 752,968
Debt discount		$ (747,032)
YA II PN, Ltd. [Member] | Warrant Two [Member]
Price per share	$ 1.75
YA II PN, Ltd. [Member] | Warrant Three [Member]
Price per share	2.00
YA II PN, Ltd. [Member] | Warrant Four [Member]
Price per share	$ 2.50

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Secured Note Payable to Related Party - Schedule of Secured Notes Payable to Related Party (Details) - USD ($)	Sep. 30, 2018	Dec. 31, 2017
Less debt discount	$ (1,555,556)
Secured note payable, net	752,968
YA II PN, Ltd. [Member]
Secured note payable	1,500,000
Less debt discount	(747,032)
Secured note payable, net	$ 752,968

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Convertible Note Payable to Related Party (Details Narrative) - USD ($)		1 Months Ended	9 Months Ended		12 Months Ended
	Nov. 08, 2017	Apr. 30, 2018	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017	May 10, 2018	Oct. 31, 2017	Jan. 01, 2014	Dec. 31, 2013
Interest rate								8.00%	20.00%
Warrants to purchase number of shares							1,936
Warrant exercise price			$ 1.10				$ 1.25
Derivative fair value of derivative			$ 902,358
Amortization of debt discount			2,308,524
Unamortization of debt discount			$ 1,555,556
In Case of Default [Member]
Interest rate	15.00%					18.00%
YA II PN, Ltd. Advisors Global, LP [Member]
Convertible notes payable	$ 1,750,000	$ 1,750,000
Interest rate	5.00%
Debt instrument duration period	18 months
Conversion price per share	$ 1.00
Warrant term	5 years
Warrants to purchase number of shares	1,137,500
Warrant exercise price	$ 1.10
Aggregate funding fee	5.00%
Due diligence and structuring fee	$ 15,000
Amount netted after fee and expenses	1,647,500
Interest expenses	102,500
Derivative fair value of derivative	3,767,724
Amortization of debt discount					$ 2,017,724
Unamortization of debt discount					$ 1,555,556
Debt instrument of interest accrued		$ 38,082
Conversion of common stock			1,788,082
YA II PN, Ltd. Advisors Global, LP [Member] | Maximum [Member]
Fair value of derivative liability	$ 1,750,000

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Convertible Note Payable to Related Party - Schedule of Convertible Notes Payable to Related Party (Details) - USD ($)	Sep. 30, 2018	Dec. 31, 2017
Convertible notes payable		$ 194,444
Less debt discount	0	(1,055,556)
YA II PN, Ltd. [Member]
Convertible notes payable		1,750,000
Less debt discount		(1,555,556)
Convertible note payable, net		$ 194,444

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Series-A Convertible Preferred Stock and Warrants (Details Narrative) - USD ($)			1 Months Ended	9 Months Ended	12 Months Ended
	Oct. 31, 2017	Oct. 24, 2017	Dec. 31, 2017	Sep. 30, 2018	Dec. 31, 2017
Warrant to purchase common stock	1,936
Warrant exercise price	$ 1.25			$ 1.10
Conversion of preferred stock value				$ 564,000
Derivative fair value				$ 902,358
Reduction in fair value of preferred stock					$ 295,410
Deemed dividend					$ 606,948
Series A-Stock [Member]
Stock issued during period of conversion				368,550
Series A Convertible Preferred Stock [Member]
Series A convertible preferred shares, discount				$ 351,000
FirstFire Global Opportunities Fund LLC [Member]
Stock issued during period, shares		117
Warrant to purchase common stock		283,140		226,512
Warrant exercise price				$ 1.25
Fees and expense		$ 295,410
Number of additional warrants issued				56,628
Warrants issued				283,140
Warrant term				5 years
Sale of stock price per share				$ 1.25
FirstFire Global Opportunities Fund LLC [Member] | Yorkville Advisors Global LP [Member]
Warrant to purchase common stock			166,860		166,860
Warrant exercise price			$ 1.00		$ 1.00
Sale of stock price per share			$ 1.25		$ 1.25
Fair value of warrants			$ 199,000
Convertible Preferred Series-A Stock [Member]
Stock issued during period, value	$ 3,000,000
Stock issued during period, shares	3
Preferred stock, description	Each Series-A share is convertible into such number of share of common stock of the Company equal to the stated value of $1,050 divided by the conversion price. The conversion price is the lesser of $1.00 per share or 80% of the VWAP of the 10 trading days prior to conversion.
Convertible Preferred Series-A Stock [Member] | FirstFire Global Opportunities Fund LLC [Member]
Stock issued during period, value		$ 351,000
Stock issued during period, shares		351,000
Warrants [Member]
Conversion of preferred stock value				$ 283,140
Fair value of warrants				$ 338,358

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Series-A Convertible Preferred Stock and Warrants - Schedule of Series-A Convertible Preferred Shares Subscription Agreement (Details) - USD ($)	Sep. 30, 2018	Dec. 31, 2017
Preferred stock
5% Series-A Convertible Preferred Shares [Member]
5% Series-A preferred stock, $0.0001 par value, none and 351,000 shares issued and outstanding as of September 30, 2018 and December 31, 2017		351,000
Discount relating to fair value of conversion feature and warrants granted upon issuance		(351,000)
Preferred stock

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Series-A Convertible Preferred Stock and Warrants - Schedule of Series-A Convertible Preferred Shares Subscription Agreement (Details) (Parenthetical) - $ / shares	Sep. 30, 2018	Dec. 31, 2017
Preferred stock, shares issued
Preferred stock, shares outstanding
5% Series-A Convertible Preferred Shares [Member]
Preferred stock, par value	$ 0.0001	$ 0.0001
Preferred stock, shares issued		351,000
Preferred stock, shares outstanding		351,000

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Derivative Liability (Details Narrative) - USD ($)	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017
Change in fair value of derivative liability	$ (2,525,234)		$ 4,286,692
Extinguishment of derivative liability			2,389,427
Warrants	6,617,284		6,617,284		$ 3,000,000
Additional Paid-in Capital [Member]
Extinguishment of derivative liability			1,799,003
Issuance of Warrant [Member]
Warrants	$ 7,677,406		7,677,406
Addition [Member]
Change in fair value of derivative liability			$ 4,188,430

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Derivative Liability - Schedule of Derivative Liability Weighted Average Assumption (Details) - USD ($)	9 Months Ended	12 Months Ended
	Sep. 30, 2018	Dec. 31, 2017
Stock Price	$ 0.95	$ 2.23
Warrants	$ 6,617,284	$ 3,000,000
Convertible debt		3,633,000
Series-A Preferred Stock		782,000
Fair Value:	$ 6,617,284	$ 7,415,000
Issued During 2018 [Member]
Stock Price	$ 1.09
Warrants	$ 7,677,406
Convertible debt
Series-A Preferred Stock
Fair Value:	$ 7,677,406
Exercise Price [Member] | Issued During 2018 [Member]
Fair value assumption, price per share	$ 1.50
Exercise Price [Member] | Minimum [Member]
Fair value assumption, price per share	0.49	$ 1.10
Exercise Price [Member] | Maximum [Member]
Fair value assumption, price per share	$ 1.50	$ 1.25
Risk Free Interest Rate [Member] | Issued During 2018 [Member]
Fair value assumption, percentage	2.83%
Risk Free Interest Rate [Member] | Minimum [Member]
Fair value assumption, percentage	2.91%	1.76%
Risk Free Interest Rate [Member] | Maximum [Member]
Fair value assumption, percentage	2.94%	2.20%
Price Volatility [Member]
Fair value assumption, percentage		172.00%
Price Volatility [Member] | Issued During 2018 [Member]
Fair value assumption, percentage	171.00%
Price Volatility [Member] | Minimum [Member]
Fair value assumption, percentage	126.00%
Price Volatility [Member] | Maximum [Member]
Fair value assumption, percentage	138.00%
Expected Term [Member] | Issued During 2018 [Member]
Fair value assumption, term	5 years
Expected Term [Member] | Minimum [Member]
Fair value assumption, term	4 years 22 days	1 year 3 months 19 days
Expected Term [Member] | Maximum [Member]
Fair value assumption, term	4 years 7 months 10 days	5 years
Expected Dividend Rate [Member]
Fair value assumption, percentage	0.00%	0.00%
Expected Dividend Rate [Member] | Issued During 2018 [Member]
Fair value assumption, percentage	0.00%

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Shareholders' Equity (Details Narrative)										1 Months Ended	3 Months Ended		9 Months Ended		12 Months Ended
	Aug. 31, 2018 USD ($) shares	Aug. 22, 2018 USD ($) $ / shares shares	May 10, 2018 USD ($) shares	Apr. 16, 2018 USD ($) Integer	Feb. 27, 2018 shares	Feb. 14, 2018 shares	Feb. 05, 2018 USD ($) shares	Dec. 27, 2017 shares	Jan. 06, 2017 USD ($) $ / shares shares	Nov. 30, 2015 USD ($) shares	Sep. 30, 2018 USD ($) $ / shares shares	Sep. 30, 2017 USD ($)	Sep. 30, 2018 USD ($) $ / shares shares	Sep. 30, 2017 USD ($)	Dec. 31, 2017 USD ($) $ / shares shares	Nov. 08, 2017 $ / shares shares	Oct. 31, 2017 $ / shares shares
Number of shares granted													4,784,391
Stock-based compensation | $													$ 958,020	$ 2,835,000
Amortization | $											$ 54,235		135,584
Selling, general and administrative expenses | $											$ 4,115,603	$ 2,050,189	$ 10,213,893	9,206,076
Warrants to purchase number of shares																	1,936
Stock price | $ / shares											$ 0.95		$ 0.95		$ 2.23
Options outstanding											7,784,391		7,784,391		3,000,000
Options exercisable											7,784,391		7,784,391
Warrant exercise price | $ / shares											$ 1.10		$ 1.10				$ 1.25
Common stock converted into warrants, value | $													$ 564,000
Warrant outstanding											900,000		900,000
Stock options, exercisable | $ / shares											$ 0.71		$ 0.71
Exercise Price [Member]
Stock price | $ / shares											0.74		$ 0.74
Expected Life [Member]
Expected of life years													3 years
Volatility [Member]
Stock options percentage													123.10%
Dividend [Member]
Stock options percentage													0.00%
Mr. Lien and Mr.Davis [Member]
Shares issued price per share | $ / shares											0.94		$ 0.94
Stock-based compensation | $													$ 2,164,755
Warrants to purchase number of shares	4,034,391
Stock price | $ / shares											0.74		$ 0.74
Expected of life years													5 years
Discount rate													2.70%
Warrant [Member]
Shares issued price per share | $ / shares											$ 1.10		$ 1.10
Warrants to purchase number of shares											5,000,000		5,000,000
Warrant term											5 years		5 years
Warrant exercise price | $ / shares											$ 0.01		$ 0.01
Common stock converted into warrants													1,306,360
Common stock converted into warrants, value | $													$ 1,436,996
Warrant outstanding life													4 years 7 months 2 days
Warrant outstanding											5,628,000		5,628,000
Secured Promissory Note [Member]
Warrants to purchase number of shares											7,500,000		7,500,000
Warrant term											5 years		5 years
Warrant exercise price | $ / shares											$ 1.50		$ 1.50
Board of Director [Member]
Number of common stock shares issued, value | $													$ 148,000
Number of common stock shares issued													200,000
Shares issued price per share | $ / shares											$ 0.74		$ 0.74
Number of common shares received													200,000
Mr. Forchic [Member]
Annual salary | $													$ 449,000
Compensation charge cost | $													$ 561,671
Unvested stock option											2,000,000		2,000,000
Selling, general and administrative expenses | $													$ 1,010,671
Consulting Agreement [Member]
Number of common stock shares issued, value | $													$ 1,636,000
Number of common stock shares issued													1,310,000
Number of common shares received													1,310,000
Three Year Employment Agreement [Member] | Tiffany Davis [Member]
Number of shares granted						1,000,000
Number of shares vested						250,000
Fair value of options granted | $													$ 1,340,000
Stock-based compensation | $													335,000
Amortization | $													$ 1,005,000
Common stock vesting period													3 years
Stock based compensation, amortized | $													$ 173,353
Three Year Employment Agreement [Member] | Tiffany Davis [Member] | Signing of Employment Agreement [Member]
Number of shares vested						250,000
Four Year Employment Agreement [Member]
Stock based compensation, amortized | $	$ 750,000
Four Year Employment Agreement [Member] | Stanley L. Teeple [Member]
Number of shares granted								1,000,000
Number of shares vested								250,000
Fair value of options granted | $															$ 1,710,000
Stock-based compensation | $															427,500
Stock based compensation, amortized | $													285,000
Four Year Employment Agreement [Member] | Stanley L. Teeple [Member] | Signing of Employment Agreement [Member]
Number of shares vested								250,000
Four Year Employment Agreement [Member] | Employees [Member]
Number of shares granted										500,000
Fair value of options granted | $										$ 400,000
Common stock vesting period										4 years
Share obligation					250,000
Four Year Employment Agreement [Member] | Employee [Member]
Stock-based compensation | $													$ 16,667
Employment Agreement [Member]
Number of common stock shares issued, value | $									$ 2,760,000
Number of common stock shares issued									5,411,765
Stock-based compensation | $														$ 300,000
Stock based compensation, amortized | $									$ 835,767						$ 561,671
Number of common shares received									5,411,765
Employment Agreement [Member] | Mr. Forchic [Member]
Number of common stock shares issued, value | $									$ 400,000
Number of common stock shares issued									784,314
Number of shares vested							3,000,000
Stock-based compensation | $									$ 100,000
Number of shares issued with fair value under agreement									3,000,000
Stock options granted price per share | $ / shares									$ 0.60
Common share options vesting percent									33.30%
Annual salary | $							$ 162,000
Employee's health care percentage							50.00%
Number of common shares received									784,314
Standby Equity Distribution Agreement [Member]
Common stock vesting period													4 years 8 months 19 days
Options outstanding											1,889,000		1,889,000
Options exercisable											1,889,000		1,889,000
Lien Agreement [Member] | Mr. Alan Lien [Member]
Options to purchase shares of common stock, percentage		6.00%
Expiration of stock options, term		5 years
Stock options, exercisable | $ / shares		$ 0.74
Lien Agreement [Member] | Mr. Alan Lien [Member] | First, Second and Third Anniversaries [Member]
Options to purchase shares of common stock, percentage		3.00%
Lien Agreement [Member] | Mr. Tiffany Davis [Member] | First Anniversaries [Member]
Options to purchase shares of common stock, percentage		2.00%
Lien Agreement [Member] | Mr. Tiffany Davis [Member] | Second Anniversaries [Member]
Options to purchase shares of common stock, percentage		2.00%
Lien Agreement [Member] | Mr. Tiffany Davis [Member] | Third Anniversaries [Member]
Options to purchase shares of common stock, percentage		3.00%
Davis Agreement [Member] | Mr. Tiffany Davis [Member]
Number of common stock shares issued		750,000
Fair value of options granted | $		$ 516,356
Options to purchase shares of common stock, percentage		3.00%
Expiration of stock options, term		5 years
Stock options, exercisable | $ / shares		$ 0.74
Number of common shares received		750,000
Options exercisable price per share | $ / shares		$ 0.94
YA II PN, Ltd. [Member]
Number of common stock shares issued, value | $													$ 500,000
Number of common stock shares issued													500,000
Shares issued price per share | $ / shares											$ 1.00		$ 1.00
Warrants to purchase number of shares			7,500,000								1,000,000		1,000,000
Warrant term			5 years								5 years		5 years
Warrant exercise price | $ / shares											$ 0.01		$ 0.01
Number of common shares received													500,000
YA II PN, Ltd. Advisors Global, LP [Member]
Warrants to purchase number of shares																1,137,500
Warrant term																5 years
Warrant exercise price | $ / shares																$ 1.10
Common stock converted into warrants													1,788,082
YA II PN, Ltd. Advisors Global, LP [Member] | Standby Equity Distribution Agreement [Member]
Number of common stock shares issued, value | $			$ 25,000,000
Line of credit facility maximum amount | $				$ 1,000,000
Percentage of lowest volume weighted average price				90.00%
YA II PN, Ltd. Advisors Global, LP [Member] | Standby Equity Distribution Agreement [Member] | Fee Warrant [Member]
Line of credit, commitment fee description				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.
Fair value of fee warrant granted | $				$ 1,140,000
YA II PN, Ltd. Advisors Global, LP [Member] | Standby Equity Distribution Agreement [Member] | Drawn-Down Facility [Member]
Line of credit facility maximum amount | $				$ 25,000,000
Trading days | Integer				5
Regulation D offering [Member]
Number of common stock shares issued, value | $													$ 1,068,000
Number of common stock shares issued													821,538
Shares issued price per share | $ / shares											$ 1.30		$ 1.30
Number of common shares received													821,538

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Shareholders' Equity - Summary of Stock Options Activity (Details)	9 Months Ended
	Sep. 30, 2018 $ / shares shares
Equity [Abstract]
Number of Options outstanding, beginning balance | shares	3,000,000
Number of Options granted | shares	4,784,391
Number of Options exercised | shares
Number of Options expired or forfeited | shares
Number of Options outstanding ending balance | shares	7,784,391
Number of Options exercisable | shares	7,784,391
Weighted Average Exercise Price outstanding beginning balance | $ / shares	$ 0.60
Weighted Average Exercise Price granted | $ / shares	0.77
Weighted Average Exercise Price exercised | $ / shares
Weighted Average Exercise Price expired or forfeited | $ / shares
Weighted Average Exercise Price outstanding | $ / shares	0.71
Weighted Average Exercise Price, exercisable | $ / shares	$ 0.71

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Shareholders' Equity - Schedule of Options Outstanding and Exercisable (Details) - $ / shares	9 Months Ended
	Sep. 30, 2018	Dec. 31, 2017
Outstanding Shares	7,784,391	3,000,000
Options Outstanding Exercise Price Per Share	$ 0.71	$ 0.60
Exercisable Shares	7,784,391
Exercisable Weighted Average Exercise Price	$ 0.71
Exercise Price One [Member]
Outstanding Weighted Average Exercise Price	$ 0.60
Outstanding Shares	3,000,000
Outstanding Life (Years)	4 years 4 months 9 days
Options Outstanding Exercise Price Per Share	$ 0.60
Exercisable Shares	3,000,000
Exercisable Weighted Average Exercise Price	$ 0.60
Exercise Price Two [Member]
Outstanding Weighted Average Exercise Price	$ 0.74
Outstanding Shares	4,034,391
Outstanding Life (Years)	4 years 10 months 21 days
Options Outstanding Exercise Price Per Share	$ 0.74
Exercisable Shares	4,034,391
Exercisable Weighted Average Exercise Price	$ 0.74
Exercise Price Three [Member]
Outstanding Weighted Average Exercise Price	$ 0.94
Outstanding Shares	750,000
Outstanding Life (Years)	4 years 10 months 28 days
Options Outstanding Exercise Price Per Share	$ 0.94
Exercisable Shares	750,000
Exercisable Weighted Average Exercise Price	$ 0.94
Exercise Price [Member]
Outstanding Shares	7,784,391
Outstanding Life (Years)	4 years 8 months 19 days
Options Outstanding Exercise Price Per Share	$ 0.71
Exercisable Shares	7,784,391
Exercisable Weighted Average Exercise Price	$ 0.71

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Shareholders' Equity - Schedule of Stock Warrants Activity (Details)	9 Months Ended
	Sep. 30, 2018 $ / shares shares
Equity [Abstract]
Number of warrants balance, beginning of period | shares	1,589,500
Number of warrants, granted | shares	13,500,000
Number of warrants, exercised | shares	(1,306,360)
Number of warrants, expired or forfeited | shares
Number of warrants, balance end of period | shares	13,783,140
Number of warrants, exercisable | shares	13,783,140
Weighted Average Exercise Price balance, beginning of period | $ / shares	$ 1.10
Weighted Average Exercise Price, granted | $ / shares	0.84
Weighted Average Exercise Price, exercised | $ / shares	1.10
Weighted Average Exercise Price, expired or forfeited | $ / shares
Weighted Average Exercise Price balance, end of period | $ / shares	0.84
Weighted Average Exercise Price, exercisable | $ / shares	$ 0.84

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Shareholders' Equity - Schedule of Warrants Outstanding and Exercisable (Details) - $ / shares	9 Months Ended
	Sep. 30, 2018	Dec. 31, 2017
Warrant exercise Prices	$ 0.84	$ 1.10
Warrant outstanding	13,783,140	1,589,500
Warrant [Member]
Warrant outstanding	13,783,140
Warrant outstanding life (years)	4 years 7 months 2 days
Warrants outstanding weighted average exercise price	$ 0.84
Warrant exercisable share	13,783,140
Warrant exercisable weighted average exercise price	$ 0.84
Warrant One [Member]
Warrant exercise Prices	$ 0.01
Warrant outstanding	6,000,000
Warrant outstanding life (years)	4 years 7 months 10 days
Warrants outstanding weighted average exercise price	$ 0.01
Warrant exercisable share	6,000,000
Warrant exercisable weighted average exercise price	$ 0.01
Warrant Two [Member]
Warrant exercise Prices	$ 1.10
Warrant outstanding	283,140
Warrant outstanding life (years)	4 years 22 days
Warrants outstanding weighted average exercise price	$ 1.10
Warrant exercisable share	283,140
Warrant exercisable weighted average exercise price	$ 1.10
Warrant Three [Member]
Warrant exercise Prices	$ 1.50
Warrant outstanding	7,500,000
Warrant outstanding life (years)	4 years 7 months 10 days
Warrants outstanding weighted average exercise price	$ 1.50
Warrant exercisable share	7,500,000
Warrant exercisable weighted average exercise price	$ 1.50

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Commitments (Details Narrative)					3 Months Ended		9 Months Ended
		Aug. 22, 2018 USD ($) $ / shares shares	Apr. 19, 2018 USD ($) a	Oct. 01, 2014 USD ($) a	Sep. 30, 2018 USD ($) a $ / shares	Sep. 30, 2017 USD ($)	Sep. 30, 2018 USD ($) a $ / shares	Sep. 30, 2017 USD ($)	Dec. 31, 2017 USD ($)
Minimum consulting amount	[1]				$ 718,139	$ 1,322,497	$ 1,836,980	$ 4,625,210
Research and development expense					$ 37,332	82,500	$ 151,916	247,770
Stock options, exercisable | $ / shares					$ 0.71		$ 0.71
California Facility [Member]
Area of land | a					17,640		17,640
Lease term					5 years		5 years
Lease expiration date							Sep. 30, 2023
Rent expenses							$ 15,000
Closure of New Jersey Facility [Member]
Area of land | a				10,160
Lease term				5 years
Lease expiration date				Dec. 31, 2019
Rent expenses				$ 8,818
Arizona Property [Member]
Area of land | a			70,000
Lease term			5 years
Rent expenses			$ 101,500
Additional renewal term			5 years
Payments to lessor			$ 160,000
Technology License Agreement [Member]
Minimum consulting amount					$ 0	4,126	0	25,160
Research and development expense					25,000	$ 75,000	25,000	$ 75,000
Technology License Agreement [Member] | Third Party Vendor [Member]
Minimum consulting amount							$ 100,000
Royalty percentage of net sales							7.00%
Royalty expenses							$ 1,428,571
Amended Agreement [Member]
Total royalty owed under agreement					$ 140,713		$ 140,713		$ 165,553
Lien Agreement [Member] | Mr. Alan Lien [Member]
Base salary		$ 280,000
Increase in base salary, percentage		10.00%
Agreement term		4 years
Bonus payments		$ 46,500
Options to purchase shares of common stock, percentage		6.00%
Expiration of stock options, term		5 years
Stock options, exercisable | $ / shares		$ 0.74
Lien Agreement [Member] | Mr. Alan Lien [Member] | First, Second and Third Anniversaries [Member]
Options to purchase shares of common stock, percentage		3.00%
Lien Agreement [Member] | Mr. Tiffany Davis [Member] | First Anniversaries [Member]
Options to purchase shares of common stock, percentage		2.00%
Lien Agreement [Member] | Mr. Tiffany Davis [Member] | Second Anniversaries [Member]
Options to purchase shares of common stock, percentage		2.00%
Lien Agreement [Member] | Mr. Tiffany Davis [Member] | Third Anniversaries [Member]
Options to purchase shares of common stock, percentage		3.00%
Davis Agreement [Member] | Mr. Tiffany Davis [Member]
Base salary		$ 230,000
Increase in base salary, percentage		8.00%
Agreement term		3 years
Bonus payments		$ 55,000
Options to purchase shares of common stock, percentage		3.00%
Expiration of stock options, term		5 years
Stock options, exercisable | $ / shares		$ 0.74
Number of common shares received | shares		750,000
Options exercisable term		5 years
Options exercisable price per share | $ / shares		$ 0.94

[1] Included in cost of goods sold are these amounts from a former related party

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Subsequent Events (Details Narrative) - Subsequent Event [Member] - YA Global II SPV LLC [Member]	Oct. 12, 2018 USD ($) shares
Number of common shares issued on exercise of warrants	1,000,000
Common shares issued on exercise of warrants, value | $	$ 10,000
Common shares issued, price per share	0.01