The following discussion and analysis of financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties and assumptions. See "Note Regarding Forward-Looking Statements." Our actual results could differ materially from those anticipated in the forward-looking statements as a result of certain factors discussed in "Risk Factors" and elsewhere in this report.

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





Business Overview

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

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

Results of Operations for the year ended December 31, 2020 compared to the year ended December 31, 2019

Revenue and Cost of Goods Sold

Revenue for the years ended December 31, 2020 and 2019 was $1,282,000 and $1,965,000, respectively, a decrease of $683,000, or 35%. The decrease was due to two significant factors during the year ended December 31, 2020, as compared to the prior year period. Those factors were: 1) a failed expansion of operations into cannabis cultivation and processing management services, which diverted resources and management attention; and 2) stagnation of the cannabis industry in terms of new markets and granting of new cultivation licenses, which resulted in few new companies obtaining licenses to legally grow cannabis, which ultimately resulted in a lack of orders for our lights.

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

Cost of sales for the years ended December 31, 2020 and 2019 was $687,000 and $1,066,000, respectively. Gross profit for the years ended December 31, 2020 and 2019 was $595,000 and $899,000, respectively. As a percentage of revenue, gross profit was 46% for the years ended December 31, 2020 and 2019. The decrease in our gross profit was due to our decrease in revenue.





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Selling, General and Administrative (SG&A) Expenses

SG&A expenses for the years ended December 31, 2020 and 2019 were $1,105,000 and $3,580,000, respectively, a decrease of $2,475,000, or 69%. We implemented a number of cost reduction initiatives leading to decreased wages and benefits of $998,000, decreased legal and professional fees of $374,000, decreased rent expense of $296,000, decreased delivery costs of $155,000, decreased bad debt of $152,000, and decreased stock-based compensation expense of $95,000, as compared to the prior year period. The remaining decrease of $405,000 was across our numerous remaining expense accounts.

Research and Development (R&D) Expenses

R&D expenses for the years ended December 31, 2020 and 2019 were $100,000 and $155,000, respectively, a decrease of $55,000, or 35%. The decrease in R&D expenses was primarily due to decreased R&D investments in the current year period.





Legal Judgments

On or about June 25, 2018, Matthew Geschke (the "Plaintiff") filed a breach of contract case against the Company in the San Diego Superior Court of San Diego, California. The Plaintiff claimed damages for breach of an employment contract when the Company terminated the Plaintiff's employment agreement on February 22, 2018. On June 26, 2020, the Plaintiff was awarded a default judgment against the Company in the amount of $448,000.

On February 15, 2019, MSCP, L.L.C, or MSCP, filed suit in the Superior Court of Arizona, County of Maricopa, Case No. CV2019-001613 against us and YLK Partners. The case arises from YLK Partner's alleged breach of a certain lease agreement dated May 19, 2018, or the Lease, for the lease of certain real property located at 4301 W. Buckeye Road, Phoenix, Arizona 85043, or the Premises, between MSCP and YLK Partners, which we guaranteed. MSCP filed the lawsuit after YLK Partners provided a notice of termination. MSCP's complaint alleged counts for breach of lease and waste and breach of guaranty. On December 12, 2019, MSCP was awarded a default judgment against the Company in the amount of $1,487,000.

Impairment of Right of Use Asset

Impairment of right of use asset for the years ended December 31, 2020 and 2019 was $427,000 and $100,000, respectively. During the years ended 2020 and 2019, we determined that our right of use asset was impaired and recorded an impairment charge accordingly (See Note 5 to the accompanying consolidated financial statements).

Loss on Abandonment of Leasehold Improvements

In February 2019, we terminated our Arizona facility lease, thereby abandoning $217,000 of leasehold improvements. We recorded the abandonment of leasehold improvements of $217,000 during the year ended December 31, 2019. No similar activity occurred during the current year period.

Impairment of Intangible Assets

Impairment of intangible assets for the year ended December 31, 2019 was $1,139,000. In June 2019, we determined that our intangible assets were impaired and recorded an impairment charge accordingly. (See Note 3 to the accompanying consolidated financial statements). No similar activity occurred during the current year period.





Other Income and Expenses

Other income for the year ended December 31, 2020 was $914,000, as compared to other expense of $1,952,000 for the year ended December 31, 2019. The change in balance was due to the aggregate gain on settlements of legal judgments and a trade account payable of $2,417,000, offset by the loss on conversion of accrued interest of $85,000, both of which did not exist during the current year period. Additionally, we realized the change in financing and debt extinguishment costs of $1,090,000, the change in the fair value of derivative liability of $195,000, and the change in interest expense of $361,000, as compared to the prior year period.





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Net Loss

Net loss for the years ended December 31, 2020 and 2019 was $571,000 and $7,894,000, respectively. The decrease in net loss was due to the increase in gross profit, the decrease in operating expenses, and the change in other income and expenses as discussed above.

Liquidity and Capital Resources





Cash and Liquidity

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

Cash Flows Used in Operating Activities

During the year ended December 31, 2020, we used $499,000 in operating activities, comprised primarily of our net loss of $571,000, a gain on settlement of legal judgments and trade accounts payable of $2,417,000, an impairment of right of use asset of $427,000, a change in the fair value of derivative liabilities of $398,000, a change in inventory of $352,000, a $328,000 legal settlement payable, a $209,000 increase in interest due to related parties, $185,000 of stock-based related compensation, a $134,000 increase in accounts payable and accrued expenses, and a $85,000 loss on conversion of accrued interest.

During the year ended December 31, 2019, we used $1,010,000 in operating activities, comprised primarily of our net loss of $7,894,000, a $1,545,000 in legal settlements payable, a $1,139,000 impairment of intangible asset, a $962,000 in debt extinguishment cost, a $870,000 increase in accounts payable, a $786,000 decrease in provision for inventory reserves, $336,000 of amortization on debt discount, $256,000 of fair value of common stock for services, a $232,000 decrease in prepaid expenses and other current assets, a $226,000 increase in interest due to related parties, a $224,000 loss on abandonment of leasehold improvements and other fixed assets, a $203,000 change in the fair value of derivative liability, $194,000 in financing costs related to change in terms of warrants and convertible notes, a $124,000 decrease in accounts receivable, and a $24,000 of fair value of vested stock options.

Cash Flows Used in Investing Activities

During the year ended December 31, 2019, we used $222,000 of cash to purchase property and equipment. No similar activity occurred during the current year period.

Cash Flows Provided by Financing Activities

During the years ended December 31, 2020 and 2019, we had cash provided from financing activities of $767,000 and $449,000, respectively. During the year ended December 31, 2020, we received proceeds of $465,000, net of fees of $35,000, from a secured convertible note payable and $355,000 from loans payable, offset by $53,000 of payments on our loan payable.

During the year ended December 31, 2019, we generated cash from financing activities of $449,000, compared to cash provided by financing activities of $3,977,000 for the year ended December 31, 2018. During the year ended December 31, 2019, we received proceeds of $275,000, net of fees of $38,000, from a secured convertible note payable, $150,000 from a loan payable and $150,000 from a note payable to related parties, offset by $88,000 of payments on our notes payable to related parties.





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The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated financial statements, during the year ended December 31, 2020, we incurred a net loss of $571,000 and used cash in operations of $499,000 and had a shareholders' deficit of $8,736,000 as of December 31, 2020. These factors raise substantial doubt about our ability to continue as a going concern within one year after the date of the financial statements being issued. Our ability to continue as a going concern is dependent upon our ability to raise additional funds and implement our business plan. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

At December 31, 2020, we had cash on hand in the amount of $372,000. Management estimates that the current funds on hand will be sufficient to continue operations through September 30, 2021. The continuation of our company as a going concern is dependent upon our ability to obtain necessary debt or equity financing to continue operations until we begin generating positive cash flow. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in case or equity financing.

Historically, we have financed our operations primarily through private sales of common stock, a line of credit, loans from a third party financial institutions, related parties, and operations. We anticipate that our primary capital source will be from the issuance of notes payable or the proceeds from the sale of our common stock. If our sales goals do not materialize as planned, we believe that we can reduce our operating costs and achieve positive cash flow from operations. However, we may not generate sufficient revenues from product sales in the future to achieve profitable operations. If we are not able to achieve profitable operations at some point in the future, we may have insufficient working capital to maintain our operations as we presently intend to conduct them or to fund our expansion, marketing, and product development plans. There can be no assurance that we will be able to obtain such financing on acceptable terms, or at all.

Notes Payable to Related Parties

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

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

We entered into note agreements with the parents of Alan Lien, a former officer and director. The loans accrue interest at 10% per annum, are unsecured and were due on or before December 31, 2016. The notes are currently past due.

A total of $40,000 was due on the loans at each of December 31, 2020 and 2019.

Secured Convertible Notes Payable

On May 10, 2018, we issued a secured debenture (the "2018 Note") to YA II PN in the principal amount of $1,500,000 with interest at 8% per annum (18% on default) and due on February 9, 2019. The 2018 Note was amended effective February 9, 2019 for which the maturity date was extended to August 9, 2019 and could be converted into our common stock at a conversion price of $0.50 a share. On October 29, 2019, the 2018 Note was further amended to include an extended maturity date of June 30, 2020, and provide a conversion right, in which the principal amount of the 2018 Note, together with any accrued but unpaid interest, could be converted into our common stock at a conversion price at 75% of the lowest volume weighted average price (VWAP) of our common stock during the 10 trading days immediately preceding the conversion date.

On October 29, 2019, we issued a convertible secured debenture (the "2019 Note") to YA II PN in the principal amount of $275,000 with interest at 10% per annum (15% on default) and due on April 29, 2020. We received net proceeds of $237,500, net of closing costs of $37,500. The 2019 Note provides a conversion right, in which the principal amount of the Note, together with any accrued but unpaid interest, could be converted into our common stock at a conversion price at 75% of the lowest volume weighted average price (VWAP) of our common stock during the 10 trading days immediately preceding the conversion date.





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On February 13, 2020, we issued a secured convertible debenture (the "2020 Note") in the amount of $150,000. The 2020 Note bears interest at a rate of 10% per annum (15% on default) and has a maturity date of August 10, 2021. The 2020 Note is secured by all our and our subsidiaries assets. The 2020 Note provides a conversion right, in which any portion of the principal amount of the 2020 Note, together with any accrued but unpaid interest, may be converted into our common stock at a conversion price equal to 75% of the lowest VWAP of our common stock during the ten (10) trading days immediately preceding the date of conversion, subject to adjustment.

On September 23, 2020, we issued a secured convertible debenture (the "September 2020 Note") in the amount of $150,000. The September 2020 Note bears interest at a rate of 10% per annum (15% on default) and has a maturity date of August 10, 2021. The September 2020 Note is secured by all our and our subsidiaries assets. The 2020 September Note provides a conversion right, in which any portion of the principal amount of the 2020 September Note, together with any accrued but unpaid interest, may be converted into our common stock at a conversion price equal to 75% of the lowest VWAP of our common stock during the ten (10) trading days immediately preceding the date of conversion, subject to adjustment.





Term Loan

On May 21, 2019, we entered into a loan agreement with Celtic Bank in the principal amount of $150,000 with interest at 40.44% per annum and due on May 21, 2020. The loan was guaranteed by Alvin Hao, one of our former officers. We have made principal payment of $53,000, leaving a total of $11,000 due on the term loan as of December 31, 2020. In February 2021, the loan was paid in full.

On May 7, 2020, the Company was granted a loan (the "PPP loan") from Wells Fargo Bank in the aggregate amount of $205,000, pursuant to the Paycheck Protection Program (the "PPP") under the CARES Act. The PPP loan agreement is dated May 8, 2020, matures on May 7, 2022, bears interest at a rate of 1% per annum, with the first six months of interest deferred, and is unsecured and guaranteed by the U.S. Small Business Administration ("SBA"). The loan term may be extended to May 7, 2025, if mutually agreed to by the Company and lender. A total of $205,000 was due on the loan as of December 31, 2020.

On June 7, 2020, the Company obtained an Economic Injury Disaster Loan from the SBA in the amount of $150,000. Interest on the loan is at the rate of 3.75% per year, and all loan payments are deferred for twelve months, at which time the balance is payable in monthly installments of $731 over a 30-year term. The loan is secured by all the Company's assets. A total of $150,000 was due on the loan as of December 31, 2020.

Critical Accounting Policies and Estimates

Management's discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to impairment of long-lived assets, including finite lived intangible assets, accrued liabilities, fair value of warrant derivatives and certain expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ materially from these estimates under different assumptions or conditions.





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Our significant accounting policies are more fully described in Note 1 to our financial statements. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and the related disclosures of contingent assets and liabilities. Actual results could differ from those estimates under different assumptions or conditions. We believe that the following critical accounting policies are subject to estimates and judgments used in the preparation of our consolidated financial statements:





Revenue Recognition

The Company recognizes revenue in accordance with Financial Accounting Standards Board ("FASB") Accounting Standard Codification ("ASC") 606, Revenue from Contracts with Customers ("ASC 606"). Revenue is recognized when control of promised goods or services is transferred to the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company reviews its sales transactions to identify contractual rights, performance obligations, and transaction prices, including the allocation of prices to separate performance obligations, if applicable. Revenue and cost of sales are recognized once products are delivered to the customer's control and performance obligations are satisfied.





Accounts Receivable

Accounts receivable are recorded net of an allowance for expected losses.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

Inventories are stated at the lower of cost or net realizable value. The Company provides inventory reserves based on excess and obsolete inventories determined primarily by historical sales and 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.





New Accounting Standards

See Note 1 of the financial statements for a discussion of recent accounting pronouncements.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results or operations, liquidity, capital expenditures or capital resources that is material to investors.

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