UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2019

 

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

 

For the transition period from _______________ to ________________

 

Commission File Number 000-53754

 

VYSTAR CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

Georgia   20-2027731

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer 

Identification No.)

 

725 Southbridge St 

Worcester, MA 01610 

 

(Address of Principal Executive Offices, Zip Code) 

 

(508) 791-9114 

 

(Registrant’s telephone number including area code)

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
NONE   NONE   NONE

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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     NO 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). YES ☒    NO 

 

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

 

Large accelerated filer ☐

Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☒
(Do not check if a smaller reporting company) Emerging growth company ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) YES   NO 

 

Class   Outstanding as of November 25, 2019
Preferred Stock, $0.0001 par value per share   13,828   shares
Common Stock, $0.0001 par value per share    1,120,677,324   shares

 

 

 

 

 

 

INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS

 

In addition to historical information, this Form 10-Q contains statements relating to our future results (including certain projections and business trends) that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are subject to the “safe harbor” created by those sections. The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the financial statements and the related notes thereto included in this Quarterly Report on Form 10-Q (this “Report”). This Report contains certain forward-looking statements and the Company’s future operating results could differ materially from those discussed herein. Our disclosure and analysis included in this Report concerning our operations, cash flows and financial position, including, in particular, the likelihood of our success in expanding our business and raising debt and capital securities include forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expect”, “anticipate”, “intend”, “plan”, “believe”, “estimate”, “may”, “project”, “will likely result”, and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to certain risks, uncertainties, and assumptions, including prevailing market conditions and are more fully described under “Part I, Item 1A - Risk Factors” of our Form 10-K for the year ended December 31, 2018. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. In any event, these and other crucial factors, including those set forth in Item 1A - “Risk Factors” of our Form 10-K for the year ended December 31, 2018 may cause actual results to differ materially from those indicated by our forward-looking statements.

 

Although we believe that these statements are based upon reasonable assumptions, we cannot guarantee future results and readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date of this filing. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct or (iv) our strategy, which is based in part on this analysis, will be successful. The Company undertakes no obligation to update or revise forward-looking statements.

 

All references to “we”, “us”, “our” or “Vystar” in this Quarterly Report on Form 10-Q mean Vystar Corporation, and affiliates.

 

2 

 

 

VYSTAR CORPORATION

FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2019

 

INDEX

 

Part I. Financial Information  
     
Item 1. Financial Statements:  
     
  Condensed Consolidated Balance Sheets at September 30, 2019 (unaudited) and December 31, 2018 4
     
  Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 (unaudited) and 2018 (unaudited) 5
     
  Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the Nine Months Ended September 30, 2019 (unaudited) and 2018 (unaudited) 6, 7
     
  Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 (unaudited) and 2018 (unaudited) 8
     
  Notes to Condensed Consolidated Financial Statements (unaudited) 9
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 31
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 37
     
Item 4. Controls and Procedures 38
     
Part II. Other Information  
   
Item 1. Legal Proceedings 39
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 39
     
Item 3. Defaults Upon Senior Securities 44
     
Item 4. Mine Safety Disclosures 44
     
Item 5. Other Information 44
     
Item 6. Exhibits 45
     
SIGNATURES 46

 

3 

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

    September 30,     December 31,  
ASSETS   2019     2018  
    (Unaudited)        
Current assets:                
Cash   $ 64,223     $ 50,053  
Accounts and notes receivable     168,776       19,732  
Inventories     5,436,519       570,587  
Investments - equity securities     148,281        
Prepaid expenses and other current assets     481,954       6,683  
Deferred commission costs     110,000        
Total current assets     6,409,753       647,055  
Operating lease right-of-use assets     9,763,381        
Property and equipment, net     1,995,632       291,346  
Other assets:                
Goodwill     737,648       147,092  
Intangible assets, net     2,657,846       1,383,919  
Notes receivable, net of current maturities     146,020        
Deferred commission costs, net of current maturities     236,722        
Deferred income taxes     282,000        
Other     37,164        
Total other assets     4,097,400       1,531,011  
Total assets   $ 22,266,166     $ 2,469,412  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)                
                 
Current liabilities:                
Line of credit   $ 2,066,146     $  
Long-term debt - current maturities     126,000        
Accounts payable     2,946,108       726,159  
Accrued expenses     433,326       101,979  
Accrued share - based compensation     716,522       771,203  
Operating lease liabilities - current maturities     964,000        
Shareholder, convertible and contingently convertible notes payable and accrued interest - current maturities     362,098       504,149  
Unearned revenue     2,109,872        
Derivative liabilities           235,085  
Total current liabilities     9,724,072       2,338,575  
                 
Long-term liabilities:                
Related party line of credit           1,499,875  
Long-term debt, net of current maturities     1,090,352       500,000  
Operating lease liabilities, net of current maturities     8,046,165        
Unearned revenue, net of current maturities     867,961        
Shareholder, convertible and contingently convertible notes payable and accrued interest, net of current maturities     2,111,738        
Total long-term liabilities     12,116,216       1,999,875  
Total liabilities     21,840,288       4,338,450  
                 
Stockholders’ equity (deficit):                
Convertible preferred stock, $0.0001 par value 15,000,000 shares authorized; 13,828 issued and outstanding at September 30, 2019 and December 31, 2018, (liquidation preference of $87,771 and $77,447 at September 30, 2019 and December 31, 2018, respectively)     1       1  
Common stock, $0.0001 par value, 1,500,000,000 shares authorized; 1,120,677,324 and 457,747,818 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively     112,067       45,774  
Additional paid-in capital     38,262,223       31,485,532  
Accumulated deficit     (39,230,782 )     (33,400,345 )
Common stock in treasury, at cost; 30,000 and 0 shares at September 30, 2019 and December 31, 2018, respectively     (30 )      
Total Vystar stockholders’ deficit     (856,521 )     (1,869,038 )
Noncontrolling interest     1,282,399        
Total stockholders’ equity (deficit)     425,878       (1,869,038 )
Total liabilities and stockholders’ equity (deficit)   $ 22,266,166     $ 2,469,412  

 

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

 

4 

 

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

                         
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2019     2018     2019     2018  
Revenue   $ 6,040,201     $ 187,543     $ 6,417,431     $ 250,516  
                                 
Cost of revenue     3,378,220       182,937       3,789,186       251,402  
                                 
Gross profit (loss)     2,661,981       4,606       2,628,245       (886 )
                                 
Operating expenses:                                
General and administrative, including non-cash share-based compensation of $305,672 and $115,072 for the three months ended September 30, 2019 and 2018, respectively; and $2,406,409 and $1,726,983 for the nine months ended September 30, 2019 and 2018, respectively.     3,871,282       477,705       6,823,395       2,970,664  
                                 
Loss from operations     (1,209,301 )     (473,099 )     (4,195,150 )     (2,971,550 )
                                 
Other income (expense):                                
Loss on settlement of debt, net     (339,875 )           (327,433 )      
Interest expense     (195,142 )     (476,847 )     (335,208 )     (579,597 )
Change in fair value of derivative liabilities           (95,365 )     (1,044,250 )     (95,365 )
Other income     7,956             7,802       326,237  
                                 
Total other expense, net     (527,061 )     (572,212 )     (1,699,089 )     (348,725 )
                                 
Net loss     (1,736,362 )     (1,045,311 )     (5,894,239 )     (3,320,275 )
                                 
Net loss attributable to noncontrolling interest     63,802             63,802        
                                 
Net loss attributable to Vystar   $ (1,672,560 )   $ (1,045,311 )   $ (5,830,437 )   $ (3,320,275 )
                                 
Basic and diluted loss per share:                                
Net loss per share   $ (0.00 )   $ (0.00 )   $ (0.01 )   $ (0.02 )
                                 
Basic and diluted weighted average number of common shares outstanding     1,115,132,332       239,105,306       984,587,635       194,316,108  

 

 

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

 

5 

 

 

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019

(Unaudited)

 

    Attributable to Vystar                  
    Number           Number                       Number           Total              
    of           of           Additional           of           Vystar           Total  
    Preferred     Preferred     Common     Common     Paid-in     Accumulated      Treasury      Treasury     Stockholders’     Noncontrolling     Stockholders’  
    Shares     Shares     Shares     Stock     Capital        Deficit     Shares     Stock     Deficit     Interest     Deficit  
                                                                                         
                                                                                         
Ending balance December 31, 2018     13,828     $ 1       457,747,818     $ 45,774     $ 31,485,532     $ (33,400,345 )         $     $ (1,869,038 )   $     $ (1,869,038 )
                                                                                         
Common stock issued for services                     147,704,875       14,771       2,017,465                               2,032,236               2,032,236  
                                                                                         
Share based compensation - options                                     17,783                               17,783               17,783  
                                                                                         
Common stock issued for settlement of warrants                     77,246,324       7,725       324,717                               332,442               332,442  
                                                                                         
Common stock issued for cash received, net                     144,933,992       14,493       420,307                               434,800               434,800  
                                                                                         
Common stock issued for conversion of related party line of credit                      2,512,900       251       143,278                               143,529               143,529  
                                                                                         
Common stock issued upon conversion of convertible notes and settlement of derivatives                     227,336,218       22,732       1,320,931                               1,343,663               1,343,663  
                                                                                         
Treasury stock repurchases                                                     (30,000 )     (30 )     (30 )             (30 )
                                                                                         
Net loss                                   (3,133,174 )                 (3,133,174 )           (3,133,174 )
                                                                                         
Ending balance March 31, 2019     13,828       1       1,057,482,127       105,746       35,730,012       (36,533,520 )     (30,000 )     (30 )     (697,791 )           (697,791 )
                                                                                         
Common stock issued for services                     4,246,576       425       350,778                               351,203               351,203  
                                                                                         
Share based compensation - options                                     17,047                               17,047               17,047  
                                                                                         
Common stock issued for cash received, net                     11,781,392       1,179       147,321                               148,500               148,500  
                                                                                         
Common stock issued for conversion of related party line of credit                     12,487,100       1,250       885,156                               886,406               886,406  
                                                                                         
Common stock issued for asset purchase                     2,500,000       250       99,750                               100,000               100,000  
                                                                                         
Net loss                                   (1,024,702 )                 (1,024,702 )           (1,024,702 )
                                                                                         
                                                                                         
Ending balance June 30, 2019     13,828       1       1,088,497,195       108,850       37,230,064       (37,558,222 )     (30,000 )     (30 )     (219,337 )       (219,337 )
                                                                                         
Share based compensation - options                                     6,876                               6,876               6,876  
                                                                                         
Common stock issued for cash received, net                     2,180,129       217       80,282                               80,499               80,499  
                                                                                         
Common stock issued for conversion of related party line of credit                     30,000,000       3,000       945,001                               948,001               948,001  
                                                                                         
Acquisition of noncontrolling interest                                                                           1,346,201       1,346,201  
                                                                                         
Net loss                                   (1,672,560 )                 (1,672,560 )     (63,802 )     (1,736,362 )
                                                                                         
Ending balance September 30, 2019     13,828    $   1       1,120,677,324     $ 112,067     $ 38,262,223     $ (39,230,782 )     (30,000 )   $ (30 )   $ (856,521 )   $ 1,282,399     $ 425,878

 

 

 

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

 

6 

 

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2018

(Unaudited)

 

    Number           Number                          
    of           of           Additional              
    Preferred     Preferred     Common     Common     Paid-in     Accumulated        
    Shares     Shares     Shares     Stock     Capital     Deficit     Total  
                                           
Ending balance December 31, 2017     13,828     $ 1       132,809,218     $ 13,280     $ 25,128,476     $ (27,999,123 )   $ (2,857,366 )
                                                         
Common stock issued for services                     1,498,000       150       51,115               51,265  
                                                         
Share based compensation - options                                     17,783               17,783  
                                                         
Net loss                                   (1,850,374 )     (1,850,374 )
                                                         
Ending balance March 31, 2018     13,828       1       134,307,218       13,430       25,197,374       (29,849,497 )     (4,638,692 )
                                                         
Common stock issued for services                     430,571       43       38,692               38,735  
                                                         
Share based compensation - options                                     17,783               17,783  
                                                         
Common stock issued for asset purchases                     55,687,500       5,569       2,925,450               2,931,019  
                                                         
Common stock issued upon conversion of convertible notes and settlement of derivatives                     22,686,375       2,269       994,990               997,259  
                                                         
Common stock issued for signing bonus                     22,521,408       2,252       951,341               953,593  
                                                         
Net loss                                   (424,590 )     (424,590 )
                                                         
Ending balance June 30, 2018     13,828       1       235,633,072       23,563       30,125,630       (30,274,087 )     (124,893 )
                                                         
Share based compensation - options                                     17,783               17,783  
                                                         
Common stock issued upon conversion of convertible notes and settlement of derivatives                     37,336,391       3,734       588,958               592,692  
                                                         
Fair value of warrants issued with convertible debt                                     18,747               18,747  
                                                         
Net loss                                   (1,045,311 )     (1,045,311 )
                                                         
Ending balance September 30, 2018     13,828     $ 1       272,969,463     $ 27,297     $ 30,751,118     $ (31,319,398 )   $ (540,982 )

 

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

 

7 

 

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    Nine Months Ended  
    September 30,  
    2019     2018  
Cash flows from operating activities:                
Net loss   $ (5,894,239 )   $ (3,320,275 )
Adjustments to reconcile net loss to cash used in operating activities:                
Loss on settlement of debt     327,433        
Share-based compensation     2,406,409       1,726,983  
Depreciation     82,921       29,859  
Amortization of intangible assets     175,592       126,653  
Noncash lease expense     18,454        
Amortization of debt discount     73,519       281,814  
Change in fair value of derivative liabilities     1,044,250       242,788  
Consulting     114,680        
Net unrealized gain on available-for-sale investments     (7,056 )      
(Increase) decrease in assets:                
Accounts receivable     5,772       (79,154 )
Inventories     199,981       (228,865 )
Prepaid expenses and other assets     (72,203 )     5,141  
Deferred commission costs     3,267        
Increase (decrease) in liabilities:                
Accounts payable     231,160       116,381  
Accrued expenses     (178,536 )     27,238  
Unearned revenue     377,693        
Net cash used in operating activities     (1,090,903 )     (1,071,437 )
                 
Cash flows from investing activities:                
Patents and trademark fees     (9,519 )     (4,423 )
Website development costs     (500 )      
                 
Net cash used in investing activities     (10,019 )     (4,423 )
                 
Cash flows from financing activities:                
Net repayments on line of credit     (307,944 )      
Proceeds of Fidelity Bank loan           500,000  
Repayment of long-term debt     (16,459 )      
Proceeds from the issuance of notes - related parties     577,648        
Repayment of notes payable - related parties     (165,246 )      
Proceeds from the issuance of notes, net     30,881       753,550  
Issuance of common stock, net of costs     996,242        
Treasury stock repurchases     (30 )      
                 
Net cash provided by financing activities     1,115,092       1,253,550  
                 
Net increase in cash     14,170       177,690  
                 
Cash - beginning of period     50,053       13,502  
                 
Cash - end of period   $ 64,223     $ 191,192  
                 
Cash paid during the period for:                
Interest   $ 198,914     $ 93,540  
                 
Non-cash transactions:                
Purchase of intangible assets with common stock   $ 100,000     $ 2,786,602  
Acquisition of Rotmans with notes payable     2,030,000        
Debt and accrued interest payable converted to common stock     64,329        
Shares issued for accrued compensation     2,383,437       1,125,000  
Shares issued for settlement of related party line of credit     1,977,935        
Shareholder advances to related party on behalf of the Company     180,000        
Convertible stock issued in settlement of convertible notes, discount and derivative liabilities     1,279,335       1,029,581  
Derivatives issued as a debt discount           419,559  
Reclass of derivative liabilities to additional paid-in capital           340,616  

 

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

 

8 

 

 

VYSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - DESCRIPTION OF BUSINESS

 

History and Nature of Business

 

Vystar Corporation (“Vystar”, the “Company”, “we”, “us”, or “our”) is the creator and exclusive owner of the innovative technology to produce Vytex® Natural Rubber Latex (“NRL”). Vytex NRL uses a global multi-patented technology and proprietary formulation to reduce non-rubber particles including the antigenic proteins associated with latex allergies, resulting in a cleaner form of latex. The antigenic protein levels are reduced to virtually undetectable levels. On January 22, 2015, Vystar announced the signing of an exclusive domestic distribution agreement with Worcester, MA based Nature’s Home Solutions who sources eco-friendly materials and technologies for use in furnishings and other markets. On March 4, 2015, the Company announced that Hartford, CT based Gold Bond formed a strategic alliance with NHS Holdings, LLC (“NHS”) to produce and market the world’s first Vytex NRL based mattress. In June 2015, the first mattresses made with Vytex (hybrid and pure Vytex) were placed on the sales floor at Rotmans in Worcester, MA using the “Evaya” brand and Gold Bond had shipped four versions of their “Brilliance” inner coil and pure foam mattresses (Emerald, Ruby, Sapphire Plush and Sapphire Firm) to over 30 stores from Maine to Florida.

 

In April of 2018, Vystar acquired the assets of NHS Holdings, LLC (“NHS”) executing on the first part of the Company’s vision to move into direct product offerings made from Vytex® latex. NHS was the exclusive U.S. distributor of Vystar’s Vytex® natural rubber latex foam to manufacturers for use in over 200 home furnishings products, including mattresses, toppers, pillows and upholstery, sold through multiple channels. This acquisition provides Vystar with roll packing and cutting equipment to support our bedding manufacturing partners, while lowering the cost of Vytex to the manufacturer by eliminating the middleman.

 

In May of 2018, Vystar acquired substantially all of the assets of UV Flu Technologies, Inc., formerly traded on the OTC under the ticker UVFT, whose patented ViraTech™ UV light air purification technology destroys greater than 99% of airborne bacteria, viruses and other microorganisms and virtually eliminates concentrations of odors and volatile organic compounds (VOCs).

 

In May of 2019, Vystar acquired the assets of Fluid Energy Conversion Inc. (“FEC”), primarily consisting of its patent on the Hughes Reactor, which has the ability to control, enhance, and focus energy in flowing liquids and gases. Vystar intends to use this technology to enhance the effectiveness of Vystar’s RxAir purification system to destroy airborne pathogens while decreasing the cost and size of Vystar’s RxAir units.

 

As part of Vystar’s mission to offer eco-friendly, sustainable materials and products that create a better environment for consumers and workers throughout the product lifecycle, UV Flu Technologies is an excellent counterpart to our Vytex materials and Vytex bedding products. Vystar products will help create a perfect natural sleep environment starting with Vytex bedding made from the purest latex in the world and UV Flu Technologies’ RxAir™ air purifier ensuring every breath is free of harmful pathogens, VOCs and odors.

 

In July of 2019, Vystar acquired 58% of the outstanding shares of common stock of Murida Furniture Co., Inc. dba Rotmans Furniture (“Rotmans”), the largest furniture and flooring store in New England and one of the largest independent furniture retailers in the U.S. Rotmans sells a broad line of residential furniture and decorative accessories and serves customers throughout the New England region. The acquisition is expected to add approximately $30 million in top line revenue and enable Vystar to capitalize on the infrastructure already in place at Rotmans for accounting, retail sales facilities and staff, customer service, warehousing, and delivery. In addition, Rotmans will offer significant marketing and advertising opportunities for all of Vystar’s brands to Rotmans’ thousands of existing customers. The Company and Rotmans are exploring a number of initiatives relating to environmentally friendly product development and distribution that will utilize the access to the capital markets afforded by this combination.

 

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying condensed consolidated balance sheet at December 31, 2018, which has been derived from audited financial statements, and the unaudited condensed consolidated financial statements as of September 30, 2019 and for the nine months ended September 30, 2019 have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statement presentation. However, the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation have been included.

 

Operating results for the nine months ended September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

9 

 

 

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

The Company has evaluated subsequent events through the date of the filing of its Form 10-K with the Securities and Exchange Commission. The Company is not aware of any significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on the Company’s financial statements.

 

Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned or controlled operating subsidiaries. All significant intercompany accounts and transactions have been eliminated.

 

Segment Reporting

 

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company’s chief operating decision maker is the chief executive officer. The Company and the chief executive officer view the Company’s operations and manage its business as one reportable segment with different operating segments.

 

Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures. Significant estimates made by management include, among others, the collectability of accounts receivable, allowance for obsolete inventory, deferred income taxes, depreciation methods and lives, the allocation of purchase price related to acquisitions, the recoverability of long-lived assets, valuation of derivative liabilities, recognition of certain accruals, and fair values of right of use assets and lease liabilities, share-based compensation and other equity issuances. Although these estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future, actual results could differ from these estimates.

 

Fair Value of Financial Instruments

 

The Company’s financial instruments consist principally of cash, accounts receivable, equity securities, accounts payable, accrued expenses and interest payable, lines of credit, shareholder notes payable, long-term debt and unearned revenue. The carrying values of all the Company’s financial instruments approximate or equal fair value because of their short maturities and market interest rates or, in the case of equity securities, being stated at fair value.

 

In specific circumstances, certain assets and liabilities are reported or disclosed at fair value. Fair value is the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the Company’s principal market for such transactions. If there is not an established principal market, fair value is derived from the most advantageous market.

 

Valuation inputs are classified in the following hierarchy:

 

 

Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

 

 

Level 2 inputs are directly or indirectly observable valuation inputs for the asset or liability, excluding Level 1 inputs.

 

 

Level 3 inputs are unobservable inputs for the asset or liability.

 

Highest priority is given to Level 1 inputs and the lowest priority to Level 3 inputs. Acceptable valuation techniques include the market approach, income approach, and cost approach. In some cases, more than one valuation technique is used. The derivative liabilities were recognized at fair value on a recurring basis through the date of the settlement and December 31, 2018 and are level 3 measurements. There have been no transfers between levels during the nine months ended September 30, 2019.

 

Acquisitions

 

Amounts paid for acquisitions are allocated to the assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition. The fair value of identifiable intangible assets is based on valuations that use information and assumptions provided by management. Identifiable intangible assets with finite lives are amortized over their useful lives. Acquisition-related costs, including, legal, accounting, and other costs, are capitalized in asset acquisitions and for business combinations are expensed in the periods in which the costs are incurred. The results of operations of acquired assets are included in the financial statements from the acquisition date.

 

10 

 

 

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Accounts and Notes Receivable

 

Accounts and notes receivable are stated at the amount management expects to collect from outstanding balances.

 

The Company routinely sells, without recourse, trade receivables resulting from retail furniture sales to various financial institutions at an average service charge of 6.0% in 2019. Amounts sold during the period from acquisition to September 30, 2019 was $1,890,000. Retail furniture receivables retained by the Company are generally collateralized by the merchandise sold, represent valid claims against debtors for sales arising on or before the balance sheet date and are reduced to their estimated net realizable value. In addition, the Company grants credit to Vytex customers without requiring collateral. The amount of accounting loss for which Vystar is at risk in these unsecured accounts receivable is limited to their carrying value. Management provides for uncollectible amounts through a charge to earnings and a credit to an allowance for doubtful accounts based upon its assessment of the current status of individual accounts. Balances that are still outstanding after management has performed reasonable collection efforts are written off through a charge to the allowance and a credit to accounts receivable. As of September 30, 2019 and December 31, 2018, the Company considers accounts receivable to be fully collectible.

 

The Company holds notes receivable from members of the Rotman family, see Note 12 for additional disclosures related to these notes. Current maturities of $36,000 are included in accounts and notes receivable at September 30, 2019.

 

Inventories

 

Inventories include those costs directly attributable to the product before sale. Inventories consist primarily of finished goods of foam toppers, furniture, mattresses and pillows and is carried at net realizable value, which is defined as selling price less cost of completion, disposal and transportation. The Company evaluates the need to record write-downs for inventory on a regular basis. Appropriate consideration is given to obsolescence, slow-moving and other factors in evaluating net realizable values.

 

Prepaid Expenses and Other Assets

 

Prepaid expenses and other assets include amounts related to prepaid insurance policies, which are expensed on a straight-line basis over the life of the underlying policy, and other expenses.

 

Investments - Equity Securities

 

Marketable equity securities have been categorized as available-for-sale and, as a result, are stated at fair value. Unrealized gains and losses are reflected in the statement of operations. The Company periodically reviews the available-for-sale securities for other than temporary declines in fair value below cost and more frequently when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As of September 30, 2019, the Company believes that the cost of the available-for-sale securities was recoverable in all material respects.

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is provided over the estimated useful lives of the assets using straight-line and accelerated methods. Leasehold improvements are being depreciated over their estimated useful lives since management intends to occupy each of its current facilities for the foreseeable future.

 

Expenditures for major renewals and betterments are capitalized, while routine repairs and maintenance are expensed as incurred. When property items are retired or otherwise disposed of, the asset and related reserve accounts are relieved of the cost and accumulated depreciation, respectively, and the resultant gain or loss is reflected in earnings. As of September 30, 2019, the net balance of property and equipment is $1,995,632 with accumulated depreciation of $114,406. As of December 31, 2018, the net balance of property and equipment is $291,346 with accumulated depreciation of $31,485.

 

Intangible Assets

 

Patents represent legal and other fees associated with the registration of patents. The Company has five issued patents with the United States Patent and Trade Office (“USPTO”) as well as five issued international Patent Cooperation Treaty (“PCT”) patents. Patents are carried at cost and are being amortized on a straight-line basis over their estimated useful lives, typically 20 years.

 

The Company has trademark protection for “Vystar”, “Vytex”, and “RxAir” among others. Trademarks are carried at cost and since their estimated life is indeterminable, no amortization is recognized. Instead, they are evaluated annually for impairment.

 

11 

 

 

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Long-Lived Assets

 

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. We evaluate assets for potential impairment by comparing estimated future undiscounted net cash flows to the carrying amount of the assets. If the carrying amount of the assets exceeds the estimated future undiscounted cash flows, impairment is measured based on the difference between the carrying amount of the assets and fair value. Assets to be disposed of would be separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet, if material. During the nine months ended September 30, 2019 and 2018, we did not recognize any impairment of our long-lived assets.

 

Goodwill

 

Goodwill reflects the cost of an acquisition in excess of the fair values assigned to identifiable net assets acquired. Goodwill is not amortized; rather, it is subject to a periodic assessment for impairment by applying a fair value-based test. We perform our annual impairment test at the end of each calendar year, or more frequently if events or changes in circumstances indicate the asset might be impaired.

 

Accounting for acquisitions requires us to recognize, separately from goodwill, the assets acquired and the liabilities assumed at their acquisition- date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition-date fair values of the assets acquired and the liabilities assumed. While we use best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, the estimates are inherently uncertain and subject to refinement.

 

The impairment model permits, and we utilize, a simplified approach for determining goodwill impairment. In the first step, we evaluate the recoverability of goodwill by estimating the fair value of our reporting unit using multiple techniques, including an income approach using a discounted cash flow model and a market approach. Based on an equal weighting of the results of these two approaches, a conclusion of fair value is estimated. The fair value is then compared to the carrying value of our reporting unit. If the fair value of a reporting unit is less than its carrying value, the Company recognizes this amount as an impairment loss. Impairment losses, limited to the carrying value of goodwill, represent the excess of the carrying amount of goodwill over its implied fair value.

 

During the three months ended September 30, 2019, goodwill of $590,556 was recognized with the acquisition of Rotmans, see Note 17.

 

Convertible Notes Payable

 

Borrowings are recognized initially at the principal amount received. Borrowings are subsequently carried at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized as interest expense in the statements of operation over the period of the borrowings using the effective interest method.

 

Derivatives

 

The Company evaluates its debt instruments or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under the relevant sections of Accounting Standards Codification (“ASC”) Topic 815-40, Derivative Instruments and Hedging: Contracts in Entity’s Own Equity. The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative instrument and is marked-to-market at each balance sheet date and recorded as a liability. In the event the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income or other expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815-40 are reclassified to a liability account at the fair value of the instrument on the reclassification date.

 

The Company applies the accounting standard that provides guidance for determining whether an equity-linked financial instrument, or embedded feature, is indexed to an entity’s own stock. The standard applies to any freestanding financial instrument or embedded features that have the characteristics of a derivative, and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. From time to time, the Company has issued notes with embedded conversion features. Certain of the embedded conversion features contain price protection or anti-dilution features that result in these instruments being treated as derivatives for accounting purposes. Accordingly, during the nine months ended September 30, 2019, the Company has classified all conversion features as derivative liabilities and has estimated the fair value of these embedded conversion features using a binomial options pricing model.

 

In accordance with the Financial Accounting Standards Board (“FASB”) fair value measurement guidance Accounting Standards Update (ASU) 2011-04, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

 

Unearned Revenue

 

Unearned revenue consists of customer advance payments, deposits on sales of undelivered merchandise and deferred warranty revenue on self-insured stain protection warranty coverage. Included in current liabilities are customer payments and deposits of approximately $1,669,000. During the nine months ended September 30, 2019, the Company recorded total proceeds of approximately $6,049,000 and recognized total revenues of approximately $5,672,000 related to deferred revenue arrangements. During the nine months ended September 30, 2019, all of the recognized revenue related to deferred revenues originating from the acquisition of Rotmans.

 

12 

 

 

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Loss Per Share

 

The Company presents basic and diluted loss per share. Because the Company reported a net loss for nine months ended September 30, 2019 and 2018, common stock equivalents, including stock options and warrants, were anti-dilutive; therefore, the amounts reported for basic and dilutive loss per share were the same. Excluded from the computation of diluted loss per share were options to purchase 27,733,271 and 7,498,271 shares of common stock for the nine months ended September 30, 2019 and 2018, respectively, as their effect would be anti-dilutive. Warrants to purchase 14,250,438 and 14,831,069 shares of common stock for the nine months ended September 30, 2019 and 2018, respectively, were also excluded from the computation of diluted loss per share as their effect would be anti-dilutive. In addition, preferred stock convertible to 4,521,020 and 4,244,460 shares of common stock and common shares to be issued for share-based compensation of 16,677,000 and 6,014,286 for the nine months ended September 30, 2019 and 2018, respectively, were excluded from the computation of diluted loss per share as their effect would be anti-dilutive.

 

Revenue

 

On January 1, 2018, we adopted FASB ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects to receive in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance.

 

We reviewed all contracts at the date of initial application and elected to use the modified retrospective transition method, where the cumulative effect of the initial application is recognized as an adjustment to opening retained earnings at January 1, 2018. Therefore, comparative prior periods have not been adjusted and continue to be reported under FASB ASC Topic 605, Revenue Recognition, (“ASC 605”). The adoption of the new revenue recognition guidance was immaterial to our consolidated balance sheets as of September 30, 2019 and December 31, 2018 and to our consolidated statements of operations and cash flows for the nine months ended September 30, 2019 and 2018.

 

Our principal activities from which we generate our revenue are product sales. Revenue is measured based on considerations specified in a contract with a customer. A contract exists when it becomes a legally enforceable agreement with a customer. The contract is based on either the acceptance of standard terms and conditions at the retail store, on the websites for e-commerce customers and via telephone with our third-party call center for our print media and direct mail customers, or the execution of terms and conditions contracts with retailers and wholesalers. These contracts define each party’s rights, payment terms and other contractual terms and conditions of the sale.

 

Consideration is typically paid prior to shipment via credit card or check when our products are sold direct to consumers, which is typically within 1 to 2 days or approximately 30 days from the time control is transferred when sold to wholesalers, distributors and retailers. We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience and, in some circumstances, published credit and financial information pertaining to the customer.

 

A performance obligation is a promise in a contract to transfer a distinct product to the customer, which for us is transfer of finished goods to our customers. Performance obligations promised in a contract are identified based on the goods that will be transferred to the customer that are both capable of being distinct and are distinct in the context of the contract, whereby the transfer of the goods is separately identifiable from other promises in the contract. We have concluded the sale of finished goods and related shipping and handling are accounted for as the single performance obligation.

 

The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation. The transaction price is determined based on the consideration to which we will be entitled to receive in exchange for transferring goods to the customer. We issue refunds to retail, e-commerce and print media customers, upon request, within 30 days of delivery. We estimate the amount of potential refunds at each reporting period using a portfolio approach of historical data, adjusted for changes in expected customer experience, including seasonality and changes in economic factors. For retailers, distributors and wholesalers, we do not offer a right of return or refund and revenue is recognized at the time products are shipped to customers. In all cases, judgment is required in estimating these reserves. Actual claims for returns could be materially different from the estimates. As of September 30, 2019 and December 31, 2018, reserves for estimated sales returns totaled $3,000, respectively, and are included in the accompanying consolidated balance sheets as accrued expenses.

 

We recognize revenue when we satisfy a performance obligation in a contract by transferring control over a product to a customer when product is shipped based on fulfillment by the Company. The Company considers fulfillment when it passes all liability at the point of shipping through third party carriers or in-house delivery services. Delivery fees are charged to customers and are included in revenue in the accompanying consolidated statements of operations and the costs associated with these deliveries are included in operating expenses in the accompanying consolidated statements of operations. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of revenue in the accompanying consolidated statements of operations.

 

13 

 

 

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Revenue (Continued)

 

The Company also defers revenues for separately-priced stain protection warranty coverage for which it is ultimately self-insured. Revenue is recognized from the extended warranty sales on a straight-line basis over the respective contract term. The extended warranty terms primarily range from three to five years from the date of delivery. At September 30, 2019, deferred warranty revenue is approximately $1,309,000 and included in unearned revenue in the accompanying consolidated balance sheets. During the nine months ended September 30, 2019, the Company recorded total proceeds of approximately $96,000 and recognized total revenues of approximately $110,000 related to deferred warranty revenue arrangements. Commission costs in obtaining extended warranty contracts are capitalized and recognized as expense on a straight-line basis over the period of the warranty contract. At September 30, 2019, deferred commission costs are approximately $347,000. All other costs, such as costs of services performed under the contract, general and administrative expenses, and advertising costs are expensed as incurred.

 

Cost of Revenue

 

Cost of revenue consists primarily of product and freight costs and fees paid to online retailers.

 

Research and Development

 

Research and development costs are expensed when incurred. Research and development costs include all costs incurred related to the research, development and testing of the Company’s process to produce Vytex NRL.

 

Vytex NRL has produced protein test results on finished products that are both “below detection” and “not detectable” in terms of the amount of proteins remaining in these finished goods made with Vytex NRL. These results have been reproduced in many subsequent tests. For the nine months ended September 30, 2019 and 2018, Vystar’s research and development costs were not significant.

 

Advertising Costs

 

Advertising costs, which include television, radio, newspaper and other media advertising, are expensed upon first showing. Advertising costs included in general and administrative expenses in the accompanying consolidated statements of operations were approximately $539,000 and $52,000 for the nine months ended September 30, 2019 and 2018, respectively.

 

Share-Based Compensation

 

The fair value of stock options is estimated on the grant date using the Black-Scholes option pricing model, based on weighted average assumptions. Expected volatility is based on historical volatility of our common stock. The Company has elected to use the simplified method described in the Securities and Exchange Commission Staff Accounting Bulletin Topic 14C to estimate the expected term of employee stock options. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The value of restricted stock awards is determined using the fair value of the Company’s common stock on the date of grant. The Company accounts for forfeitures as they occur. Compensation expense is recognized on a straight-line basis over the requisite service period of the award.

 

Income Taxes

 

Vystar recognizes income taxes on an accrual basis based on a tax position taken or expected to be taken in its tax returns. A tax position is defined as a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets or liabilities. Tax positions are recognized only when it is more likely than not (i.e., likelihood of greater than 50%), based on technical merits, that the position would be sustained upon examination by taxing authorities. Tax positions that meet the more likely than not threshold will be measured using a probability-weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. A valuation allowance is established to reduce deferred tax assets if all, or some portion, of such assets will more likely than not be realized. Should they occur, interest and penalties related to tax positions are recorded as interest expense. No such interest or penalties have been incurred for the nine months ended September 30, 2019 and 2018.

  

Concentration of Credit Risk

 

Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of cash and accounts receivable. Cash held in operating accounts may exceed the Federal Deposit Insurance Corporation, or FDIC, insurance limits. While the Company monitors cash balances in our operating accounts on a regular basis and adjust the balances as appropriate, these balances could be impacted if the underlying financial institutions fail. To date, the Company has experienced no loss or lack of access to our cash; however, the Company can provide no assurances that access to our cash will not be impacted by adverse conditions in the financial markets. Credit concentration risk related to accounts receivable is mitigated as customer credit is checked prior to the sales and accounts receivable consists of a high number of relatively small balances.

 

14 

 

 

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Other Risks and Uncertainties

 

The Company is exposed to commodity price risk, mainly associated with variations in the market price for NRL as well as wintering of the Hevea trees, which differs for each country. The timing and magnitude of industry cycles are difficult to predict and are impacted by general economic conditions including the buying climate in China. The Company responds to changes in NRL prices by adjusting sales prices on a weekly basis and by turning rather than holding inventory in anticipation of higher prices. The Company actively manages its exposure to commodity price risk and monitors the actual and expected spread between forward selling prices and purchase costs and processing and shipping expense. The Company also currently spreads the processing of Vytex NRL among three continents. Sales contracts are based on forward market prices, and generally orders are placed 30 to 90 days ahead of shipment date due to these fluctuations. However, financial results may be negatively impacted where selling prices fall more quickly than purchase price adjustments can be made or when levels of inventory have an anticipated net realizable value that is below cost. The Company is also exposed to risks pertinent to the operations of a retailer, including, but not limited to, the ability to acquire new customers and maintain a strong brand as well as broader economic factors such as interest rates and changes in customer spending patterns.

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 requires lessees to recognize the assets and liabilities on their balance sheet for the rights and obligations created by most leases and continue to recognize expenses on their income statements over the lease term. It will also require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted. The Company has adopted this standard (see Note 7), and it had no significant impact upon adoption but significant impact to the Company’s balance sheet upon the acquisition (see Note 17).

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (“ASC 350”), Simplifying the Test for Goodwill Impairment. The guidance removes Step 2 of the goodwill impairment test and eliminates the need to determine the fair value of individual assets and liabilities to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The guidance will be applied prospectively and is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for any impairment tests performed on testing dates after January 1, 2017. The Company does not believe adoption will have a material impact on its financial condition or results of operations.

 

In July 2017, the FASB issued ASU 2017-11, Earnings per share (Topic 260), Distinguishing Liabilitiesfrom Equity (Topic 480), and Derivatives and Hedging(Topic 815): Accounting for Certain Financial Instruments with DownRound Features. The update addresses the complexity of accounting for certain financial instruments with down round features and the liability or equity classification of financial instruments with warrants or convertible features. The guidance eliminates the requirement to consider “down round” features when determining whether certain equity-linked financial instruments or embedded features are indexed to an entity’s own stock. The ASU is effective for annual periods beginning after December 15, 2018, and for interim periods within those years, with early adoption permitted. The Company has adopted ASU 2017-11 and it did not have a material impact on its financial statements.

 

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic718) to expand the scope of ASC 718, Compensation - Stock Compensation (Topic 718) (“ASU 2017-07”), to include share-based payment transactions for acquiring goods and services from non- employees. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company has adopted ASU 2018-17 and it did not have a material impact on its financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements, including eliminating the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and requiring the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption, either of the entire standard or only the provisions that eliminate or modify requirements, is permitted. The Company has evaluated the disclosure requirements of this standard and does not expect it to have a material impact on the Company’s financial statements.

 

NOTE 3 - LIQUIDITY AND GOING CONCERN

 

The Company’s financial statements are prepared using the accrual method of accounting in accordance with U.S. GAAP and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. However, the Company has incurred significant losses and experienced negative cash flow since inception. At September 30, 2019, the Company had cash of $64,223 and a deficit in working capital of approximately $3.3 million. Further, at September 30, 2019, the accumulated deficit amounted to approximately $39.2 million. We use working capital to finance our ongoing operations, and since those operations do not currently cover all our operating costs, managing working capital is essential to our Company’s future success. Because of this history of losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.

 

15 

 

 

NOTE 3 - LIQUIDITY AND GOING CONCERN (Continued)

 

A successful transition to attaining profitable operations is dependent upon obtaining sufficient financing to fund the Company’s planned expenses and achieving a level of revenue adequate to support the Company’s cost structure. Management plans to finance future operations using cash on hand, increased revenue from Vytex license fees that now also include the Company’s association with foam cores made from Vytex used in mattresses, mattress toppers and pillows, and stock warrant exercises from existing shareholders. The Company has also focused the efforts of key internal employees on the goal of creating efficiencies in each department in our retail furniture business, including purchasing, marketing, inventory control, advertising, accounting, warehousing and customer service.  In addition, the Company has invested in new accounting and operations software, which will improve our ability to control inventory levels and monitor the financial performance of our operations.

 

There can be no assurances that the Company will be able to achieve projected levels of revenue in 2019 and beyond. If the Company is not able to achieve projected revenue and obtain alternate additional financing of equity or debt, the Company would need to significantly curtail or reorient operations during 2020, which could have a material adverse effect on the ability to achieve the business objectives, and as a result, may require the Company to file bankruptcy or cease operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities that might be necessary should the Company be forced to take any such actions.

 

The Company’s future expenditures will depend on numerous factors, including: the rate at which the Company can introduce and license Vytex NRL raw materials and foam cores made from Vytex to manufacturers, and subsequently retailers; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and market acceptance of the Company’s products, services and competing technological developments, the Company’s ability to successfully realize synergies through the integration of the merged companies, our ability to acquire new customers and maintain a strong brand, the success of our efforts to reduce expenses in our retail furniture business, as well as broader economic factors such as interest rates and changes in customer spending patterns. As the Company expands its activities and operations, cash requirements are expected to increase at a rate consistent with revenue growth after the Company has achieved sustained revenue generation.

 

NOTE 4 - INVESTMENTS – EQUITY SECURITIES

 

Cost and fair value of investments - equity securities are as follows as of September 30, 2019:

 

Cost    

Gross

Unrealized Gains

    Fair Value  
$ 141,225     $ 7,056     $ 148,281  

 

Net unrealized holding gains on available-for-sale securities were approximately $7,000 since the date of the Rotmans acquisition and have been included in other income (expense).

 

NOTE 5 - PROPERTY AND EQUIPMENT

  

Property and equipment, net consists of the following: 

 

   

September 30,

 
2019

    December 31,
2018
 
Leasehold improvements   $ 427,707     $  
Furniture, fixtures and equipment     761,129       3,831  
Capital lease equipment     189,770        
Tooling and testing equipment     319,000       319,000  
Parking lots     365,707        
Motor vehicles     46,725        
                 
      2,110,038       322,831  
Accumulated depreciation     (114,406 )     (31,485 )
                 
Property and equipment, net   $ 1,995,632     $ 291,346  

 

Depreciation expense for the nine months ended September 30, 2019 and 2018 was $82,921 and $29,859, respectively.

 

16 

 

  

NOTE 6 - INTANGIBLE ASSETS

  

Intangible assets consist of the following:

 

    September 30,
2019
    December 31,
2018
    Amortization
Period
(in Years)
 
Amortized intangible assets:                      
Customer relationships   $ 210,000     $ 100,000     6 - 10  
Proprietary technology     610,000       610,000     10  
Tradename and brand     1,430,000       610,000     5 - 10  
Marketing related     410,000           5  
Patents     351,668       242,149     6 - 20  
Noncompete     50,000       50,000     5  
                       
Total     3,061,668       1,612,149        
Accumulated amortization     (412,894 )     (237,302 )      
                       
Intangible assets, net     2,648,774       1,374,847        
Indefinite-lived intangible assets:                      
Trademarks     9,072       9,072        
                       
Total intangible assets   $ 2,657,846     $ 1,383,919        

 

During the three months ended September 30, 2019, amortized intangible assets of $1,340,000 were recognized with the acquisition of Rotmans (see Note 17).

 

Amortization expense for the nine months ended September 30, 2019 and 2018 was $175,592 and $126,653, respectively. Estimated future amortization expense for finite-lived intangible assets is as follows: 

 

         
      Amount  
         
Remaining in 2019     $ 108,025  
2020       432,101  
2021       432,101  
2022       432,101  
2023       425,490  
Thereafter       818,956  
           
Total     $ 2,648,774  

 

17 

 

 

 

 

NOTE 7 - LEASES

 

After adoption of ASU 2016-02, the Company has lease arrangements for equipment, showroom and warehouse spaces. These leases expire at various dates through 2024 with options to extend to 2031.

 

The following table presents the lease-related assets and liabilities on the balance sheet:

 

        September 30,  
Leases   Classification   2019  
           
Assets            
Operating lease assets   Operating lease right-of-use assets   $ 9,763,381  
Finance lease assets   Property and equipment, net     174,335  
Total lease assets       $ 9.937,716  
             
Liabilities            
Current            
Operating   Current operating lease liabilities   $ 964,000  
Finance   Current maturities of long-term debt     77,000  
Noncurrent            
Operating   Operating lease liabilities, net of current maturities     8,046,165  
Finance   Long-term debt, net of current maturities     111,013  
Total lease liabilities       $ 9,198,178  

 

The table below presents the lease costs for finance and operating leases for the three and nine months ended September 30, 2019:

 

    Three Months Ended     Nine Months Ended  
Lease Cost   September 30, 2019     September 30, 2019  
Finance lease cost                
Amortization of leased assets   $ 15,435     $ 15,435  
Interest on lease liabilities     1,257       1,257  
Operating lease cost     323,239       323,239  
Total lease cost   $ 339,931     $ 339,931  

 

 

18 

 

 

NOTE 7 - LEASES (Continued)

 

The future minimum lease payments required under operating and financing lease obligations as of September 30, 2019 having initial or remaining non-cancelable lease terms in excess of one year are summarized as follows:

 

    Operating Leases     Finance Leases     Total  
                   
Remaining in 2019   $ 368,047     $ 20,483     $ 388,530  
2020     1,482,279       79,630       1,561,909  
2021     1,489,582       70,607       1,560,189  
2022     1,153,298       12,593       1,165,891  
2023     906,959       11,741       918,700  
Thereafter     6,671,179       979       6,672,158  
Total future minimum lease payments     12,071,344       196,033       12,267,377  
Less: Imputed interest     (3,061,179 )     (8,020 )     (3,069,199 )
Present value of lease liabilities   $ 9,010,165     $ 188,013     $ 9,198,178  

 

The following table presents other information related to leases:

 

    Nine months ended
September 30, 2019
 
Supplemental cash flows information:        
Cash paid for amounts included in the measurement of lease liabilities:        
Operating cash flows used for operating leases   $ 278,988  
Financing cash flows used for financing leases   $ 16,728  
         
Right-of-use assets obtained in exchange for lease obligations   $ 9,975,859  
Leased assets obtained in exchange for new finance lease liabilities   $ 189,770  
         
Additional lease information:        
Weighted average remaining lease term:        
Operating leases     10  
Finance leases     3  
         
Weighted average discount rate:        
Operating leases     6 %
Finance leases     3 %

 

19 

 

 

NOTE 8 - NOTES PAYABLE AND LOAN FACILITY

 

Line of Credit

 

The Company has a $2,500,000 revolving line of credit with Fidelity Co-operative Bank. Advances are limited to 50% of eligible inventory and bear interest at the prime rate plus 0.50% with a floor of 3.75%. The interest rate was 5.75% at September 30, 2019. The line of credit is due upon demand and is subject to renewal annually. It is secured by all assets of the Company. The credit line is subject to certain financial and non-financial covenants. The Company was not in compliance with certain covenants as of September 30, 2019 and has obtained a waiver through April 30, 2020.  Financial covenants are reviewed annually in April. Indebtedness to existing and future Rotman Family notes are subordinated to the bank debt. The line is also secured with a mortgage on a property of a wholly owned entity of Steven Rotman.

 

Borrowings under this agreement at September 30, 2019 were approximately $2,066,000 and available borrowings were $434,000.

 

Related Party Line of Credit (CMA Note Payable)

 

On November 2, 2012, the Company executed a $1,500,000 unsecured line of credit agreement with CMA Investments, LLC (“CMA”), a related party and a Georgia limited liability company (the “CMA Note”). Three of the directors of the Company (“CMA directors”) were initially the members of CMA Investments, LLC. Pursuant to the terms of the CMA Note, interest is computed at LIBOR plus 5.25% on amounts drawn and fees.

 

In July 2018, the Company issued 15 million shares in escrow, which CMA began to sell in March 2019 at the end of the six-month period. The shares were sold at their discretion to bring down the balance of the CMA Note. In accordance with the agreement, CMA had to sell all shares at no less than $0.035 per share. As of September 30, 2019, the Company reduced the amounts due by $0.9 million of the $1.5 million CMA Note through the issuance and sale of 15 million shares of its common stock that were previously held in escrow. The total value received upon the sale of the 15 million shares was less than the total obligation outstanding after all shares were sold through April 2019.

 

In July 2019, the Company issued an additional 30 million shares to CMA to settle the shortfall. The details are as follows:

 

Upon delivery of the 30 million shares for the second and third tranches, the debt was fully satisfied. CMA can sell the shares at least six months after issue at no less than $0.01399 per share (subject to adjustment for stock split, reorganization, recapitalization, reclassification, reverse stock split or stock dividend).

 

Simultaneous with the CMA Note payoff, CMA was expected to transfer 5 million shares of the third tranche to StillH2OS Financial, LLC (“StillH2OS”) to settle a claim regarding the conversion of debt if acceleration events are met. StillH2OS is a related party and former consultant to the Company.

  

The agreement specifies CMA must purchase up to 19 million shares of the Company if the average sale prices of the shares in the second and third tranches are at or above certain thresholds. There have been no additional purchases of Company shares by CMA.

 

Long-Term Debt

 

Long-term debt consists of the following:

 

    2019     2018  
             
Term notes   $ 520,839     $ 500,000  
Rotman Family nonconvertible notes     507,500        
Capital lease obligations     188,013        
      1,216,352       500,000  
Less: current maturities     (126,000 )      
    $ 1,090,352     $ 500,000  

 

20 

 

 

NOTE 8 - NOTES PAYABLE AND LOAN FACILITY (Continued)

 

The approximate maturities for the succeeding years excluding capital lease obligations are as follows:

 

Remaining in 2019   $ 4,000  
2020     62,000  
2021     59,000  
2022     62,000  
2023     85,000  
Thereafter     756,339  
    $ 1,028,339  

 

Term Notes

 

During the year ended December 31, 2018, certain investors guaranteed $100,000 each with Fidelity Bank to establish a $500,000 revolving line of credit. At the present time, the Company is paying interest only at a rate of 4.5% per annum, with a balloon payment of $500,000 due in 2033. The balance is $500,000 as of September 30, 2019.

 

Other term debt totaling $20,839 at September 30, 2019 represents three 0% loans on motor vehicles, requiring cumulative monthly payments of $1,488 through maturity in November 2020.

 

Rotman Family Nonconvertible Notes

 

In connection with the acquisition of 58% of Rotmans (see Note 17), Steven and Bernard Rotman were issued related party notes payable in the amounts of $367,500 and $140,000, respectively. The notes bear interest at an annual rate of five percent (5%). Steven Rotman’s note matures eight years from issuance and Bernard Rotman’s note matures four years from issuance. Payments of $3,828 and $2,917 to Steven and Bernard Rotman, respectively, per month begin six months from issuance until maturity in December 2027 and 2023, respectively. The balance of these notes payable including accrued interest to Steven and Bernard Rotman were approximately $370,000 and $141,000 at September 30, 2019.

 

Shareholder, Convertible and Contingently Convertible Notes Payable

 

    September 30,     December 31,  
    2019     2018  
             
Shareholder, convertible and contingently convertible notes   $ 2,419,858     $ 542,528  
Accrued interest     53,978       35,140  
Debt discount           (73,519 )
      2,473,836       504,149  
Less: current maturities     (362,098 )     (504,149 )
    $ 2,111,738     $  

 

Shareholder Notes Payable

 

From January 1, 2018 to February 9, 2018, the Company issued Contingently Convertible notes payable (the “Notes”) for contract work performed by other entities in lieu of compensation and expense reimbursement in the amount of $195,635. The Notes are (i) unsecured, (ii) bear interest at an annual rate of five percent (5%) per annum from date of issuance, and (iii) are convertible at the Company’s option post April 19, 2018. The Notes mature one year from issuance but may be extended one (1) additional year by the Company. If converted, the Notes plus accrued interest are convertible into shares of the Company’s common stock at the prior twenty (20) day average closing price with a 50% discount. As of September 30, 2019, the balance on these notes was $217,554 and they were extended one additional year until January 2020 at which point they become eligible for conversion.

 

21 

 

 

NOTE 8 - NOTES PAYABLE AND LOAN FACILITY (Continued)

 

Convertible and Contingently Convertible Notes Payable

 

From January 1, 2018 and through the date of these consolidated financial statements, the Company has issued certain Convertible and Contingently Convertible notes payable in varying amounts, in the aggregate of $710,000. The face amount of the notes represents the amount due at maturity along with the accrued interest, at which time that amount may be converted into shares of the Company stock based on the lowest 2 day closing price for the trailing 20 days prior to conversion and carrying a 35% discount. The Convertible and Contingently Convertible notes provide for interest to accrue at an interest rate equal to 12% per annum or the maximum rate permitted under applicable law after the occurrence of any event of default as provided in the notes. At any time after 180 days from the issue date, the holder, at its option, may convert the outstanding principal balance and accrued interest into shares of common stock of the Company. The initial conversion price for the principal and interest in connection with voluntary conversions by a holder of the Convertible and Contingently Convertible notes ranges from $0.05 to $0.10 per share, subject to adjustment as provided therein. The total outstanding balance of the Convertible and Contingently Convertible notes was converted as of September 30, 2019. They were converted into approximately 303 million shares of the Company’s common stock. Based on the variable conversion price, the Company recorded initial derivative liabilities of $465,905. The remaining balance of $235,085, net of discount, as of December 31, 2018 was reduced to zero after a change in fair value of $1,044,250 and a decrease of $1,279,335 to the balance of the derivative liabilities upon the date all notes were converted.

 

In connection with the issuance of the Convertible and Contingently Convertible notes, the Company issued warrants to purchase 411,875 shares of the Company’s common stock. The exercise term of the warrants ranges from issuance to any time on or after the six (6) month anniversary or prior to the maturity of the related note. The exercise price of the warrants is $0.40 per share of the Company’s common stock, as may be adjusted from time to time pursuant to the antidilution provisions of the related warrant. Pursuant to ASU 2017-11, such antidilution features do not subject the Company to derivative accounting pursuant to ASC 815. All warrants were forfeited during the nine months ended September 30, 2019 upon negotiation and conversion of the remaining outstanding balances.

 

Peak One Opportunity Fund, L.P.

 

During the year ended December 31, 2018, the Company entered into a financing agreement with Peak One Opportunity Fund, L.P. to receive $435,000 of original issue discount notes in three tranches as follows:

 

  1. July 17, 2018, principal $85,000 with an imputed interest rate of 6%, discounted by 10%, and $5,000 for legal fees, for a net of $71,500 due three years from the funding date. The Company has the option of receiving two additional amounts ninety days apart;

 

  2. September 14, 2018: $150,000 principal, $135,000 net.

 

  3. November 13, 2018: a final $200,000 principal, $180,000 net.

 

Peak One Opportunity Fund is entitled to convert the note into common stock at a price equal to 65% of the lowest traded price for the twenty trading days immediately preceding the date of the date of conversion. The Company had the option to redeem the note at varying prices based upon the redemption date. As of September 30, 2019, the entire balance had been converted into shares of common stock.

 

Crown Bridge Partners, LLC

 

During the year ended December 31, 2018, the Company entered into a financing agreement with Crown Bridge Partners, LLC to receive $100,000 of original issue discount notes in two tranches as follows:

 

  1. August 6, 2018: principal $50,000 bearing interest at 8%, discounted by 10%, and $2,000 for legal fees, for a net of $43,000 due one year from the funding date;

 

  2. The remaining tranche may be funded at the holder’s discretion.

 

Crown Bridge Partners has converted the first tranche into common stock at a price equal to 65% of the average of the two lowest traded prices for the twenty-five trading days immediately preceding the date of the date of conversion. As of September 30, 2019, the entire balance has been converted into 32,240,000 shares of common stock.

 

 

22 

 

 

NOTE 8 - NOTES PAYABLE AND LOAN FACILITY (Continued)

 

Other Notes Payable

 

The following notes were convertible after nine months from the issue date:

 

      Face     Interest           Net Cash     Amount  
Issue Date and Name     Amount     Rate     Maturity     Proceeds     Converted/Paid  
                                 
Jan 29, 2018 EMA     $ 80,000       12 %     Jan 29, 2019     $ 72,300     $ 80,000  
Feb 14, 2018 Auctus     $            80,000       12 %     Nov 14, 2018     $             72,500     $             80,000  
Feb 13, 2018 FirstFire Global     $            81,500       5 %     Nov 13, 2018     $             72,500     $             81,500  
May 2, 2018 Power Up #3     $            83,000       12 %     May 23, 2019     $             80,000     $             83,000  
Oct 10, 2018 Power Up #4     $          103,000       12 %     Oct 10, 2019     $           103,000     $           103,000  

 

 

During the nine months ended September 30, 2019, approximately $63,000 of the convertible notes above and approximately $21,000 of accrued interest were exchanged for approximately 227,000,000 shares of common stock. In addition, approximately $142,000 of the Power Up notes have been settled in cash. All convertible notes above have been paid in full or fully converted as of September 30, 2019.

 

During the nine months ended September 30, 2019, the Company has issued certain contingently convertible promissory notes in varying amounts to existing shareholders. The face amount of the notes represents the amount due at maturity along with the accrued interest. The amount can be converted into shares of the Company’s stock, at the option of the Company, based on the average closing price for the trailing 20 days prior to conversion and carrying a 35% to 50% discount. These notes can be converted only after an acceleration event which involves a symbol change, uplisting, or reverse stock split and such conversion is in the control of the Company. These notes, which are all outstanding at September 30, 2019, are included in the table below:

 

      Face     Interest           Net Cash  
Issue Date     Amount     Rate     Maturity     Proceeds  
                           
Jan. 3, 2019     $ 4,500       5 %     Jan. 3, 2021     $ 4,500  
Jan. 3, 2019     $             93,750       5 %     Jan. 3, 2021     $          93,750  
Jan. 3, 2019     $           102,200       5 %     Jan. 3, 2021     $        102,200  
Feb. 4, 2019     $             18,750       5 %     Feb. 4, 2021     $          18,750  
June 4, 2019     $               7,500       5 %     June 4, 2021     $            7,500  
June 4, 2019     $             50,000       5 %     June 4, 2021     $          50,000  
June 4, 2019     $               4,000       5 %     June 4, 2021     $            4,000  
June 4, 2019     $             25,000       5 %     June 4, 2021     $          25,000  
June 4, 2019     $             25,000       5 %     June 4, 2021     $          25,000  
June 4, 2019     $             25,000       5 %     June 4, 2021     $          25,000  
June 4, 2019     $             12,000       5 %     June 4, 2021     $         12,000  
July 1, 2019     $               5,500       5 %     June 4, 2021     $            5,500  
July 11, 2019     $             25,000       5 %     June 4, 2021     $          25,000  

 

23 

 

 

NOTE 8 - NOTES PAYABLE AND LOAN FACILITY (Continued)

 

Rotman Family Notes

 

On June 30, 2019, the Company issued contingently convertible promissory notes totaling $180,000, to Steven Rotman ($105,000) and Greg Rotman ($75,000). These notes are (i) unsecured, (ii) bear interest at an annual rate of eight percent (8%) per annum from date of issuance, (iii) are convertible at the Company’s option after December 31, 2019, and (iv) mature five years from issuance. If converted, the notes plus accrued interest are convertible into shares of the Company’s common stock at the average of the five lowest closing prices in any 90 day period with a 50% discount. The balance of the notes payable including accrued interest to Steven and Greg Rotman were approximately $107,000 and $57,000, respectively at September 30, 2019.

 

On July 18, 2019, the Company issued contingently convertible notes totaling $1,522,500, to Steven Rotman ($1,102,500) and Bernard Rotman ($420,000) as partial consideration for the acquisition of 58% of Rotmans (see Note 17). These notes are (i) unsecured, and (ii) bear interest at an annual rate of eight percent (8%) per annum from date of issuance. These notes can be converted only after an acceleration event which involves a symbol change, or reverse stock split and such conversion is in the control of the Company. Steven Rotman’s note matures eight years from issuance and Bernard Rotman’s note matures four years from issuance. If converted, the notes plus accrued interest are convertible into shares of the Company’s common stock at a 20 day average closing price at a 50% discount. The balance of the notes payable including accrued interest to Steven and Bernard Rotman were approximately $1,114,000 and $424,000, respectively, at September 30, 2019.

 

NOTE 9 - DERIVATIVE LIABILITIES

 

As of September 30, 2019, the Company had a $0 derivative liability balance on the consolidated balance sheet and recorded a loss from change in fair value of derivative liabilities of $1,044,250 for the nine months ended September 30, 2019. The derivative liability activity comes from the Convertible notes payable (and any related warrants). The Company analyzed the conversion features and warrants of the various note agreements for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the embedded conversion features should be classified as a derivative because the exercise price of these Convertible notes are subject to a variable conversion rate. The Company has determined that the conversion feature is not considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment. In accordance with ASC 815, the Company has bifurcated the conversion feature of the notes and recorded a derivative liability.

 

The embedded derivatives for the notes are carried on the Company’s consolidated balance sheet at fair value. The derivative liability is marked-to-market each measurement period and any unrealized change in fair value is recorded as a component of the consolidated statement of operations and the associated fair value carrying amount on the consolidated balance sheet is adjusted by the change. The Company fair values the embedded derivative using a lattice-based valuation model. The conversion feature is valued at the date the feature can be convertible which ranges from the issuance date of the note to 180 days after the issue date.

 

The following table summarizes the derivative liabilities included in the consolidated balance sheet at September 30, 2019:

 

Fair Value of Embedded Derivative and Warrant Liabilities:

 

Fair Value of Embedded Derivative and Warrant Liabilities:      
Balance, December 31, 2018   $ 235,085  
Change in fair value     1,044,250  
Settlement due to conversion     (1,279,335 )
         
Balance, September 30, 2019   $  

 

NOTE 10 - STOCKHOLDERS’ EQUITY (DEFICIT)

 

Cumulative Convertible Preferred Stock

 

On May 2, 2013, the Company began a private placement offering to sell up to 200,000 shares of the Company’s 10% Series A Cumulative Convertible Preferred Stock. Under the terms of the offering, the Company offered to sell up to 200,000 shares of preferred stock at $10 per share for a value of $2,000,000. The preferred stock accumulates a 10% per annum dividend and was convertible at a conversion price of $0.075 per common share at the option of the holder after a nine-month holding period. The conversion price was lowered to $0.05 per common share for those holders who invested an additional $25,000 or more in the Company’s common stock in the aforementioned September 2014 Private Placement. The preferred shares have full voting rights as if converted and have a fully participating liquidation preference.

 

As of September 30, 2019, the 13,828 shares of outstanding preferred stock had undeclared dividends of approximately $88,000 and could be converted into 4,521,020 shares of common stock, at the option of the holder.

 

As of December 31, 2018, the 13,828 shares of outstanding preferred stock had undeclared dividends of approximately $77,000 and could be converted into 4,314,537 shares of common stock, at the option of the holder.

 

24 

 

 

NOTE 10 - STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)

 

Common Stock and Warrants

 

In January 2019, the Company repurchased 30,000 shares of common stock from an existing shareholder for $30 in cash. The transaction was recorded as treasury stock repurchased and is included in the accompanying consolidated financial statements as a separate item in the condensed statements of stockholders’ equity (deficit).

 

During the three months ended March 31, 2019, through majority shareholder consent, the Company increased the amount of authorized common stock shares to 1,500,000,000 which increased the available shares to be issued and outstanding.

 

During the nine months ended September 30, 2019, the Company issued 158,895,513 shares under equity purchase agreements for cash proceeds totaling $613,800. Included in this amount are 12,999,999 of shares purchased for $14,000 from related parties. Approximately 54,999,997 shares were issued during the nine months ended September 30, 2019 but were included in shares issued and outstanding at December 31, 2018 as the related cash was received prior to year-end 2018. There were additional share issuances to First Fire Global Opportunities Fund, LLC and Crown Bridge Partners, LLC for cash related to the settlement of warrants previously attached to convertible notes payable. See discussion below in Other Shares Issued.

 

During the nine months ended September 30, 2019, the Company issued 227,336,218 shares due to the conversion of principal and interest totaling $85,000. The fair value at dates of conversion totaled approximately $1.3 million which were offset by the settlement of derivative liabilities upon conversion of approximately $1.3 million. The difference was recognized as a gain on settlement of debt of approximately $21,000 and is included in the condensed consolidated statements of operations in other income (expense) for the nine months ended September 30, 2019. See Note 8 for further details on conversion of the Contingently Convertible Notes.

 

As discussed in Note 8, in July 2018, the Company issued 15,000,000 shares in escrow which CMA Investments, LLC began to sell in March 2019 at the end of the six-month period. The shares were sold at their discretion to bring down the balance of the debt. In accordance with the agreement, CMA Investments, LLC had to sell all shares at no less than $0.035 per share. As of September 30, 2019, the Company has fully satisfied the CMA note through the issuance of an additional 30,000,000 shares of its common stock.

 

Other Shares Issued

 

In January 2019, the Company issued 14,746,324 shares to Peak One Opportunity Fund, L.P. as part of a settlement. The shares were issued to settle any exercise of the 600,000 warrants previously granted to the investor related to convertible debt that was already converted, in addition to under conversion of previously outstanding convertible notes payable. As part of settlement to consider any remaining dispute over convertible notes payable and to avoid returning shares to the Company, the parties agreed the debt would be considered fully converted as of March 31, 2019. As part of that settlement agreement, the previously issued warrants were forfeited during the three months ended March 31, 2019 in exchange for shares noted above. On the date of settlement, the shares had a fair value of $33,917.

 

In March 2019, the Company issued a total of 31,333,333 shares for $200,000 in cash received from First Fire Global Opportunities Fund, LLC. The shares were issued to settle any exercise of the 286,875 warrants previously granted to the investor related to convertible debt that was already converted in addition to over conversion of previously outstanding convertible notes payable. These warrants were issued in connection with convertible notes payable. As part of settlement to consider any remaining dispute over convertible notes payable and to avoid returning shares to the Company, the parties agreed the debt would be considered fully converted as of March 31, 2019. As part of that settlement agreement, the previously issued warrants were forfeited during the three months ended March 31, 2019 in exchange for shares issued for cash noted above.

 

In January and March of 2019, the Company issued 31,166,667 shares for $100,000 in cash received from Crown Bridge Partners, LLC. The shares were issued to settle any exercise of the 125,000 warrants previously granted to the investor related to convertible debt that was already converted. As part of settlement to consider any remaining dispute over convertible notes payable, the parties agreed the debt would be considered fully converted as of March 31, 2019. As part of that settlement agreement, the previously issued warrants were forfeited during the three months ended March 31, 2019 in exchange for shares issued for cash noted above.

 

In May and June 2019, the Company issued 2,500,000 shares related to the purchase of the assets of Fluid Energy Conversion Inc. and 666,667 shares to Crown Bridge Partners, LLC for amounts received after the close of the quarter.

 

During the nine months ended September 30, 2019, the Company issued 151,951,451 shares for consulting services valued at approximately $2,383,440 based on the respective measurement dates. Of these shares, 90,791,655 were issued to related parties, see further detail of related party shares in Note 12.

 

25 

 

 

NOTE 11 - SHARE-BASED COMPENSATION

  

Generally accepted accounting principles require share-based payments to employees, including grants of employee stock options, warrants, and common stock to be recognized in the income statement based on their fair values at the date of grant, net of estimated forfeitures.

 

The Company used the Black-Scholes option pricing model to estimate the grant-date fair value of option and warrant awards granted. The following assumptions were used for warrant awards during the nine months ended September 30, 2019:

 

  Expected Dividend Yield - because we do not currently pay dividends, the expected dividend yield is zero;

 

  Expected Volatility in Stock Price - volatility based on our own trading activity was used to determine expected volatility;

 

  Risk-free Interest Rate - reflects the average rate on a United States Treasury Bond with a maturity equal to the expected term of the option; and

 

  Expected Life of Award - because we have minimal experience with the exercise of options or warrants for use in determining the expected life of each award, we used the option or warrant’s contractual term as the expected life.

 

In total for the nine months ended September 30, 2019 and 2018, the Company recorded $2,406,409 and $2,100,736, respectively, of share-based compensation expense related to employee and Board Members’ stock options. The unrecognized compensation expense as of September 30, 2019 was $56,544 for non-vested share-based awards to be recognized over a period of approximately four years.

 

Options

 

During 2004, the Board of Directors of the Company adopted a stock option plan (the “Plan”) and authorized up to 4,000,000 shares to be issued under the Plan. In April 2009, the Company’s Board of Directors authorized an increase in the number of shares to be issued under the Plan to 10,000,000 shares and to include the independent Board Members in the Plan in lieu of continuing the previous practice of granting warrants each quarter to independent Board Members for services. At September 30, 2019, there are 2,251,729 shares of common stock available for issuance under the Plan. In 2014, the Board of Directors adopted an additional stock option plan which provides for an additional 5,000,000 shares which are all available as of September 30, 2019. The Plan is intended to permit stock options granted to employees to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (“Incentive Stock Options”). All options granted under the Plan that are not intended to qualify as Incentive Stock Options are deemed to be non-qualified options. Stock options are granted at an exercise price equal to the fair market value of the Company’s common stock on the date of grant, typically vest over periods up to 4 years and are typically exercisable up to 10 years.

 

There were no options granted during the nine-month period ended September 30, 2019. The following table summarizes all stock option activity of the Company for the period.

 

    Number
of Shares
  Weighted
Average
Exercise Price
  Weighted Average Remaining Contractual Term
             
Outstanding, December 31, 2018     29,098,270     $ 0.21       4.49  
                         
Granted     —         —         —    
                         
Exercised     —         —         —    
                         
Forfeited     (1,325,000 )     0.21       —    
                         
Outstanding, September 30, 2019     27,773,270     $ 0.21       3.74  
                         
Exercisable, September 30, 2019     26,558,271     $ 0.21       3.98  

 

As of September 30, 2019 and December 31, 2018, the aggregate intrinsic value of the Company’s outstanding options was approximately $1,000 and $22,000, respectively. The aggregate intrinsic value will change based on the fair market value of the Company’s common stock.

 

26 

 

 

NOTE 11 - SHARE-BASED COMPENSATION (Continued)

 

Warrants

 

Warrants are issued to third parties as payment for services, debt financing compensation and conversion and in conjunction with the issuance of common stock. The fair value of each common stock warrant issued for services is estimated on the date of grant using the Black-Scholes option pricing model.

 

The following table represents the Company’s warrant activity for the nine months ended September 30, 2019:

 

    Number
of Shares
    Weighted
Average
Fair Value
    Weighted
Average
Exercise Price
    Weighted
Average
Remaining
Contractual
Life (Years)
 
                         
Outstanding, December 31, 2018     15,488,832             $ 0.12       4.27  
                                 
Granted                   —        —   
                                 
Exercised                   —        —   
                                 
Forfeited     (1,238,394 )             1.01        —   
                                 
Expired                   —        —   
                                 
Outstanding, September 30, 2019     14,250,438             $ 0.07       3.77  
                                 
Exercisable, September 30, 2019     14,250,438             $ 0.07       3.77  

 

 

Of the warrants that were forfeited, 1,011,875 of them were issued in connection with convertible notes payable. When the notes fully converted, 411,875 warrants were forfeited during the nine months ended September 30, 2019 as part of a settlement in two separate cash transactions. The remaining 600,000 warrants were forfeited during the nine months ended September 30, 2019 as part of a separate settlement in a cashless issuance. See further discussion in Note 10 of these consolidated financial statements.

 

NOTE 12 - RELATED PARTY TRANSACTIONS

 

Officers and Directors

 

Per Steven Rotman’s Employment agreement dated July 22, 2019, he is to be paid approximately $125,000 per year in cash, $10,417 per month in shares based on a 20-day average price at a 50% discount to market, $5,000 per month in cash for expenses as well as access to a Company provided vehicle and health and life insurance. During the nine months ended September 30, 2019, the Company issued Steven Rotman 28,016,022 shares in accordance with his previous employment agreement that were accrued and expensed as of December 31, 2018. The Company expensed $276,000 during the nine months ended September 30, 2019 related to 4,000,000 shares issued for Steven Rotman’s services as a Board Member of the Company. In addition, the Company accrued and expensed approximately $378,000 related to approximately 9,127,000 shares to be issued in the future.

 

Designcenters.com

 

This entity is owned by Jamie Rotman, who is the daughter of the Company’s CEO, Steven Rotman. Designcenters.com provided bookkeeping and management services to the Company. In exchange for such services, the Company entered into a consulting agreement with the related party entity through July 2019.

 

Per the Designcenter.com consulting agreement, Designcenter.com was to receive approximately $7,100 per month to be paid in cash or shares based on a 20-day average at a 50% discount to market, and a $10,000 quarterly bonus to be paid in shares using the same formula. During the nine months ended September 30, 2019, the Company issued Designcenters.com 20,030,407 shares in accordance with the consulting agreement that were accrued and expensed as of December 31, 2018. During the nine months ended September 30, 2019, the Company expensed approximately $83,000 related to the consulting agreement. Of the expensed amount, approximately $41,000 was paid in cash. As of September 30, 2019, the Company had an accrued stock-based compensation balance of $42,000, for approximately 850,000 shares related to this party.

 

27 

 

 

NOTE 12 - RELATED PARTY TRANSACTIONS (Continued)

 

Blue Oar Consulting, Inc.

 

This entity is owned by Gregory Rotman, who is the son of the Company’s CEO, Steven Rotman. Blue Oar Consulting, Inc. (“Blue Oar”) provides business consulting services to the Company. In exchange for such services, the Company has entered into a consulting agreement with the related party entity.

 

Per Blue Oar’s consulting agreement, it is to be paid $15,000 per month in cash for expenses, and $12,500 per month to be paid in shares based on a 20-day average at a 50% discount to market. During the nine months ended September 30, 2019, the Company issued Blue Oar 33,618,226 shares in accordance with the consulting agreement that were accrued and expensed as of December 31, 2018. During the nine months ended September 30, 2019, the Company expensed approximately $400,000. Of the expensed amount, approximately $135,000 was paid in cash. As of September 30, 2019, the Company had an accrued stock-based compensation balance of $265,000, or approximately 6,700,000 shares related to this party.

 

Polymer Consultancy Services, Ltd.

 

This entity is owned in part by Dr. R.K. Matthan, a director of the Company. Polymer Consultancy Services, Ltd. provides research and development consulting services related to the Company’s latex products. The Company paid Polymer Consultancy Services, Ltd. approximately $23,000 for these services in the nine months ended September 30, 2019.

 

Rotman Family Notes Receivable

 

The Company entered into separate agreements with members of the Rotman family to convert previous advances to ten-year term notes. The notes require annual payments totaling approximately $36,000 plus interest at 0.30% through maturity in April 2024. As of September 30, 2019, the balance on these notes is $182,020.

 

NOTE 13 - COMMITMENTS

  

Employment and Consulting Agreements

 

The Company has entered into employment and consulting agreements with certain of our officers, employees, and affiliates. For employees, payment and benefits would become payable in the event of termination by us for any reason other than cause, or upon change in control of our Company, or by the employee for good reason.

 

There is currently one employment agreement in place for 2019 with the CEO, Steven Rotman. See compensation terms in Note 12.

 

During the nine months ended September 30, 2019, the Company entered into various services agreement with consultants for financial reporting, advisory, and compliance services.

 

Litigation

 

From time to time, the Company is party to certain legal proceedings that arise in the ordinary course and are incidental to our business. Future events or circumstances, currently unknown to management, will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on our consolidated financial position, liquidity or results of operations in any future reporting periods.

 

On February 19, 2019, EMA Financial, Inc. filed a lawsuit in the Southern District of New York against the Company. The lawsuit alleged various breaches of an underlying convertible promissory note and stock purchase agreement and sought four claims for relief: (i) specific performance to enforce a stock conversion and contractual obligations; (ii) breach of contract; (iii) permanent injunction to enforce the stock conversion and contractual obligations; and (iv) legal fees and costs of the litigation. The complaint was filed with a motion seeking: (i) a preliminary injunction seeking an immediate resolution of the case through the stock conversion; (ii) a consolidation of the trial with the preliminary injunctive hearing; and (iii) summary judgment on the first and third claims for relief.

 

The Company filed an opposition to the motion and at oral argument the motion for injunctive relief was denied. The Court issued a decision permitting a motion for summary judgment to proceed and permitted the Company the opportunity to supplement its opposition papers together with the plaintiff who was also provided opportunity to submit reply papers. On April 5, 2019, the Company filed the opposition papers as well as a motion to dismiss the first and third causes of action in the complaint. As of September 30, 2019, there was no accurate assumption of liability to be accrued. It is the Company’s position that they issued all shares under the conversion terms.

 

NOTE 14 - MAJOR CUSTOMERS AND VENDORS

 

Major customers and vendors are defined as a customer or vendor from which the Company derives at least 10% of its revenue and cost of revenue, respectively.

 

28 

 

 

NOTE 14 - MAJOR CUSTOMERS AND VENDORS (Continued)

  

During the nine months ended September 30, 2019, the Company made approximately 26% of its purchases from two major vendors. The Company owed its major vendors approximately $400,000 at September 30, 2019. There were no significant customer or vendor concentrations at September 30, 2018.

 

NOTE 15 - INCOME TAXES

  

Deferred tax assets consist of the following as of:

   

September 30, 2019

   

September 30, 2018

 
Noncurrent deferred tax:                
  Federal   $ 4,853,337     $ 4,190,337  
  State     210,000        
  Valuation allowance     (4,781,337 )     (4,190,337 )
                 
    $ 282,000     $  

 

Deferred taxes are caused by temporary differences in the valuation of inventories, depreciation and a large net operating loss carryforward.

 

A benefit from income taxes and related deferred taxes for the nine months ended September 30, 2019 and 2018 have not been computed due to the Company’s large net operating loss carryforwards and valuation allowance. The deferred tax asset as of September 30, 2019 was acquired with the Rotmans purchase (see Note 17).

 

For federal income tax purposes, the Company has a net operating loss carryforward of approximately $20,940,000 as of December 31, 2018, of which approximately $18,410,000 expires beginning in 2024 and $2,530,000 which can be carried forward indefinitely. For state income tax purposes, the Company has a net operating loss carryforward of approximately $18,280,000 and $2,470,000 as of December 31, 2018 in Georgia and Massachusetts, respectively, which expires beginning in 2023.

 

In addition, Rotmans has a net operating loss carryforward of approximately $2,662,000 for federal income tax purposes of which $1,812,000 expires beginning in 2029 and $850,000 can be carried forward indefinitely. Rotmans has a state operating loss carryforward of approximately $1,728,000 which expires beginning in 2022.

 

Pursuant to Internal Revenue Code Section 382, the future realization of our net operating loss carryforwards to offset future taxable income may be suject to an annual limitation as a result of ownership changes that may have occurred previously or that could occur in the future.

 

NOTE 16 - PROFIT SHARING PLAN

 

The Company sponsors a qualified 401(k) profit sharing plan covering all eligible employees. The plan permits participants to make tax-deferred contributions to the plan by salary reduction. Company contributions are discretionary and are determined annually by the Board of Directors.

 

There were no Company contributions in 2019. Participant and Company contributions are limited to amounts allowed under the Internal Revenue Code.

 

The Company offers no post-retirement benefits other than the plan discussed above and no significant post-employment benefits.

 

NOTE 17 - ACQUISITION OF ROTMANS

 

On July 18, 2019, the Company acquired 58% of the outstanding shares of common stock of Rotmans, the largest furniture and flooring store in New England, for an aggregate purchase price of $2,030,000. The consideration is to be paid in 25% notes payable over 4 to 8 years and 75% in notes convertible to common shares (see Note 8). The Company and Rotmans are exploring a number of initiatives relating to environmentally friendly product development and distribution that will utilize the access to the capital markets afforded by this combination.

 

29 

 

 

NOTE 17 - ACQUISITION OF ROTMANS (Continued)

 

The transaction has been accounted for using the acquisition method of accounting which requires, among other things, the assets acquired and liabilities assumed to be recognized at their fair values at the date of acquisition. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

 

Consideration Paid:      
Notes payable   $ 507,500  
Contingently convertible notes payable     1,522,500  
         
Total consideration   $ 2,030,000  
         
Purchase Price Allocation:        
Accounts and notes receivable   $ 300,836  
Inventories     5,065,913  
Other current assets     654,293  
Operating lease right-of-use assets     9,975,859  
Property and equipment     1,786,707  
Other assets     559,153  
Customer relationships     110,000  
Trade name     820,000  
Marketing related intangibles     410,000  
Goodwill     590,556  
         
Total identifiable assets     20,273,317  
Line of credit     (2,374,090 )
Notes payable     (225,311 )
Accounts payable     (1,988,789 )
Accrued expenses     (504,597 )
Operating lease liabilities     (9,204,189 )
Unearned revenue     (2,600,140 )
Noncontrolling interest in net assets     (1,346,201 )
         
Net assets acquired   $ 2,030,000  

 

The assessment of fair value is preliminary and is based on information that was available to management at the time the unaudited condensed consolidated financial statements were prepared. Measurement period adjustments will be recorded in the period in which they are determined, as if they had been completed at the acquisition date.

 

The goodwill of $590,000 recognized in the third quarter is derived from the acquisition of Rotmans.  The combined capabilities of our two organizations, including improved infrastructure in support of purchasing, marketing, inventory control, advertising, accounting, warehousing and customer service create an opportunity to grow our brands and accelerate long term growth and value for our people, customers, and suppliers. The addition of Rotmans to Vystar’s platform, positions the Company as an authority in our customers’ homes and also creates a showcase for Vystar’s products. This partnership represents a key opportunity to drive long-term growth and value creation for our shareholders. The Company has invested approximately $400,000 in the completion of the merger and has committed a considerable amount of staff resources, most of which is a one-time cost.

 

Unaudited pro forma financial information

 

The following unaudited pro forma information presents a summary of the Company’s combined operating results for the three and nine months ended September 30, 2019 and 2018, as if the acquisition and the related financing transactions had occurred on January 1, 2018. The following pro forma financial information is not necessarily indicative of the Company’s operating results as they would have been had the acquisition been effected on the assumed date, nor is it necessarily an indication of trends in future results for a number of reasons, including, but not limited to, differences between the assumptions used to prepare the pro forma information, basic shares outstanding and dilutive equivalents, cost savings from operating efficiencies, potential synergies, and the impact of incremental costs incurred in integrating the businesses.

 

    Three Months
Ended
September 30, 2019
  Three Months
Ended
September 30, 2018
  Nine Months
Ended
September 30, 2019
  Nine Months
Ended
September 30, 2018
Total revenues   $ 7,258,091     $ 7,913,988     $ 21,262,403     $ 23,515,972  
Loss from operations   $ (1,136,151 )   $ (925,336 )   $ (4,751,198 )   $ (4,253,978 )
Net loss   $ (1,531,289 )   $ (1,492,526 )   $ (6,169,176 )   $ (4,589,945 )
Basic and dilated loss per share   $ (0.00 )   $ (0.01 )   $ (0.01 )   $ (0.02 )

  

NOTE 18 -

SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events through the date of the filing of its Form 10-K with the Securities and Exchange Commission. The Company is not aware of any significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on the Company’s condensed consolidated financial statements.

 

30 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

OVERVIEW

 

Vystar LLC, the predecessor to the Company, was formed February 2, 2000, as a Georgia limited liability company by Travis W. Honeycutt. Operations under the LLC entity were focused substantially on the research, development and testing of the Vytex® Natural Rubber Latex (“NRL”) process, as well as attaining intellectual property rights. In 2003, the Company reorganized as Vystar Corporation, a Georgia corporation, at which time all assets and liabilities of the limited liability company became assets and liabilities of Vystar Corporation, including all intellectual property rights, patents and trademarks.

 

We are the creator and exclusive owner of the innovative technology to produce Vytex NRL. This technology reduces antigenic protein in natural rubber latex products to virtually undetectable levels in both liquid NRL and finished latex products. The process also removes many of the naturally occurring non-rubber particles superfluous to end product function, resulting in a cleaner latex base material. We have introduced Vytex NRL, our “ultra-low protein” natural rubber latex, throughout the worldwide marketplace that uses NRL or latex substitutes as a component of manufactured products. Natural rubber latex is used in an extensive range of products including balloons, textiles, footwear and clothing (threads), adhesives, foams, furniture, carpet, paints, coatings, protective equipment, sporting equipment, and especially health care products such as condoms, surgical and exam gloves. We produce Vytex through licensing agreements and have introduced Vytex NRL into the supply channels with aggressive, targeted marketing campaigns directed to the end users.

 

We transitioned from a development stage company to the operating stage during the last quarter of 2009. During the period of 2010 to 2015, our financial condition and results of operations have experienced substantial fluctuations as we provided introductory pricing in 2010 and then began to switch to a licensing rather than a toll model in 2011. Our licensing model will continue in 2019 for the raw material business and we will continue our focus in 2019 onward on the licensing contracts associated with the foam and furniture offerings. Accordingly, the financial condition and results of operations reflected in our historical financial statements are not expected to be indicative of our future financial condition and results of operations.

 

We believe that the key for increased Vytex NRL product acceptance is to focus on companies seeking solutions to production challenges or ways to differentiate their product offering. Vystar’s technical team has been successful in developing customized formulations to meet specific manufacturer needs. Some of these formulations will become new line extensions. Vystar is becoming less of a raw material provider and more of a technology innovator through its technical consultation and formulation activities.

 

In addition to this technology focus, we are determined to have the “made with Vytex” claim added to products made using various forms of Vytex NRL. To help drive this effort, we’re focusing on products that benefit from Vytex NRL low non-rubber features. As part of this effort, we are working with a licensee to launch a line of foam core products used in various bedding products including pillows, mattresses and mattress toppers.

 

In January 2015, Vystar announced that it had entered into an exclusive agreement with NHS Holdings, LLC (“NHS”) to distribute mattresses, mattress toppers and pillows made with its multi-patented Vytex NRL raw material. NHS is a distribution company led by Steven Rotman of Rotmans, who as of December 18, 2017 is the CEO of Vystar, that focuses on innovative, sustainably sourced, eco-friendly material and technologies for use in furnishings and other markets. Our Vytex NRL fits the needs of this unique new distributor, which has already attracted such firms as mattress manufacturer Gold Bond, that was formed in 1899 to manufacture and then distribute mattresses, toppers and pillows along with a plan to reach specific segments of the United States by targeting other manufacturers. Vystar has focused on these segments since 2015 and will continue into 2019 as we display at furniture and mattress conventions and attend and sell at sleep products meetings such as the ISPA 2016 (International Sleep Products Association) held in Orlando, FL, the ISPA 2017 in Tampa, FL and the ISPA 2018 in Charlotte, NC. Vystar will also continue to develop specialty versions of Vytex NRL after presenting to the International Latex Conference in Akron, OH in July 2016 and 2017 and sending out samples for lab trials. Vystar is currently producing Vytex thread samples for an entry into the thread marketplace. In September 2016, the Vystar Board of Directors voted to end the January 2015 agreement with NHS and replace it with a global exclusive for foam manufactured with Vytex and sold into the home furnishings industry. This change reflects the global nature of the mattress, topper and pillow businesses.

 

In April of 2018, Vystar acquired the assets of NHS executing on the first part of the Company’s vision to move into direct product offerings made from Vytex® latex. NHS was the exclusive U.S. distributor of Vystar’s Vytex® natural rubber latex foam to manufacturers for use in over 200 home furnishings products, including mattresses, toppers, pillows and upholstery, sold through multiple channels. This acquisition provides Vystar with roll packing and cutting equipment to support our bedding manufacturing partners, while lowering the cost of Vytex to the manufacturer by eliminating the middleman.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

OVERVIEW (Continued)

 

Now unified under the Vytex brand, we anticipate developing additional product offerings and solidifying partnerships with multiple major manufacturing partners throughout the home furnishings industry. We anticipate our new offerings will include cushions and padding for use in seating and other products which we believe will achieve higher margins.

 

In May of 2018, Vystar acquired substantially all of the assets of UV Flu Technologies, Inc. (“UV Flu”), formerly traded on the OTC under the ticker UVFT, whose patented ViraTech™ UV light air purification technology destroys greater than 99% of airborne bacteria, viruses and other microorganisms and virtually eliminates concentrations of odors and volatile organic compounds (“VOCs”).

 

As part of Vystar’s mission to offer eco-friendly, sustainable materials and products that create a better environment for consumers and workers throughout the product lifecycle, UV Flu is an excellent counterpart to our Vytex materials and Vytex bedding products. Vystar products will help create a perfect natural sleep environment starting with Vytex bedding made from the purest latex in the world and UV Flu’s RxAir™ air purifier ensuring every breath is free of harmful pathogens, VOCs and odors.

 

UV Flu products use 48 inches of high-intensity germicidal UV lamps that destroy bacteria, viruses and other germs instead of just trapping them, setting it apart from ordinary air filtration units. RxAir is one of the few UV air purifiers that have been proven in independent EPA- and FDA- certified testing laboratories to destroy on the first pass 99.6% of harmful airborne viruses and bacteria. In addition to inactivating airborne viruses that cause influenza (flu) and colds, RxAir’s device disarms the airborne pathogens that cause MRSA (staph), strep (whooping cough), tuberculosis (TB), measles, pneumonia and a myriad of other antibiotic-resistant and viral infections.

 

UV Flu’s product line includes:

 

RxAir™ Residential Filterless Air Purifier

UV400 ™ FDA cleared Class II Filterless Air Purifier

RX3000™ Commercial FDA cleared Class II Air Purifier

 

Vystar acquired all UV Flu intellectual property and multiple patents, product lines, tooling, FDA clearances, research data, websites and other assets related to the business for the purchase price of $975,000 or 27,918,000 shares of Vystar restricted common stock which may not be assigned or sold by UV Flu for 12 months.

 

Vystar will continue production of UV Flu product lines with BOI, a world-class manufacturer. Vystar plans to sell RxAir residential and commercial units via distributors, online and through retail channels. Vystar has been selling the RxAir units after receiving a substantial number of units by container in the first quarter. In addition, master distributors and manufacturers representatives have signed contracts with Vystar. The first large scale distributor order was placed and paid for in May 2019.

 

Vystar is assembling the distribution network to relaunch sales of UV400 and Rx3000 units to the healthcare and medical markets, which UV Flu had ceased due to a lack of sales force, distribution and cash flow constraints. Once production and sales are firmly re-established, Vystar expects that the air purification products will produce margins of approximately 75%.

 

UV Flu’s products have world class engineering, are made to the highest quality standards and are extremely effective in settings ranging from homes to offices, healthcare facilities, salons, restaurants, and nursing homes.

 

About RxAir

 

RxAir promotes a healthy lifestyle through the use of its innovative, patented ViraTech air purification technology, thereby improving the quality of life of each and every customer. Independently tested by EPA- and FDA-certified laboratories, the RxAir has been proven to destroy greater than 99% of bacteria and viruses and reduce concentrations of odors and VOCs. The RxAir uses high-intensity germicidal UV lamps that destroy bacteria and viruses instead of just trapping them, setting it apart from ordinary air filtration units. RxAir® and ViraTech® are registered trademarks of Vystar Corp. For more information, visit http://www.RxAir.com.

 

In the first quarter, Vystar also made huge strides in enhancing Vystar’s large patent portfolio, continuing the outstanding work from previous management. Today, Vystar has 28 patents encompassing many continents. Vystar will be adding significant resources in the near term to enforce and prosecute infringers of our patents ensuring Vystar has the ability to fully collect on its proprietary Vytex investment.

 

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

OVERVIEW (Continued)

 

About FEC

 

In May of 2019, Vystar Corporation executed a patent assignment to purchase the assets of Fluid Energy Conversion Inc., (“FEC”), which consists primarily of U.S. and foreign rights to US Patent No. 7,897,121. The assets were purchased for 2,500,000 shares of common stock of Vystar Corporation (current approximate value of $100,000).

 

FEC is a global green energy company whose patented and proprietary technologies harness sound energy in unique ways to destroy bacteria and viruses, improve water processing and irrigation, and enhance chemical reactions. FEC has married the science of sound energy, called sono- chemistry, with molecular fluid mechanics for the development of applications to more effectively kill pathogens, improve combustion efficiency, overcome the issues of hardwater mineral build up, and enhance vaporization of liquids. FEC’s science and technology has been proven in multiple studies with major corporations. Currently, FEC technology R&D is underway on the following initiatives:

 

Vystar plans to apply FEC technology to increase pathogen killing efficiency, reduce size and cost of Vystar’s RxAir air purifiers.

 

FEC technology expected to be used to negate viruses and bacteria using sound energy in a highly proprietary manner.

 

Vystar plans to apply FEC technology to vape pens to improve substance delivery and control dosage.

 

FEC technology offers numerous eco-friendly product initiatives already in development in metering, energy, water purification, and medical uses.

 

A water filtration enhancement device in prototype stage to improve dialysis efficiency for those affected by renal failure.

 

 

About Rotmans

 

On July 18, 2019, the Company acquired a controlling interest in Rotmans for $2,030,000, comprised of 25% in notes payable over 4-8 years and 75% in notes convertible into common shares. Rotmans and the Company are exploring a number of initiatives relating to environmentally friendly product development and distribution that will utilize the access to the capital markets afforded by this transaction.

 

Rotmans, the largest furniture and flooring store in New England and one of the largest independent furniture retailers in the U.S., encompassing over 200,000 square feet in Worcester, Mass., and employing 150 people, was founded and has been under the leadership of the Rotman family for the past 50 years. Rotmans is expected to add approximately $30 million annually to Vystar’s top line revenue and enable Vystar to capitalize on the infrastructure already in place for accounting, retail sales facilities and staff, customer service, warehousing, and delivery. Additionally, it will offer significant marketing and advertising opportunities for all of Vystar’s brands to Rotmans’ thousands of existing customers. The acquisition is expected to dramatically increase Vystar shareholder value and liquidity through improved access to capital markets as well as lay the groundwork for future eco-friendly initiatives. As CEO of both Rotmans and Vystar, Steven Rotman will provide continuity of management and customer- focused values for Rotmans and Vystar.

 

During the third quarter of 2019, the Company focused on the completion of the Rotmans acquisition and subsequent integration of the Company’s sales, marketing, warehousing, and accounting functions. New systems, controls, and procedures are being added as well as a host of additional staff and software. The Company has invested significantly in the completion of the merger and has committed a considerable amount of staff resources, most of which is a one-time cost. We believe the combined capabilities of our two organizations create an opportunity to amplify the authentic and special brands we have built and accelerate the pursuit of our vision to build the most innovative and inspirational home furnishings brand. Together, we will create a dramatic path toward long term growth and value for our brand, people, customers, and suppliers. We are thrilled to add this prestigious brand to Vystar’s platform, as it not only positions Vystar as an authority in one of the most important and profitable rooms of the home – the bedroom – but also creates a showcase for Vystar. There are very few opportunities to acquire a well-managed, growing company such as Rotmans, especially given Vystar’s previous size. This partnership represents a key opportunity to drive long-term growth and value creation for our shareholders.

 

33 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

RESULTS OF OPERATIONS

 

Comparison of the Three Months Ended September 30, 2019 with the Three Months Ended September 30, 2018

 

    Three Months Ended September 30,  
    2019     2018     $ Change     % Change  
                         
    CONSOLIDATED  
                         
Revenue   $ 6,040,201     $ 187,543     $ 5,852,658       3,120.7 %
                                 
Cost of revenue     3,378,220       182,937       3,195,283       1,746.7 %
                                 
Gross profit (loss)     2,661,981       4,606       2,657,375       57,693.8 %
                                 
Operating expenses:                                
                                 
General and administrative     3,871,282       477,705       3,393,577       710.4 %
                                 
Loss from operations     (1,209,301 )     (473,099 )     (736,202 )     155.6 %
                                 
Other income (expense):                                
Loss on settlement of debt     (339,875 )           (339,875 )     100.0 %
Interest expense     (195,142 )     (476,847 )     281,705       -59.1 %
Change in fair value of derivative liabilities           (95,365 )     95,365       -100.0 %
Other income     7,956             7,956       100.0 %
                                 
Total other expense, net     (527,061 )     (572,212 )     45,151       -7.9 %
                                 
Net loss     (1,736,362 )     (1,045,311 )     (691,051 )     66.1 %
                                 
Net loss attributable to noncontrolling interest     63,802             63,802       100.0 %
                                 
Net loss attributable to Vystar   $ (1,672,560 )   $ (1,045,311 )   $ (627,249 )     60.0 %

 

 

Revenues

 

Revenues for the three months ended September 30, 2019 and 2018 from the Company were $6,040,201 and $187,543, respectively, for an increase of $5,852,658 or 3,120.7%. The significant increase in revenues was due to an increase in operations as a whole due to multiple acquisitions since March 31, 2018.

 

The Company reported a significant increase in gross income to $2,661,981 for the three-month period ended September 30, 2019 compared to gross income of $4,606 for the three-month period ended September 30, 2018, an increase of $2,657,375. The cost of revenue for the three months ended September 30, 2019 and 2018 was $3,378,220 and $182,937, respectively, an increase of 1,746.7%. The increase is due to the greater inventory needs primarily from the acquisitions of Rotmans, UV Flu and NHS.

 

Operating Expenses

 

The Company’s operating expenses consist of general and administrative expenses. General and administrative expenses consist primarily of compensation and support costs for management and administrative staff, and for other general and administrative costs, including professional fees related to accounting, finance, and legal services as well as other operating expenses. The Company’s operating expenses were $3,871,282 and $477,705 for the three months ended September 30, 2019 and 2018, respectively, an increase of $3,393,577 or 710.4%. The increase is mainly due to accounting and legal fees related to shareholder note conversions and the Rotmans transaction. Operating expenses included patents, latex consultants, accounting fees, and employee expenses. 

 

34 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

RESULTS OF OPERATIONS (Continued)

 

Other Income (Expense)

 

Other expense for the three months ended September 30, 2019 was $527,061, which primarily consisted of a loss on settlement of convertible notes payable of $339,875 and interest expense of $195,142. This compares to other expense of $572,212, for the three months ended September 30, 2018, which includes interest expense of $476,847 and change in the fair value of derivative liabilities of $95,365. The reason for the decrease in other expense for the three months ended September 30, 2019 was related to prior financings.

 

Net Loss

 

Net loss attributable to Vystar was $1,672,560 and $1,045,311 for the three months ended September 30, 2019 and 2018, respectively, an increase of $627,249. The larger net loss the Company experienced in the quarter ended September 30, 2019 versus the same period in 2018 was primarily attributable to accounting and legal fees related to shareholder note conversions and the Rotmans transaction.

 

Comparison of the Nine Months Ended September 30, 2019 with the Nine Months Ended September 30, 2018

 

    Nine Months Ended September 30,  
    2019     2018     $ Change     % Change  
                         
    CONSOLIDATED  
                         
Revenue   $ 6,417,431     $ 250,516     $ 6,166,915       2,461.7 %
                                 
Cost of revenue     3,789,186       251,402       3,537,784       1,407.2 %
                                 
Gross profit (loss)     2,628,245       (886 )     2,629,131       -296,741.6 %
                                 
Operating expenses:                                
                                 
General and administrative     6,823,395       2,970,664       3,852,731       129.7 %
                                 
Loss from operations     (4,195,150 )     (2,971,550 )     (1,223,600 )     41.2 %
                                 
Other income (expense):                                
Loss on settlement of debt     (327,433 )           (327,433 )     100.0 %
Interest expense     (335,208 )     (579,597 )     244,389       -42.2 %
Change in fair value of derivative liabilities     (1,044,250 )     (95,365 )     (948,885 )     995.0 %
Other income     7,802       326,237       (318,435 )     -97.6 %
                                 
Total other expense, net     (1,699,089 )     (348,725 )     (1,350,364 )     387.2 %
                                 
Net loss     (5,894,239 )     (3,320,275 )     (2,573,964 )     77.5 %
                                 
Net loss attributable to noncontrolling interest     63,802             63,802       100.0 %
                                 
Net loss attributable to Vystar   $ (5,830,437 )   $ (3,320,275 )   $ (2,510,162 )     75.6 %

 

Revenues

 

Revenues for the nine months ended September 30, 2019 and 2018 from the Company were $6,417,431 and $250,516, respectively, for an increase of $6,166,915, or 2,461.7%. The increase in revenues was due to an increase in operations as a whole due to multiple acquisitions since March 31, 2018.

 

For the Company, gross profit increased from a gross loss of $886 for the nine months ended September 30, 2018 to gross profit of $2,628,245 for the nine months ended September 30, 2019, an increase of $2,629,131. Cost of revenue for the nine months ended September 30, 2019 and 2018 was $3,789,186 and $251,402, respectively, an increase of $3,537,784. The increase is mainly due accounting and legal fees related to the greater inventory needs primarily from the acquisitions of UV Flu, NHS, and Rotmans. 

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

RESULTS OF OPERATIONS (Continued)

 

Operating Expenses

 

The Company’s operating expenses consist of general and administrative expenses. General and administrative expenses consist primarily of compensation and support costs for management and administrative staff, and for other general and administrative costs, including professional fees related to accounting, finance, and legal services as well as other operating expenses. The Company’s operating expenses were $6,823,395 and $2,970,664 for the nine months ended September 30, 2019 and 2018, respectively, an increase of $3,852,731 or 129.7% due primarily to accounting and legal fees related to shareholder note conversions and the Rotmans transaction. Operating expenses included patents, latex consultants, accounting fees, and employee expenses.

 

Other Income (Expense)

 

Other expense for the nine months ended September 30, 2019 was $1,699,089, which consisted of interest expense of $335,208, loss on settlement of convertible notes payable of $327,433, change in fair value of derivative liabilities of $1,044,250 and other income of $746. This compares to other expense of $348,725 for the nine months ended September 30, 2018, which includes $326,237 related to forgiveness of debt and interest expense of $579,597. The reason for the increase in other expense for the nine months ended September 30, 2019 was due to a loss recognized on the conversion of debt instruments into shares of common stock, in addition to the increase in the fair value of derivative liabilities related to the convertible notes payable. The decrease in interest expense for the nine months ended September 30, 2019 was due to the settlement of the CMA note in the third quarter.

 

Net Loss

 

Net loss attributable to Vystar was $5,830,437 and $3,320,275 for the nine months ended September 30, 2019 and 2018, respectively, an increase of $2,510,162 or 75.6%. The larger net loss the Company experienced in the nine months ended September 30, 2019 versus the same period in 2018 was primarily attributable to the unusual and infrequent loss recognized from fair value changes to the derivative liabilities and the loss on settlement of debt.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s financial statements are prepared using the accrual method of accounting in accordance with U.S. GAAP and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. However, we have incurred significant losses and experienced negative cash flow since inception. At September 30, 2019, the Company had cash of $64,233 and a deficit in working capital of approximately $3.3 million. Further, at September 30, 2019, the accumulated deficit amounted to approximately $39.2 million. We use working capital to finance our ongoing operations, and since those operations do not currently cover all of our operating costs, managing working capital is essential to our Company’s future success. Because of this history of losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.

 

A successful transition to profitable operations is dependent upon obtaining sufficient financing to fund the Company’s planned expenses and achieving a level of revenue adequate to support the Company’s cost structure. Management plans to finance future operations using cash on hand, increased revenue from Vytex license fees that now also include the Company’s association with foam cores made from Vytex used in mattresses, mattress toppers and pillows, and stock warrant exercises from existing shareholders. The Company has also focused the efforts of key internal employees on the goal of creating efficiencies in each department, including purchasing, marketing, inventory control, advertising, accounting, warehousing and customer service.

 

There can be no assurances that we will be able to achieve projected levels of revenue in 2019 and beyond. If we are not able to achieve projected revenue and obtain alternate additional financing of equity or debt, we would need to significantly curtail or reorient operations during 2020, which could have a material adverse effect on our ability to achieve our business objectives, and as a result, may require the Company to file bankruptcy or cease operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities that might be necessary should the Company be forced to take any such actions.

 

The Company’s future expenditures will depend on numerous factors, including: the rate at which we can introduce and license Vytex NRL raw material and the foam cores made from Vytex to manufacturers and subsequently retailers; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; market acceptance of the Company’s products, services and competing technological developments; and the success of our efforts to reduce expenses in our retail furniture business. As the Company expands its activities and operations, cash requirements are expected to increase at a rate consistent with revenue growth after the Company has achieved sustained revenue generation.

  

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

 

LIQUIDITY AND CAPITAL RESOURCES (Continued)

 

Sources and Uses of Cash

 

For the nine months ended September 30, 2019 and 2018, net cash used in operations was $1,090,903 and $1,071,437, respectively. The negative cash flow from operations for the nine months ended September 30, 2019 and 2018 resulted primarily from accounting and legal fees related to the NHS, UV Flu, FEC and Rotmans transactions.

 

Net cash used in investing activities of $10,019 for the nine months ended September 30, 2019 was for costs associated with patent and trademark fees and website development costs compared to net cash used in investing activities of $4,423 for the nine months ended September 30, 2018 for costs related to patent and trademark fees.

 

Net cash provided by financing activities of $1,115,092 for the nine months ended September 30, 2019 consisted of mainly equity and debt arrangements. Net cash provided by financing activities for the nine months ended September 30, 2018 was $1,253,550, which included equity and debt arrangements.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that may be reasonably likely to have a current or future material effect on our financial condition, liquidity, or results of operations.

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; product development, introduction and acceptance; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.

 

Although the forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

None

 

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ITEM 4. CONTROLS AND PROCEDURES

 

The Company’s Chief Executive Officer and Chief Financial Officer (the “Certifying Officer”) is responsible for establishing and maintaining disclosure controls and procedures for the Company. Although the Certifying Officer has designed such disclosure controls and procedures to ensure that material information is made known to them, particularly during the period in which this report was prepared, certain material weaknesses occurred during the period September 30, 2019 and subsequent to period end. The Certifying Officer has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e) (the “Rules”) under the Securities Exchange Act of 1934 (or “Exchange Act”) as of the end of the period covered by this Quarterly Report and is working on improving controls with an outside CPA firm and dedicated internal resources.

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d - 15(f) under the Securities Exchange Act of 1934). Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those policies and procedures that: (i) in reasonable detail accurately and fairly reflect our transactions; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; (iii) provide reasonable assurance that our receipts and expenditures are made in accordance with management authorization; and (iv) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting, however well designed and operated, can provide only reasonable, and not absolute, assurance that the controls will prevent or detect misstatements. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only the reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.

 

Management, under the supervision and with the participation of our Chief Executive Officer and our acting Chief Financial Officer, conducted an evaluation of our internal control over financial reporting as of September 30, 2019 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) 2013. Based on our evaluation under the COSO framework, management concluded that our internal control over financial reporting was not effective as of September 30, 2019. Such conclusion was reached based on the following material weaknesses noted by management:

 

a) We have a lack of segregation of duties due to the small size of the Company.

 

b) The Company did not maintain reasonable control over records underlying transactions necessary to permit preparation of the Company’s financial statements.

 

c) Lack of controls that provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposal of the Company’s assets that could have a material effect on the financial statements.

 

d) Lack of a formal CFO position who can devote significant attention to financial reporting resulted in multiple audit adjustments.

 

e) Lack of a functioning audit committee, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures. Management believes the lack of a functioning audit committee results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future period.

 

f) Management expects to strengthen internal control during 2019 by developing stronger business and financial processes for accounting for transactions such as warrant/stock issuances, which will enhance internal control for the Company.

  

38 

 

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

None

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Set forth below is information regarding shares of common stock, warrants and options to purchase common stock issued by the Company for the nine months ended September 30, 2019, that were not registered under the Securities Act of 1933, as amended (the “Securities Act”). Also included is the consideration, if any, received by the Company for such shares, warrants and options and information relating to the section of the Securities Act, or rule of the Securities and Exchange Commission, under which exemption from registration was claimed.

 

(a) Common Stock and Warrant Financings

 

From January 1, 2018 through December 31, 2018, we issued 1,011,875 warrants to purchase shares of common stock per the following:

 

      Exercise  
      Price  
Warrants     Per Share  
         
  286,875     $0.40 per share  
  600,000     $0.40 per share  
  125,000     $0.40 per share  

 

These warrants were issued in connection with convertible notes payable. When the notes fully converted, 411,875 warrants were forfeited during the three months ended September 30, 2019 as part of a settlement in two separate cash transactions. The remaining 600,000 warrants were forfeited during the three months ended September 30, 2019 as part of a separate settlement in a cashless issuance.

 

In January 2019, the Company repurchased 30,000 shares of common stock from an existing shareholder for $30 in cash. The transaction will be recorded as treasury stock repurchased and is included in the accompanying financial statements as a separate item in the condensed consolidated statement of stockholders’ equity.

 

During the three months ended March 31, 2019, through majority shareholder consent, the Company increased the amount of authorized common stock shares to 1,500,000,000 which increased the available shares to be issued and outstanding.

 

During the nine months ended September 30, 2019, the Company issued 158,895,513 shares under equity purchase agreements for cash proceeds totaling $613,800. Included in this amount are 12,999,999 of shares purchased for $14,000 from related parties. Approximately 54,999,997 shares were issued during the nine months ended September 30, 2019 but were included in shares issued and outstanding at December 31, 2018 as the related cash was received prior to year-end 2018. There were additional share issuances to First Fire Global Opportunities Fund, LLC and Crown Bridge Partners, LLC for cash related to the settlement of warrants previously attached to convertible notes payable. See discussion below in Other Shares Issued.

 

During the nine months ended September 30, 2019, the Company issued 227,336,218 shares due to the conversion of principal and interest totaling $85,000. The fair value at dates of conversion totaled approximately $1.3 million which were offset by the settlement of derivative liabilities upon conversion of approximately $1.3 million. The difference was recognized as a gain on settlement of debt of approximately $21,000 and is included in the condensed consolidated statements of operations in other income (expense) for the nine months ended September 30, 2019. See Note 8 for further details on conversion of the Contingently Convertible Notes.

  

39 

 

 

PART II. OTHER INFORMATION (Continued)

 

(a) Common Stock and Warrant Financing (Continued)

 

On November 2, 2012, the Company executed a $1,500,000 unsecured line of credit agreement with CMA Investments, LLC (“CMA”), a related party and a Georgia limited liability company (the “CMA Note”). Three of the directors of the Company (“CMA directors”) were initially the members of CMA. Pursuant to the terms of the CMA Note, interest is computed at LIBOR plus 5.25% on amounts drawn and fees.

 

In July 2018, the Company issued 15 million shares in escrow, which CMA began to sell in March 2019 at the end of the six-month period. The shares were sold at their discretion to bring down the balance of the CMA Note. In accordance with the agreement, CMA had to sell all shares at no less than $0.035 per share. As of September 30, 2019, the Company reduced the amounts due by $0.9 million of the $1.5 million CMA Note through the issuance and sale of 15 million shares of its common stock that were previously held in escrow. The total value received upon the sale of the 15 million shares was less than the total obligation outstanding after all shares were sold through April 2019.

 

In July 2019, the Company issued an additional 30 million shares to CMA to settle the shortfall. The details are as follows:

 

Upon delivery of the 30 million shares for the second and third tranches, the debt was fully satisfied. CMA can sell the shares at least six months after issue at no less than $0.01399 per share (subject to adjustment for stock split, reorganization, recapitalization, reclassification, reverse stock split or stock dividend).

 

Simultaneous with the CMA Note payoff, CMA was expected to transfer 5 million shares of the third tranche to StillH2OS Financial, LLC (“StillH2OS”) to settle a claim regarding the conversion of debt if acceleration events are met. StillH2OS is a related party and former consultant to the Company.

  

The agreement specifies CMA must purchase up to 19 million shares of the Company if the average sale prices of the shares in the second and third tranches are at or above certain thresholds. There have been no additional purchases of Company shares by CMA.

 

Other Shares Issued

 

In January 2019, the Company issued 14,746,324 shares to Peak One Opportunity Fund L.P. as part of a settlement. The shares were issued to settle any exercise of the 600,000 warrants previously granted to the investor related to convertible debt that was already converted, in addition to under conversion of previously outstanding convertible notes payable. As part of settlement to consider any remaining dispute over convertible notes payable and to avoid returning shares to the Company, the parties agreed the debt would be considered fully converted as of March 31, 2019. As part of that settlement agreement, the previously issued warrants were forfeited during the three months ended March 31, 2019 in exchange for shares issued for cash noted above. On the date of settlement, the shares had a fair value of $33,917.

 

In March 2019, the Company issued a total of 31,333,333 shares for $200,000 in cash received from First Fire Global Opportunities Fund, LLC. The shares were issued to settle any exercise of the 286,875 warrants previously granted to the investor related to convertible debt that was already converted in addition to over conversion of previously outstanding convertible notes payable. These warrants were issued in connection with convertible notes payable. As part of settlement to consider any remaining dispute over convertible notes payable and to avoid returning shares to the Company, the parties agreed the debt would be considered fully converted as of March 31, 2019. As part of that settlement agreement, the previously issued warrants were forfeited during the three months ended March 31, 2019 in exchange for shares issued above.

 

In January and March of 2019, the Company issued 31,166,667 shares for $100,000 in cash received from Crown Bridge Partners, LLC. The shares were issued to settle any exercise of the 125,000 warrants previously granted to the investor related to convertible debt that was already converted. As part of settlement to consider any remaining dispute over convertible notes payable, the parties agreed the debt would be considered fully converted as of March 31, 2019. As part of that settlement agreement, the previously issued warrants were forfeited during the three months ended March 31, 2019 in exchange for shares issued for cash noted above.

 

In May and June 2019, the Company issued 2,500,000 shares related to the purchase of the assets of Fluid Energy Conversion Inc. and 666,667 shares to Crown Bridge Partners, LLC for amounts received after the close of the quarter.

 

During the nine months ended September 30, 2019, the Company issued 151,951,451 shares for consulting services valued at approximately $2,383,440 based on the respective measurement dates. Of these shares, 81,664,655 were issued to related parties, see further detail of related party shares in Note 12.

 

(b) Stock Option Grants

 

From January 1, 2019 through September 30, 2019, the Company did not grant any stock options.

 

40 

 

 

PART II. OTHER INFORMATION (Continued)

 

(c) Proceeds from loans and shareholder, convertible and contingently convertible notes payable

 

Related Party Line of Credit (CMA Note Payable)

 

On November 2, 2012, the Company executed a $1,500,000 unsecured line of credit agreement with CMA Investments, LLC (“CMA”), a related party and a Georgia limited liability company (the “CMA Note”). Three of the directors of the Company (“CMA directors”) were initially the members of CMA. Pursuant to the terms of the CMA Note, interest is computed at LIBOR plus 5.25% on amounts drawn and fees.

 

In July 2018, the Company issued 15 million shares in escrow, which CMA began to sell in March 2019 at the end of the six-month period. The shares were sold at their discretion to bring down the balance of the CMA Note. In accordance with the agreement, CMA had to sell all shares at no less than $0.035 per share. As of September 30, 2019, the Company reduced the amounts due by $0.9 million of the $1.5 million CMA Note through the issuance and sale of 15 million shares of its common stock that were previously held in escrow. The total value received upon the sale of the 15 million shares was less than the total obligation outstanding after all shares were sold through April 2019.

 

In July 2019, the Company issued an additional 30 million shares to CMA to settle the shortfall. The details are as follows:

 

Upon delivery of the 30 million shares for the second and third tranches, the debt was fully satisfied. CMA can sell the shares at least six months after issue at no less than $0.01399 per share (subject to adjustment for stock split, reorganization, recapitalization, reclassification, reverse stock split or stock dividend).

 

Simultaneous with the CMA Note payoff, CMA was expected to transfer 5 million shares of the third tranche to StillH2OS Financial, LLC (“StillH2OS”) to settle a claim regarding the conversion of debt if acceleration events are met. StillH2OS is a related party and former consultant to the Company.

  

The agreement specifies CMA must purchase up to 19 million shares of the Company if the average sale prices of the shares in the second and third tranches are at or above certain thresholds. There have been no additional purchases of Company shares by CMA.

 

Term Notes

 

During the year ended December 31, 2018, certain investors have guaranteed $100,000 each with Fidelity Bank to establish a $500,000 revolving line of credit. At the present time, the Company is paying interest only at a rate of 4.5% per annum, with a balloon payment of $500,000 due in 2033. The balance is $500,000 as of September 30, 2019.

 

Other term debt totaling $20,839 at September 30, 2019 represents three 0% loans on motor vehicles, requiring cumulative monthly payments of $1,488 through maturity in November 2020.

 

Shareholder, Convertible and Contingently Convertible Notes Payable

 

The following table summarizes the shareholder notes payable:

 

    September 30,     December 31,  
    2019     2018  
             
Shareholder, convertible and contingently convertible notes   $ 2,419,858     $ 542,528  
Accrued interest     53,978       35,140  
Debt discount           (73,519 )
                 
      2,473,836       504,149  
Less - current maturities     (362,098 )     (504,149 )
                 
    $ 2,111,738     $  

 

41 

 

 

PART II. OTHER INFORMATION (Continued)

 

Shareholder Notes Payable

 

From January 1, 2018 to February 9, 2018, the Company issued Contingently Convertible notes payable (the “Notes”) for contract work performed by other entities in lieu of compensation and expense reimbursement in the amount of $195,635. The Notes are (i) unsecured, (ii) bear interest at an annual rate of five percent (5%) per annum from date of issuance, and (iii) are convertible at the Company’s option post April 19, 2018. The Notes mature one year from issuance but may be extended one (1) additional year by the Company. If converted, the Notes plus accrued interest are convertible into shares of the Company’s common stock at the prior twenty (20) day average closing price with a 50% discount. As of September 30, 2019, the balance on these notes was $217,554 and they were extended one additional year until January 2020 at which point they become eligible for conversion.

 

Convertible and Contingently Convertible Notes Payable

 

From January 1, 2018 and through the date of these consolidated financial statements, the Company has issued certain Convertible and Contingently Convertible notes payable in varying amounts, in the aggregate of $710,000. The face amount of the notes represents the amount due at maturity along with the accrued interest, at which time that amount may be converted into shares of the Company stock based on the lowest 2 day closing price for the trailing 20 days prior to conversion and carrying a 35% discount. The Convertible and Contingently Convertible notes provide for interest to accrue at an interest rate equal to 12% per annum or the maximum rate permitted under applicable law after the occurrence of any event of default as provided in the notes. At any time after 180 days from the issue date, the holder, at its option, may convert the outstanding principal balance and accrued interest into shares of common stock of the Company. The initial conversion price for the principal and interest in connection with voluntary conversions by a holder of the Convertible and Contingently Convertible notes ranges from $0.05 to $0.10 per share, subject to adjustment as provided therein. The total outstanding balance of the Convertible and Contingently Convertible notes was converted as of September 30, 2019. They were converted into approximately 303 million shares of the Company’s common stock. Based on the variable conversion price, the Company recorded initial derivative liabilities of $465,905. The remaining balance of $235,085, net of discount, as of December 31, 2018 was reduced to zero after a change in fair value of $1,044,250 and a decrease of $1,279,335 to the balance of the derivative liabilities upon the date all notes were converted.

 

In connection with the issuance of the Convertible and Contingently Convertible notes, the Company issued warrants to purchase 411,875 shares of the Company’s common stock. The exercise term of the warrants ranges from issuance to any time on or after the six (6) month anniversary or prior to the maturity of the related note. The exercise price of the warrants is $0.40 per share of the Company’s common stock, as may be adjusted from time to time pursuant to the antidilution provisions of the related warrant. Pursuant to ASU 2017-11, such antidilution features do not subject the Company to derivative accounting pursuant to ASC 815. All warrants were forfeited during the nine months ended September 30, 2019 upon negotiation and conversion of the remaining outstanding balances.

 

Peak One Opportunity Fund, L.P.

 

During the year ended December 31, 2018, the Company entered into a financing agreement with Peak One Opportunity Fund, L.P. to receive $435,000 of original issue discount notes in three tranches as follows:

 

1. July 17, 2018, principal $85,000 with an imputed interest rate of 6%, discounted by 10%, and $5,000 for legal fees, for a net of $71,500 due three years from the funding date. The Company has the option of receiving two additional amounts ninety days apart;

2. September 14, 2018: $150,000 principal, $135,000 net.

3. November 13, 2018: a final $200,000 principal, $180,000 net.

 

Peak One Opportunity Fund is entitled to convert the note into common stock at a price equal to 65% of the lowest traded price for the twenty trading days immediately preceding the date of the date of conversion. The Company had the option to redeem the note at varying prices based upon the redemption date. As of September 30, 2019, the entire balance has been converted into shares of common stock.

 

Crown Bridge Partners, LLC

 

During the year ended December 31, 2018, the Company entered into a financing agreement with Crown Bridge Partners, LLC to receive $100,000 of original issue discount notes in two tranches as follows:

 

1. August 6, 2018: principal $50,000 bearing interest at 8%, discounted by 10%, and $2,000 for legal fees, for a net of $43,000 due one year from the funding date;

2. The remaining tranche may be funded at the holder’s discretion.

 

Crown Bridge Partners has converted the first tranche into common stock at a price equal to 65% of the average of the two lowest traded prices for the twenty-five trading days immediately preceding the date of the date of conversion.

 

As of September 30, 2019, the entire balance has been converted into 32,240,000 shares of common stock.

 

 

42 

 

 

PART II. OTHER INFORMATION (Continued)

 

Other Notes Payable

 

The following notes were convertible after none months from the issue date.

 

Issue Date and Name   Face
Amount
  Interest
Rate
  Maturity     Net Cash
Proceeds
  Amount
Converted/Paid
Jan 29, 2018 EMA   $ 80,000     12 %   Jan 29, 2019     $ 72,300     $ 80,000  
Feb 14, 2018 Auctus   $ 80,000     12 %   Nov 14, 2018     $ 72,500     $ 80,000  
Feb 13, 2018 FirstFire Global   $ 81,500     5 %   Nov 13, 2018     $ 72,500     $ 81,500  
May 2, 2018 Power Up #3   $ 83,000     12 %   May 23, 2019     $ 80,000     $ 83,000  
Oct 10, 2018 Power Up #4   $ 103,000     12 %   Oct 10, 2019     $ 103,000     $ 103,000  

 

During the nine months ended September 30, 2019, approximately $63,000 of the convertible notes above and approximately $21,000 of accrued interest were exchanged for approximately 227,000,000 shares of common stock. In addition, approximately $142,000 of the Power Up notes have been settled in cash. All convertible notes above have been paid in full or fully converted as of September 30, 2019.

 

During the nine months ended September 30, 2019, the Company has issued certain contingently convertible promissory notes in varying amounts to existing shareholders. The face amount of the notes represents the amount due at maturity along with the accrued interest. The amount can be converted into shares of the Company’s stock, at the option of the Company, based on the average closing price for the trailing 20 days prior to conversion and carrying a 35% to 50% discount. These notes can be converted only after an acceleration event which involves a symbol change, uplisting, or reverse stock split and such conversion is in the control of the Company. These notes, which are all outstanding at September 30, 2019, are included in the table below: 

 

    Face     Interest           Net Cash  
Issue Date   Amount     Rate     Maturity     Proceeds  
Jan. 3, 2019   $ 4,500       5 %   Jan. 3, 2021     $ 4,500  
Jan. 3, 2019   $ 93,750       5 %   Jan. 3, 2021     $ 93,750  
Jan. 3, 2019   $ 102,200       5 %   Jan. 3, 2021   $ 102,200  
Feb. 4, 2019   $ 18,750       5 %   Feb. 4, 2021     $ 18,750  
June 4, 2019   $ 7,500       5 %   June 4, 2021     $ 7,500  
June 4, 2019   $ 50,000       5 %   June 4, 2021     $ 50,000  
June 4, 2019   $ 4,000       5 %   June 4, 2021     $ 4,000  
June 4, 2019   $ 25,000       5 %   June 4, 2021     $ 25,000  
June 4, 2019   $ 25,000       5 %   June 4, 2021     $ 25,000  
June 4, 2019   $ 25,000       5 %   June 4, 2021     $ 25,000  
June 4, 2019   $ 12,000       5 %   June 4, 2021     $ 12,000  
July 1, 2019   $ 5,500       5 %   June 4, 2021     $ 5,500  
July 11, 2019   $ 25,000       5 %   June 4, 2021     $ 25,000  

 

  

43 

 

 

PART II. OTHER INFORMATION (Continued)

 

 

Rotman Family Notes

 

On June 30, 2019, the Company issued contingently convertible promissory notes totaling $180,000, to Steven Rotman ($105,000) and Greg Rotman ($75,000). These notes are (i) unsecured, (ii) bear interest at an annual rate of eight percent (8%) per annum from date of issuance, (iii) are convertible at the Company’s option after December 31, 2019, and (iv) mature five years from issuance. If converted, the notes plus accrued interest are convertible into shares of the Company’s common stock at the average of the five lowest closing prices in any 90 day period with a 50% discount. The balance of the notes payable to Steven and Greg Rotman were approximately $107,000 and $57,000, respectively, at September 30, 2019.

 

On July 18, 2019, the Company issued contingently convertible notes totaling $1,522,500, to Steven Rotman ($1,102,500) and Bernard Rotman ($420,000) as partial consideration for the acquisition of 58% of Rotmans (see Note 17). These notes are (i) unsecured, and (ii) bear interest at an annual rate of eight percent (8%) per annum from date of issuance. These notes can be converted only after an acceleration event, which involves a symbol change or reverse stock split and such conversion is in the control of the Company. Steven Rotman’s note matures eight years from issuance and Bernard Rotman’s note matures four years from issuance. If converted, the notes plus accrued interest are convertible into shares of the Company’s common stock at a 20 day average closing price at a 50% discount. The balance of the notes payable including accrued interest to Steven and Bernard Rotman were approximately $1,114,000 and $424,000, respectively, at September 30, 2019. In addition, Steven and Bernard Rotman were also issued related party notes payable in the amounts of $367,500 and $140,000, respectively, for the acquisition of 58% of Rotmans. The notes bear interest at an annual rate of five percent (5%). Steven Rotman’s note matures eight years from issuance and Bernard Rotman’s note matures four years from issuance and payments begin six months from issuance until maturity. The balance of these notes payable including accrued interest to Steven and Bernard Rotman were approximately $370,000 and $141,000 at September 30, 2019.

 

(d) Application of Securities Laws and Other Matters

 

No underwriters were involved in the foregoing sales of securities. The securities described in section (a) of this Item 2 were issued to investors in reliance upon the exemption from the registration requirements of the Securities Act, as set forth in Section 4(2) under the Securities Act and Regulation D promulgated thereunder, as applicable, relative to sales by an issuer not involving any public offering, to the extent an exemption from such registration was required.

 

All of the foregoing securities are deemed restricted securities for purposes of the Securities Act. All certificates representing the issued shares of common stock, warrants and options described in this Item 2 included appropriate legends setting forth that the securities had not been registered and the applicable restrictions on transfer.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable

 

ITEM 5. OTHER INFORMATION

 

None

  

44 

 

 

PART II. OTHER INFORMATION (Continued)

 

ITEM 6. EXHIBITS

 

Exhibit Index

 

Number Description
   
31.1 * Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32.1 * Certification 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.INS XBRL Instance Document
   
101.SCH XBRL Taxonomy Extension Schema Document
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

   

* Filed herewith

 

45 

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

  

  VYSTAR CORPORATION
     
Date: November 25, 2019 By: /s/ Steven Rotman
    Steven Rotman
    President, Chief Executive Officer, Chief Financial Officer and Director

  

46 

 

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