UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2020

 

[  ] 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 [X]

 

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 [X] 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 [X]
(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 [X]

 

Class   Outstanding as of July 6, 2020
Preferred Stock, $0.0001 par value per share   13,698 shares
Common Stock, $0.0001 par value per share   1,105,776,437 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, 2019. 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, 2019 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 MARCH 31, 2020

 

INDEX

 

Part I. Financial Information  
     
Item 1. Financial Statements:  
     
  Condensed Consolidated Balance Sheets at March 31, 2020 (unaudited) and December 31, 2019 4
     
  Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2020 (unaudited) and 2019 (unaudited) 5
     
  Condensed Consolidated Statements of Stockholders’ Deficit for the Three Months Ended March 31, 2020 (unaudited) and 2019 (unaudited) 6
     
  Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020 (unaudited) and 2019 (unaudited) 7
     
  Notes to Condensed Consolidated Financial Statements (unaudited) 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 32
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 38
     
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 40
     
Item 3. Defaults Upon Senior Securities 44
     
Item 4. Mine Safety Disclosures 44
     
Item 5. Other Information 44
     
Item 6. Exhibits 44
     
SIGNATURES 45

 

3
 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    March 31,     December 31,  
    2020     2019  
    (Unaudited)        
ASSETS                
Current assets:                
Cash   $ 403,091     $ 72,355  
Accounts receivable     40,155       38,526  
Stock subscription receivable     49,250       49,250  
Inventories     3,916,997       4,114,977  
Investments - equity securities, at fair value     99,095       149,517  
Prepaid expenses and other     311,476       602,980  
Deferred commission costs     124,725       129,123  
                 
Total current assets     4,944,789       5,156,728  
                 
Property and equipment, net     1,787,616       1,879,739  
Operating lease right-of-use assets     10,094,497       10,379,685  
Finance lease right-of-use assets, net     871,246       849,209  
                 
Other assets:                
Intangible assets, net     2,389,056       2,489,612  
Goodwill     460,301       460,301  
Inventories, long-term     890,130       935,121  
Deferred commission costs, net of current portion     211,335       217,024  
Other     34,377       34,377  
                 
Total other assets     3,985,199       4,136,435  
                 
Total assets   $ 21,683,347     $ 22,401,796  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
Current liabilities:                
Line of credit   $ 2,163,562     $ 2,413,539  
Term notes - current maturities     769,814       16,374  
Accounts payable     3,124,371       2,846,306  
Accrued expenses     350,117       681,758  
Stock subscription payable     1,298,931       1,150,125  
Operating lease liabilities - current maturities     1,071,000       1,055,000  
Finance lease liabilities - current maturities     171,000       167,000  
Shareholder, convertible and contingently convertible notes payable and accrued interest - current maturities     611,281       366,326  
Related party debt - current maturities     46,000       46,000  
Unearned revenue     1,662,716       1,677,171  
Derivative liabilities     1,499,800       1,499,800  
                 
Total current liabilities     12,768,592       11,919,399  
                 
Long-term liabilities:                
Term notes, net of current maturities     500,000       500,000  
Operating lease liabilities, net of current maturities     7,231,508       7,490,431  
Finance lease liabilities, net of current maturities     707,524       694,487  
Unearned revenue, net of current maturities     811,550       823,401  
Shareholder, convertible and contingently convertible notes payable and accrued interest, net of current maturities and debt discount     319,681       494,363  
Related party debt, net of current maturities and debt discount     2,049,797       1,712,259  
                 
Total long-term liabilities     11,620,060       11,714,941  
                 
Total liabilities     24,388,652       23,634,340  
                 
Stockholders’ deficit:                
Convertible preferred stock, $0.0001 par value 15,000,000 shares authorized; 13,828 issued and outstanding (liquidation preference of $94,779 and $91,275 at March 31, 2020 and December 31, 2019 , respectively)     1       1  
Common stock, $0.0001 par value, 1,500,000,000 shares authorized; 1,105,762,080 shares issued and 1,105,732,080 shares outstanding     110,573       110,573  
Additional paid-in capital     38,442,169       38,436,607  
Accumulated deficit     (42,472,344 )     (41,104,967 )
Common stock in treasury, at cost; 30,000 shares     (30 )     (30 )
                 
Total Vystar stockholders’ deficit     (3,919,631 )     (2,557,816 )
                 
Noncontrolling interest     1,214,326       1,325,272  
                 
Total stockholders’ deficit     (2,705,305 )     (1,232,544 )
                 
Total liabilities and stockholders’ deficit   $ 21,683,347     $ 22,401,796  

 

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  
    March 31,  
    2020     2019  
             
Revenue   $ 5,932,238     $ 191,667  
                 
Cost of revenue     2,932,614       199,842  
                 
Gross profit (loss)     2,999,624       (8,175 )
                 
Operating expenses:                
Salaries, wages and benefits     1,454,074       -  
Share-based compensation     154,368       1,612,286  
Professional fees     292,696       192,029  
Advertising     446,695       20,483  
Rent     293,171       -  
Service charges     183,577       1,126  
Depreciation and amortization     243,923       49,653  
Other operating     781,673       120,303  
                 
Total operating expenses     3,850,177       1,995,880  
                 
Loss from operations     (850,553 )     (2,004,055 )
                 
Other income (expense):                
Gain on settlement of debt, net     -       14,945  
Interest expense     (604,714 )     (99,663 )
Change in fair value of derivative liabilities     -       (1,044,250 )
Other income (expense), net     (23,056 )     (151 )
                 
Total other expense, net     (627,770 )     (1,129,119 )
                 
Net loss     (1,478,323 )     (3,133,174 )
                 
Net loss attributable to noncontrolling interest     110,946       -  
                 
Net loss attributable to Vystar   $ (1,367,377 )   $ (3,133,174 )
                 
Basic and diluted loss per share:                
Net loss per share   $ (0.00 )   $ (0.00 )
                 
Basic and diluted weighted average number of common shares outstanding     1,105,732,080       770,752,984  

 

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

 

5
 

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE THREE MONTHS ENDED MARCH 31, 2020

 

    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     Stock     Shares     Stock     Capital     Deficit     Shares     Stock     Deficit     Interest     Deficit  
                                                                   
Ending balance December 31, 2019     13,828     $ 1       1,105,762,080     $ 110,573     $ 38,436,607     $ (41,104,967 )     (30,000 )   $ (30 )   $     (2,557,816 )   $         1,325,272     $     (1,232,544 )
                                                                                         
Common stock and warrants issued for services                                     5,562                               5,562               5,562  
                                                                                         
Net loss     -       -       -       -       -       (1,367,377 )     -       -       (1,367,377 )     (110,946 )     (1,478,323 )
                                                                                         
Ending balance March 31, 2020     13,828     $ 1       1,105,762,080     $ 110,573     $ 38,442,169     $ (42,472,344 )     (30,000 )   $ (30 )   $ (3,919,631 )   $ 1,214,326     $ (2,705,305 )

 

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

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE THREE MONTHS ENDED MARCH 31, 2019

 

    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     Stock     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     $ 35,730,013     $ (36,533,519 )     (30,000 )   $ (30 )   $ (697,789 )     -     $ (697,789 )

 

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

 

6
 

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    Three Months Ended  
    March 31,  
    2020     2019  
Cash flows from operating activities:                
Net loss   $ (1,478,323 )   $ (3,133,174 )
Adjustments to reconcile net loss to cash used in operating activities:                
Gain on settlement of debt     -       (14,945 )
Share-based compensation     154,368       1,612,286  
Depreciation     139,684       10,232  
Bad debts     5,317       -  
Amortization of intangible assets     104,239       39,421  
Noncash lease expense    

32,166

      -  
Unamortized term debt issuance costs     (14,208 )     -  
Amortization of debt discount     315,875       73,519  
Change in fair value of derivative liabilities     -       1,044,250  
Net unrealized loss on available-for-sale investments     50,422       -  
(Increase) decrease in assets:                
Accounts receivable     (6,946 )     (513 )
Inventories     242,971       (25,093 )
Prepaid expenses and other assets     291,504       6,235  
Deferred commission costs     10,087       -  
Increase (decrease) in liabilities:                
Accounts payable     278,065       (23,746 )
Accrued expenses and interest payable     ( 289,705 )     1,164  
Unearned revenue     (26,306 )     -  
                 
Net cash used in operating activities     (190,790 )     (410,364 )
                 
Cash flows from investing activities:                
Patents and trademark fees    

(3,683

)     (2,839 )
Website development costs     -       (500 )
                 
Net cash used in investing activities    

(3,683

)     (3,339 )
                 
Cash flows from financing activities:                
Net repayments on line of credit     (249,977 )     -  

Proceeds from the issuance of term debt

    808,500       (146,176 )
Repayment of term debt     (40,852 )     -  
Repayment of finance lease obligations     (42,462 )     -  
Proceeds from the issuance of notes - related parties     50,000       217,000  
Issuance of common stock, net of costs     -       731,020  
Treasury stock repurchases     -       (30 )
                 
Net cash provided by financing activities     525,209       801,814  
                 
Net increase in cash     330,736       388,111  
                 
Cash - beginning of period     72,355       50,053  
                 
Cash - end of period   $ 403,091     $ 438,164  
                 
Cash paid during the period for:                
Interest   $

224,433

    $ 16,209  
                 
Non-cash transactions:                
Shareholder and convertible notes and accrued interest payable converted to common stock   $ -     $ 1,487,192  
Common stock issued for accrued compensation     -       771,203  
Common stock issued for settlement of warrant exercises     -       32,442  
Settlement of derivative liabilities     -       1,279,335  

 

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

 

7
 

 

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 based in Worcester, Massachusetts. The Company uses patented technology to produce a line of innovative air purifiers, which destroy viruses and bacteria through the use of ultraviolet light. Vystar also manufactures and sells reduced allergen natural rubber latex used primarily in various bedding products. In addition, Vystar has a majority ownership in 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.

 

Vystar 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.

 

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”).

 

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 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.

 

In July of 2019, Vystar acquired 58% of the outstanding shares of common stock of Rotmans. 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 consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification.

 

8
 

 

The Company has evaluated subsequent events through the date of the filing of its Form 10-Q with the Securities and Exchange Commission. Other than those events disclosed in Note 18, the Company is not aware of any other 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.

 

Basis 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.

 

COVID-19

 

In December 2019, a novel coronavirus (“COVID-19”) emerged and has subsequently spread worldwide. The World Health Organization has declared COVID-19 a pandemic resulting in federal, state, and local governments mandating various restrictions, including travel restrictions, restrictions on public gatherings, stay at home orders and advisories and quarantining of people who may have been exposed to the virus. On March 24, 2020, Massachusetts required all non-essential businesses to close their physical workplaces. As a result, the Rotmans showroom, offices and warehouse temporarily closed. During that time, associates worked remotely where possible. The Company re-opened on June 10, 2020 and continues to monitor developments, including government requirements and recommendations.

 

The results of operations for the three months ended March 31, 2020 are not necessarily indicative of results for the entire year. The pandemic has resulted in significant economic disruption. Although our showroom has reopened, we cannot reasonably estimate the impact on Vystar should the pandemic persist or worsen. Accordingly, the estimates and assumptions made as of March 31, 2020 could change in subsequent interim reports and upon final determination at year-end, and it is reasonably possible that such changes could be significant (although the potential effects cannot be measured at this time).

 

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, allowance for obsolete inventory, the allocation of purchase price related to acquisitions, the recoverability of long-lived assets, fair values of right of use assets and lease liabilities, valuation of derivative 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, investments - 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 March 31, 2020 and are level 3 measurements. There have been no transfers between levels during the three months ended March 31, 2020.

 

9
 

 

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.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include all liquid investments with a maturity date of less than three months when purchased. Cash equivalents also include amounts due from third-party financial institutions for credit and debit card transactions which typically settle within five days.

 

Accounts Receivable

 

Accounts 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 5.9% in 2020. Amounts sold during the first quarter of 2020 were approximately $1,691,000. There were no sales of trade receivables in the first quarter of 2019. 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 March 31, 2020 and December 31, 2019, the Company considers accounts receivable to be fully collectible and no allowance for doubtful accounts was recorded.

 

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 are 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. Inventories not expected to be sold within 12 months are classified as long-term.

 

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 March 31, 2020, the Company believes that the carrying value of the available-for-sale securities was recoverable in all material respects.

 

10
 

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation. Depreciation is provided over the estimated useful lives of the assets, generally 5 to 10 years, using straight-line and accelerated methods.

 

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 March 31, 2020, the net balance of property and equipment is $1,787,616 with accumulated depreciation of $300,922. As of December 31, 2019, the net balance of property and equipment is $1,879,739 with accumulated depreciation of $208,799.

 

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 ranging from 9 to 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.

 

Customer relationships, tradename and marketing related intangibles are carried at cost and are being amortized on a straight-line basis over their estimated useful lives, typically ranging from 5 to 10 years.

 

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 three months ended March 31, 2020 and 2019, 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.

 

11
 

 

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 operations 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 statements 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 three months ended March 31, 2020 and 2019, the Company has classified all conversion features as derivative liabilities and has estimated the fair value of these embedded conversion features using a Monte Carlo simulation model.

 

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. There was no unearned revenue during the three months ended March 31, 2019.

 

Changes to unearned revenue during the three months ended March 31, 2020 are summarized as follows:

 

Balance, December 31, 2019   $ 2,500,572  
         
Customer deposits received     4,930,536  
         
Warranty coverage purchased     98,309  
         
Gift cards purchased     2,500  
         
Revenue earned     (5,057,651 )
         
Balance, March 31, 2020   $ 2,474,266  

 

Loss Per Share

 

The Company presents basic and diluted loss per share. Because the Company reported a net loss in the first quarter of 2020 and 2019, 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 27,983,271 and 29,098,270 shares of common stock for the three months ended March 31, 2020 and 2019, respectively, as their effect would be anti-dilutive. Warrants to purchase 14,237,315 and 14,382,380 shares of common stock for the three months ended March 31, 2020 and 2019, 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 4,661,180 and 4,382,730 shares of common stock three months ended March 31, 2020 and 2019, respectively, were excluded from the computation of diluted loss per share as their effect would be anti-dilutive.

 

12
 

 

Revenue

 

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 March 31, 2020 and December 31, 2019, 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.

 

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 March 31, 2020, deferred warranty revenue was approximately $812,000 and is included in unearned revenue in the accompanying consolidated balance sheets. During the three months ended March 31, 2020, the Company recorded total proceeds of approximately $98,000 and recognized total revenues of approximately $134,000 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 March 31, 2020, deferred commission costs are approximately $336,000 and included in the accompanying consolidated balance sheets. All other costs, such as costs of services performed under the contract, general and administrative expenses, and advertising costs are expensed as incurred.

 

13
 

 

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 three months ended March 31, 2020 and 2019, 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 $447,000 and $20,000 for the three months ended March 31, 2020 and 2019, 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 three months ended March 31, 2020 and 2019.

 

The Company remains subject to income tax examinations from Federal and state taxing jurisdictions for 2016 through 2019.

 

14
 

 

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.

 

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 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 March 31, 2020, the Company had cash of $403,091 and a deficit in working capital of approximately $7.8 million. Further, at March 31, 2020 the accumulated deficit amounted to approximately $42.5 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.

 

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 RxAir air purification units and 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.

 

15
 

 

There can be no assurances that the Company will be able to achieve projected levels of revenue in 2020 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 RxAir air purification units 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; 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, acquire new customers and maintain a strong brand; the success of our efforts to reduce expenses in our retail furniture business; and 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 March 31, 2020:

 

      Gross     Fair  
Cost     Unrealized Losses     Value  
                     
$ 141,225     $ (42,130 )   $ 99,095  

 

Net unrealized holding losses on available-for-sale securities were approximately $50,000 in the first quarter of 2020 and have been included in other income (expenses) in the accompanying statements of operations. There were no investments – equity securities prior to the Rotmans acquisition in July 2019. Investments represent equity securities in a publicly traded company.

 

NOTE 5 - PROPERTY AND EQUIPMENT

 

Property and equipment, net consists of the following:

 

    March 31,     December 31,  
    2020     2019  
             
Furniture, fixtures and equipment   $ 1,354,665     $ 1,354,665  
Tooling and testing equipment     319,000       319,000  
Parking lots     365,707       365,707  
Motor vehicles     49,166       49,166  
                 
      2,088,538       2,088,538  
Accumulated depreciation     (300,922 )     (208,799 )
                 
Property and equipment, net   $ 1,787,616     $ 1,879,739  

 

Depreciation expense for the three months ended March 31, 2020 and 2019 was $139,684 and $10,232, respectively.

 

16
 

 

NOTE 6 - INTANGIBLE ASSETS

 

Intangible assets consist of the following:

 

                Amortization  
    March 31,     December 31,     Period  
    2020     2019     (in Years)  
Amortized intangible assets:                        
Customer relationships   $ 210,000     $ 210,000       6 - 10  
Proprietary technology     610,000       610,000       10  
Tradename and brand     1,380,000       1,380,000       5 - 10  
Marketing related     380,000       380,000       5  
Patents     359,101       355,418       6 - 20  
Noncompete     50,000       50,000       5  
                         
Total     2,989,101       2,985,418          
Accumulated amortization     (609,117 )     (504,878 )        
                         
Intangible assets, net     2,379,984       2,480,540          
Indefinite-lived intangible assets:                        
Trademarks     9,072       9,072          
                         
Total intangible assets   $ 2,389,056     $ 2,489,612          

 

Amortization expense for the three months ended March 31, 2020 and 2019 was $104,239 and $39,421, respectively. Estimated future amortization expense for finite-lived intangible assets is as follows:

 

    Amount  
       
Remaining in 2020   $ 312,716  
2021     416,956  
2022     417,140  
2023     410,529  
2024     311,306  
Thereafter     511,337  
         
Total   $ 2,379,984  

 

17
 

 

NOTE 7 - LEASES

 

The Company leases equipment, a showroom, offices and warehouse facilities. These leases expire at various dates through 2024 with options to extend to 2031.

 

The table below presents the lease costs for the three months ended March 31, 2020:

 

    March 31, 2020  
       
Operating lease cost   $ 394,348  
         
Finance lease cost:        
         
Amortization of right-of-use assets     47,561  
Interest on lease liabilities     11,690  
         
Total lease cost   $ 453,599  

 

During the three months ended March 31, 2020, the Company recognized sublease income of approximately $27,000 which is included in other income (expense), net in the accompanying condensed consolidated statements of operations.

 

There were no lease costs for the three months ended March 31, 2019.

 

Our leases generally do not provide an implicit rate, and therefore we use our incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease. We used incremental borrowing rates as of the implementation date for operating leases that commenced prior to that date.

 

The following table presents other information related to leases:

 

    Three months ended
March 31, 2020
 
       
Cash paid for amounts included in the measurement of lease liabilities:        
         
Operating cash flows used for operating leases   $ 372,884  
Financing cash flows used for financing leases     54,152  
         
Assets obtained in exchange for operating lease liabilities     -  
         
Assets obtained in exchange for finance lease liabilities     75,739  
         
Weighted average remaining lease term:        
Operating leases     9 years  
Finance leases     6 years  
         
Weighted average discount rate:        
Operating leases     5.53 %
Finance leases     5.16 %

 

18
 

 

The future minimum lease payments required under operating and financing lease obligations as of March 31, 2020 having initial or remaining non-cancelable lease terms in excess of one year are summarized as follows:

 

    Operating Leases     Finance
Leases
    Total  
                   
Remainder of 2020   $ 1,127,733     $ 160,156     $ 1,287,889  
2021     1,503,643       205,545       1,709,188  
2022     1,110,794       150,943       1,261,737  
2023     880,275       150,142       1,030,417  
2024     870,000       140,002       1,010,002  
Thereafter     5,220,000       207,475       5,427,475  
                         
Total undiscounted lease liabilities     10,712,445       1,014,263       11,726,708  
Less: imputed interest     ( 2,409,937 )     (135,739 )     ( 2,545,676 )
                         
Net lease liabilities   $ 8.302,508     $ 878,524     $ 9,181,032  

 

As of March 31, 2020, the Company does not have additional operating and finance leases that have not yet commenced.

 

NOTE 8 - NOTES PAYABLE AND LOAN FACILITY

 

Line of Credit

 

At March 31, 2020, the Company had a $2,500,000 revolving line of credit with Fidelity Co-operative Bank. Advances were limited to 50% of eligible inventory and bore interest at the prime rate plus 0.50% with a floor of 3.75%. The interest rate was 3.75% at March 31, 2020. The line of credit was due upon demand and subject to renewal annually. It was secured by all assets of the Company and subject to certain financial and non-financial covenants. The Company was not in compliance with certain covenants and was in default at March 31, 2020. The credit line was subsequently paid-off on May 29, 2020. Indebtedness to existing and future Rotman Family notes were subordinated to the bank debt. The line was also secured with a mortgage on a property of a wholly-owned entity of Steven Rotman.

 

Borrowings under this agreement at March 31, 2020 were approximately $2,164,000.

 

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 the Company (“CMA directors”) were initially the members of CMA Investments, LLC. Pursuant to the term of the CMA Note, interest is computed at LIBOR plus 5.25% on amounts drawn and fees. The CMA Note was settled in July 2019.

 

19
 

 

Term Notes

 

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 March 31, 2020 and December 31, 2019.

 

Other term debt totaling $13,397 and $16,374 at March 31, 2020 and December 31, 2019, respectively, represents three 0% loans on motor vehicles, requiring cumulative monthly payments of $1,488 through maturity in November 2020.

 

On February 24, 2020, the Company entered into an agreement with Libertas Funding LLC (“Libertas”) to sell future sale receipts totaling $1,089,000 for a purchase price of $825,000. The sold amount of future sales receipts are delivered weekly to Libertas at predetermined amounts over a period of nine months. The agreement contains an early delivery discount fee for delivering the future revenues before the end of the contract term and an origination fee of $16,500, which has been capitalized and is being amortized over the term of the agreement. The implicit borrowing rate of the agreement is approximately 75%. The agreement is personally guaranteed by Steven Rotman. As of March 31, 2020, current maturities of term notes include $756,417 related to this agreement.

 

Shareholder, Convertible and Contingently Convertible Notes Payable

 

The following table summarizes shareholder, convertible and contingently convertible notes payable:

 

    March 31,     December 31,  
    2020     2019  
             
Shareholder, convertible and contingently convertible notes   $ 951,895     $ 951,895  
Accrued interest     58,467       46,569  
Debt discount     (79,400 )     (137,775 )
                 
      930,962       860,689  
Less: current maturities     (611,281 )     (366,326 )
                 
    $ 319,681     $ 494,363  

 

Shareholder Convertible Notes Payable

 

During the year ended December 31, 2018, the Company issued shareholder contingently convertible notes payable (the “Notes”), some of which were for contract work performed by other entities in lieu of compensation and expense reimbursement, totaling approximately $335,000. 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. The outstanding balance of all of these Notes of as March 31, 2020 and December 31, 2019 is $338,195. The Notes matured in January 2020.

 

During the year ended December 31, 2019, the Company issued certain contingently convertible promissory notes in varying amounts to existing shareholders which totaled $613,700. The face amount of the note 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. All of these notes are outstanding as of March 31, 2020.

 

20
 

 

Based on the variable conversion price of these notes, the Company recorded the embedded conversion features as derivative liabilities, which amounted to $442,934 at December 31, 2019. There were no significant changes to this measurement at March 31, 2020.

 

Convertible and Contingently Convertible Notes Payable

 

From January 1, 2018 and through 2019, the Company had issued certain convertible and contingently convertible notes payable in varying amounts, in the aggregate of $710,000. The face amount of the notes represented 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 provided 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 December 31, 2019 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 in 2019 after a change in fair value of $1,044,250 and a settlement 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 year ended December 31, 2019 upon negotiation and conversion of the remaining outstanding balances.

 

Related Party Debt

 

The following table summarizes related party debt:

 

    March 31,     December 31,  
    2020     2019  
             
Rotman Family convertible notes   $ 1,832,707     $ 1,782,707  
Rotman Family nonconvertible notes     507,500       507,500  
Accrued interest     83,190       53,153  
Debt Discount     (327,600 )     (585,100 )
                 
      2,095,797       1,758,260  
Less: current maturities     (46,000 )     (46,000 )
                 
    $ 2,049,797     $ 1,712,260  

 

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Rotman Family Convertible 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 the 90-day period prior to conversion with a 50% discount. The balance of the notes payable including accrued interest to Steven and Greg Rotman is approximately $111,000 and $59,000, respectively, at March 31, 2020 and approximately $109,000 and $57,000, respectively, at December 31, 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 18). 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 $1,142,000 and $435,000, respectively, at March 31, 2020 and approximately $1,128,000 and $430,000, respectively, at December 31, 2019.

 

On December 19, 2019, the Company issued a contingently convertible promissory note totaling $100,000, to Steven Rotman. The face amount of the note 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 50% discount. The note 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. The note matures two years from issuance. The balance of the note payable including accrued interest to Steven Rotman is approximately $101,000 and $100,000 at March 31, 2020 and December 31, 2019, respectively.

 

On February 20, 2020, the Company issued a contingently convertible promissory note totaling $50,000, to Steven Rotman. The face amount of the note 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 50% discount. The note 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. The note matures two years from issuance. The balance of the note payable including accrued interest to Steven Rotman is approximately $50,000, at March 31, 2020.

 

Based on the variable conversion price for all of these convertible notes, the Company recorded the embedded conversion features as derivative liabilities, which amounted to $1,056,866 at December 31, 2019. There were no significant changes to this measurement at March 31, 2020.

 

Rotman Family Nonconvertible Notes

 

In connection with the acquisition of 58% of Rotmans (see Note 18), 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 is approximately $381,000 and $145,000, respectively, at March 31, 2020 and approximately $376,000 and $143,000, respectively, at December 31, 2019.

 

22
 

 

Approximate maturities for the succeeding years are as follows:

 

Remainder of 2020   $ 46,000  
2021     59,000  
2022     62,000  
2023     85,000  
2024     34,000  
Thereafter     221,500  
         
    $ 507,500  

 

NOTE 9 - DERIVATIVE LIABILITIES

 

As of March 31, 2020, the Company had a $1,499,800 derivative liability balance on the consolidated balance sheet and recorded a loss from change in fair value of derivative liabilities of $1,079,450 for the year ended December 31, 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 or Monte Carlo simulation.

 

The following table summarizes the derivative liabilities included in the consolidated balance sheet at March 31, 2020:

 

Fair Value of Embedded Derivative and Warrant Liabilities:

 

Balance, December 31, 2018   $ 235,085  
Initial measurement of liabilities     1,464,600  
Change in fair value     1,079,450  
Settlement due to conversion     (1,279,335 )
         
Balance, December 31, 2019     1,499,800  
Change in fair value     -  
Settlement due to conversion     -  
         
Balance, March 31, 2020   $ 1,499,800  

 

23
 

 

NOTE 10 - STOCKHOLDERS’ 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 March 31, 2020, the 13,828 shares of outstanding preferred stock had undeclared dividends of approximately $95,000 and could be converted into 4,661,180 shares of common stock, at the option of the holder.

 

As of December 31, 2019, the 13,828 shares of outstanding preferred stock had undeclared dividends of approximately $91,000 and could be converted into 4,591,100 shares of common stock, at the option of the holder.

 

Common Stock and Warrants

 

During the three months ended March 31, 2020, no shares were issued under equity purchase agreements.

 

During the three months ended March 31, 2020, no shares were issued for the conversion of principal and interest.

 

NOTE 11 - REVENUES

 

The following table presents our revenues disaggregated by each major product category and service for the three months ended March 31, 2020 and 2019:

 

    Three Months Ended March 31,  
    2020     2019  
          % of           % of  
    Net Sales     Net Sales     Net Sales     Net Sales  
Merchandise:                                
Case Goods                                
Bedroom Furniture   $ 861,123       14.5     $ -       -  
Dining Room Furniture     522,114       8.8       -       -  
Occasional     960,379       16.2       -       -  
      2,343,616       39.5       -       -  
Upholstery     1,617,547       27.3       -       -  
Mattresses and Toppers     1,071,327       18.1       179,017       93.4  
Broadloom, Flooring and Rugs     406,879       6.9       -       -  
Warranty     98,309       1.7       -       -  
Accessories and Other     394,560       6.7       12,650       6.6  
    $ 5,932,238       100.0     $ 191,667       100.0  

 

NOTE 12 - 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.

 

In total, the company recorded $154,368 and $1,612,286 of stock-based compensation for the three months ended March 31, 2020 and 2019, respectively, including shares to be issued related to consultants and board member stock options and common stock and warrants issued to non-employees. Included in stock subscription payable is accrued stock-based compensation of $993,981 and $845,175 at March 31, 2020 and December 31, 2019, respectively.

 

24
 

 

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 three months ended March 31, 2020:

 

  Expected Dividend Yield - because the Company does not currently pay dividends, the expected dividend yield is zero;
     
  Expected Volatility in Stock Price - volatility based on the Company’s 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 three months ended March 31, 2020 and 2019, the Company recorded $5,562 and $17,783, respectively, of share-based compensation expense related to employee and Board Members’ stock options. The unrecognized compensation expense as of March 31, 2020 was $43,371 for non-vested share-based awards to be recognized over a period of approximately three 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 March 31, 2020, 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 March 31, 2020. In 2019, the Board of Directors adopted an additional stock option plan with provides for 50,000,000 shares which are all available as of March 31, 2020. 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 three months ended March 31, 2020.

 

25
 

 

The following table summarizes all stock option activity of the Company for the three months ended March 31, 2020:

 

                Weighted  
          Weighted     Average  
          Average     Remaining  
    Number     Exercise     Contractual  
    of Shares     Price     Life (Years)  
                   
Outstanding, December 31, 2019     27,983,271     $ 0.20       3.45  
                         
Granted     -       -       -  
                         
Exercised     -       -       -  
                         
Forfeited     -       -       -  
                         
Outstanding, March 31, 2020     27,983,271     $ 0.20       3.20  
                         
Exercisable, March 31, 2020     26,783,271     $ 0.21       3.42  

 

As of March 31, 2020, and 2019, the aggregate intrinsic value of the Company’s outstanding options was approximately $1,000 and $52,000, respectively. The aggregate intrinsic value will change based on the fair market value of the Company’s common stock.

 

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.

 

26
 

 

The following table represents the Company’s warrant activity for the three months ended March 31, 2020:

 

                      Weighted  
                      Average  
          Weighted     Weighted     Remaining  
    Number     Average     Average     Contractual  
    of Shares     Fair Value     Exercise Price     Life (Years)  
                         
Outstanding, December 31, 2019     14,237,646             $ 0.07       3.58  
                                 
Granted     -          -       -       -  
                                 
Exercised     -       -       -       -  
                                 
Forfeited     -       -       -       -  
                                 
Expired     -       -       -       -  
                                 
Outstanding, March 31, 2020     14,237,646               0.07       3.28