UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

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

 

For the Fiscal Year Ended December 31, 2019

 

OR

 

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

 

Commission File No. 000-53754

 

VYSTAR CORPORATION

(Exact name of registrant as specified in its charter)

 

GEORGIA   20-2027731
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
     
725 Southbridge St    
Worcester, MA   01610
(Address of principal executive offices)   (Zip Code)

 

Registrants telephone number, including area code: (508) 791-9114

 

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

 

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

 

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

 

Common Stock, par value $0.0001 per share

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ] No [X]

 

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [  ] No [X]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

 

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,” “non-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]
             
            Emerging growth Company [  ]

 

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

 

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

 

As of July 6, 2020, the aggregate market value of shares held by non-affiliates of the registrant (based upon the closing sale price of such shares on the OTC Market on July 2, 2020) was $18,982,435. See Item 12.

 

As of July 6, 2020, there were 1,105,776,437 shares of the registrant’s common stock outstanding and 13,698 shares of the registrants Series A preferred stock.

 

 

 

 

 

 

Vystar Corporation

Annual Report on Form 10-K

For the Year Ended December 31, 2019

Table of Contents

 

Part I
       
Item 1.   Business 4
Item 1A   Risk Factors 10
Item 1B.   Unresolved Staff Comments 16
Item 2.   Properties 16
Item 3.   Legal Proceedings 16
Item 4.   Mine Safety Disclosures 17
       
Part II
       
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 17
Item 6.   Selected Financial Data 19
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
Item 7A.   Quantitative and Qualitative Disclosures about Market Risk 28
Item 8.   Financial Statements and Supplementary Data 28
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 29
Item 9A.   Controls and Procedures 29
Item 9B.   Other Information 29
     
Part III
       
Item 10.   Directors, Executive Officers and Corporate Governance 30
Item 11.   Executive Compensation 34
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 36
Item 13.   Certain Relationships and Related Transactions, and Director Independence 38
Item 14.   Principal Accountant Fees and Services 40
       
Part IV
       
Item 15.   Exhibits and Financial Statement Schedules 42
Item 16.   Form 10K Summary 46
Signatures 47

 

2

 

 

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

 

Certain oral and written statements made by Vystar Corporation about future events and expectations, including statements in this Annual Report on Form 10-K (the “Report”) contain forward-looking statements, within the meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Securities Act of 1933, as amended (the “Securities Act”), that involve risks and uncertainties. For those statements, we claim the protection of the safe-harbor for forward-looking statements contained in the Private Securities Litigation Act of 1995. In some cases, forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may” and similar expressions. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Report or the statement. All of these forward-looking statements are based on information available to us at this time, and we assume no obligation to update any of these statements. Actual results could differ from those projected in these forward-looking statements as a result of many factors, including those identified in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere. We urge you to review and consider the various disclosures made by us in this Report, and those detailed from time to time in our filings with the Securities and Exchange Commission (the “SEC”), that attempt to advise you of the risks and factors that may affect our future results. We qualify any forward-looking statements entirely by these cautionary factors.

 

The above-mentioned risk factors are not all-inclusive. Given these uncertainties and that such statements, speak only as of the date made; you should not place undue reliance on forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

3

 

 

PART I

 

ITEM 1. BUSINESS

 

Products and Services

 

For more information, www.vystarcorp.com, www.vytex.com.

 

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. In addition, Vystar manufactures and sells reduced allergen natural rubber latex used primarily in various bedding products.

 

Vystar has a majority ownership in Murida Furniture Co., Inc. dba Rotmans Furniture, the largest furniture and flooring store in New England and one of the largest independent furniture stores in the U.S.

 

Company Background

 

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 Volatile Organic Compounds (“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 UV Flu Technologies, Inc. For more information, visit http://www.RxAir.com

 

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).

 

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 (news video with RX3000)

 

Vystar acquired all UV Flu intellectual property, multiple patents, product lines, tooling, FDA clearances, research data, websites and other assets related to the business.

 

Vystar is the exclusive creator of Vytex Natural Rubber Latex (NRL), a multi-patented, all-natural, raw material that contains significantly reduced levels of the proteins found in natural rubber latex and can be used in over 40,000 products. Vytex NRL is a 100% renewable resource, environmentally safe, “green” and fully biodegradable. Vystar is working with manufacturers across a broad range of consumer and medical products bringing Vytex NRL to market in adhesives, gloves, balloons, condoms, other medical devices and natural rubber latex foam mattresses, toppers, and pillows.

 

Vytex is currently used in multiple mattress lines, including Symbol™ and Gold Bond®; Jeffco manufactured components for toppers and mattresses, which are sold to multiple manufacturers; and private label toppers, pillows and mattresses sold online via Amazon. Vytex is also used in industrial adhesives, apparel padding and threads, shoes, sports equipment and electrical gloves and Vytex 3D printed fabrics available through partners like Tami Care. Liquid Vytex can be ordered wholesale through Halcyon Agri’s RCMA and CentroTrade.

 

The Vytex business contains our global multi-patented technology that reduces antigenic and total protein in natural rubber latex products to virtually undetectable levels. Vytex NRL, our “ultra-low protein” natural rubber latex has been introduced throughout the worldwide marketplace that uses NRL or latex substitutes as a raw material for end products. Natural rubber latex or latex substitutes are used in an extensive range of products including balloons, textiles, footwear and clothing (threads), adhesives, foams (mattresses, pillows, mattress toppers, etc.), furniture (foam and adhesives), carpet, paints, coatings, protective equipment, sporting equipment, and, especially health care products such as condoms, surgical and exam gloves, among others. Our challenge has been that a manufacturer’s conversion from the use of standard latex or synthetic raw material to Vytex NRL involves a protracted sales cycle ranging from eighteen to thirty-six months. We have seen that same cycle apply to the newest version of Vytex NRL, a dry rubber sampling targeted for the tire and tubing industries. Additionally, in the past, our primary method of distribution was via toll manufacturing. We now have several licensing agreements in place for global distribution that have allowed us to focus on and transition to sales and marketing with a technical oversight.

 

Natural rubber latex is an agricultural product produced from the sap of the rubber tree, Hevea brasiliensis. In presentations at the 5th World Elastomer Conference held in Dusseldorf, Germany during early March 2018 it was noted that there was a slowing growth rate in global NR consumption and it was predicted demand would fall over the next two years. The numbers 1 and 2 producers (Thailand and Indonesia) had a modest fall in production while Malaysia, China and India showed a large negative gap between output and capacity mainly based on current low prices. Vietnam continues at 85 to 95% capacity. There is a huge natural rubber capacity surplus until the early 2030s and prices will remain flat through 2025. With growing substitution of synthetics, that an uptick in prices may not occur and based on the pricing of synthetics the market share competition may weigh more to synthetics.

 

4

 

 

Substantially all the latex processors are in Southeast Asia, India, Africa and Latin America and are owned by local groups or large multinational corporations. This future demand is awakening interest in other areas of the world where the climate is suitable, particularly in Guatemala, where focus now shifts to certifications from the Forestry Stewardship Council and Rainforest Alliance, as a specialty latex. In addition to the resurgence of Central and South America in natural rubber latex production, countries such as Vietnam, Cambodia and Cameroon have launched major efforts to meet the needs of the global liquid natural rubber latex market. Vietnam is now a major processor of our Vytex NRL. Several trial runs of the specialty offerings discussed below that are in place for manufacturer trials. We now have two producers in Guatemala, one in the trial phase.

 

Our initial product portfolio included Vytex NRL in high ammonia (HA) and low ammonia (LA) formulations. New specialized formulations are projected to come to market over the next year with trials in ultra-low ammonia, pre-vulcanized and low nitrosamine versions currently taking place. Vystar has used its technology to work with customers to solve production issues and provide them with a point of difference and guidance as research using Vytex has headed into directions previously thought to be off-limits to natural rubber latex. It appears to be the removal of the vast majority of the proteins, the carotenoids and the non-rubbers that affords Vytex NRL this opportunity.

 

Board of Directors Member and Research & Development Director Ranjit K. Matthan, Ph.D., revealed ongoing developments in the formulation of Vytex NRL with reduced or no ammonia and nitrosamines at the International Latex Conference (ILC) session titled “Advances in Environmentally Friendly Ultra Low Protein Natural Rubber Specialty Latices” on August 12, 2015. The significant advances in aluminum hydroxide-treated Vytex NRL properties and applications are potential game-changers for the issues of volatile organic content and nitrosamines for some critical latex products, such as balloons, catheters, condoms, and other medical devices, as well as enabling cleaner and more sustainable work environments. The expanded Vystar product grades make it applicable in a wider range of latex products with the advantage of improved environmental impact through reduced leachables/extractables. The advances deliver a simplified, sustainable, totally safe raw material that Vystar can offer for several applications without reservations about nitrosamines. Vystar has initiated a scale up to lab production of all three newer versions of Vytex NRL and has commenced a sample fulfillment mode with a significant manufacturer of women’s intimate apparel who is in the final testing stages of two of the grades (no ammonia and ultra-low ammonia) as possible replacements of their current raw materials.

 

At the Nuremberg Toy Show (Speilwarenmesse) Vytex NRL was a targeted product for manufacturers of balloons, masks, etc. As there is a new proposal for limits on protein content of balloons by virtue of an EN listing, Vytex has now gone in to full prevulcanized testing to start the sampling process in selected areas based on manufacturing needs.

 

Over the course of several years, our technical groups have presented technical papers of varying topics that still hold relevance. Vytex NRL is produced at the latex processor level and can be integrated into the current processing environments without additional capital equipment investment. The protein removal and modification process that leads to Vytex NRL allows manufacturers to lower manufacturing costs with the benefit of reduced protein levels. Reduced leaching times and resulting reductions in energy, water and material handling consumption can lead to realized cost savings.

 

Also, the article “Eco-Friendly Manufacturing of High-Performance Latex using Ultra Low Antigenic Protein Latex” reviewed some of the learnings Vystar had made since commercializing Vytex NRL. Among these discoveries were: improved air and helium retention in balloons; reduced leaching needs for some dipped products; truer colors for dyed dipped products (such as balloons); and low latex odor in foams, which has now led to unique research into areas previously considered off-limits to NRL. Vystar published and presented a paper, “Further Development of Vytex® Natural Rubber Latex Leads to Strong Niche Market Advances”, that added additional learnings related to slow release (memory) foam formulations and other technical improvements helping customers solve their new product development challenges.

 

Vystar has transitioned from toll manufacturing agreements to licensing agreements that eliminate the need to maintain a costly infrastructure along with the other investment and regulatory compliance costs to develop and operate a processing or manufacturing facility. All of these costs are or will be borne by our manufacturing and distribution contractors and/or customers. This means we must show the NRL producers and product manufacturers the economic value proposition of including Vytex NRL in their product lines, hence the technical paper presentations we have made and continue to make. In addition, as an all-natural raw material, Vytex NRL puts the main component in gloves and other products back in the environmentally friendly arena.

 

5

 

 

Additionally, in 2017, Vystar began trials to process various Vytex offerings, including pre-vulcanized grades, at Forteleza’s new facility in Guatemala with initial good results. This is an important strategic maneuver to handle demand in the North, Central and South American regions as well as certain areas of Southeast Asia. This will lead to a new agreement between the two companies upon successful completion of the trials.

 

In addition, in January 2009, we entered into a Distribution Agreement with Centrotrade Minerals & Metals, US and Centrotrade Deutschland, GmbH, Germany, a leading global distributor of latex raw materials, to create a worldwide distribution network that will further enhance our ability to cost effectively reach and service manufacturer customers in these key manufacturing areas. This provides an expansive distribution network that facilitates both the licensing and toll manufacturing models and can assist with various processors in taking their products to market. On December 19, 2012, we amended our agreement with Centrotrade to expand Vytex NRL distribution rights to the world’s largest NRL consuming markets in Southeast Asia, specifically Malaysia and Thailand. Under this new license agreement, Centrotrade controls production scheduling of Vytex NRL, inventory in Thailand, sales, pricing and customer financing, while Vystar will focus on marketing, customized product development, as noted above, and support activities. Vystar currently has no exclusive areas under contract as RCMA, a Dutch based distributor was added in 2016.

 

In December 2017 Halcyon Agri, the owners of Centrotrade, announced that they had acquired RCMA’s polymer group and would operate it under the Wurfbain label.

 

The paper entitled, “The Non-Enzymatic Deproteinization of Natural Rubber Latex (DPNRL) Enabling the Greater Versatility in End Product Applications” discussed improvements that extend beyond the ultra-low allergenicity of the DPNRL and include improved color, absence of rubber odor, and improved physicochemical attributes. Improved air and helium retentions results were reported. The potential to extend applications into other non-conventional areas other than latex end products was discussed and we are currently in the final retail test market stages for the United States based manufacturing of mattresses, pillows and toppers to key furniture stores and buying groups, primarily in the Northeastern United States and signed a 5 year renewable agreement in January 2015 with Nature’s Home Solutions (NHS) to exclusively distribute these products in the United States. In September 2016, the Vystar Board of Directors voted to end the January 2015 NHS agreement 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, the need for local warehousing, and access to container loads of foam cores and pillows for European and Asian manufacturers.

 

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.

 

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.

 

NHS was a related party transaction for Vystar, approved by NHS members, who are also major Vystar shareholders, business partners and insiders. Notable NHS members include:

 

  Lam Ngoc Minh, CEO of Lien ‘A, which is one of the world’s largest latex foam manufacturers, and a major producer of Vytex foam. Lien ‘A has worked closely with NHS to develop traditional and innovative new foam products;
  Keith Osborn, MD; member of Vystar Board of Directors, orthopedic spine surgeon and Vystar’s largest shareholder;
  Bryan Stone, MD, member of Vystar Board of Directors, nephrologist and CEO of Fluid Energy Conversion;
  Joseph Allegra, MD, Director at Oncology Molecular Imaging LLC, a Director & Owner at Cyber Logistics, Inc., a Founder at Diamond Investments II LLC and an Owner at Lincoln Lee Investments LLC; and
  Steven Rotman, now CEO of Vystar, and CEO of Rotmans Furniture and Carpet, a large independent furniture retailer.

 

6

 

 

On April 18, 2018, Vystar acquired assets of NHS for 27,769,500 shares of restricted common stock of Vystar valued at approximately $1.1 million. NHS assets included: current inventory, equipment and intellectual property related to product development.

 

Vytex is considered by many as one the best foam products in the world, as it is sustainably sourced; biodegradable; purer and more resilient and durable than competitors’ latex; virtually free of odor, VOCs and allergenic proteins; and competitively priced for a wide array of over 40,000 products. Vytex is available in many offerings such as low/no ammonia and low/no nitrosamine formulations, which are now being required in certain countries and by certain manufacturers. Vystar anticipates fulfilling this multi-billion-dollar market need with Vytex.

 

Vystar has also expanded licensing arrangements into the consumer arena, with the licensing of foam products produced with and labeled as “Made with Vytex NRL”. Specifically working with partners, to introduce foam made with Vytex into the mattress, mattress topper and pillow arenas aligning with key foam manufacturers, mattress, mattress toppers and pillow producers, and furniture stores in specific areas of the Unites States. In May 2018, Vystar announced acquisition with Worcester, MA based NHS who sources eco-friendly materials and technologies for use in furnishings and other markets. NHS has completed several trials with Vietnamese, European and Indian makers of foam products to use its Vytex NRL raw material in their current offerings in their own areas as well as to supply added needs for foam cores in both the mattress and topper arenas globally. The current requests from major mattress manufactures for Vytex foam trials involves different densities especially those used on the upper levels of mattresses. FA similar trial occurred in October 2016 in Thailand focusing on specific densities and pillows, and a meeting with a Belgian foam maker using a unique drying concept occurred in May 2016 with discussions ongoing. In addition, with the acquisition of NHS and working with a large Vietnamese foam manufacturer, Lien A, the group attended the International Sleep Products Association (ISPA) in Orlando in March 2016 and has followed that joint effort with ISPA 2018 and 2019. The significance of ISPA is the focus on components for use with major mattress and pillow manufacturers, which takes Vytex foam to an additional audience.

 

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. Included in stock subscription payable is $103,750 representing the shares to be issued to FEC in 2020 for these assets. 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 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.

 

Competition

 

Natural Rubber Latex

 

Synthetic raw materials such as ethylene, propylene, styrene and butadiene compete with NRL. Currently, it is estimated that NRL processors have lost one-half of the overall latex market to synthetic latex. Despite the switch to non-latex alternatives, it is estimated that almost 70% of exam gloves and nearly 80% of surgical gloves used in U.S. hospitals are still made with NRL.

 

7

 

 

During 2017 and 2018 Vystar contracted with two consultants and manufacturers to make exam and surgical gloves on an OEM basis. The testing and results were encouraging and led to further efforts prepare for a potential launch of these lines in 2020. The company is going to proceed with testing and subsequent filing with the US FDA to obtain 510(k) allowances. With this new OEM structure, the Company will bring several versions (surgical, exam, household, etc.) of the gloves to market under its own OEM brand label.

 

Several attempts, including new source crops, synthetic lattices and various treatment methods, have been made by competitors to eliminate problem proteins from Hevea NRL by biological, physical and/or chemical methods that act on proteins. One approach has been to introduce the latex articles to multiple leaching steps and chlorination. While it does reduce the protein levels in the finished product, it weakens the latex film thus compromising the desirable physical properties of the product. Another attempt to reduce proteins in NRL is the use of proteolytic enzymes to degrade the proteins in the latex solution but this approach introduces another protein (the enzyme) to the latex, which may itself be allergenic. Attempts to commercialize two other non-Hevea NRL materials have been made in the United States: guayule rubber latex and Taraxacum kok-saghyz, also known as the Russian dandelion. These materials are reported to be higher in cost compared to natural rubber latex and presently are available only in limited quantities.

 

These facts, coupled with the uncomplicated transition to the utilization of Vytex NRL, make it very attractive for processors to regain lost business by switching to Vytex NRL. We believe our unique patented technology offers a viable alternative to the marketplace. The licensing model will allow the message to spread through more sales channels than we could reach in the past.

 

Furniture Store

 

The retail sale of home furnishings is a highly competitive business. There has been growth in the e-commerce channel both from internet only retailers and those with a brick-and-mortar presence. We also compete with numerous individual retail stores as well as chains in our immediate geographic area.

 

Intellectual Property

 

Vystar has five issued patents by the United States Patent Trademark Office (“USPTO”) that were issued in 2005 (Patent No. 6,906,126), 2006 (Patent No. 7,056,970), 2011 (Patent No. 8,048,951) and 2012 (Patent No. 8,324,312). International patents include one issued patent from the Republic of South Africa in 2009 (2008/00886), a second foreign patent issued by China in 2011 (No. 200580051526.1), a third foreign patent issued by Japan in 2012 (No. 4944885) and a fourth foreign patent issued by Hong Kong in 2013 (HK1125959). In 2005, we sought international patent protection of our application that would become our U.S. Patent No. 6,906,126 pursuant to the Patent Cooperation Treaty (“PCT”) (No. PCT/US2005/025018), and this application has been nationalized in the following countries and regions: The European Union (No.05775523.3), Canada (No. 2,614,945), India (No.295/DELNP/2008), and Sri Lanka (No.14827). Additionally, this PCT was nationalized back into the United States to expand our protection to both method and composition claims (No.11/988,498). We expect patents to be issued in these countries without objection.

 

On January 18, 2012, we converted the provisional patent filed January 18, 2011 (No. 61/433,853) to full utility applications based on new discoveries and unexpected results (No. 13/374,851). We also sought international protection for the new developments and unexpected results reflected in this 2009 USPTO patent application through another PCT application (No. PCT/US2009/031445). This PCT application was nationalized in the following countries in 2010: the European Union (No. 09702339.4), Brazil (No. PI0906513-0), Guatemala (No. 2010-000208), India (No.2487/KOLNP/2010), Indonesia (No. W-00201002436), and Malaysia (No. PI2010003317). In addition, we filed the same patent application that was the subject of our USPTO patent application No. 12/356,355 and PCT/US2009/031445 directly into Thailand (No. 0901000201). Thailand has informed us our patent application is now published for open comments and Vystar has responded to various questions by Thailand’s patent office and is awaiting their response.

 

On January 18, 2017 Vystar was informed that the Indian Patent Office approved our application (2487/KOLNP/2010) entitled, “Natural Rubber Latex Having Reduced Allergenicity and Method of Making” under Patent Number 279323.

 

On February 8, 2017 Vystar received notice of grant from the Guatemalan Patent Office for application number 2010-000208 entitled, “Natural Rubber Latex Having Reduced Allergenicity and Method of Making” and is awaiting a grant number.

 

8

 

 

On October 27, 2017 Vystar was granted its second Indian patent (288824) from Application No.: 295/DELNP/2008 entitled: “Decreasing Allergenicity of Natural Latex Rubber Prior to Vulcanization.” The European Patent Office issued a Decision to Grant Vystar’s patent application under European Patent Number 1 902 089 titled “Decreasing Allergenicity of Natural Latex Rubber Prior to Vulcanization” greatly expanding the territory covered by the Company’s intellectual property portfolio. The mention of the grant was published in the European Patent Bulletin 13/35 dated 28 August 2013. Vystar selected the United Kingdom (065143-011612/UK), Germany (065143-011611/DE), and Austria (065143-001610/AT) as validation points for this specific patent.

 

In March 2019 Vystar Corp. was granted European, EP Patent No. 2238183 (its second European patent) entitled “Natural Rubber Latex Having Reduced Allergenicity and Method of Making Same.” Vystar now holds 13 foreign and 4 U.S. patents related to its latex deproteinization process for the production of Vytex®, a natural rubber latex (NRL) that is virtually free of allergen-causing latex proteins, for products including balloons, examination and surgical gloves, condoms, breather bags, latex tubing, probe covers, catheters, threads, foams, cold seal and pressure sensitive adhesives. Vystar has now broadened its protected areas in Europe to include additional manufacturing areas in Germany, the United Kingdom, France, Spain and Italy, which account for much of latex product manufacturing in Europe for another ten years.

 

On December 9, 2016 Vystar was notified by our Singaporean IP Counsel that Malaysia Application No PI 2010003317 entitled “Natural Rubber Latex Having Reduced Allergenicity and Method of Making” was cleared for issuance and that a Notice of Grant will be issued.

 

Vystar filed and has received registered trademark protected status in the United States for the marks “Vystar”, “Vytex” and “Created by Nature. Recreated by Science.” In 2010 Vystar filed for international trademark protection of “Vytex” in Malaysia (No.2010013149) and India (No. 1992991), which was granted in India. On November 18, 2014, the Company was informed that the “VYTEX” trademark was registered in Malaysia effective May 30, 2014. The aforementioned trademarks have been renewed successfully in each period as required.

 

While we believe that the pending patent and trademark applications will be granted without objection, there are no guarantees that all such patents or trademarks will be granted by each relevant governing body. No assurance can be given that such patent and trademark protection will provide substantial protection from competition. We realize that the market for Vytex NRL is an industrialized world concern and we are committed to aggressively challenging any infringements of our patents and/or trademarks. As of December 31, 2019, Vystar has expended, since inception, approximately $370,245 on such patent and trademark costs and has budgeted approximately $30,000 more for the year ended December 31, 2020 to continue to pursue and maintain its patents and trademarks around the world

 

Government Regulation

 

In the United States, healthcare and many food and food-based packaging products are subject to regulation by the Food and Drug Administration (FDA). Vystar is not directly subject to regulation by the FDA due to the fact that it does not manufacture a finished medical device or other product, but only provides Vytex NRL as a component or raw material to healthcare or other product manufacturers. However, there will be FDA regulation of the labeling of healthcare and food-based packaging products that are produced with Vytex NRL and the FDA has promulgated standards for good manufacturing practices for manufacturing the end products, which makes the end product manufacturers responsible for seeing that all of their components and component manufacturers, including Vytex NRL, are produced using quality manufacturing processes. Additionally, the FDA prohibits the use of the term “hypoallergenic” or “low protein” on any natural rubber latex product it regulates. In order to make any such claim, the latex product manufacturer must seek a waiver from the FDA of such regulatory prohibitions. Commentary by the FDA in its guidance documents and other rulings indicate that the prohibition on the use of the “hypoallergenic” or “low protein” label is based, at least in part, on the fact that, although the use of such terms in such labeling may be intended to indicate that the risk of allergic reaction to residual levels of processing chemicals has been reduced, consumers may interpret the labeling to mean that the risk of allergic reactions to any component in the device would be minimal. Thus, the hypoallergenic or low protein label is deemed misleading. There can be no assurance, however, that we will succeed in securing FDA approval for any claim regarding the “hypoallergenic” “low protein” or reduced allergy potential of latex produced with the Vytex NRL process. Failure to secure, if required, such FDA approval, could delay or otherwise detrimentally affect our introduction to natural rubber latex healthcare and/or food packaging products regulated by the FDA. Notwithstanding, the medical or food packaging manufacturer will be able to use the Vytex NRL trademark on its label if size permits to indicate only that the Vytex NRL component was used in the production of the healthcare product, and what protein levels the end product does contain, but no further claim is asserted. We have been able to provide sufficient testing data to the FDA to support our protein level claims with respect to the natural rubber latex antigenic and total proteins present in end products made with Vytex NRL. On May 1, 2009, a condom manufactured from Vytex NRL received 510(k) clearance from the U.S. Food and Drug Administration. This was the first medical product available in the U.S. made from Vytex NRL, which had less than 2 micrograms/dm2, virtually undetectable levels, of the antigenic proteins that cause an allergic response, while retaining and improving upon all of the desirable qualities of latex. This condom is a predicate device for future products and the 510(k) is still in existence. Vystar continues to seek other U.S. and global manufacturers interested in pursuing similar claims for products.

 

9

 

 

On July 22, 2009, a non-powdered medical exam glove manufactured with Vytex NRL received 510(k) clearance from the FDA, with an approved claim of less than 50 micrograms/gram of total proteins. As with the condom product, Vystar continues to pursue U.S. and global manufacturers using this exam glove as a predicate device and to help fill pending exam glove business. Late in 2016 the FDA banned the use of powder in medical gloves which took effect early in 2017 advantaging the position of the Vytex non-powdered exam glove.

 

Inflation and Seasonality

 

We do not believe that our operations are significantly impacted by inflation. Our NRL business is not seasonal in nature but is subject to commodity pricing. Our NRL product is a commodity-based raw material and prices for such material fluctuate from day-to-day, though this will have less impact as we transition to sales via licensing fees. Our furniture business is affected by traditional retail seasonality, advertising and promotion programs and general economic trends.

 

Employees

 

As of December 31, 2019, Vystar had three employees, including Steven Rotman, CEO. Rotmans had 109 full-time and 28 part-time employees. None of the employees are represented by a labor organization or a party to any collective bargaining arrangement.

 

Corporate Information

 

Vystar Corporation is a Georgia corporation that was incorporated in 2003. Our predecessor company, Vystar LLC, was formed by our founder, Travis Honeycutt, in February 2000 as a Georgia limited liability company.

 

Our principal mailing address is 725 Southbridge St., Worcester, MA 01610. Our website address is www.vytex.com & www.vystarcorp.com.

 

The information contained on, or that can be accessed through, our website is not a part of this Report. We have links on our website to reports, information statements, and other information that we file electronically with the Securities and Exchange Commission, or SEC, at the Internet website maintained by the SEC, www.sec.gov. In addition to visiting our website and the SEC’s website, you may read and copy public reports we file with or furnish to the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

ITEM 1A. RISK FACTORS

 

Our business is subject to a number of risks and uncertainties — many of which are beyond our control — that may cause our actual operating results or financial performance to be materially different from our expectations. If one or more of the events discussed below were to occur, actual outcomes could differ materially from those expressed in or implied by any forward-looking statements we make in this report or our other filings with the SEC, and our business, financial condition, results of operations or liquidity could be materially adversely affected; furthermore, the trading price of our common stock could decline and our shareholders could lose all or part of their investment.

 

10

 

 

Vystar presently does not generate the cash needed to finance its current and anticipated operations.

 

The Company has had very limited revenue in its history prior to 2011 and transitioned from the development stage to the operational stage during the fourth quarter of 2009. The Company is still in the early stage of establishing our business including attracting new customers and increasing sales. Our financial success will be dependent upon the soundness of our business concept, our management’s ability to successfully and profitably execute our plan, and our ability to raise additional capital.

 

Our limited operating history makes it difficult to evaluate our business. We expect to make significant future operating expenditures to develop and expand our business into areas such as OEM product lines and offerings in the mattress and furniture arenas. We may incur significant losses in the future for a number of reasons, including due to the other risks described in this Report, and we may encounter unforeseen expenses, difficulties, complications and delays and other unknown events. Accordingly, we may not be able to achieve or maintain profitability, and we may incur significant losses for the foreseeable future. See additional discussion under Liquidity and Capital Resources.

 

At December 31, 2019 our cash position was $72,355 and we had an accumulated deficit of $41,104,967. We plan to finance our operations for the next twelve (12) months through the use of cash on hand, stock warrant exercises from existing shareholders, raising capital through private placement and increased sales from RxAir products by exploring sales partnerships with third-party wholesalers and retailers. The Company is also evaluating adopting a consignment-based sales model at Rotmans. You should consider, among other factors, our prospects for success in light of the risks and uncertainties encountered by companies that, like us, have not generated net earnings on an annual basis. Various factors, such as economic conditions, regulatory and legislative considerations, and competition, may also impede our ability to expand our market presence. We may not successfully address these risks and uncertainties or successfully implement our operating strategies. If we fail to do so, it could materially harm our business and impair the value of our common stock. Even if we accomplish these objectives, we may not generate positive cash flows or profits we anticipate in the future.

 

The following risk factors apply to our Vytex business:

 

Our Vytex operating results could fluctuate and differ considerably from our financial forecasts.

 

Our business model is based on assumptions derived from (i) the experience of the principals of the Company, and (ii) third party market information and analysis. There are no assurances that these assumptions will prove to be valid for our future operations or plans.

 

Our operating results may fluctuate significantly as a result of a variety of factors, including:

 

  Acceptance by manufacturers of the Vytex Natural Rubber Latex technology;
     
  Our ability to achieve and sustain profitability;
     
  Consumer confidence in products manufactured using our Vytex Natural Rubber Latex technology;
     
  Our ability to raise additional capital.

 

Our Vytex NRL business is totally dependent on market demand for, and acceptance of, the Vytex Natural Rubber Latex process.

 

We expect to derive most of our Vytex NRL business revenue from the sales of our Vytex Natural Rubber Latex raw material to various manufacturers of rubber and rubber end products using NRL through our distribution agreement with Centrotrade Deutschland. We pay natural rubber latex processors a fee for the service of manufacturing and creating Vytex NRL for us under our toll manufacturing agreements. Conversely, Vystar collects a fee under the Centrotrade and Occidente (PICA) licensing models. The agreement in the bedding and furniture industries with NHS also provides income based on a license model. Our Vytex NRL product operates within broad, diverse and rapidly changing markets. As a result, widespread acceptance and use of product is critical to our future growth and success. If the market for our product fails to grow or grows more slowly than we currently anticipate, demand for our product could be negatively affected.

 

11

 

 

Our ability to generate significant revenue in the Vytex business is substantially dependent upon the willingness of consumers to make discretionary purchases and the willingness of manufacturers to utilize capital for research and development and the retooling of their manufacturing process, both of which are impacted by the state of the economy.

 

The current state of the world economy has and likely will in the future impact upon our ability to increase revenue. Certain products that we anticipate will be manufactured with our Vystar NRL process, such as mattresses and sponge products, are considered discretionary consumer purchases which decline during economic downturns. Additionally, certain manufacturers who might otherwise utilize the Vytex NRL process in the manufacturing of products with NRL have determined not to expend capital to complete the research of the Vytex NRL process or to retool their manufacturing process because of the general downturn in the economy. As part of a strategy to increase awareness of the Vytex NRL brand, the Company has been aggressively seeking to have end products produced and labeled “made with Vytex NRL” such as mattresses, toppers and pillows. As these products enter the market, the Company plans to create consumer awareness of these end products and in so doing begin to develop consumer demand pull through as part of the Company’s efforts to complete the push-pull cycle using an ingredient branding strategy.

 

Assertions by a third party that our Vytex process infringes its intellectual property, whether or not correct, could subject us to costly and time-consuming litigation or expensive licenses.

 

There is frequent litigation based on allegations of infringement or other violations of intellectual property rights. As we face increasing competition and become increasingly visible as an operating company, the possibility of intellectual property rights claims against us may grow.

 

Any intellectual property rights claim against us or our customers, with or without merit, could be time-consuming, expensive to litigate or settle and could divert management attention and financial resources. An adverse determination also could prevent us from offering our process, require us to pay damages, require us to obtain a license or require that we stop using technology found to be in violation of a third party’s rights or procure or develop substitute services that do not infringe, which could require significant resources and expenses.

 

The latex market in which we will participate is competitive and if we do not compete effectively, our operating results may be harmed.

 

The markets for our product are competitive and rapidly changing. With the introduction of new technologies, increasing scrutiny of alternative lattices such as Russian dandelion, and new market entrants, we expect competition to intensify in the future. In addition, pricing pressures and increased competition generally could result in reduced sales, reduced margins or the failure of our products to achieve or maintain widespread market acceptance.

 

While early interest was strong in a new innovative product in the natural rubber latex industry, pricing and regulatory approvals remain a key selling factor especially in the exam glove arena. There is no exam glove manufacturer signed to date that has accepted Vytex NRL into its product mix.

 

Our Vytex revenue will vary based on fluctuations in commodity prices for NRL.

 

NRL is a commodity and, as such, its price fluctuates on a daily basis. Our raw material revenue including licensing fees and cost of goods will also fluctuate upward or downward based upon changing market prices for the raw material used to produce Vytex NRL. Prolonged periods of lowered market prices can also cause manufacturers to review synthetic price drops as they look for even lower cost alternatives to NRL.

 

While Vytex NRL has received 510(k) clearance from the FDA for condoms and exam gloves, there is no assurance that future applications will be cleared.

 

In order for Vytex to be used in medical device applications, the manufacturer of the end product must submit an application to the FDA. If the device is classified by the FDA as Class II (e.g., condoms, surgical gloves, and most non-cardiac and non-renal/dialysis catheters) and in some cases Class I (e.g., exam gloves), a 510(k) application must be filed with the FDA seeking clearance to market the device based on the fact that there is at least one other predicate or similar device already marketed. If the product is classified as a Class III product (e.g., most cardiac and renal/dialysis catheters, certain adhesives and other in vivo devices), or is otherwise a new device with no predicate on the market already, then the manufacturer of the end product must submit a Pre-Market Approval (“PMA”) application seeking approval by the FDA to market the device. The PMA approval process is much more in depth and lengthy and requires a greater degree of clinical data and FDA review than does a 510(k) clearance process.

 

12

 

 

Since Vytex is a raw material and not an end-product, Vystar is not the entity that files with the FDA for any clearance or approval to market a device. Instead, the end-product manufacturers who will be selling and marketing the device(s) must submit applications and seek FDA clearance or approval depending upon the device classification. Vystar’s role in this process is only as background support to the manufacturers to supply information and any technical or test data regarding the Vytex raw material.

 

An American manufacturer of condoms and exam gloves had been engaged in production work and had completed required testing and received FDA clearance for using Vytex NRL in their condom and exam glove lines. However, this manufacturer is not currently producing products made with Vytex NRL or any other type of raw material. Notwithstanding such approvals, we have no assurance that future products will provide acceptable test results and even if they do, there is no certainty that the FDA will approve the applications.

 

Each of the above mentioned 510(k)s have been sold to other manufacturers hence the need to pursue 510(k)s for the newer manufacturing facilities.

 

Vytex may seek to have lower protein claims than what is currently on the market today for exam gloves and may ultimately seek to have latex warnings removed from or modified on all FDA-regulated products, but it cannot guarantee that either of such actions will be approved by the FDA.

 

The FDA heavily scrutinizes any and all claims categorizing the protein levels and other claims of an NRL product. Currently, the FDA has allowed claims only stating the level of less than 50 micrograms/gram of total extractable proteins pursuant to only one of two FDA-recognized standards on exam or surgical gloves. Vystar intends to claim protein levels pursuant to both of the two FDA-recognized standards, which will result in claiming the lowest level of antigenic proteins for a Hevea NRL product currently on the market. Although the FDA has cleared such claims on the condom using Vytex NRL, the FDA rejected those claims for the exam glove. There is no guarantee that the FDA will ultimately or ever allow these claims on an exam glove.

 

Additionally, for many years, the FDA has required warnings on products containing latex due to the latex allergy issue that exists. Vystar plans on petitioning the FDA to have that label removed from or modified on products manufactured with Vytex NRL, by filing a Citizen’s Petition. The Petition will be filed when we see that the benefits of filing will far outweigh the costs since such Petition is likely to require clinical test results indicating acceptable allergic reactions associated with Vytex NRL. There are no assurances that the FDA will grant that request.

 

Manufacturers are implementing trials of Vytex NRL in their facilities but final data is not yet available from all these manufacturers on its viability for their particular environments.

 

Over the past several years, samples of Vytex NRL have been made available to over 50 natural rubber latex and latex substitute end product manufacturers, 30 of which have been in place since early 2009. Since the completion of the Vytex NRL Standard Operation Procedures (SOPs), Vytex has been produced at Revertex (Malaysia), Occidente (Guatemala), KAPVL (India) and most recently Mardec-Yala (Thailand) and MMG (Thailand). Manufacturers that have signed a ‘sampling’ agreement with us have been provided with samples of Vytex NRL for validating its use in their manufacturing processes. To date, a number of manufacturers have completed those runs and feedback is often minimal. Although most feedback to date has been positive, there is no assurance that such feedback will continue to be satisfactory.

 

Another risk is the validity of the customer as testing completes. Recently Vystar has completed more than three years of a specialized version of Vytex NRL only to have the end product manufacturer fail to upgrade their production line and fulfill their own contract.

 

13

 

 

As part of the Company’s learnings, we have found that in listening closely to customer challenges and needs, our technical team has been able to develop solutions. The Company has come to realize that what we offer is not just a raw material but often a technology solution to a production or product development challenge.

 

While many of these new formulations look promising, there is no guarantee that these technological innovations will be successfully scaled up or successfully implemented by the customer.

 

The following risk factors apply to our furniture business:

 

We face a volatile retail environment and changing economic conditions that may further adversely affect consumer demand and spending.

 

Historically, the home furnishings industry has been subject to cyclical variations in the general economy and to uncertainty regarding future economic prospects. Should the current economic recovery falter or the current recovery in housing starts stall, consumer confidence and demand for home furnishings could deteriorate which could adversely affect our business.

 

Our retail store faces significant competition from national, regional and local retailers of home furnishings, including increasing on-line competition via the internet.

 

The retail market for home furnishings is highly fragmented and intensely competitive. We currently compete against a diverse group of retailers, including national department stores, regional or independent specialty stores, and dedicated franchises of furniture manufacturers. National mass merchants such as Costco also have limited product offerings. We also compete with retailers that market products through store catalogs and the internet. In addition, there are few barriers to entry into our current and contemplated markets, and new competitors may enter our current or future markets at any time. We have also seen increasing competition from retailers offering consumers the ability to purchase home furnishings via the internet for home delivery, and this trend is expected to continue. Our existing competitors or new entrants into our industry may use a number of different strategies to compete against us, including aggressive advertising, pricing and marketing, extension of credit to customers on terms more favorable than we offer, and expansion into markets where we currently operate.

 

Competition from any of these sources could cause us to lose market share, revenues and customers, increase expenditures or reduce prices, any of which could have a material adverse effect on our results of operations.

 

Failure to successfully anticipate or respond to changes in consumer tastes and trends in a timely manner could adversely impact our business, operating results and financial condition.

 

Sales of our furniture are dependent upon consumer acceptance of specific designs, styles, quality and price. As with all retailers, our business is susceptible to changes in consumer tastes and trends. We attempt to monitor changes in consumer tastes and home design trends through communication with our design consultants who provide valuable input on consumer tendencies. However, such tastes and trends can change rapidly and any delay or failure to anticipate or respond to changing consumer tastes and trends in a timely manner could adversely impact our business, operating results and financial condition. In addition, certain suppliers may require extensive advance notice of our requirements in order to produce products in the quantities we desire. This long lead time may require us to place orders far in advance of the time when certain products will be offered for sale, thereby exposing us to risks relating to shifts in consumer demand and trends, and any downturn in the U.S. economy.

 

The following risk factors apply to our company as a whole:

 

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.

 

14

 

 

As the COVID-19 pandemic is complex and rapidly changing, the full extent and duration of the impact of COVID-19 on the Company’s operation and financial performance is currently unknown and depends on future developments that are uncertain and unpredictable, including the duration and spread of the pandemic, its impact on capital and financial markets.

 

Our use of foreign sources of production for a portion of our products exposes us to certain additional risks associated with international operations.

 

Our use of foreign sources for the supply of certain of our products exposes us to risks associated with overseas sourcing. These risks are related to government regulation, volatile ocean freight costs, delays in shipments, and extended lead time in ordering. Governments in the foreign countries where we source our products may change their laws, regulations and policies, including those related to tariffs and trade barriers, investments, taxation and exchange controls which could make it more difficult to service our customers resulting in an adverse effect on our earnings. We could also experience increases in the cost of ocean freight shipping which could have an adverse effect on our earnings. Shipping delays and extended order lead times may adversely affect our ability to respond to sudden changes in demand, resulting in the purchase of excess inventory in the face of declining demand, or lost sales due to insufficient inventory in the face of increasing demand, either of which would also have an adverse effect on our earnings or liquidity.

 

Because our stock price may be volatile due to factors beyond our control, you could lose all or part of your investment.

 

Price and volume of stock, including additional stock issuances may cause price decline and dilution.

 

If we do not attract and retain highly qualified employees, we may not be able to grow effectively.

 

Our ability to compete and grow depends in large part on the efforts and talents of our executive officers or employees. We require the key employee(s) to enter into employment agreements, but in the U.S., employees are free to leave an employer at any time without penalties. The loss of key employees or the inability to hire additional skilled employees as necessary could result in significant disruptions of our business, and the integration of replacement personnel could be time-consuming and expensive and cause us additional disruptions.

 

We do not expect to declare any dividends in the foreseeable future.

 

We do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future. Consequently, shareholders must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our common stock.

 

There is no assurance that any significant public market for our shares of common stock will develop.

 

While our shares of common stock trade on the OTC Bulletin Board under the symbol “VYST”, there is currently no significant public market for our common stock and there is no assurance that there will be any such significant public market for our common stock in the future.

 

15

 

 

The utilization of our tax losses could be substantially limited if we experience an ownership change as defined in the Internal Revenue Code.

 

Because of net operating losses we have experienced for federal income tax purposes at December 31, 2019, we had federal net operating loss (“NOL”) carry-forwards of approximately $26.0 million ($20.0 million for 2018) available to offset future taxable income. Our ability to utilize NOL carry-forwards to reduce future taxable income may be limited under Section 382 of the Internal Revenue Code if certain ownership changes in our Company occur during a rolling three-year period. These ownership changes include purchases of common stock under share repurchase programs, the offering of stock by us, the purchase or sale of our stock by 5% shareholders, as defined in the Treasury regulations, or the issuance or exercise of rights to acquire our stock. If such ownership changes by 5% shareholders result in aggregate increases that exceed 50 percentage points during the three-year period, then Section 382 imposes an annual limitation on the amount of our taxable income that may be offset by our NOL carry-forwards or tax credit carry-forwards at the time of ownership change. The limitation may affect the amount of our deferred income tax asset and, depending on the limitation, a significant portion of our NOL carry-forwards or tax credit carry-forwards could expire before we are able to use them. In such an event, our business, financial condition, results of operations or cash flows could be adversely affected. We believe we have not experienced an ownership change under Section 382 of the Internal Revenue Code as of December 31, 2019; however, the amount by which our ownership may change in the future could be affected by purchases and sales of stock by 5% shareholders and new issuances of stock by us, should we choose to do so.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

Although we believe that our current space is adequate for the foreseeable future, if additional office space is required, we believe that suitable space will be available at market rates.

 

ITEM 3. LEGAL PROCEEDINGS

 

EMA Financial

 

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. 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.

 

On March 13, 2020, the Court granted the Company’s motion and denied the motion for summary judgment as moot.

 

The Company subsequently filed an amended answer with counterclaims. The affirmative defenses collectively preclude the relief sought. The counterclaims asserted are: (a) violation of 10(b)(5) of the Securities and Exchange Act; (b) violation of Section 15(a)(1) of the Exchange Act (failure to register as a broker-dealer); (c) pursuant to the Uniform Declaratory Judgment Act, 28 U.S.C. §§ 2201, the Company requests the Court to declare: (i) pursuant to Delaware law, the underlying agreements are unconscionable; (ii) the underlying agreements are unenforceable and/or portions are unenforceable, such as the liquidated damages sections; (iii) to the extent the agreement is enforceable, Vystar in good faith requests the Court to declare the legal fee provisions of the agreements be mutual (d) unjust enrichment; (e) breach of contract (in the alternative); and (f) attorneys’ fees.

 

Discovery has recently commenced. No discovery responses have been served. EMA recently requested leave to file a motion to dismiss the counterclaims and for summary judgment on the remaining breach of contract claim. The Court granted the right to file the motions.

 

16

 

 

Robert LaChapelle Class Action

 

On March 13, 2020, Robert LaChapelle, a former employee of Rotmans Furniture, the Company’s majority owned subsidiary, on behalf of himself and all others similarly situated, filed a class action complaint against Rotmans and two of its prior owners (including Steve Rotman, President of the Company) in the Worcester Superior Court alleging non-payment of overtime pay and Sunday premium pay pursuant to the Massachusetts Blue Laws (Ch. 136), the Massachusetts Overtime Law (Chapter 151, § 1A), and the Massachusetts Payment of Wages Law (Chapter 149 §§148 and 150). Specifically, LaChapelle has alleged that Rotmans failed to pay him and other salespeople who were paid on a commission-only basis overtime pay at a rate of least 1.5 times the basic minimum wage or premium pay (also at 1.5 times the basic minimum wage) for hours they worked on Sundays. Rotmans is in the process of investigating these claims to determine whether it may be liable to the members of the putative class for unpaid overtime and Sunday pay and, if so, the approximate amount of such amounts.

 

Eric Maas Lawsuit

 

The Company and members of its Board of Directors, and certain employees and consultants, have been added as defendants in the case Maas v. Zymbe, LLC, et. al. The complaint was recently moved from Superior Court of the State of California to Federal District Court in California. The amended complaint alleges various employment, contract, and tort claims, including defamation, arising out of a dispute over the quality and utility of consulting and other services provided by Mr. Eric Maas, including through his dealings with Mr. Jason Leaf and Mr. Gregory Rotman. The original litigation was filed in 2017.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

PART II.

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND PURCHASES OF EQUITY SECURITIES

 

Market Price Information

 

Our common stock is traded in the United States on the Over the Counter Bulletin Board (OTCBB) under the symbol “VYST.” The following table shows the range of high and low closing prices for our common stock.

 

    High     Low  
December 31, 2018            
             
First Quarter   $ 0.08     $ 0.02  
                 
Second Quarter   $ 0.08     $ 0.04  
                 
Third Quarter   $ 0.08     $ 0.01  
                 
Fourth Quarter   $ 0.03     $ 0.006  
                 
December 31, 2019                
                 
First Quarter   $ 0.06     $ 0.007  
                 
Second Quarter   $ 0.08     $ 0.04  
                 
Third Quarter   $ 0.04     $ 0.03  
                 
Fourth Quarter   $ 0.03     $ 0.01  

 

17

 

 

Holders of Record

 

As of December 31, 2019, there were 237 holders of record of our common stock. Because some of our shares are held by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of stockholders represented by these record holders.

 

Dividend Policy

 

We have never paid or declared any cash dividends on our common stock and we do not intend to pay or declare dividends on our common stock in the near future. We presently expect to retain any future earnings to fund continuing development and growth of our business. Our payment of dividends is subject to the discretion of our board of directors and will depend on earnings, financial condition, capital requirements and other relevant factors.

 

Issuer Purchases of Equity Securities

 

We repurchased 30,000 shares of our equity securities during the 2019 fiscal year for $30.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

Information concerning our equity compensation plans is set forth in Item 12 of Part III of this Annual Report on Form 10-K.

 

Recent Sales of Unregistered Securities

 

Common Stock and Warrant Grants

 

From January 1, 2019 through December 31, 2019, we issued 142,538,209 shares of our common stock valued at $2,642,936 for services rendered to the Company in 2019, 155,226,844 shares were issued for cash for $606,300, 77,912,991 shares were issued for settlement of warrants at $394,250 and 45,000,000 shares were issued for conversion of related party line of credit valued at $1,977,935. During the period, 227,336,218 shares of common stock valued at $1,343,664 were issued upon the conversion of convertible notes including accrued interest and settlement of derivatives.

 

Stock Option Grants

 

There were no stock option grants issued from January 1, 2019 through December 31, 2019.

 

Proceeds from loans and shareholder, convertible and contingently convertible notes payable

 

From January 1, 2019 through December 31, 2019, the Company issued certain contingently convertible promissory notes in varying amounts, in the aggregate of $713,700, to existing shareholders including a $100,000 note to Steven Rotman. The face amount of the notes represents the amount due at maturity in two years, along with accrued interest at a rate of 5%, at which time that amount may be converted into shares of the Company stock 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.

 

On June 30, 2019, the Company issued contingently convertible promissory notes totaling $180,000 to Steven Rotman ($105,000) and Greg Rotman ($75,000). The notes bear interest at a rate of 8%, are convertible at the Company’s option after December 31, 2019 and mature in five years. If converted. The notes plus 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.

 

18

 

 

On July 18, 2019, the Company issued contingently convertible promissory notes totaling $1,522,500 to Steven Rotman ($1,102,500) and Bernard Rotman ($420,000) as partial consideration for the acquisition of Rotmans (see Note 18). These notes bear interest at a rate of 8% and 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 remaining consideration for the Rotmans acquisition were nonconvertible notes totaling $507,500 to Steven Rotman ($367,500) and Bernard Rotman ($140,000). These 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.

 

Application of Securities Laws and Other Matters

 

No underwriters were involved in the foregoing sales of securities. The securities described above 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.

 

The issuance of stock options as described above were issued pursuant to written compensatory plans or arrangements with our employees, directors and consultants, in reliance on the exemption provided by Rule 701 promulgated under the Securities Act. All recipients either received adequate information about us or had access, through employment or other relationships, to such information.

 

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 above included appropriate legends setting forth that the securities had not been registered and the applicable restrictions on transfer.

 

ITEM 6. SELECTED FINANCIAL DATA

 

As a smaller reporting company, we are not required to provide the information required by this Item pursuant to 301(c) of Regulation S-K.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This analysis of our results of operations should be read in conjunction with the accompanying financial statements, including notes thereto, contained in Item 8 of this Report. This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. Statements that are predictive in nature and that depend upon or refer to future events or conditions are forward-looking statements. Although we believe that these statements are based upon reasonable expectations, we can give no assurance that projections will be achieved. Please refer to the discussion of forward-looking statements included in Part I of this Report.

 

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.

 

19

 

 

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 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 Furniture and as of December 18, 2017 is the CEO of Vystar and 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 ISPA 2016 (International Sleep Products Association) held in Orlando, FL and ISPA 2017 in Tampa, FL and attended 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 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.

 

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.

 

20

 

 

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’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. (see news video with RX3000 in use)

 

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 (news video with RX3000)

 

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.

 

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. Included in stock subscription payable is $103,750 representing the shares to be issued to FEC in 2020 for these assets. 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 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 annual 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.

 

Manufacturing, Distribution and Sales

 

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 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 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%.

 

21

 

 

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

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. As such, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. Our management reviews its estimates on an on-going basis. We base our estimates and assumptions on historical experience, knowledge of current conditions and our understanding of what we believe to be reasonable that might occur in the future considering available information. Actual results may differ from these estimates, and material effects on our operating results and financial position may result.

 

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

 

Fair Value Inputs Related to Share-based and Other Equity Compensation

 

Generally accepted accounting principles require all share-based payments, including grants of employee stock options, stock grants and warrants, to be recognized in the financial statements based on their fair values. We compute the value of option awards granted by utilizing the Black-Scholes valuation model based upon their expected lives, expected volatility, expected dividend yield, and the risk-free interest rate. The value of the awards is then straight-line expensed over the service period of the awards. Issuance in shares of common stock is valued using the closing market price on the measurement date.

 

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 inventories on a regular basis. Approximate consideration is given to obsolescence, slow-moving and other factors in evaluating net realizable values. Inventories not expected to be sold within 12 months is classified as long-term.

 

Revenue

 

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. Consideration is typically paid prior to shipment via credit card or check when our products are sold direct to consumers, which is typically within a 1 to 2 days or approximately 30 days from the time control is transferred when sold to wholesalers, distributors and retailers. 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 product sales.

 

22

 

 

Impairment Analyses

 

We review long-lived assets such as property and equipment for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. If the total of the estimated undiscounted future cash flows is less than the carrying value of the assets, an impairment loss is recognized for the excess of the carrying value over the fair value of the long-lived assets.

 

Accounting for Derivative Financial Instruments

 

The Company evaluates stock options, stock warrants, notes payable 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 ASC 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 that 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 815-40 are reclassified to a liability account at the fair value of the instrument on the reclassification date.

 

Purchase Accounting for Acquisition

 

In 2019, the Company acquired Murida Furniture Co., Inc. Acquisition of a business requires companies to record assets acquired and liabilities assumed at their respective fair market value at the date of acquisition. Any amount of the purchase price paid in excess of the estimated fair value of the net assets acquired is recorded as goodwill. The Company determined the fair value of Murida Furniture Co., Inc. using widely accepted valuation techniques. In addition, proper accounting for any acquisition required the Company to record the transactions of the acquired entity in the Company’s financial statements from the date of acquisition and forward.

 

Leases

 

The Company has adopted and implemented ASC 842, Leases, where the Company recognized right-of use assets and lease liabilities. For leases in which the acquiree is a lessee, the Company measured the lease liability at the present value of the remaining lease payments, as if the acquired lease were a new lease at the acquisition date. The Company measured the right-of-use asset at the same amount as the lease liability as adjusted to reflect favorable and unfavorable terms of the lease when compared with market terms.

 

23

 

 

RESULTS OF OPERATIONS

 

Year ended December 31, 2019 compared to year ended December 31, 2018

 

    Year Ended December 31,  
    2019     2018     $ Change     % Change  
    CONSOLIDATED  
                         
Revenue   $ 13,685,872     $ 342,049     $ 13,343,823       3901.1 %
                                 
Cost of revenue     7,332,271       385,803       6,946,468       1800.5 %
                                 
Gross profit (loss)     6,353,601       (43,754 )     6,397,355       14621.2 %
                                 
Operating expenses:                                
Salaries, wages and benefits     3,355,593       -       3,355,593       100.0 %
Share-based compensation     2,968,898       1,285,938       1,682,960       130.9 %
Professional fees     1,132,251       1,961,328       (829,077 )     -42.3 %
Advertising     1,050,459       77,467       972,992       1256.0 %
Rent     570,779       -       570,779       100.0 %
Service charges     436,183       -       436,183       100.0 %
Depreciation and amortization     444,890       145,046       299,844       206.7 %
Other operating     1,335,204       201,577       1,133,627       562.4 %
                                 
Total operating expenses     11,294,257       3,671,356       7,622,901       207.6 %
                                 
Loss from operations     (4,940,656 )     (3,715,110 )     (1,225,546 )     33.0 %
                                 
Other income (expense):                                
Gain (loss) on settlement of debt     (327,433 )     108,854       (436,287 )     -400.8 %
Interest expense     (1,390,407 )     (673,277 )     (717,130 )     106.5 %
Change in fair value of derivative liabilities     (1,079,450 )     (269,539 )     (809,911 )     300.5 %
Loss on impairment     -       (848,462 )     848,462       -100.0 %
Other income (expense)     12,395       (3,688 )     16,083       436.1 %
                                 
Total other expense, net     (2,784,895 )     (1,686,112 )     (1,098,783 )     65.2 %
                                 
Net loss     (7,725,551 )     (5,401,222 )     (2,324,329 )     43.0 %
                                 
Net loss attributable to noncontrolling interest     20,929     -       20,929     100.0 %
                                 
Net loss attributable to Vystar   $ (7,704,622 )   $ (5,401,222 )   $ (2,303,400 )     42.6 %

  

Revenues

 

Consolidated revenues for the year ended December 31, 2019 and 2018 were $13,685,872 and $342,049, respectively, for an increase of $13,343,823 or 3,901%. The increase in revenues from operations was principally due to the acquisition of Rotmans.

 

Consolidated gross profit (loss) for the year ended December 31, 2019 and 2018 were $6,353,601 and $(43,754), respectively, for an increase of $6,397,355 or 14,621%. Consolidated cost of revenue for year ended December 31, 2019 and 2018 was $7,332,271 and $385,803, respectively, an increase of $6,946,468 or 1,801%. The increase in gross profit and cost of revenue was mainly due to the acquisition of Rotmans.

 

Operating Expenses

 

The Company’s operating expenses consist primarily of compensation and support costs for management, sales 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 such as advertising and occupancy costs. The Company’s consolidated operating expenses were $11,294,257 and $3,671,356 for the year ended December 31, 2019 and 2018, respectively, for an increase of $7,622,901 or 208%. The increase in operating expenses was primarily due to the acquisition of Rotmans.

 

Other Income (Expense)

 

Other income (expense) for the year ended December 31, 2019 and 2018 were $(2,784,895) and ($1,686,112), respectively, for a net increase of $1,098,783 or 65%. Increases in other expenses in 2019 included change in fair value of derivative liabilities of $809,911, interest expense of $717,130 and loss on settlement of debt of $436,287 which were offset with a decrease in impairment loss of $848,462 and an increase in other income of $16,083.

 

24

 

 

Net Loss

 

Net loss for the year ended December 31, 2019 and 2018 were $7,725,551 and $5,401,222, respectively, for an increase in net loss of $2,324,329 or 43%. Net loss in 2019 includes net loss attributable to noncontrolling interest of $20,929. The larger net loss the Company experienced in the year ended December 31, 2019 versus the same period in 2018 was attributable to the large increase in operating expenses for the year, primarily related to the increase in stock-based compensation expenses and professional fees related to the acquisition of Rotmans.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America 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 December 31, 2019, the Company had cash of $72,355 and a deficit in working capital of $6,762,671. For the year ended December 31, 2019, the Company had a net loss of $7,725,551 and an accumulated deficit of $41,104,967 . For the year ended December 31, 2018, the Company had a net loss of $5,401,222 and the accumulated deficit amounted to $33,400,345. 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.

 

Net cash used in operating activities was $1,513,997 for the year ended December 31, 2019 as compared to $1,508,036 for the year ended December 31, 2018. During the year ended December 31, 2019, cash used in operations was primarily due to the net loss for the year of $7,725,551 net of non-cash related add-back of share-based compensation expense of $2,968,898.

 

The Company had $9,519 cash used in investing activities during the year ended December 31, 2019 as compared to $3,598 for the year ended December 31, 2018. During the year ended December 31, 2019, cash used in investing activities was related to the purchase of patents and trademark fees.

 

Net cash provided by financing activities was $1,545,818 during the year ended December 31, 2019, as compared to cash provided of $1,548,185 during the year ended December 31, 2018. During 2019, cash was provided from the proceeds in notes payable in the amount of $713,700, repayments on notes payable in the amount of $28,724, net borrowings on line of credit of $39,449, $1,000,550 in proceeds from common stock issuances, repayments of convertibles notes of $146,206 and treasury stock repurchases of $30. In 2018, cash provided by financing activities was provided from the issuance of common stock in the amount of $149,500, proceeds from a bank loan of $500,000, proceeds from notes payable in the amount of $981,685 and repayments on notes payable in the amount of $83,000.

 

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, as well as increased revenue from RxAir air purifier sales 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.

 

There can be no assurances that we will be able to achieve projected levels of revenue in 2020 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 for 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.

 

25

 

 

Our future expenditures will depend on numerous factors, including: the rate at which we can introduce RxAir products 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, along with market acceptance of our products, and services and competing technological developments. As we expand our activities and operations, our cash requirements are expected to increase at a rate consistent with revenue growth after we achieve sustained revenue generation.

 

Off-Balance Sheet Arrangements

 

We do not have any material off-balance sheet arrangements.

 

Certain Relationships and Related Transactions

 

On April 29, 2011, the Company executed with CMA Investments, LLC, a Georgia limited liability company of which three of the directors of the Company (“CMA directors”) are the members (“CMA”), an unsecured line of credit (“CMA Note Payable”) bearing interest at LIBOR plus 5.25% per annum on amounts drawn and fees. The weighted average interest rate in effect on the borrowings for the years ended December 31, 2018 was 7.99%.

 

During the tenure of the CMA Note Payable, the Company has increased the amount of the note and in exchange provided benefits to the CMA directors as follows:

 

Date   Amount (increase)   Benefit to CMA   Impact to Company
Inception   $800,000   Warrants to purchase 2,600,000 shares @ $0.45, vesting 20% immediately and 10% per $100,000 drawn   Warrant costs amortized over the term of the CMA Note Payable
Sept 4, 2011   $200,000   Modified warrant price on 2,600,000 shares from $0.45 to $0.27, and issued additional 1,600,000 shares @ $0.27   Warrant costs amortized over the remaining term of the CMA Note Payable
Nov 2, 2012   $500,000   Warrants to purchase 2,100,000 shares @ $0.35   Warrant costs amortized over the remaining term of the CMA Note Payable
Apr 29, 2013   $0 (maturity date extended 1 year)   Modified warrant price on 6,300,000 shares from $0.10, and agreed to forfeit 630,000 of the warrants   Warrant costs amortized over the remaining term of the CMA Note Payable
Apr 29, 2014   $0 (maturity date extended 1 year)   None   None
Apr 29, 2015   $0 (maturity date extended 1 year)   None   None

 

26

 

 

As of December 31, 2018, the Company had borrowed up to $1,500,000 from CMA Investments, LLC (the “Note”). Holders of the Note received the proceeds for the Note to make the loan from a financial institution (the “Holder Loan”). Pursuant to a Loan Payoff and Share Payment Agreement, as final payment of the Note, CMA Investments agreed to accept 15,000,000 shares of common stock of the Company. The shares of common stock were issued in the name of CMA Investments and delivered to an escrow agent for its benefit. The Company agreed to pay interest under lender’s bank loan for a six-month period which may be extended by 30 days under certain circumstances. After the six-month period, the escrow agent may sell the shares at a price no less than $.035 per share with expectation that sales would be complete by July 1, 2022. In the event of a short from the proceeds from the sale of the shares and the amount that was owed, the Company must pay the shortfall in shares based on the fair market value of the shares, provided that the Company may pay cash at any time in Escrow at par value.

 

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).

 

  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.

 

In connection with the July settlement the Company recorded a loss on debt extinguishment of approximately $340,000.

 

Per Steven Rotman’s Employment agreement dated July 22, 2019, he is to be paid $125,000 per year in cash, $10,417 per month to be paid 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. Under the terms of his previous employment agreement, he was paid approximately $1 per year in cash and $20,833 per month to be paid in shares based on a 20-day average at a 0% discount to market. During the year ended December 31, 2019, the Company issued Steven Rotman 28,016,022 shares that were accrued and expensed as of December 31, 2018. The Company expensed approximately $201,000 during the year ended December 31, 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 $442,000 in 2019 related to approximately 12,771,000 shares to be issued in the future.

 

During the year ended December 31, 2019, the Company had sales of approximately $49,000 to Murida, DBA Rotmans Furniture (“Rotmans”). Steve Rotman, the Company’s CEO, is also Rotmans CEO and a former shareholder. The Company acquired a 58% interest in Rotmans on July 18, 2019. During the year ended December 31, 2019, the Company utilized certain warehouse staff, warehouse space/services and an executive assistant of Rotmans for the Company’s purposes. The Company was charged approximately $821,000 for these services in 2019. All significant intercompany transactions since the acquisition date have been eliminated in the accompanying consolidated financial statements.

 

Designcenters.com (“Design”) is owned by Jamie Rotman, who is the daughter of the Company’s CEO, Steven Rotman. Design provided bookkeeping and management services to the Company through July 2019. In exchange for such services, the Company had entered into a consulting agreement with the related party entity. Per Design’s consulting agreement, it is to be paid approximately $7,100 per month 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 year ended December 31, 2019, the Company issued Design 20,030,407 shares in accordance with the consulting agreement that were accrued and expensed in 2018. The Company expensed approximately $83,000 related to the consulting agreement during the year ended December 31, 2019. Of the expensed amount, approximately $41,000 was paid in cash, with the remaining $42,000 included in stock subscription payable for approximately 850,000 shares to be issued in the future.

 

27

 

 

Blue Oar Consulting, Inc. (“Blue Oar”) is owned by Gregory Rotman, who is the son of the Company’s CEO, Steven Rotman. 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 approximately $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 year ended December 31, 2019, the Company issued Blue Oar 33,618,226 shares in accordance with the consulting agreement that were accrued and expensed in 2018. During the year ended December 31, 2019, the Company expensed approximately $510,000 related to the consulting agreement . Of the expensed amount, approximately $180,000 was paid in cash, with the remaining $330,000 included in stock subscription payable for approximately 10,562,000 shares to be issued in the future.

 

Polymer Consultancy Services, Ltd. (“Polymer”) is partly owned by Dr. R.K. Matthan, a director of the Company. Polymer provides research and development consulting services related to the Company’s latex products. The Company paid Polymer approximately $23,000 for these services during the year ended December 31, 2019.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a smaller reporting company, we are not required to provide the information required by this Item pursuant to 301(c) of Regulation S-K.

 

ITEM 8. Index to Financial Statements

 

Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders’ Deficit F-4
Consolidated Statements of Cash Flows F-5

 

28

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  

To the Board of Directors and Stockholders of Vystar Corporation

 

Opinion on the Financial Statements

 

We have audited the accompanying balance sheets of Vystar Corporation (the “Company”) as of December 31, 2019 and 2018, and the related statements of operations, stockholders’ deficit and cash flows for the years then ended and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Going Concern

 

The accompanying financial statements have been prepared assuming that the entity will continue as a going concern. As discussed in Note 3 to the financial statements, the entity has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

 

We have served as the Company’s auditor since 2018.

 

Irvine, CA

 

July 6, 2020

 

F- 1

 

 

VYSTAR CORPORATION

CONSOLIDATED BALANCE SHEETS

 

    December 31,     December 31,  
    2019     2018  
ASSETS                
Current assets:                
Cash   $ 72,355     $ 50,053  
Accounts receivable     38,526       19,732  
Stock subscription receivable     49,250       -  
Inventories     4,114,977       570,587  
Investments - equity securities , at fair value     149,517       -  
Prepaid expenses and other     602,980       6,683  
Deferred commission costs     129,123       -  
Total current assets     5,156,728       647,055  
                 
Property and equipment, net     1,879,739       291,346  
Operating lease right-of-use assets     10,379,685       -  
Finance lease right-of-use assets, net     849,209       -  
                 
Other assets:                
Intangible assets, net     2,489,612       1,383,919  
Goodwill     460,301       147,092  
Inventories, long-term     935,121       -  

Deferred commission costs, net of current portion

    217,024       -  
Other     34,377       -  
Total other assets     4,136,435       1,531,011  
                 
Total assets   $ 22,401,796     $ 2,469,412  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
Current liabilities:                
Line of credit   $ 2,413,539     $ -  
Term notes - current maturities     16,374       -  
Accounts payable     2,846,306       726,159  
Accrued expenses     681,758       101,979  
Stock subscription payable     1,150,125       771,203  
Operating lease liabilities - current maturities     1,055,000       -  
Finance lease liabilities - current maturities     167,000       -  
Shareholder, convertible and contingently convertible notes payable and accrued interest - current maturities     366,326       504,149  
Related party debt - current maturities     46,000       -  
Unearned revenue     1,677,171       -  
Derivative liabilities     1,499,800       235,085  
                 
Total current liabilities     11,919,399       2,338,575  
                 
Long-term liabilities:                
Related party line of credit     -       1,499,875  
Term notes, net of current maturities     500,000       500,000  
Operating lease liabilities, net of current maturities     7,506,671       -  
Finance lease liabilities, net of current maturities     678,247       -  
Unearned revenue, net of current maturities     823,401       -  

Shareholder, convertible and contingently convertible notes payable and accrued interest, net of current maturities and debt discount

    494,363       -  

Related party debt, net of current maturities and debt discount

    1,712,259       -  
Total long-term liabilities     11,714,941       1,999,875  
Total liabilities     23,634,340       4,338,450  
                 
Stockholders’ deficit:                
Convertible preferred stock, $0.0001 par value 15,000,000 shares authorized; 13,828 issued and outstanding at December 31, 2019 and 2018, (liquidation preference of $91,275 and $77,447 at December 31, 2019 and 2018, respectively)   1   1
Common stock, $0.0001 par value, 1,500,000,000 shares authorized; 1,105,762,080 and 457,747,818 shares issued and 1,105,732,080 and 457,747,818 shares outstanding at December 31, 2019 and 2018, respectively        110,573   45,774    
Additional paid-in capital     38,436,607       31,485,532  
Accumulated deficit     (41,104,967 )     (33,400,345 )
Common stock in treasury, at cost; 30,000 and 0 shares at December 31, 2019 and 2018, respectively     (30 )     -  
Total Vystar stockholders’ deficit     (2,557,816 )     (1,869,038 )
Noncontrolling interest     1,325,272       -  
Total stockholders’ deficit     (1,232,544 )     (1,869,038 )
                 
Total liabilities and stockholders’ deficit   $ 22,401,796     $ 2,469,412  

 

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

 

F- 2

 

 

VYSTAR CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

 

    Years Ended  
    December 31,  
    2019     2018  
             
Revenue   $ 13,685,872     $ 342,049  
                 
Cost of revenue     7,332,271       385,803  
                 
Gross profit (loss)     6,353,601       (43,754 )
                 
Operating expenses:                
Salaries, wages and benefits     3,355,593       -  
Share-based compensation     2,968,898       1,285,938  
Professional fees     1,132,251       1,961,328  
Advertising     1,050,459       77,467  
Rent     570,779       -  
Service charges     436,183       -  
Depreciation and amortization     444,890       145,046  
Other operating     1,335,204       201,577  

 

               
Total operating expenses    

11,294,257

     

3,671,356

 
                 

Loss from operations

    (4,940,656 )     (3,715,110 )
                 
Other income (expense):                
Gain (loss) on settlement of debt, net     (327,433 )     108,854  
Interest expense     (1,390,407 )     (673,277 )
Change in fair value of derivative liabilities     (1,079,450 )     (269,539 )
Loss on impairment     -       (848,462 )
Other income (expense)     12,395       (3,688 )
                 
Total other expense, net     (2,784,895 )     (1,686,112 )
                 
Net loss     (7,725,551 )     (5,401,222 )
                 
Net loss attributable to noncontrolling interest     20,929     -  
                 
Net loss attributable to Vystar   $ (7,704,622 )   $ (5,401,222 )
                 
Basic and diluted loss per share:                
Net loss per share   $ (0.01 )   $ (0.02 )
                 
Basic and diluted weighted average number  of common shares outstanding     1,009,072,209       257,499,751  

 

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

 

F- 3

 

 

VYSTAR CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

 

    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, 2017     13,828     $ 1       132,809,218     $ 13,280     $ 25,128,476     $ (27,999,123 )     -     $ -     $ (2,857,366 )   $ -     $ (2,857,366 )
                                                                                         
Common stock issued in acquisitions                     55,687,500       5,569       2,925,450                               2,931,019               2,931,019  
                                                                                         
Common stock issued for signing bonus                     721,408       72       34,734                               34,806               34,806  
                                                                                         
Share-based compensation - options                                     1,161,132                               1,161,132               1,161,132  
                                                                                         
Common stock issued for cash received                     54,999,997       5,500       159,500                               165,000               165,000  
                                                                                         
Common stock issued for conversion of payables                     8,333,333       833       43,334                               44,167               44,167  
                                                                                         
Reclassification of derivative upon conversion                                     500,359                               500,359               500,359  
                                                                                         
Relative fair value of warrants issued with convertible debt                                     18,747                               18,747               18,747  
                                                                                         
Common stock and warrants issued for services                     1,928,571       193       89,807                               90,000               90,000  
                                                                                         
Common stock issued upon conversion of convertible notes and settlement of debt                     203,267,791       20,327       1,423,993                               1,444,320               1,444,320  
                                                                                         
Net loss     -       -       -       -       -       (5,401,222 )     -       -       (5,401,222 )     -       (5,401,222 )
                                                                                         
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                     142,538,209       14,253       2,628,683                               2,642,936               2,642,936  
                                                                                         
Share based compensation - options                                     50,789                               50,789               50,789  
                                                                                         
Common stock issued for settlement of warrants                     77,912,991       7,791       386,459                               394,250               394,250  
                                                                                         
Common stock issued for cash received, net                     155,226,844       15,522       590,778                               606,300               606,300  
                                                                                         
Common stock issued for conversion of related party line of credit                     45,000,000       4,500       1,973,435                               1,977,935               1,977,935  
                                                                                         
Common stock issued upon conversion of convertible notes and settlement of derivatives                     227,336,218       22,733       1,320,931                               1,343,664               1,343,664  
                                                                                         
Treasury stock repurchases                                                     (30,000 )     (30 )     (30 )             (30 )
                                                                                         
Acquisition of noncontrolling interest                                                                     -       1,346,201       1,346,201  
                                                                                         
Net loss     -       -       -       -       -       (7,704,622 )     -       -       (7,704,622 )     (20,929 )      (7,725,551 )
                                                                                         
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 )

 

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

 

F- 4

 

 

VYSTAR CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    Years Ended  
    December 31,  
    2019     2018  
Cash flows from operating activities:                
Net loss   $ (7,725,551 )   $ (5,401,222 )
Adjustments to reconcile net loss to cash used in operating activities:                
(Gain) loss on settlement of debt     327,433       (108,854 )
Share-based compensation     2,968,898       1,285,938  
Loss on impairment     -       848,462  
Depreciation     177,314       31,485  
Bad debts     2,183       -  
Amortization of intangible assets     267,576       113,561  
Noncash lease expense     35,120       -  
Amortization of debt discount     73,519       463,084  
Excess fair value of derivatives upon grant     -       35,326  
Change in fair value of derivative liabilities    

1,079,450

      269,539  

Interest on derivative liabilities

   

741,725

      -  
Interest charged on related party line of credit     121,957       -  
Net unrealized gain on available-for-sale investments     (8,292 )     -  
(Increase) decrease in assets:                
Accounts receivable     (5,131 )     (15,769 )
Stock subscription receivable     (49,250 )     (49,250 )
Inventories     424,988       (330,730 )
Prepaid expenses and other assets     (375,990 )     159,408  
Deferred commission costs     3,842       -  
Increase (decrease) in liabilities:                
Accounts payable     300,000       539,933  
Accrued expenses     134,263       601,803  
Unearned revenue     (8,051 )     -  
Net cash used in operating activities     (1,513,997 )     (1,508,036 )
                 
Cash flows from investing activities:                
Patents and trademark fees     (9,519 )     (3,598 )
                 
Cash flows from financing activities:                
Net borrowings on line of credit     39,449       -  
Proceeds of Fidelity Bank loan     -       500,000  
Repayment of long-term debt     (8,931 )     (78,060 )
Repayment of finance lease obligations     (32,921 )     -  
Proceeds from the issuance of notes - related parties     713,700       195,635  
Repayment of notes payable - related parties     (19,793 )     (4,940 )
Proceeds from the issuance of notes, net     -       786,050