NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2019 and 2018
NOTE
1 -
|
DESCRIPTION
OF BUSINESS
|
History
and Nature of Business
Vystar
Corporation (“Vystar”, the “Company”, “we,” “us,” or “our”) is based
in Worcester, Massachusetts. The Company uses patented technology to produce a line of innovative air purifiers, which destroy
viruses and bacteria through the use of ultraviolet light. Vystar also manufactures and sells reduced allergen natural
rubber latex used primarily in various bedding products. In addition, Vystar has a majority ownership in Murida Furniture Co.,
Inc. dba Rotmans Furniture (“Rotmans”), the largest furniture and flooring store in New England and one of the largest
independent furniture retailers in the U.S.
Vystar
is the creator and exclusive owner of the innovative technology to produce Vytex® Natural Rubber Latex (“NRL”).
Vytex NRL uses a global multi-patented technology and proprietary formulation to reduce non-rubber particles including the antigenic
proteins associated with latex allergies, resulting in a cleaner form of latex. The antigenic protein levels are reduced to virtually
undetectable levels. On January 22, 2015, Vystar announced the signing of an exclusive domestic distribution agreement with Worcester,
MA based Nature’s Home Solutions who sources eco-friendly materials and technologies for use in furnishings and other markets.
On March 4, 2015, the Company announced that Hartford, CT based Gold Bond formed a strategic alliance with NHS Holdings, LLC (“NHS”)
to produce and market the world’s first Vytex NRL based mattress. In June 2015, the first mattresses made with Vytex (hybrid
and pure Vytex) were placed on the sales floor at Rotmans in Worcester, MA using the “Evaya” brand and Gold Bond had
shipped four versions of their “Brilliance” inner coil and pure foam mattresses (Emerald, Ruby, Sapphire Plush and
Sapphire Firm) to over 30 stores from Maine to Florida.
In
April of 2018, Vystar acquired the assets of NHS Holdings, LLC executing on the first part of the Company’s vision to move
into direct product offerings made from Vytex® latex. NHS was the exclusive U.S. distributor of Vystar’s
Vytex® natural rubber latex foam to manufacturers for use in over 200 home furnishings products, including mattresses,
toppers, pillows and upholstery, sold through multiple channels. This acquisition provides Vystar with roll packing and cutting
equipment to support our bedding manufacturing partners, while lowering the cost of Vytex to the manufacturer by eliminating the
middleman.
In
May of 2018, Vystar acquired substantially all of the assets of UV Flu Technologies, Inc., formerly traded on the OTC under the
ticker UVFT, whose patented ViraTech™ UV light air purification technology destroys greater than 99% of airborne bacteria,
viruses and other microorganisms and virtually eliminates concentrations of odors and volatile organic compounds (“VOCs”).
As
part of Vystar’s mission to offer eco-friendly, sustainable materials and products that create a better environment for
consumers and workers throughout the product lifecycle, UV Flu Technologies is an excellent counterpart to our Vytex materials
and Vytex bedding products. Vystar products will help create a perfect natural sleep environment starting with Vytex bedding made
from the purest latex in the world and UV Flu Technologies’ RxAir™ air purifier ensuring every breath is free of harmful
pathogens, VOCs and odors.
In
May of 2019, Vystar acquired the assets of Fluid Energy Conversion Inc. (“FEC”), primarily consisting of its patent
on the Hughes Reactor, which has the ability to control, enhance, and focus energy in flowing liquids and gases. Vystar intends
to use this technology to enhance the effectiveness of Vystar’s RxAir purification system to destroy airborne pathogens
while decreasing the cost and size of Vystar’s RxAir units.
In
July of 2019, Vystar acquired 58% of the outstanding shares of common stock of Rotmans. Rotmans sells a broad line of residential
furniture and decorative accessories and serves customers throughout the New England region. The acquisition is expected to add
approximately $30 million in 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.
NOTE
2 -
|
BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Presentation
The
consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States
of America (“U.S. GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting
Standards Codification.
The
Company has evaluated subsequent events through the date of the filing of its Form 10-K with the Securities and Exchange Commission.
Other than those events disclosed in Note 19, the Company is not aware of any other significant events that occurred subsequent
to the balance sheet date but prior to the filing of this report that would have a material impact on the Company’s financial
statements.
Basis
of Consolidation
The
consolidated financial statements include the accounts of the Company and its wholly-owned or controlled operating subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
Segment
Reporting
Operating
segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation
by the chief operating decision maker, or decision-making group, in making decisions on how to allocate resources and assess performance.
The Company’s chief operating decision maker is the chief executive officer. The Company and the chief executive officer
view the Company’s operations and manage its business as one reportable segment with different operating segments.
Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying disclosures. Significant estimates made by management include,
among others, the allowance for obsolete inventory, the allocation of purchase price related to acquisitions, the recoverability
of long-lived assets, fair values of right of use assets and lease liabilities, valuation of derivative liabilities, share-based
compensation and other equity issuances. Although these estimates are based on management’s best knowledge of current events
and actions the Company may undertake in the future, actual results could differ from these estimates.
Fair
Value of Financial Instruments
The
Company’s financial instruments consist principally of cash, accounts receivable, investments - equity securities, accounts
payable, accrued expenses and interest payable, lines of credit, shareholder notes payable, long-term debt and unearned revenue.
The carrying values of all the Company’s financial instruments approximate or equal fair value because of their short maturities
and market interest rates or, in the case of equity securities, being stated at fair value.
In
specific circumstances, certain assets and liabilities are reported or disclosed at fair value. Fair value is the exit price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date in the Company’s principal market for such transactions. If there is not an established principal market,
fair value is derived from the most advantageous market.
Valuation
inputs are classified in the following hierarchy:
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●
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Level
1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
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●
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Level
2 inputs are directly or indirectly observable valuation inputs for the asset or liability, excluding Level 1 inputs.
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●
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Level
3 inputs are unobservable inputs for the asset or liability.
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Highest
priority is given to Level 1 inputs and the lowest priority to Level 3 inputs. Acceptable valuation techniques include the market
approach, income approach, and cost approach. In some cases, more than one valuation technique is used. The derivative liabilities
were recognized at fair value on a recurring basis through the date of the settlement and December 31, 2019 and 2018 and
are level 3 measurements. There have been no transfers between levels during the year ended December 31, 2019.
Acquisitions
Amounts
paid for acquisitions are allocated to the assets acquired and liabilities assumed based on their estimated fair value at the
date of acquisition. The fair value of identifiable intangible assets is based on valuations that use information and assumptions
provided by management. Identifiable intangible assets with finite lives are amortized over their useful lives. Acquisition-related
costs, including, legal, accounting, and other costs, are capitalized in asset acquisitions and for business combinations are
expensed in the periods in which the costs are incurred. The results of operations of acquired assets are included in the financial
statements from the acquisition date.
Cash
and Cash Equivalents
Cash
and cash equivalents include all liquid investments with a maturity date of less than three months when purchased. Cash equivalents
also include amounts due from third-party financial institutions for credit and debit card transactions which typically settle
within five days.
Accounts
Receivable
Accounts
receivable are stated at the amount management expects to collect from outstanding balances. The Company routinely sells, without
recourse, trade receivables resulting from retail furniture sales to various financial institutions at an average service charge
of 6.6% in 2019. Amounts sold during the period from the Rotmans acquisition of July 18, 2019 through December 31, 2019 was $4,123,000.
Retail furniture receivables retained by the Company are generally collateralized by the merchandise sold, represent valid claims
against debtors for sales arising on or before the balance sheet date and are reduced to their estimated net realizable value.
In addition, the Company grants credit to Vytex customers without requiring collateral. The amount of accounting loss for which
Vystar is at risk in these unsecured accounts receivable is limited to their carrying value. Management provides for uncollectible
amounts through a charge to earnings and a credit to an allowance for doubtful accounts based upon its assessment of the current
status of individual accounts. Balances that are still outstanding after management has performed reasonable collection efforts
are written off through a charge to the allowance and a credit to accounts receivable. As of December 31, 2019 and 2018, the Company
considers accounts receivable to be fully collectible and no allowance for doubtful accounts was recorded.
Inventories
Inventories
include those costs directly attributable to the product before sale. Inventories consist primarily of finished goods of foam
toppers, furniture, mattresses and pillows and is carried at net realizable value, which is defined as selling price less cost
of completion, disposal and transportation. The Company evaluates the need to record write-downs for inventory on a regular basis.
Appropriate consideration is given to obsolescence, slow-moving and other factors in evaluating net realizable values. Inventories
not expected to be sold within 12 months are classified as long-term.
Prepaid
Expenses and Other Assets
Prepaid
expenses and other assets include amounts related to prepaid insurance policies, which are expensed on a straight-line basis over
the life of the underlying policy, and other expenses.
Investments
- Equity Securities
Marketable
equity securities have been categorized as available-for-sale and, as a result, are stated at fair value. Unrealized gains and
losses are reflected in the statement of operations. The Company periodically reviews the available-for-sale securities for other
than temporary declines in fair value below cost and more frequently when events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. As of December 31, 2019, the Company believes that the c arrying value
of the available-for-sale securities was recoverable in all material respects.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation. Depreciation is provided over the estimated useful lives of the
assets, generally 5 to 10 years, using straight-line and accelerated methods.
Expenditures
for major renewals and betterments are capitalized, while routine repairs and maintenance are expensed as incurred. When property
items are retired or otherwise disposed of, the asset and related reserve accounts are relieved of the cost and accumulated depreciation,
respectively, and the resultant gain or loss is reflected in earnings. As of December 31, 2019, the net balance of property and
equipment is $1,879,739 with accumulated depreciation of $208,799. As of December 31, 2018, the net balance of property and equipment
is $291,346 with accumulated depreciation of $31,485.
Intangible
Assets
Patents
represent legal and other fees associated with the registration of patents. The Company has five issued patents with the United
States Patent and Trade Office (“USPTO”) as well as five issued international Patent Cooperation Treaty (“PCT”)
patents. Patents are carried at cost and are being amortized on a straight-line basis over their estimated useful lives, typically
ranging from 9 to 20 years.
The
Company has trademark protection for “Vystar”, “Vytex”, and “RxAir” among others. Trademarks
are carried at cost and since their estimated life is indeterminable, no amortization is recognized. Instead, they are evaluated
annually for impairment.
Customer
relationships, tradename and marketing related intangibles are carried at cost and are being amortized on a straight-line basis
over their estimated useful lives, typically ranging from 5 to 10 years. See Note 18 for further discussion.
Long-Lived
Assets
We
review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the
assets may not be fully recoverable. We evaluate assets for potential impairment by comparing estimated future undiscounted net
cash flows to the carrying amount of the assets. If the carrying amount of the assets exceeds the estimated future undiscounted
cash flows, impairment is measured based on the difference between the carrying amount of the assets and fair value. Assets to
be disposed of would be separately presented in the consolidated balance sheet and reported at the lower of the carrying amount
or fair value less costs to sell and are no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale
would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet, if material.
During the year ended December 31, 2019, we did not recognize any impairment of our long-lived assets. During the year ended December
31, 2018, we recognized an impairment charge of $848,462 related to the increase in the value of the Company’s common stock
from the time of negotiation to closing and the fair value of the underlying assets.
Goodwill
Goodwill
reflects the cost of an acquisition in excess of the fair values assigned to identifiable net assets acquired. Goodwill is not
amortized, rather, it is subject to a periodic assessment for impairment by applying a fair value-based test. We perform our annual
impairment test at the end of each calendar year, or more frequently if events or changes in circumstances indicate the asset
might be impaired.
Accounting
for acquisitions requires us to recognize, separately from goodwill, the assets acquired and the liabilities assumed at their
acquisition-date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the
net of the acquisition-date fair values of the assets acquired and the liabilities assumed. While we use best estimates and assumptions
to accurately value assets acquired and liabilities assumed at the acquisition date, the estimates are inherently uncertain and
subject to refinement.
The
impairment model permits, and we utilize, a simplified approach for determining goodwill impairment. In the first step, we evaluate
the recoverability of goodwill by estimating the fair value of our reporting unit using multiple techniques, including an income
approach using a discounted cash flow model and a market approach. Based on an equal weighting of the results of these two approaches,
a conclusion of fair value is estimated. The fair value is then compared to the carrying value of our reporting unit. If the fair
value of a reporting unit is less than its carrying value, the Company recognizes this amount as an impairment loss. Impairment
losses, limited to the carrying value of goodwill, represent the excess of the carrying amount of goodwill over its implied fair
value.
The
following table reflects goodwill activity for the years ended December 31, 2019 and 2018:
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|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Balance, beginning of
the year
|
|
$
|
147,092
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
313,210
|
|
|
|
995,554
|
|
|
|
|
|
|
|
|
|
|
Loss on impairment
|
|
|
-
|
|
|
|
(848,462
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end
of the year
|
|
$
|
460,302
|
|
|
$
|
147,092
|
|
Convertible
Notes Payable
Borrowings
are recognized initially at the principal amount received. Borrowings are subsequently carried at amortized cost; any difference
between the proceeds (net of transaction costs) and the redemption value is recognized as interest expense in the statements of
operations over the period of the borrowings using the effective interest method.
Derivatives
The
Company evaluates its debt instruments or other contracts to determine if those contracts or embedded components of those contracts
qualify as derivatives to be separately accounted for under the relevant sections of Accounting Standards Codification (“ASC”)
Topic 815-40, Derivative Instruments and Hedging: Contracts in Entity’s Own Equity. The result of this accounting
treatment could be that the fair value of a financial instrument is classified as a derivative instrument and is marked-to-market
at each balance sheet date and recorded as a liability. In the event the fair value is recorded as a liability, the change in
fair value is recorded in the statements of operations as other income or other expense. Upon conversion or exercise of a derivative
instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.
Financial instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815-40 are
reclassified to a liability account at the fair value of the instrument on the reclassification date.
The
Company applies the accounting standard that provides guidance for determining whether an equity-linked financial instrument,
or embedded feature, is indexed to an entity’s own stock. The standard applies to any freestanding financial instrument
or embedded features that have the characteristics of a derivative, and to any freestanding financial instruments that are potentially
settled in an entity’s own common stock. From time to time, the Company has issued notes with embedded conversion features.
Certain of the embedded conversion features contain price protection or anti-dilution features that result in these instruments
being treated as derivatives for accounting purposes. Accordingly, during the years ended December 31, 2019 and 2018, the Company
has classified all conversion features as derivative liabilities and has estimated the fair value of these embedded conversion
features using a Monte Carlo simulation model.
Unearned
Revenue
Unearned
revenue consists of customer advance payments, deposits on sales of undelivered merchandise and deferred warranty revenue on self-insured
stain protection warranty coverage. During the year ended December 31, 2019, all of the recognized revenue related to deferred
revenues which originated from the acquisition of Rotmans.
Changes
to unearned revenue during the year ended December 31, 2019 are summarized as follows:
Balance, beginning of the year
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|
$
|
-
|
|
|
|
|
|
|
Balance acquired with
acquisition
|
|
|
2,508,623
|
|
|
|
|
|
|
Customer deposits received
|
|
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11,392,251
|
|
|
|
|
|
|
Warranty coverage purchased
|
|
|
229,646
|
|
|
|
|
|
|
Gift cards purchased
|
|
|
17,750
|
|
|
|
|
|
|
Revenue earned
|
|
|
(11,647,698
|
)
|
|
|
|
|
|
Balance, end
of the year
|
|
$
|
2,500,572
|
|
Loss
Per Share
The
Company presents basic and diluted loss per share. Because the Company reported a net loss in 2019 and 2018, common stock equivalents,
including stock options and warrants, were anti-dilutive; therefore, the amounts reported for basic and dilutive loss per share
were the same. Excluded from the computation of diluted loss per share were options to purchase 27,983,271 and 29,098,271 shares
of common stock for 2019 and 2018, respectively, as their effect would be anti-dilutive. Warrants to purchase 14,237,646 and 15,488,832
shares of common stock for 2019 and 2018, respectively, were also excluded from the computation of diluted loss per share as their
effect would be anti-dilutive. In addition, preferred stock convertible to 4,591,100 and 4,314,537 shares of common stock and
common shares to be issued for share-based compensation of 24,939,402 and 108,871,543 in 2019 and 2018, respectively, were excluded
from the computation of diluted loss per share as their effect would be anti-dilutive.
Revenue
On
January 1, 2018, we adopted FASB ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). The
new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its
entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically
existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue
to depict the transfer of promised goods or services to customers in an amount that reflects what it expects to receive in exchange
for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions
that were not addressed completely in the prior accounting guidance.
We
reviewed all contracts at the date of initial application and elected to use the modified retrospective transition method,
where the cumulative effect of the initial application is recognized as an adjustment to opening retained earnings at January
1, 2018. The adoption of the new revenue recognition guidance on January 1, 2018 was immaterial to our consolidated
financial statements.
Our
principal activities from which we generate our revenue are product sales. Revenue is measured based on considerations specified
in a contract with a customer. A contract exists when it becomes a legally enforceable agreement with a customer. The contract
is based on either the acceptance of standard terms and conditions at the retail store, on the websites for e-commerce customers
and via telephone with our third-party call center for our print media and direct mail customers, or the execution of terms and
conditions contracts with retailers and wholesalers. These contracts define each party’s rights, payment terms and other
contractual terms and conditions of the sale.
Consideration
is typically paid prior to shipment via credit card or check when our products are sold direct to consumers, which is typically
within 1 to 2 days or approximately 30 days from the time control is transferred when sold to wholesalers, distributors and retailers.
We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including
the customer’s historical payment experience and, in some circumstances, published credit and financial information pertaining
to the customer.
A
performance obligation is a promise in a contract to transfer a distinct product to the customer, which for us is transfer of
finished goods to our customers. Performance obligations promised in a contract are identified based on the goods that will be
transferred to the customer that are both capable of being distinct and are distinct in the context of the contract, whereby the
transfer of the goods is separately identifiable from other promises in the contract. We have concluded the sale of finished goods
and related shipping and handling are accounted for as the single performance obligation.
The
transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the
customer receives the benefit of the performance obligation. The transaction price is determined based on the consideration to
which we will be entitled to receive in exchange for transferring goods to the customer. We issue refunds to retail, e-commerce
and print media customers, upon request, within 30 days of delivery. We estimate the amount of potential refunds at each reporting
period using a portfolio approach of historical data, adjusted for changes in expected customer experience, including seasonality
and changes in economic factors. For retailers, distributors and wholesalers, we do not offer a right of return or refund and
revenue is recognized at the time products are shipped to customers. In all cases, judgment is required in estimating these reserves.
Actual claims for returns could be materially different from the estimates. As of December 31, 2019 and 2018, reserves for estimated
sales returns totaled $3,000 and are included in the accompanying consolidated balance sheets as accrued expenses.
We
recognize revenue when we satisfy a performance obligation in a contract by transferring control over a product to a customer
when product is shipped based on fulfillment by the Company. The Company considers fulfillment when it passes all liability at
the point of shipping through third party carriers or in-house delivery services. Delivery fees are charged to customers and are
included in revenue in the accompanying consolidated statements of operations and the costs associated with these deliveries are
included in operating expenses in the accompanying consolidated statements of operations. Taxes assessed by a governmental authority
that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer,
are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred
to a customer are accounted for as a fulfillment cost and are included in cost of revenue in the accompanying consolidated statements
of operations.
The
Company also defers revenues for separately-priced stain protection warranty coverage for which it is ultimately self-insured.
Revenue is recognized from the extended warranty sales on a straight-line basis over the respective contract term. The extended
warranty terms primarily range from three to five years from the date of delivery. At December 31, 2019, deferred warranty revenue
is approximately $1,309,000 and is included in unearned revenue in the accompanying consolidated balance sheets. During
the year ended December 31, 2019, the Company recorded total proceeds of approximately $230,000 and recognized total revenues
of approximately $245,000 related to deferred warranty revenue arrangements. Commission costs in obtaining extended warranty contracts
are capitalized and recognized as expense on a straight-line basis over the period of the warranty contract. At December 31, 2019,
deferred commission costs are approximately $346,000 and included in the accompanying consolidated balance sheets. All other costs,
such as costs of services performed under the contract, general and administrative expenses, and advertising costs are expensed
as incurred.
Cost
of Revenue
Cost
of revenue consists primarily of product and freight costs and fees paid to online retailers.
Research
and Development
Research
and development costs are expensed when incurred. Research and development costs include all costs incurred related to the research,
development and testing of the Company’s process to produce Vytex NRL.
Vytex
NRL has produced protein test results on finished products that are both “below detection” and “not detectable”
in terms of the amount of proteins remaining in these finished goods made with Vytex NRL. These results have been reproduced in
many subsequent tests. For the years ended December 31, 2019 and 2018, Vystar’s research and development costs were not
significant.
Advertising
Costs
Advertising
costs, which include television, radio, newspaper and other media advertising, are expensed upon first showing. Advertising costs
included in general and administrative expenses in the accompanying consolidated statements of operations were approximately $1,050,000
and $77,000 for the years ended December 31, 2019 and 2018, respectively.
Share-Based
Compensation
The
fair value of stock options is estimated on the grant date using the Black-Scholes option pricing model, based on weighted average
assumptions. Expected volatility is based on historical volatility of our common stock. The Company has elected to use the simplified
method described in the Securities and Exchange Commission Staff Accounting Bulletin Topic 14C to estimate the expected term of
employee stock options. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The value
of restricted stock awards is determined using the fair value of the Company’s common stock on the date of grant. The Company
accounts for forfeitures as they occur. Compensation expense is recognized on a straight-line basis over the requisite service
period of the award.
Income
Taxes
Vystar
recognizes income taxes on an accrual basis based on a tax position taken or expected to be taken in its tax returns. A tax position
is defined as a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected
in measuring current or deferred income tax assets or liabilities. Tax positions are recognized only when it is more likely than
not (i.e., likelihood of greater than 50%), based on technical merits, that the position would be sustained upon examination by
taxing authorities. Tax positions that meet the more likely than not threshold will be measured using a probability-weighted approach
as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Income taxes are accounted
for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in our financial statements or tax returns. A valuation allowance
is established to reduce deferred tax assets if all, or some portion, of such assets will more likely than not be realized. Should
they occur, interest and penalties related to tax positions are recorded as interest expense. No such interest or penalties have
been incurred for the years ended December 31, 2019 and 2018.
The
Company remains subject to income tax examinations from Federal and state taxing jurisdictions for 2016 through 2019.
Concentration
of Credit Risk
Certain
financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily
of cash and accounts receivable. Cash held in operating accounts may exceed the Federal Deposit Insurance Corporation, or FDIC,
insurance limits. While the Company monitors cash balances in our operating accounts on a regular basis and adjust the balances
as appropriate, these balances could be impacted if the underlying financial institutions fail. To date, the Company has experienced
no loss or lack of access to our cash; however, the Company can provide no assurances that access to our cash will not be impacted
by adverse conditions in the financial markets. Credit concentration risk related to accounts receivable is mitigated as customer
credit is checked prior to the sales and accounts receivable consists of a high number of relatively small balances.
Other
Risks and Uncertainties
The
Company is exposed to commodity price risk, mainly associated with variations in the market price for NRL as well as wintering
of the Hevea trees, which differs for each country. The timing and magnitude of industry cycles are difficult to predict and are
impacted by general economic conditions including the buying climate in China. The Company responds to changes in NRL prices by
adjusting sales prices on a weekly basis and by turning rather than holding inventory in anticipation of higher prices. The Company
actively manages its exposure to commodity price risk and monitors the actual and expected spread between forward selling prices
and purchase costs and processing and shipping expense. The Company also currently spreads the processing of Vytex NRL among three
continents. Sales contracts are based on forward market prices, and generally orders are placed 30 to 90 days ahead of shipment
date due to these fluctuations. However, financial results may be negatively impacted where selling prices fall more quickly than
purchase price adjustments can be made or when levels of inventory have an anticipated net realizable value that is below cost.
The Company is also exposed to risks pertinent to the operations of a retailer, including, but not limited to, the ability to
acquire new customers and maintain a strong brand as well as broader economic factors such as interest rates and changes in customer
spending patterns.
Recent
Accounting Pronouncements
In
February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 requires lessees to recognize the assets and liabilities
on their balance sheet for the rights and obligations created by most leases and continue to recognize expenses on their income
statements over the lease term. It will also require disclosures designed to give financial statement users information on the
amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for annual reporting periods beginning
after December 15, 2018, and interim periods within those years. Early adoption is permitted. The Company has adopted this standard
(see Note 7), and it had no significant impact upon adoption but significant impact to the Company’s balance sheet upon
the acquisition of Rotmans (see Note 18).
In
January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (“ASC 350”), Simplifying
the Test for Goodwill Impairment. The guidance removes Step 2 of the goodwill impairment test and eliminates the need to determine
the fair value of individual assets and liabilities to measure goodwill impairment. A goodwill impairment will now be the amount
by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Entities
will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary.
The guidance will be applied prospectively and is effective for annual and interim goodwill impairment tests in fiscal years beginning
after December 15, 2019. Early adoption is permitted for any impairment tests performed on testing dates after January 1, 2017.
The Company has adopted ASU 2017-04 and no impairment was recorded on its financial statements.
In
July 2017, the FASB issued ASU 2017-11, Earnings per share (Topic 260), Distinguishing Liabilities from Equity (Topic 480),
and Derivatives and Hedging (Topic 815): Accounting for Certain Financial Instruments with Down Round Features. The update
addresses the complexity of accounting for certain financial instruments with “down round” features and the liability
or equity classification of financial instruments with warrants or convertible features. The guidance eliminates the requirement
to consider “down round” features when determining whether certain equity-linked financial instruments or embedded
features are indexed to an entity’s own stock. The ASU is effective for annual periods beginning after December 15, 2018,
and for interim periods within those years, with early adoption permitted. The Company has adopted ASU 2017-11 and it did not
have a material impact on its financial statements.
In
June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718) to expand the scope of ASC 718, Compensation
- Stock Compensation (Topic 718) (“ASU 2017-07”), to include share-based payment transactions for acquiring goods
and services from non-employees. The pronouncement is effective for fiscal years, and for interim periods within those fiscal
years, beginning after December 15, 2018, with early adoption permitted. The Company has adopted ASU 2018-17 and it did not have
a material impact on its financial statements.
In
August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework - Changes to the Disclosure
Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value
measurements, including eliminating the requirement to disclose the amount of and reasons for transfers between Level 1 and Level
2 of the fair value hierarchy, and requiring the range and weighted average used to develop significant unobservable inputs for
Level 3 fair value measurements. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim
periods within those fiscal years. Early adoption, either of the entire standard or only the provisions that eliminate or modify
requirements, is permitted. The Company has evaluated the disclosure requirements of this standard and does not expect it to have
a material impact on the Company’s financial statements.
NOTE
3 -
|
LIQUIDITY
AND GOING CONCERN
|
The
Company’s financial statements are prepared using the accrual method of accounting in accordance with U.S. GAAP and have
been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the
normal course of business. However, the Company has incurred significant losses and experienced negative cash flow since inception.
At December 31, 2019, the Company had cash of $72,355 and a deficit in working capital of approximately $6.8 million. Further,
at December 31, 2019 the accumulated deficit amounted to approximately $41.1 million. We use working capital to finance
our ongoing operations, and since those operations do not currently cover all our operating costs, managing working capital is
essential to our Company’s future success. Because of this history of losses and financial condition, there is substantial
doubt about the Company’s ability to continue as a going concern.
A
successful transition to attaining profitable operations is dependent upon obtaining sufficient financing to fund the Company’s
planned expenses and achieving a level of revenue adequate to support the Company’s cost structure. Management plans to
finance future operations using cash on hand, increased revenue from RxAir air purification units and Vytex license fees that
now also include the Company’s association with foam cores made from Vytex used in mattresses, mattress toppers and pillows,
and stock warrant exercises from existing shareholders. The Company has also focused the efforts of key internal employees on
the goal of creating efficiencies in each department in our retail furniture business, including purchasing, marketing, inventory
control, advertising, accounting, warehousing and customer service. In addition, the Company has invested in new accounting and
operations software, which will improve our ability to control inventory levels and monitor the financial performance of our operations.
There
can be no assurances that the Company will be able to achieve projected levels of revenue in 2020 and beyond. If the Company is
not able to achieve projected revenue and obtain alternate additional financing of equity or debt, the Company would need to significantly
curtail or reorient operations during 2020, which could have a material adverse effect on the ability to achieve the business
objectives, and as a result, may require the Company to file bankruptcy or cease operations. The financial statements do not include
any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities
that might be necessary should the Company be forced to take any such actions.
The
Company’s future expenditures will depend on numerous factors, including: the rate at which the Company can introduce RxAir
air purification units and license Vytex NRL raw materials and foam cores made from Vytex to manufacturers, and subsequently retailers;
the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; market acceptance
of the Company’s products, services and competing technological developments; the Company’s ability to successfully
realize synergies through the integration of the merged companies, acquire new customers and maintain a strong brand; the success
of our efforts to reduce expenses in our retail furniture business; and broader economic factors such as interest rates and changes
in customer spending patterns. As the Company expands its activities and operations, cash requirements are expected to increase
at a rate consistent with revenue growth after the Company has achieved sustained revenue generation.
NOTE
4 -
|
INVESTMENTS
– EQUITY SECURITIES
|
Cost
and fair value of investments - equity securities are as follows as of December 31, 2019:
|
|
|
Gross
|
|
|
Fair
|
|
Cost
|
|
|
Unrealized
Gains
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
141,225
|
|
|
$
|
8,292
|
|
|
$
|
149,517
|
|
Net
unrealized holding gains on available-for-sale securities were approximately $8,000 since the date of the Rotmans acquisition
and have been included in other income (expense) in the accompanying statements of operations. There were no investments –
equity securities prior to the Rotmans acquisition in July 2019. Investments represent equity securities in a publicly traded
company.
NOTE
5 -
|
PROPERTY
AND EQUIPMENT
|
Property
and equipment, net consists of the following at December 31:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Furniture, fixtures and
equipment
|
|
$
|
1,354,665
|
|
|
$
|
3,831
|
|
Tooling and testing equipment
|
|
|
319,000
|
|
|
|
319,000
|
|
Parking lots
|
|
|
365,707
|
|
|
|
-
|
|
Motor vehicles
|
|
|
49,166
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,088,538
|
|
|
|
322,831
|
|
Accumulated depreciation
|
|
|
(208,799
|
)
|
|
|
(31,485
|
)
|
|
|
|
|
|
|
|
|
|
Property and
equipment, net
|
|
$
|
1,879,739
|
|
|
$
|
291,346
|
|
Depreciation
expense for the years ended December 31, 2019 and 2018 was $177,314 and $31,485, respectively.
NOTE
6 -
|
INTANGIBLE
ASSETS
|
Intangible
assets consist of the following at December 31:
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
Period
|
|
|
2019
|
|
|
2018
|
|
|
(in
Years)
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$
|
210,000
|
|
|
$
|
100,000
|
|
|
6 - 10
|
Proprietary technology
|
|
|
610,000
|
|
|
|
610,000
|
|
|
10
|
Tradename and brand
|
|
|
1,380,000
|
|
|
|
610,000
|
|
|
5 - 10
|
Marketing related
|
|
|
380,000
|
|
|
|
-
|
|
|
5
|
Patents
|
|
|
355,418
|
|
|
|
242,149
|
|
|
6 - 20
|
Noncompete
|
|
|
50,000
|
|
|
|
50,000
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,985,418
|
|
|
|
1,612,149
|
|
|
|
Accumulated
amortization
|
|
|
(504,878
|
)
|
|
|
(237,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets,
net
|
|
|
2,480,540
|
|
|
|
1,374,847
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
9,072
|
|
|
|
9,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible
assets
|
|
$
|
2,489,612
|
|
|
$
|
1,383,919
|
|
|
|
Amortization
expense for the years ended December 31, 2019 and 2018 was $267,576 and $113,561, respectively. Estimated future amortization
expense for finite-lived intangible assets is as follows:
|
|
Amount
|
|
|
|
|
|
2020
|
|
$
|
416,955
|
|
2021
|
|
|
416,955
|
|
2022
|
|
|
416,955
|
|
2023
|
|
|
410,344
|
|
2024
|
|
|
375,288
|
|
Thereafter
|
|
|
444,043
|
|
|
|
|
|
|
Total
|
|
$
|
2,480,540
|
|
As
discussed in Note 18, amortized intangible assets of $1,260,000 were recognized with the acquisition of Rotmans. In addition,
patents increased $103,750 with the acquisition of FEC in May of 2019. Included in stock subscription payable is $103,750 representing
the shares to be issued to FEC in 2020 for these assets. In determining the fair value of the intangible assets related to the
purchase, the Company considered, among other factors, the best use of the acquired assets, analysis of historical financial performance
of the Company and estimates of future performance. This helped determine the fair values of the identified intangibles assets
related to customer relationships, tradename and brand and marketing.
The
Company leases equipment, a showroom, offices and warehouse facilities. These leases expire at various dates through 2024 with
options to extend to 2031.
The
table below presents the lease costs for the year ended December 31, 2019:
|
|
Year
Ended
|
|
|
|
December
31, 2019
|
|
|
|
|
|
Operating lease cost
|
|
$
|
724,609
|
|
|
|
|
|
|
Finance lease cost:
|
|
|
|
|
|
|
|
|
|
Amortization of
right-of-use assets
|
|
|
37,121
|
|
Interest
on lease liabilities
|
|
|
4,826
|
|
|
|
|
|
|
Total lease cost
|
|
$
|
766,556
|
|
Our
leases generally do not provide an implicit rate, and therefore we use our incremental borrowing rate as the discount rate when
measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate we would incur
at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease. We
used incremental borrowing rates as of the implementation date for operating leases that commenced prior to that date.
The
following table presents other information related to leases:
|
|
Year
Ended December 31, 2019
|
|
|
|
|
|
Cash paid for amounts included in the
measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
|
Operating
cash flows used for operating leases
|
|
$
|
635,377
|
|
Financing cash flows
used for financing leases
|
|
$
|
32,921
|
|
|
|
|
|
|
Assets obtained in exchange for operating
lease liabilities
|
|
$
|
10,215,153
|
|
|
|
|
|
|
Assets obtained in exchange for finance
lease liabilities
|
|
$
|
880,189
|
|
|
|
|
|
|
Weighted average remaining lease term:
|
|
|
|
|
Operating leases
|
|
|
9
years
|
|
Finance leases
|
|
|
6
years
|
|
|
|
|
|
|
Weighted average discount rate:
|
|
|
|
|
Operating leases
|
|
|
5.53
|
%
|
Finance leases
|
|
|
5.16
|
%
|
The
future minimum lease payments required under operating and financing lease obligations as of December 31, 2019 having initial
or remaining non-cancelable lease terms in excess of one year are summarized as follows:
|
|
Operating
Leases
|
|
|
Finance
Leases
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
$
|
1,500,616
|
|
|
$
|
200,568
|
|
|
$
|
1,701,184
|
|
2021
|
|
|
1,503,643
|
|
|
|
191,805
|
|
|
|
1,695,448
|
|
2022
|
|
|
1,153,799
|
|
|
|
137,203
|
|
|
|
1,291,002
|
|
2023
|
|
|
878,807
|
|
|
|
136,402
|
|
|
|
1,015,209
|
|
2024
|
|
|
870,000
|
|
|
|
126,262
|
|
|
|
996,262
|
|
Thereafter
|
|
|
5,292,500
|
|
|
|
186,865
|
|
|
|
5,479,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total undiscounted lease liabilities
|
|
|
11,199,365
|
|
|
|
979,105
|
|
|
|
12,178,470
|
|
Less: imputed
interest
|
|
|
(2,637,694
|
)
|
|
|
(133,858
|
)
|
|
|
(2,771,552
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net lease liabilities
|
|
$
|
8,561,671
|
|
|
$
|
845,247
|
|
|
$
|
9,406,918
|
|
As
of December 31, 2019, the Company has an additional finance lease that will commence in January 2020. The right of use asset totals
$75,739 and requires monthly installments of $1,145 for 78 months.
NOTE
8 -
|
NOTES
PAYABLE AND LOAN FACILITY
|
Line
of Credit
The
Company has a $2,500,000 revolving line of credit with Fidelity Co-operative Bank. Advances are limited to 50% of eligible inventory
and bear interest at the prime rate plus 0.50% with a floor of 3.75%. The interest rate was 5.25% at December 31, 2019. The line
of credit is due upon demand and is subject to renewal annually. It is secured by all assets of the Company. The credit line is
subject to certain financial and non-financial covenants. The Company was not in compliance with certain covenants as of December
31, 2019 and was in default in March 2020. The credit line was subsequently paid off on May 29, 2020. See Note 19 for additional
discussion. Indebtedness to existing and future Rotman Family notes were subordinated to the bank debt. The line was
also secured with a mortgage on a property of a wholly-owned entity of Steven Rotman.
Borrowings
under this agreement at December 31, 2019 were approximately $2,414,000.
Related
Party Line of Credit (CMA Note Payable)
On
November 2, 2012, the Company executed a $1,500,000 unsecured line of credit agreement with CMA Investments, LLC (“CMA”),
a related party and a Georgia limited liability company (the “CMA Note”). Three of the directors of the Company (“CMA
directors”) were initially the members of CMA Investments, LLC. Pursuant to the terms of the CMA Note, interest is computed
at LIBOR plus 5.25% on amounts drawn and fees.
In
July 2018, the Company issued 15 million shares in escrow, which CMA began to sell in March 2019 at the end of the six-month restrictive
period. The shares were sold at their discretion to bring down the balance of the CMA Note. In accordance with the agreement,
CMA had to sell all shares at no less than $0.035 per share. As of September 30, 2019, the Company reduced the amounts due by
$0.9 million of the $1.5 million CMA Note through the issuance and sale of 15 million shares of its common stock that were previously
held in escrow. The total value received upon the sale of the 15 million shares was less than the total obligation outstanding
after all shares were sold through April 2019.
In
July 2019, the Company issued an additional 30 million shares to CMA to settle the shortfall. The details are as follows:
|
●
|
Upon
delivery of the 30 million shares for the second and third tranches, the debt was fully satisfied. CMA can sell the shares
at least six months after issue at no less than $0.01399 per share (subject to adjustment for stock split, reorganization,
recapitalization, reclassification, reverse stock split or stock dividend).
|
|
|
|
|
●
|
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 through June 2020.
|
In
connection with the July settlement the Company recorded a loss on debt extinguishment of approximately $340,000.
Term
Notes
During
the year ended December 31, 2018, certain investors guaranteed $100,000 each with Fidelity Bank to establish a $500,000 revolving
line of credit. At the present time, the Company is paying interest only at a rate of 4.5% per annum, with a balloon payment of
$500,000 due in 2033. The balance is $500,000 as of December 31, 2019 and 2018.
Other
term debt totaling $16,374 at December 31, 2019 represents three 0% loans on motor vehicles, requiring cumulative monthly payments
of $1,488 through maturity in November 2020.
Shareholder,
Convertible and Contingently Convertible Notes Payable
The
following table summarizes shareholder, convertible and contingently convertible notes payable as of December 31:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Shareholder, convertible
and contingently convertible notes
|
|
$
|
951,895
|
|
|
$
|
542,528
|
|
Accrued interest
|
|
|
46,569
|
|
|
|
35,140
|
|
Debt discount
|
|
|
(137,775
|
)
|
|
|
(73,519
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
860,689
|
|
|
|
504,149
|
|
Less: current
maturities
|
|
|
(366,326
|
)
|
|
|
(504,149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
494,363
|
|
|
$
|
-
|
|
Shareholder
Convertible Notes Payable
During
the year ended December 31, 2018, the Company issued shareholder
contingently convertible notes payable (the “Notes”), some of which were for contract work performed by other
entities in lieu of compensation and expense reimbursement, totaling approximately $335,000. The Notes are (i) unsecured,
(ii) bear interest at an annual rate of five percent (5%) per annum from date of issuance, and (iii) are convertible at the Company’s
option post April 19, 2018. The Notes mature one year from issuance but may be extended one (1) additional year by the Company.
If converted, the Notes plus accrued interest are convertible into shares of the Company’s common stock at the prior twenty
(20) day average closing price with a 50% discount. The Notes were extended one additional year until January 2020. The outstanding
balance of all of these Notes as of December 31, 2019 and 2018 is $338,195.
During
the year ended December 31, 2019, the Company issued certain contingently convertible promissory notes in varying amounts to existing
shareholders which totaled $613,700. The face amount of the notes represents the amount due at maturity along with the accrued
interest. The amount can be converted into shares of the Company’s stock, at the option of the Company, based on the average
closing price for the trailing 20 days prior to conversion and carrying a 35% to 50% discount. These notes can be converted only
after an acceleration event which involves a symbol change, uplisting, or reverse stock split and such conversion is in the control
of the Company. All of these notes are outstanding as of December 31, 2019.
Based
on the variable conversion price, the Company recorded derivative liabilities of $442,934 at December 31, 2019.
Convertible
and Contingently Convertible Notes Payable
The
following table summarizes convertible and contingently convertible notes payable as of December 31:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Power Up Lending Group
LTD
|
|
$
|
-
|
|
|
$
|
149,305
|
|
Crown Bridge Partners, LLC
|
|
|
-
|
|
|
|
50,000
|
|
Auctus Fund LLC
|
|
|
-
|
|
|
|
9,375
|
|
EMA Financial LLC
|
|
|
-
|
|
|
|
653
|
|
First Fire
Global Opportunities Fund, LLC
|
|
|
-
|
|
|
|
(5,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
204,333
|
|
Accrued interest
|
|
|
-
|
|
|
|
21,139
|
|
Debt discount
|
|
|
-
|
|
|
|
(73,519
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
151,953
|
|
From
January 1, 2018 and through the date of these consolidated financial statements, the Company had issued certain convertible and
contingently convertible notes payable in varying amounts, in the aggregate of $710,000. The face amount of the notes represented
the amount due at maturity along with the accrued interest, at which time that amount may be converted into shares of the Company
stock based on the lowest 2 day closing price for the trailing 20 days prior to conversion and carrying a 35% discount. The convertible
and contingently convertible notes provided for interest to accrue at an interest rate equal to 12% per annum or the maximum rate
permitted under applicable law after the occurrence of any event of default as provided in the notes. At any time after 180 days
from the issue date, the holder, at its option, may convert the outstanding principal balance and accrued interest into shares
of common stock of the Company. The initial conversion price for the principal and interest in connection with voluntary conversions
by a holder of the convertible and contingently convertible notes ranges from $0.05 to $0.10 per share, subject to adjustment
as provided therein. The total outstanding balance of the convertible and contingently convertible notes was converted as of December
31, 2019 into approximately 303 million shares of the Company’s common stock. Based on the variable conversion price, the
Company recorded initial derivative liabilities of $465,905. The remaining balance of $235,085, net of discount, as of December
31, 2018 was reduced to zero in 2019 after a change in fair value of $1,044,250 and a decrease of $1,279,335 to the balance of
the derivative liabilities upon the date all notes were converted.
In
connection with the issuance of the convertible and contingently convertible notes, the Company issued warrants to purchase 411,875
shares of the Company’s common stock. The exercise term of the warrants ranges from issuance to any time on or after the
six (6) month anniversary or prior to the maturity of the related note. The exercise price of the warrants is $0.40 per share
of the Company’s common stock, as may be adjusted from time to time pursuant to the antidilution provisions of the related
warrant. Pursuant to ASU 2017-11, such antidilution features do not subject the Company to derivative accounting pursuant to ASC
815. All warrants were forfeited during the year ended December 31, 2019 upon negotiation and conversion of the remaining outstanding
balances.
Peak
One Opportunity Fund, L.P.
During
the year ended December 31, 2018, the Company entered into a financing agreement with Peak One Opportunity Fund, L.P. to receive
$435,000 of original issue discount notes in three tranches as follows:
|
1.
|
July
17, 2018, principal $85,000 with an imputed interest rate of 6%, discounted by 10%, and $5,000 for legal fees, for a net of
$71,500 due three years from the funding date. The Company has the option of receiving two additional amounts ninety days
apart;
|
|
|
|
|
2.
|
September
14, 2018: $150,000 principal, $135,000 net.
|
|
|
|
|
3.
|
November
13, 2018: a final $200,000 principal, $180,000 net.
|
Peak
One Opportunity Fund is entitled to convert the note into common stock at a price equal to 65% of the lowest traded price for
the twenty trading days immediately preceding the date of the date of conversion. The Company had the option to redeem the note
at varying prices based upon the redemption date. As of December 31, 2018, the entire balance had been converted into shares
of common stock.
Crown
Bridge Partners, LLC
During
the year ended December 31, 2018, the Company entered into a financing agreement with Crown Bridge Partners, LLC to receive $100,000
of original issue discount notes in two tranches as follows:
|
1.
|
August
6, 2018: principal $50,000 bearing interest at 8%, discounted by 10%, and $2,000 for legal fees, for a net of $43,000 due
one year from the funding date;
|
|
|
|
|
2.
|
The
remaining tranche may be funded at the holder’s discretion.
|
Crown
Bridge Partners has converted the first tranche into common stock at a price equal to 65% of the average of the two lowest traded
prices for the twenty-five trading days immediately preceding the date of the date of conversion. As of December 31, 2019, the
entire balance has been converted into 32,240,000 shares of common stock.
Other
Notes Payable
The
following notes were also convertible after six months from the issue date:
|
|
Face
|
|
|
Interest
|
|
|
|
|
|
Net
Cash
|
|
|
Amount
|
|
Issue
Date and Name
|
|
Amount
|
|
|
Rate
|
|
|
Maturity
|
|
|
Proceeds
|
|
|
Converted/Paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan 29, 2018 EMA
|
|
$
|
80,000
|
|
|
|
12
|
%
|
|
|
Jan
29, 2019
|
|
|
$
|
72,300
|
|
|
$
|
80,000
|
|
Feb 14, 2018 Auctus
|
|
$
|
80,000
|
|
|
|
12
|
%
|
|
|
Nov
14, 2018
|
|
|
$
|
72,500
|
|
|
$
|
80,000
|
|
Feb 13, 2018 FirstFire Global
|
|
$
|
76,500
|
|
|
|
5
|
%
|
|
|
Nov
13, 2018
|
|
|
$
|
72,500
|
|
|
$
|
81,500
|
|
May 2, 2018 Power Up #3
|
|
$
|
83,000
|
|
|
|
12
|
%
|
|
|
May
23, 2019
|
|
|
$
|
80,000
|
|
|
$
|
83,000
|
|
Oct 10, 2018 Power Up #4
|
|
$
|
103,000
|
|
|
|
12
|
%
|
|
|
Oct
10, 2019
|
|
|
$
|
103,000
|
|
|
$
|
103,000
|
|
During
the year ended December 31, 2019, approximately $63,000 of the convertible notes above and approximately $21,000 of accrued interest
were exchanged for approximately 227,000,000 shares of common stock. In addition, approximately $142,000 of the Power Up notes
have been settled in cash. All convertible notes above have been paid in full or fully converted as of December 31, 2019.
Related
Party Debt
The
following table summarizes related party debt as of December 31, 2019:
|
|
2019
|
|
|
|
|
|
Rotman Family convertible
notes
|
|
$
|
1,782,707
|
|
Rotman Family nonconvertible notes
|
|
|
507,500
|
|
Accrued interest
|
|
|
53,152
|
|
Debt discount
|
|
|
(585,100
|
)
|
|
|
|
|
|
|
|
|
1,758,259
|
|
Less: current
maturities
|
|
|
(46,000
|
)
|
|
|
|
|
|
|
|
$
|
1,712,259
|
|
Rotman
Family Convertible Notes
On
June 30, 2019, the Company issued contingently convertible promissory notes totaling $180,000, to Steven Rotman ($105,000) and
Greg Rotman ($75,000). These notes are (i) unsecured, (ii) bear interest at an annual rate of eight percent (8%) per annum from
date of issuance, (iii) are convertible at the Company’s option and (iv) mature five years from issuance. If converted,
the notes plus accrued interest are convertible into shares of the Company’s common stock at the average of the five lowest
closing prices in the 90-day period prior to conversion with a 50% discount. The balance of the notes payable including accrued
interest to Steven and Greg Rotman is approximately $109,000 and $57,000, respectively, at December 31, 2019.
On
July 18, 2019, the Company issued contingently convertible notes totaling $1,522,500, to Steven Rotman ($1,102,500) and Bernard
Rotman ($420,000) as partial consideration for the acquisition of 58% of Rotmans (see Note 18). These notes are (i) unsecured,
and (ii) bear interest at an annual rate of eight percent (8%) per annum from date of issuance. These notes can be converted only
after an acceleration event which involves a symbol change, or reverse stock split and such conversion is in the control of the
Company. Steven Rotman’s note matures eight years from issuance and Bernard Rotman’s note matures four years from
issuance. If converted, the notes plus accrued interest are convertible into shares of the Company’s common stock at a 20-day
average closing price at a 50% discount. The balance of the notes payable including accrued interest to Steven and Bernard Rotman
is approximately $1,128,000 and $430,000, respectively, at December 31, 2019.
On
December 19, 2019, the Company issued a contingently convertible promissory note totaling $100,000, to Steven Rotman. The face
amount of the note represents the amount due at maturity along with the accrued interest. The amount can be converted into shares
of the Company’s stock, at the option of the Company, based on the average closing price for the trailing 20 days prior
to conversion and carrying 50% discount. The note can be converted only after an acceleration event which involves a symbol change,
uplisting, or reverse stock split and such conversion is in the control of the Company. The note matures two years from issuance.
Based
on the variable conversion price for all of these convertible notes, the Company recorded derivative liabilities of $1,056,866
at December 31, 2019.
Rotman
Family Nonconvertible Notes
In
connection with the acquisition of 58% of Rotmans (see Note 18), Steven and Bernard Rotman were issued related party notes payable
in the amounts of $367,500 and $140,000, respectively. The notes bear interest at an annual rate of five percent (5%). Steven
Rotman’s note matures eight years from issuance and Bernard Rotman’s note matures four years from issuance. Payments
of $3,828 and $2,917 to Steven and Bernard Rotman, respectively, per month begin six months from issuance until maturity in December
2027 and 2023, respectively. The balance of these notes payable including accrued interest to Steven and Bernard Rotman is approximately
$376,000 and $143,000, respectively, at December 31, 2019.
Approximate
maturities for the succeeding years are as follows:
2020
|
|
$
|
46,000
|
|
2021
|
|
|
59,000
|
|
2022
|
|
|
62,000
|
|
2023
|
|
|
85,000
|
|
2024
|
|
|
34,000
|
|
Thereafter
|
|
|
221,500
|
|
|
|
|
|
|
|
|
$
|
507,500
|
|
NOTE
9 -
|
DERIVATIVE
LIABILITIES
|
As
of December 31, 2019, the Company had a $1,499,800 derivative liability balance on the consolidated balance sheet and recorded
a loss from change in fair value of derivative liabilities of $1,079,450 for the year ended December 31, 2019. The derivative
liability activity comes from certain convertible notes payable (and any related warrants). The Company analyzed the conversion
features and warrants of the various note agreements for derivative accounting consideration under ASC 815-15 “Derivatives
and Hedging” and determined that the embedded conversion features should be classified as a derivative because the exercise
price of these convertible notes are subject to a variable conversion rate. The Company has determined that the conversion feature
is not considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment. In accordance
with ASC 815, the Company has bifurcated the conversion feature of the notes and recorded a derivative liability.
The
embedded derivatives for the notes are carried on the Company’s consolidated balance sheet at fair value. The derivative
liability is marked-to-market each measurement period and any unrealized change in fair value is recorded as a component of the
consolidated statement of operations and the associated fair value carrying amount on the consolidated balance sheet is adjusted
by the change. The Company fair values the embedded derivative using a lattice-based valuation model or Monte Carlo simulation.
The
following table summarizes the derivative liabilities included in the consolidated balance sheet at December 31, 2019 and 2018:
Fair
Value of Embedded Derivative and Warrant Liabilities:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Balance, beginning of
the year
|
|
$
|
235,085
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Initial measurement of liabilities
|
|
|
1,464,600
|
|
|
|
465,905
|
|
|
|
|
|
|
|
|
|
|
Change in fair value
|
|
|
1,079,450
|
|
|
|
269,539
|
|
|
|
|
|
|
|
|
|
|
Settlement
due to conversion
|
|
|
(1,279,335
|
)
|
|
|
(500,359
|
)
|
|
|
|
|
|
|
|
|
|
Balance, end
of the year
|
|
$
|
1,499,800
|
|
|
$
|
235,085
|
|
NOTE
10 -
|
STOCKHOLDERS’
EQUITY (DEFICIT)
|
Cumulative
Convertible Preferred Stock
On
May 2, 2013, the Company began a private placement offering to sell up to 200,000 shares of the Company’s 10% Series A Cumulative
Convertible Preferred Stock. Under the terms of the offering, the Company offered to sell up to 200,000 shares of preferred stock
at $10 per share for a value of $2,000,000. The preferred stock accumulates a 10% per annum dividend and was convertible at a
conversion price of $0.075 per common share at the option of the holder after a nine-month holding period. The conversion price
was lowered to $0.05 per common share for those holders who invested an additional $25,000 or more in the Company’s common
stock in the aforementioned September 2014 Private Placement. The preferred shares have full voting rights as if converted and
have a fully participating liquidation preference.
As
of December 31, 2019, the 13,828 shares of outstanding preferred stock had undeclared dividends of approximately $91,000 and could
be converted into 4,591,100 shares of common stock, at the option of the holder.
As
of December 31, 2018, the 13,828 shares of outstanding preferred stock had undeclared dividends of approximately $77,000 and could
be converted into 4,314,537 shares of common stock, at the option of the holder.
Common
Stock and Warrants
In
January 2019, the Company repurchased 30,000 shares of common stock from an existing shareholder for $30 in cash. The transaction
was recorded as treasury stock repurchased and is included in the accompanying consolidated financial statements as a separate
item in the consolidated statements of stockholders’ deficit.
During
the first quarter of 2019, through majority shareholder consent, the Company increased the amount of authorized common stock shares
to 1,500,000,000.
During
the year ended December 31, 2019, the Company issued 155,226,844 shares under equity purchase agreements for cash proceeds
totaling $606,300. Included in this amount are 22,999,999 of shares purchased for $69,000 from related parties. Approximately
54,999,997 shares were issued during 2019 but were included in shares issued and outstanding at December 31, 2018 as the related
cash was received prior to year-end 2018. There were additional share issuances to First Fire Global Opportunities Fund, LLC and
Crown Bridge Partners, LLC for cash related to the settlement of warrants previously attached to convertible notes payable. See
discussion below in Other Shares Issued.
During
the year ended December 31, 2019, the Company issued 227,336,218 shares due to the conversion of principal and interest of notes
payable totaling $85,000. The fair value at dates of conversion totaled approximately $1.3 million which were offset by the settlement
of derivative liabilities upon conversion of approximately $1.3 million. The difference was recognized as a gain on settlement
of debt of approximately $21,000 and is included in the consolidated statements of operations in other income (expense) for the
year ended December 31, 2019. See Note 8 for further details on conversion of the contingently convertible notes.
As
discussed in Note 8, in July 2018, the Company issued 15,000,000 shares in escrow which CMA Investments, LLC began to sell in
March 2019 at the end of the restrictive six-month period. The shares were sold at their discretion to bring down the balance
of the debt. In accordance with the agreement, CMA Investments, LLC had to sell all shares at no less than $0.035 per share. During
the year ended December 31, 2019, the Company issued an additional 30,000,000 shares of its common stock to fully satisfy the
CMA note.
Other
Shares Issued
In
January 2019, the Company issued 14,746,324 shares to Peak One Opportunity Fund, L.P. as part of a settlement. The shares were
issued to settle any exercise of the 600,000 warrants previously granted to the investor related to convertible debt that was
already converted, in addition to under conversion of previously outstanding convertible notes payable. As part of settlement
to consider any remaining dispute over convertible notes payable and to avoid returning shares to the Company, the parties agreed
the debt would be considered fully converted as of March 31, 2019. As part of that settlement agreement, the previously issued
warrants were forfeited in exchange for shares noted above. On the date of settlement, the shares had a fair value of $32,442.
In
March 2019, the Company issued a total of 31,333,333 shares for $200,000 in cash received from First Fire Global Opportunities
Fund, LLC. The shares were issued to settle any exercise of the 286,875 warrants previously granted to the investor related to
convertible debt that was already converted, in addition to over conversion of previously outstanding convertible notes payable.
These warrants were issued in connection with convertible notes payable. As part of settlement to consider any remaining dispute
over convertible notes payable and to avoid returning shares to the Company, the parties agreed the debt would be considered fully
converted as of March 31, 2019. As part of that settlement agreement, the previously issued warrants were forfeited in exchange
for shares issued for cash noted above. On the date of the settlement, the shares had a fair value of $2,193,333.
In
January and March of 2019, the Company issued 31,833,334 shares for $200,000 in cash from Crown Bridge Partners, LLC. The shares
were issued to settle any exercise of the 125,000 warrants previously granted to the investor related to convertible debt that
was already converted. As part of settlement to consider any remaining dispute over convertible notes payable, the parties agreed
the debt would be considered fully converted as of March 31, 2019. As part of that settlement agreement, the previously issued
warrants were forfeited in exchange for shares issued for cash noted above. On the date of the settlement, the shares had a
fair value of $1,457,967.
During
the year ended December 31, 2019, the Company issued 142,538,209 shares for consulting services valued at $2,642,936 based
on the respective measurement dates. Of these shares, 85,664,655 were issued to related parties, see further detail of related
party shares in Note 13.
The
following table presents our revenues disaggregated by each major product category and service for the last two years:
|
|
Year
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
% of
|
|
|
|
|
|
% of
|
|
|
|
Net
Sales
|
|
|
Net
Sales
|
|
|
Net
Sales
|
|
|
Net
Sales
|
|
Merchandise:
|
|
|
|
|
|
|
|
|
|
|
|
|
Case Goods
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bedroom
Furniture
|
|
$
|
1,812,867
|
|
|
|
13.2
|
|
|
$
|
-
|
|
|
|
-
|
|
Dining Room Furniture
|
|
|
1,135,807
|
|
|
|
8.3
|
|
|
|
-
|
|
|
|
-
|
|
Occasional
|
|
|
2,239,769
|
|
|
|
16.4
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
5,188,443
|
|
|
|
37.9
|
|
|
|
-
|
|
|
|
-
|
|
Upholstery
|
|
|
3,523,817
|
|
|
|
25.7
|
|
|
|
-
|
|
|
|
-
|
|
Mattresses and Toppers
|
|
|
3,038,471
|
|
|
|
22.2
|
|
|
|
319,523
|
|
|
|
93.4
|
|
Broadloom, Flooring
and Rugs
|
|
|
1,172,318
|
|
|
|
8.6
|
|
|
|
-
|
|
|
|
-
|
|
Warranty
|
|
|
245,002
|
|
|
|
1.8
|
|
|
|
-
|
|
|
|
-
|
|
Accessories
and Other
|
|
|
517,821
|
|
|
|
3.8
|
|
|
|
22,526
|
|
|
|
6.6
|
|
|
|
$
|
13,685,872
|
|
|
|
100.0
|
|
|
$
|
342,049
|
|
|
|
100.0
|
|
NOTE
12 -
|
SHARE-BASED
COMPENSATION
|
Generally
accepted accounting principles require share-based payments to employees, including grants of employee stock options, warrants,
and common stock to be recognized in the income statement based on their fair values at the date of grant, net of estimated forfeitures.
In
total, the Company recorded $2,968,898 and $1,285,938 of stock-based compensation for the years ended December 31, 2019 and 2018,
respectively, including shares to be issued related to consultants and board member stock options and common stock and warrants
issued to non-employees. Included in stock subscription payable is accrued stock-based compensation of $845,175 and $771,203 at
December 31, 2019 and 2018, respectively.
The
Company used the Black-Scholes option pricing model to estimate the grant-date fair value of option and warrant awards granted.
The following assumptions were used for warrant awards during the year ended December 31, 2019:
|
●
|
Expected
Dividend Yield – because the Company does not currently pay dividends, the expected dividend yield is zero;
|
|
|
|
|
●
|
Expected
Volatility in Stock Price - volatility based on the Company’s trading activity was used to determine expected volatility;
|
|
|
|
|
●
|
Risk-free
Interest Rate - reflects the average rate on a United States Treasury Bond with a maturity equal to the expected term of the
option; and
|
|
|
|
|
●
|
Expected
Life of Award - because we have minimal experience with the exercise of options or warrants for use in determining the expected
life of each award, we used the option or warrant’s contractual term as the expected life.
|
In
total for the years ended December 31, 2019 and 2018, the Company recorded $50,789 and $1,161,132, respectively, of share-based
compensation expense related to employee and Board Members’ stock options. The unrecognized compensation expense as of December
31, 2019 was $48,933 for non-vested share-based awards to be recognized over a period of approximately four years.
Options
During
2004, the Board of Directors of the Company adopted a stock option plan (the “Plan”) and authorized up to 4,000,000
shares to be issued under the Plan. In April 2009, the Company’s Board of Directors authorized an increase in the number
of shares to be issued under the Plan to 10,000,000 shares and to include the independent Board Members in the Plan in lieu of
continuing the previous practice of granting warrants each quarter to independent Board Members for services. At December 31,
2019, there are 2,251,729 shares of common stock available for issuance under the Plan. In 2014, the Board of Directors adopted
an additional stock option plan which provides for an additional 5,000,000 shares which are all available as of December 31, 2019.
During 2019, the Board of Directors adopted the 2019 Equity Incentive Plan (the “Plan”) and authorized up to 50,000,000
shares to be issued under the Plan. All employees, consultants and independent Board members are eligible to participate in the
Plan.
The
Plan is intended to permit stock options granted to employees to qualify as incentive stock options under Section 422 of the Internal
Revenue Code of 1986, as amended (“Incentive Stock Options”). All options granted under the Plan that are not intended
to qualify as Incentive Stock Options are deemed to be non-qualified options. Stock options are granted at an exercise price equal
to the fair market value of the Company’s common stock on the date of grant, typically vest over periods up to 4 years and
are typically exercisable up to 10 years.
There
were no options and 21,800,000 non-plan options granted during the year ended December 31, 2019 and 2018, respectively.
The
weighted average assumptions used in the option pricing model for stock option grants were as follows:
|
|
2019
|
|
|
2018
|
|
Expected Dividend Yield
|
|
|
-
|
|
|
|
0.00
|
%
|
Expected Volatility in Stock Price
|
|
|
-
|
|
|
|
263.33
|
%
|
Risk-Free Interest Rate
|
|
|
-
|
|
|
|
2.25
|
%
|
Expected Life of Stock Awards
- Years
|
|
|
-
|
|
|
|
10.00
|
|
Weighted Average Fair Value at Grant Date
|
|
|
-
|
|
|
$
|
0.05
|
|
The
following table summarizes all stock option activity of the Company for the years ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
of
Shares
|
|
|
Price
|
|
|
Life
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
|
7,748,271
|
|
|
$
|
0.16
|
|
|
|
5.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
21,800,000
|
|
|
$
|
0.02
|
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(450,000
|
)
|
|
$
|
0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2018
|
|
|
29,098,271
|
|
|
$
|
0.06
|
|
|
|
4.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2018
|
|
|
27,258,270
|
|
|
$
|
0.06
|
|
|
|
6.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,115,000
|
)
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2019
|
|
|
27,983,271
|
|
|
$
|
0.20
|
|
|
|
3.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2019
|
|
|
26,783,271
|
|
|
$
|
0.21
|
|
|
|
3.69
|
|
As
of December 31, 2019, and 2018, the aggregate intrinsic value of the Company’s outstanding options was approximately $1,000
and $22,000, respectively. The aggregate intrinsic value will change based on the fair market value of the Company’s common
stock.
Warrants
Warrants
are issued to third parties as payment for services, debt financing compensation and conversion and in conjunction with the issuance
of common stock. The fair value of each common stock warrant issued for services is estimated on the date of grant using the Black-Scholes
option pricing model.
The
weighted-average assumptions used in the option pricing model for stock warrant grants were as follows:
|
|
2019
|
|
|
2018
|
|
Expected Dividend Yield
|
|
|
-
|
|
|
|
0.00
|
%
|
Expected Volatility in Stock Price
|
|
|
-
|
|
|
|
295.00
|
%
|
Risk-Free Interest Rate
|
|
|
-
|
|
|
|
3.05
|
%
|
Expected Life of Stock Awards
|
|
|
-
|
|
|
|
8.52
|
|
The
following table represents the Company’s warrant activity for the year ended December 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
Number
|
|
|
Average
|
|
|
Average
|
|
|
Contractual
|
|
|
|
of
Shares
|
|
|
Fair
Value
|
|
|
Exercise
Price
|
|
|
Life
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December
31, 2017
|
|
|
14,699,582
|
|
|
|
|
|
|
$
|
0.10
|
|
|
|
5.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,011,875
|
|
|
$
|
0.05
|
|
|
$
|
0.40
|
|
|
|
3.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(222,625
|
)
|
|
|
|
|
|
$
|
0.90
|
|
|
|
3.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2018
|
|
|
15,488,832
|
|
|
|
|
|
|
$
|
0.12
|
|
|
|
4.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,251,186
|
)
|
|
|
|
|
|
$
|
0.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2019
|
|
|
14,237,646
|
|
|
|
|
|
|
$
|
0.07
|
|
|
|
3.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2019
|
|
|
14,237,646
|
|
|
|
|
|
|
$
|
0.07
|
|
|
|
3.58
|
|
NOTE
13 -
|
RELATED
PARTY TRANSACTIONS
|
Officers
and Directors
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
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 $201,200 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.
Designcenters.com
This
entity is owned by Jamie Rotman, who is the daughter of the Company’s CEO, Steven Rotman. Designcenters.com (“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
the Design’s consulting agreement, Design was to receive approximately $7,100 per month to be paid in cash or shares based
on a 20-day average at a 50% discount to market and a $10,000 quarterly bonus to be paid in shares using the same formula. During
the year ended December 31, 2019, the Company issued Design 20,030,407 shares in accordance with the consulting agreement that
were accrued and expensed as of December 31, 2018. During the year ended December 31, 2019, the Company expensed approximately
$83,000 related to the consulting agreement. Of the expensed amount, approximately $41,000 was paid in cash. As of December 31,
2019, the Company had a stock subscription payable balance of $42,000, for approximately 850,000 shares related to this party.
Blue
Oar Consulting, Inc.
This
entity is owned by Gregory Rotman, who is the son of the Company’s CEO, Steven Rotman. Blue Oar Consulting, Inc. (“Blue
Oar”) provides business consulting services to the Company. In exchange for such services, the Company has entered into
a consulting agreement with the related party entity.
Per
Blue Oar’s consulting agreement, it is to be paid $15,000 per month in cash for expenses, and $12,500 per month to be paid
in shares based on a 20-day average at a 50% discount to market. During the 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 as of December 31, 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. As of December 31, 2019, the Company had a stock subscription payable
balance of $330,000, for approximately 10,562,000 shares related to this party.
Polymer
Consultancy Services, Ltd.
This
entity is owned in part by Dr. R.K. Matthan, a director of the Company. Polymer Consultancy Services, Ltd. (“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.
Fluid
Energy Conversion Inc.
In
May of 2019, the Company acquired the assets of Fluid Energy Conversion Inc. (“FEC”) for 2,500,000 shares of common
stock to be issued in 2020. FEC is owned by Dr. Bryan Stone, one of the Company’s directors. The assets consist of a patent
on the Hughes Reactor, which has the ability to control, enhance and focus energy in flowing liquids and gases. Included in subscription
stock payable at December 31, 2019 is $103,750 representing the value of the 2,500,000 shares on the purchase date.
Rotmans
Furniture
During
the year ended December 31, 2019, the Company had sales of approximately $49,000 to Murida Furniture Co., Inc., DBA Rotmans
Furniture (“Rotmans”). All significant intercompany transactions since the acquisition date of July 18, 2019 have
been eliminated in the accompanying consolidated financial statements. The Company utilized certain warehouse staff, warehouse
and office 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.
Employment
and Consulting Agreements
The
Company has entered into employment and consulting agreements with certain of our officers, employees, and affiliates. For employees,
payment and benefits would become payable in the event of termination by us for any reason other than cause, or upon change in
control of our Company, or by the employee for good reason.
There
is currently one employment agreement in place for 2019 with the CEO, Steven Rotman. See compensation terms in Note 13.
During
the year ended December 31, 2019, the Company entered into various services agreement with consultants for financial reporting,
advisory, and compliance services.
Litigation
From
time to time, the Company is party to certain legal proceedings that arise in the ordinary course and are incidental to our business.
Future events or circumstances, currently unknown to management, will determine whether the resolution of pending or threatened
litigation or claims will ultimately have a material effect on our consolidated financial position, liquidity or results of operations
in any future reporting periods.
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. The Court issued a
decision permitting a motion for summary judgment to proceed and permitted the Company the opportunity to supplement its opposition
papers together with the plaintiff who was also provided opportunity to submit reply papers. On April 5, 2019, the Company filed
the opposition papers as well as a motion to dismiss the first and third causes of action in the complaint.
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.
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 sales people 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.
NOTE
15 -
|
MAJOR
CUSTOMERS AND VENDORS
|
Major
customers and vendors are defined as a customer or vendor from which the Company derives at least 10% of its revenue and cost
of revenue, respectively.
During
2019, the Company made approximately 15% of its purchases from one major vendor. The Company owed its major vendor approximately
$219,000 at December 31, 2019. There were no significant vendor concentrations in 2018.
During
2018, revenue came from three major customers. At December 31, 2018, receivables from major customers totaled approximately $17,000.
There were no significant customer concentrations in 2019.
The
provision (benefit) for income taxes for the years ended December 31, 2019 and 2018 assumes a 21% effective tax rate for federal
income taxes. A reconciliation of the federal statutory income tax rate and the effective income tax rate as a percentage of income
before income taxes is as follows:
|
|
Year
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Federal statutory income
tax rate
|
|
|
(21.0
|
%)
|
|
|
(21.0
|
%)
|
|
|
|
|
|
|
|
|
|
Change in valuation
allowance on net operating loss carryforwards
|
|
|
21.0
|
|
|
|
21.0
|
|
|
|
|
|
|
|
|
|
|
Effective income
tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Deferred
tax assets as of December 31, 2019 and 2018 are as follows:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
NOL carryforwards
|
|
$
|
5,490,000
|
|
|
$
|
4,190,000
|
|
|
|
|
|
|
|
|
|
|
Less valuation
allowance
|
|
|
(5,490,000
|
)
|
|
|
(4,190,000
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax
assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
taxes are caused primarily by net operating loss carryforwards. For federal income tax purposes, the Company, excluding Rotmans,
has a net operating loss carryforward of approximately $26,100,000 as of December 31, 2019, of which approximately $18,400,000
expires beginning in 2024 and $7,700,000 which can be carried forward indefinitely. For state income tax purposes, the
Company, excluding Rotmans, has a net operating loss carryforward of approximately $18,300,000 and $7,700,000 as of December
31, 2019 in Georgia and Massachusetts, respectively, which expires beginning in 2023.
In
addition, as of December 31, 2019, Rotmans has a net operating loss carryforward of approximately $2,700,000 for federal income
tax purposes of which $1,800,000 expires beginning in 2029 and $900,000 can be carried forward indefinitely. Rotmans has a state
operating loss carryforward of approximately $1,800,000 which expires beginning in 2022.
Pursuant
to Internal Revenue Code Section 382, the future realization of our net operating loss carryforwards to offset future taxable
income may be subject to an annual limitation as a result of ownership changes that may have occurred previously or that could
occur in the future.
NOTE
17 -
|
PROFIT
SHARING PLAN
|
The
Company sponsors a qualified 401(k) profit sharing plan covering all eligible employees. The plan permits participants to make
tax-deferred contributions to the plan by salary reduction. Company contributions are discretionary and are determined annually
by the Board of Directors.
There
were no Company contributions in 2019. Participant and Company contributions are limited to amounts allowed under the Internal
Revenue Code.
The
Company offers no post-retirement benefits other than the plan discussed above and no significant post-employment benefits.
NOTE
18 -
|
ACQUISITION
OF ROTMANS
|
On
July 18, 2019, the Company acquired 58% of the outstanding shares of common stock of Rotmans, the largest furniture and flooring
store in New England, for an aggregate purchase price of $2,030,000. The consideration is to be paid in 25% notes payable over
4 to 8 years and 75% in notes convertible to common shares (see Note 8). The Company and Rotmans are exploring a number of initiatives
relating to environmentally friendly product development and distribution that will utilize the access to the capital markets
afforded by this combination.
The
transaction has been accounted for using the acquisition method of accounting which requires, among other things, the assets acquired
and liabilities assumed to be recognized at their fair values at the date of acquisition. The following table summarizes the estimated
fair values of the assets acquired and liabilities assumed at the date of acquisition:
Consideration Paid:
|
|
|
|
Notes
payable
|
|
$
|
507,500
|
|
Convertible
notes payable
|
|
|
1,522,500
|
|
|
|
|
|
|
Total consideration
|
|
$
|
2,030,000
|
|
|
|
|
|
|
Purchase Price Allocation:
|
|
|
|
|
Accounts receivable
|
|
$
|
15,847
|
|
Inventories
|
|
|
4,904,499
|
|
Other current assets
|
|
|
471,532
|
|
Operating lease
right-of-use assets
|
|
|
10,848,241
|
|
Finance lease right-of-use
assets, net
|
|
|
173,596
|
|
Property and equipment
|
|
|
1,765,707
|
|
Other assets
|
|
|
274,366
|
|
Customer relationships
|
|
|
110,000
|
|
Trade name
|
|
|
770,000
|
|
Marketing related
intangibles
|
|
|
380,000
|
|
Goodwill
|
|
|
313,210
|
|
|
|
|
|
|
Total identifiable assets
|
|
|
20,026,998
|
|
Line of credit
|
|
|
(2,374,090
|
)
|
Notes payable
|
|
|
(25,305
|
)
|
Accounts payable
|
|
|
(2,000,146
|
)
|
Accrued expenses
|
|
|
(544,971
|
)
|
Operating lease
liabilities
|
|
|
(9,008,241
|
)
|
Finance lease liabilities
|
|
|
(189,421
|
)
|
Unearned revenue
|
|
|
(2,508,623
|
)
|
Noncontrolling
interest in net assets
|
|
|
(1,346,201
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
2,030,000
|
|
Goodwill
of $313,210 was recognized in the acquisition of Rotmans which represents the value derived from t he
combined capabilities of our two organizations, including improved infrastructure in support of purchasing, marketing, inventory
control, advertising, accounting, warehousing and customer service create an opportunity to grow our brands and accelerate long
term growth and value for our people, customers, and suppliers. The addition of Rotmans to Vystar’s platform, positions
the Company as an authority in our customers’ homes and also creates a showcase for Vystar’s products. This partnership
represents a key opportunity to drive long-term growth and value creation for our shareholders. The Company has invested approximately
$400,000 in the completion of the merger and has committed a considerable amount of staff resources, most of which is a one-time
cost.
In
determining the fair value of the intangible assets, the Company considered, among other factors, the best use of the acquired
assets such as the customer relationships, trade name and marketing related intangibles. The Company finalized the purchase price
allocation through the use of management analysis and certain other factors. The preliminary allocation was properly adjusted
for the finalized figures. Accordingly, any differences between preliminary estimates and the final allocation to the intangible
assets have been reflected in the accompanying consolidated financial statements.
Unaudited
pro forma financial information
The
following unaudited pro forma information presents a summary of the Company’s combined operating results for the years ended
December 31, 2019 and 2018, as if the acquisition and the related financing transactions had occurred on January 1, 2018. The
following pro forma financial information is not necessarily indicative of the Company’s operating results as they would
have been had the acquisition been effected on the assumed date, nor is it necessarily an indication of trends in future results
for a number of reasons, including, but not limited to, differences between the assumptions used to prepare the pro forma information,
basic shares outstanding and dilutive equivalents, cost savings from operating efficiencies, potential synergies, and the impact
of incremental costs incurred in integrating the businesses.
|
|
Year
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Total revenues
|
|
$
|
28,534,224
|
|
|
$
|
31,663,294
|
|
Loss from operations
|
|
$
|
(5,941,018
|
)
|
|
$
|
(5,345,935
|
)
|
Net loss
|
|
$
|
(8,817,917
|
)
|
|
$
|
(7,240,829
|
)
|
Net loss attributable to Vystar
|
|
$
|
(8,360,970
|
)
|
|
$
|
(6,513,098
|
)
|
Basic and dilated loss per share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
NOTE
19 -
|
SUBSEQUENT
EVENTS
|
The
Company has evaluated subsequent events through the date of the filing of its Form 10-K with the Securities and Exchange Commission.
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.
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.
In
January 2020, Rotmans entered into an agreement with NEHDS Logistics, LLC (“NEHDS”) to provide delivery services for
all delivered customer sales. Prior to the agreement, Rotmans had maintained an in-house delivery service. Existing fleet operating
leases are being subleased to NEHDS according to the same terms and conditions as the original lease agreements.
On
February 24, 2020, the Company entered into an agreement with Libertas Funding LLC (“Libertas”) to sell future sale
receipts totaling $1,089,000 for a purchase price of $825,000. The sold amount of future sale receipts will be delivered weekly
to Libertas at predetermined amounts over a period of nine months. The agreement contains an early delivery discount fee for delivering
the future receivables before the end of the contract term and an origination fee of $16,500, which has been capitalized and will
be amortized over the term of the agreement. The agreement is personally guaranteed by Steven Rotman.
In
March 2020, due to a breach of a covenant clause, the Company was in default under the line of credit agreement with Fidelity
Co-operative Bank (“Fidelity”). According to the terms of a tentative agreement with Fidelity, interest only
payments will be payable on the outstanding loan balance until July 24, 2020, at which date the entire loan will be due. The entire
loan was paid off on May 29, 2020 pursuant to an agreement with a third-party agent.
On
April 16, 2020, Rotmans received $1,402,900 in loan funding from the Paycheck Protection Program (the “PPP”), established
pursuant to the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and administered
by the U.S. Small Business Administration (“SBA”). The unsecured loan (the “PPP Loan”) is evidenced by
a promissory note of the Company dated April 16, 2020 (the “Note”) in the principal amount of $1,402,900 with United
Community Bank (the “Bank”), the lender.
Under
the terms of the Note and the PPP Loan, interest accrues on the outstanding principal at the rate of 1.0% per annum. The term
of the Note is two years, though it may be payable sooner in connection with an event of default under the Note. To the extent
the loan amount is not forgiven under the PPP, Rotmans is obligated to make equal monthly payments of principal and interest,
beginning seven months from the date of the Note, until the maturity date.
The
CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed. Under the PPP, Rotmans may apply
for forgiveness for all or a part of the PPP Loan. The amount of loan proceeds eligible for forgiveness is based on a formula
that takes into account a number of factors, including the amount of loan proceeds used by Rotmans during the twenty-four week
period after the loan origination for certain purposes including payroll costs, interest on certain mortgage obligations, rent
payments on certain leases, and certain qualified utility payments, provided that at least 60% of the loan amount is used for
eligible payroll costs; the employer maintaining or rehiring employees and maintaining salaries at certain levels; and other factors.
Subject to the other requirements and limitations on loan forgiveness, only loan proceeds spent on payroll and other eligible
costs during the covered twenty-four week period will qualify for forgiveness.
The
Note may be prepaid in part or in full, at any time, without penalty. The Note provides for certain customary events of default,
including (i) failing to make a payment when due under the Note, (ii) failure to do anything required by the Note or any other
loan document, (iii) defaults of any other loan with the Bank, (iv) failure to disclose any material fact or make a materially
false or misleading representation to the Bank or SBA, (v) default on any loan or agreement with another creditor, if the Bank
believes the default may materially affect Rotmans ability to pay the Note, (vi) failure to pay any taxes when due, (vii) becoming
the subject of a proceeding under any bankruptcy or insolvency law, having a receiver or liquidator appointed for any part of
the Rotmans business or property, or making an assignment for the benefit of creditors, (viii) having any adverse change in financial
condition or business operation that the Bank believes may materially affect Rotmans ability to pay the Note, (ix) if Rotmans
reorganizes, merges, consolidates, or otherwise changes ownership or business structure without the Bank’s prior written
consent, or (x) becoming the subject of a civil or criminal action that the Bank believes may materially affect Rotmans ability
to pay the Note. Upon the occurrence of an event of default, the Bank has customary remedies and may, among other things, require
immediate payment of all amounts owed under the Note, collect all amounts owing from Rotmans, and file suit and obtain judgment
against Rotmans.
In
May 2020, Rotmans entered into a sale promotion consulting agreement with a national furniture sales event company. Under the
agreement, Rotmans appointed the third-party as its exclusive agent to assist with a high-impact sale to pay off the Fidelity
loan. Before the sale, the agent lent the Company funds to pay off the Fidelity loan. The agent will be reimbursed for the advance
from the proceeds of the sale. In addition, the agent has a senior first priority security interest and lien in Rotmans inventories
and other assets until all obligations and liabilities are satisfied. Profits of the sale will be distributed according to
the specific terms of the agreement. The agreement will expire 240 days from the commencement date of May 29, 2020.
On
July 1, 2020, 130 preferred shares were converted into 44,357 shares of common stock.