UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2020

 

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

 

For the transition period from _______________ to ________________

 

Commission File Number 000-53754

 

VYSTAR CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

Georgia   20-2027731

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

725 Southbridge St

Worcester, MA 01610

(Address of Principal Executive Offices, Zip Code)

 

(508) 791-9114

(Registrant’s telephone number including area code)

 

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

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES [  ] NO [X]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES [X] NO [  ]

 

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

 

Large accelerated filer [  ]   Accelerated filer [  ]
Non-accelerated filer [  ]   Smaller reporting company [X]
(Do not check if a smaller reporting company)   Emerging growth company [  ]

 

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

 

Class   Outstanding as of August 19, 2020
Preferred Stock, $0.0001 par value per share   13,698 shares
Common Stock, $0.0001 par value per share   1,118,718,315 shares

 

 

 

 

 

 

INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS

 

In addition to historical information, this Form 10-Q contains statements relating to our future results (including certain projections and business trends) that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are subject to the “safe harbor” created by those sections. The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the financial statements and the related notes thereto included in this Quarterly Report on Form 10-Q (this “Report”). This Report contains certain forward-looking statements and the Company’s future operating results could differ materially from those discussed herein. Our disclosure and analysis included in this Report concerning our operations, cash flows and financial position, including, in particular, the likelihood of our success in expanding our business and raising debt and capital securities include forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expect”, “anticipate”, “intend”, “plan”, “believe”, “estimate”, “may”, “project”, “will likely result”, and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to certain risks, uncertainties, and assumptions, including prevailing market conditions and are more fully described under “Part I, Item 1A - Risk Factors” of our Form 10-K for the year ended December 31, 2019. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. In any event, these and other crucial factors, including those set forth in Item 1A - “Risk Factors” of our Form 10-K for the year ended December 31, 2019 may cause actual results to differ materially from those indicated by our forward-looking statements.

 

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

 

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

 

2

 

 

VYSTAR CORPORATION

FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2020

 

INDEX

 

Part I. Financial Information  
     
Item 1. Financial Statements:  
     
  Condensed Consolidated Balance Sheets at June 30, 2020 (unaudited) and December 31, 2019 4
     
  Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2020 (unaudited) and 2019 (unaudited) 5
     
  Condensed Consolidated Statements of Stockholders’ Deficit for the Three and Six Months Ended June 30, 2020 (unaudited) and 2019 (unaudited) 6-7
     
  Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 (unaudited) and 2019 (unaudited) 8
     
  Notes to Condensed Consolidated Financial Statements (unaudited) 9
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 35
     
Item 4. Controls and Procedures 35
     
Part II. Other Information  
   
Item 1. Legal Proceedings 36
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 36
     
Item 3. Defaults Upon Senior Securities 36
     
Item 4. Mine Safety Disclosures 36
     
Item 5. Other Information 36
     
Item 6. Exhibits 36
     
SIGNATURES 37

 

3

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    June 30,     December 31,  
    2020     2019  
    (Unaudited)        
ASSETS                
Current assets:                
Cash   $ 832,632     $ 72,355  
Accounts receivable     95,458       38,526  
Stock subscription receivable     -       49,250  
Inventories     3,534,511       4,114,977  
Investments - equity securities, at fair value     110,855       149,517  
Prepaid expenses and other     221,924       602,980  
Deferred commission costs     122,614       129,123  
                 
Total current assets     4,917,994       5,156,728  
                 
Property and equipment, net     1,695,493       1,879,739  
                 
Operating lease right-of-use assets     9,799,748       10,379,685  
                 
Finance lease right-of-use assets, net     823,685       849,209  
                 
Other assets:                
Intangible assets, net     2,284,816       2,489,612  
Goodwill     460,301       460,301  
Inventories, long-term     802,383       935,121  
Deferred commission costs, net of current portion     182,711       217,024  
Other     34,377       34,377  
                 
Total other assets     3,764,588       4,136,435  
                 
Total assets   $ 21,001,508     $ 22,401,796  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
Current liabilities:                
Line of credit   $ -     $ 2,413,539  
Term notes - current maturities     596,768       16,374  
Accounts payable     4,139,102       2,846,306  
Accrued expenses     587,850       681,758  
Stock subscription payable     1,447,628       1,150,125  
Operating lease liabilities - current maturities     1,127,500       1,055,000  
Finance lease liabilities - current maturities     171,800       167,000  
Shareholder, convertible and contingently convertible notes payable and accrued interest - current maturities     806,911       366,326  
Related party debt - current maturities     46,000       46,000  
Unearned revenue     2,199,907       1,677,171  
Derivative liabilities     1,979,700       1,499,800  
                 
Total current liabilities     13,103,166       11,919,399  
                 
Long-term liabilities:                
Term notes, net of current maturities     1,902,900       500,000  
Operating lease liabilities, net of current maturities     6,912,497       7,490,431  
Finance lease liabilities, net of current maturities     663,713       694,487  
Unearned revenue, net of current maturities     704,021       823,401  
Shareholder, convertible and contingently convertible notes payable and accrued interest, net of current maturities and debt discount     145,592       494,363  
Related party debt, net of current maturities and debt discount     2,355,775       1,712,259  
                 
Total long-term liabilities     12,684,498       11,714,941  
                 
Total liabilities     25,787,664       23,634,340  
                 
Stockholders’ deficit:                
Convertible preferred stock, $0.0001 par value 15,000,000 shares authorized; 13,828 issued and outstanding at June 30, 2020 and December 31, 2019 (liquidation preference of $98,283 and $91,275 at June 30, 2020 and December 31, 2019 , respectively)     1       1  
Common stock, $0.0001 par value, 1,500,000,000 shares authorized; 1,105,762,080 shares issued and 1,105,732,080 outstanding     110,573       110,573  
Additional paid-in capital     38,447,731       38,436,607  
Accumulated deficit     (44,338,616 )     (41,104,967 )
Common stock in treasury, at cost; 30,000 shares     (30 )     (30 )
                 
Total Vystar stockholders’ deficit     (5,780,341 )     (2,557,816 )
                 
Noncontrolling interest     994,185       1,325,272  
                 
Total stockholders’ deficit     (4,786,156 )     (1,232,544 )
                 
Total liabilities and stockholders’ deficit   $ 21,001,508     $ 22,401,796  

 

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

 

4

 

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2020     2019     2020     2019  
                         
Revenue   $ 2,388,906     $ 185,563     $ 8,321,144     $ 377,230  
                                 
Cost of revenue     990,404       211,124       3,923,018       410,966  
                                 
Gross profit (loss)     1,398,502       (25,561 )     4,398,126       (33,736 )
                                 
Operating expenses:                                
Salaries, wages and benefits     721,808       -       2,175,882       -  
Share-based compensation     154,259       488,450       308,627       2,100,736  
Professional fees     251,187       179,956       543,883       371,985  
Advertising     234,462       23,096       681,157       43,579  
Rent     300,139       -       593,310       -  
Service charges     44,346       778       227,923       1,904  
Depreciation and amortization     243,925       50,451       487,848       100,104  
Other operating     487,940       213,502       1,269,613       333,805  
                                 
Total operating expenses     2,438,066       956,233       6,288,243       2,952,113  
                                 
Loss from operations     (1,039,564 )     (981,794 )     (1,890,117 )     (2,985,849 )
                                 
Other income (expense):                                
Interest expense     (610,679 )     (40,403 )     (1,215,393 )     (140,066 )
Change in fair value of derivative liabilities     (479,900 )     -       (479,900 )     (1,044,250 )
Gain (loss) on settlement of debt, net     -       (2,503 )     -       12,442  
Other income (expense)     43,730       (2 )     20,674       (154 )
                                 
Total other expense, net     (1,046,849 )     (42,908 )     (1,674,619 )     (1,172,028 )
                                 
Net loss     (2,086,413 )     (1,024,702 )     (3,564,736 )     (4,157,877 )
                                 
Net loss attributable to noncontrolling interest     220,141       -       331,087       -  
                                 
Net loss attributable to Vystar   $ (1,866,272 )   $ (1,024,702 )   $ (3,233,649 )   $ (4,157,877 )
                                 
Basic and diluted loss per share:                                
Net loss per share   $ (0.00 )   $ (0.00 )   $ (0.00 )   $ (0.00 )
                                 
Basic and diluted weighted average number of common shares outstanding     1,105,732,080       1,076,466,101       1,105,732,080       919,249,702  

 

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

 

5

 

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE SIX MONTHS ENDED JUNE 30, 2020

 

    Attributable to Vystar              
    Number
of
Preferred
 Shares
     Preferred
Stock
    Number
of
Common
 Shares
    Common Stock     Additional
Paid-in
Capital
    Accumulated
Deficit
    Number
of
Treasury Shares
     Treasury Stock     Total
Vystar
Stockholders’
Deficit
    Non
controlling Interest
    Total
Stockholders’
Deficit
 
                                                                   
Ending balance December 31, 2019     13,828     $ 1       1,105,762,080     $ 110,573     $ 38,436,607     $ (41,104,967 )     (30,000 )   $ (30 )   $ (2,557,816 )   $ 1,325,272     $ (1,232,544 )
                                                                                         
Share based compensation - options                                     5,562                               5,562               5,562  
                                                                                         
Net loss     -       -       -       -       -       (1,367,377 )     -       -       (1,367,377 )     (110,946 )     (1,478,323 )
                                                                                         
Ending balance March 31, 2020     13,828     $ 1       1,105,762,080     $ 110,573     $ 38,442,169     $ (42,472,344 )     (30,000 )   $ (30 )   $ (3,919,631 )   $ 1,214,326     $ (2,705,305 )
                                                                                         
Share based compensation - options                                     5,562                               5,562               5,562  
                                                                                         

Adjustment for treasury shares purchased in prior year

                   

(30,000

)                                                                
                                                                                         
Net loss     -       -       -       -       -       (1,866,272 )      -       -       (1,866,272 )     (220,141 )     (2,086,413 )
                                                                                         
Ending balance June 30, 2020     13,828     $ 1       1,105,732,080     $ 110,573     $ 38,447,731     $ (44,338,616 )     (30,000 )   $ (30 )   $ (5,780,341 )   $ 994,185     $ (4,786,156 )

 

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

 

6

 

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE SIX MONTHS ENDED JUNE 30, 2019

 

    Attributable to Vystar              
    Number
of
Preferred
Shares
    Preferred
Stock
    Number
of
Common
Shares
    Common
Stock
    Additional
Paid-in
Capital
    Accumulated
Deficit
    Number
of
Treasury
Shares
    Treasury
Stock
    Total
Vystar
Stockholders’
Deficit
    Non
controlling
Interest
    Total
Stockholders’
Deficit
 
                                                                   
Ending balance December 31, 2018     13,828     $ 1       457,747,818     $ 45,774     $ 31,485,532     $ (33,400,345 )     -     $ -     $ (1,869,038 )   $ -     $ (1,869,038 )
                                                                                         
Common stock issued for services                     147,704,875       14,771       2,017,465                               2,032,236               2,032,236  
                                                                                         
Share based compensation - options                                     17,783                               17,783               17,783  
                                                                                         
Common stock issued for settlement of warrants                     77,246,324       7,725       324,717                               332,442               332,442  
                                                                                         
Common stock issued for cash received, net                     144,933,992       14,493       420,307                               434,800               434,800  
                                                                                         
Common stock issued for conversion of related party line of credit                     2,512,900       251       143,278                               143,529               143,529  
                                                                                         
Common stock issued upon conversion of convertible notes and settlement of derivatives                     227,336,218       22,732       1,320,931                               1,343,663               1,343,663  
                                                                                         
Treasury stock repurchases                    

                        (30,000 )     (30 )     (30 )             (30 )
                                                                                         
Net loss     -       -       -       -       -       (3,133,174 )     -       -       (3,133,174 )     -       (3,133,174 )
                                                                                         
Ending balance March 31, 2019     13,828     $ 1       1,057,482,127     $ 105,746     $ 35,730,012     $ (36,533,520 )     (30,000 )   $ (30 )   $ (697,791 )     -     $ (697,791 )
                                                                                         
Common stock issued for services                     4,246,576       425       350,778                               351,203               351,203  
                                                                                         
Share based compensation - options                                     17,047                               17,047               17,047  
                                                                                         
Common stock issued for cash received, net                     11,781,392       1,179       147,321                               148,500               148,500  
                                                                                         
Common stock issued for conversion of related party line of credit                     12,487,100       1,250       885,156                               886,406               886,406  
                                                                                         
Common stock issued for asset purchase                     2,500,000       250       99,750                               100,000               100,000  
                                                                                         
Net loss     -       -       -       -       -       (1,024,702 )     -       -       (1,024,702 )     -       (1,024,702 )
                                                                                         
Ending balance June 30, 2019     13,828     $ 1       1,088,497,195     $ 108,850     $ 37,230,064     $ (37,558,222 )     (30,000 )   $ (30 )   $ (219,337 )     -     $ (219,337 )

  

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

 

7

 

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    Six Months Ended  
    June 30,  
    2020     2019  
Cash flows from operating activities:                
Net loss   $ (3,564,736 )   $ (4,157,877 )
Adjustments to reconcile net loss to cash used in operating activities:                
Share-based compensation     308,627       2,100,736  
Depreciation     279,369       20,422  
Bad debts     12,645       -  
Amortization of intangible assets     208,479       79,682  
Noncash lease expense     64,402       -  
Amortization of debt discount     601,041       73,519  
Consulting     -       125,822  
Change in fair value of derivative liabilities     479,900       1,044,250  
Amortization of debt issuance costs     8,250       -  
Net unrealized loss on available-for-sale investments     38,662       -  
(Gain) loss on settlement of debt, net     -       (12,442 )
(Increase) decrease in assets:                
Accounts receivable     (69,577 )     9,011  
Inventories     713,204       66,415  
Prepaid expenses and other     381,056       (8,896 )
Deferred commission costs     40,822       -  
Increase (decrease) in liabilities:                
Accounts payable     (910,543 )     68,234  
Accrued expenses and interest payable     (9,619 )     (48,225 )
Unearned revenue     403,356       -  
                 
Net cash used in operating activities     (1,014,662 )     (639,349 )
                 
Cash flows from investing activities:                
Patents and trademark fees     (3,683 )     (9,519 )
Website development costs     -       (500 )
                 
Net cash used in investing activities     (3,683 )     (10,019 )
                 
Cash flows from financing activities:                
Net repayments on line of credit     (210,200 )     -  
Proceeds from issuance of term debt     2,211,400       -  
Repayment of term debt     (236,356 )     -  
Repayment of finance lease obligations     (85,472 )     -  
Proceeds from the issuance of notes - related parties     50,000       367,700  
Proceeds from stock subscription receivable     49,250       -  

Repayment of notes payable - related parties

      -       (146,206 )
Issuance of common stock, net of costs     -       883,300  
Treasury stock repurchases     -       (30 )
                 
Net cash provided by financing activities     1,778,622       1,104,764  
                 
Net increase in cash     760,277       455,396  
                 
Cash - beginning of period     72,355       50,053  
                 
Cash - end of period   $ 832,632     $ 505,449  
                 
Cash paid during the period for:                
Interest   $ 499,275     $ 53,796  
                 
Non-cash transactions:                
Third-party settlement of the Company’s line of credit   $

2,203,339

    $ -  

Purchase of intangible assets with common stock

    -       100,000  
Convertible notes and accrued interest payable converted to common stock     -       64,576  
Common stock issued for accrued compensation     -       771,203  
Common stock issued for settlement of related party line of credit     -       1,029,935  
Shareholder advances to related party on behalf of the Company     -       180,000  
Settlement of derivative liabilities     -       1,279,335  

 

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

 

8

 

 

VYSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - DESCRIPTION OF BUSINESS

 

Nature of Business

 

Vystar Corporation (“Vystar”, the “Company”, “we,” “us,” or “our”) is based in Worcester, Massachusetts and produces a line of innovative air purifiers, which destroy viruses and bacteria through the use of ultraviolet light. Vystar is the creator and exclusive owner of the innovative technology to produce Vytex® Natural Rubber Latex (“NRL”). Vystar manufactures and sells NRL 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 stores in New England and one of the largest independent furniture retailers in the U.S.

 

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

 

Basis of Presentation

 

The condensed consolidated financial statements of the Company and the accompanying notes included in this Quarterly Report on Form 10-Q are unaudited. In the opinion of management, all adjustments necessary for the fair presentation of the condensed consolidated financial statements have been included. Such adjustments are of a normal, recurring nature. The condensed consolidated financial statements, and the accompanying notes, are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and do not contain certain information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2019. Therefore, the interim condensed consolidated financial statements should be read in conjunction with that Annual Report on Form 10-K.

 

The Company has evaluated subsequent events through the date of the filing of its Form 10-Q with the Securities and Exchange Commission. Other than those events disclosed in Note 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 condensed consolidated financial statements include the accounts of the Company and its wholly-owned or controlled operating subsidiaries. All significant intercompany accounts and transactions have been eliminated.

 

COVID-19

 

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

 

In addition, the COVID-19 pandemic has caused, among other things, interruptions in our supply chains and suppliers, including potential problems with inventory availability and the potential result of the volatility or higher cost of product and international freight due to the high demand of products and low supply for an unpredictable period of time.

 

The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of results for the entire year. The pandemic has resulted in significant economic disruption. Although our showroom has reopened, we cannot reasonably estimate the impact on Vystar should the pandemic persist or worsen. Accordingly, the estimates and assumptions made as of June 30, 2020 could change in subsequent interim reports and upon final determination at year-end, and it is reasonably possible that such changes could be significant (although the potential effects cannot be measured at this time).

 

9

 

 

Segment Reporting

 

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

 

Estimates

 

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

 

Fair Value of Financial Instruments

 

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

 

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

 

Valuation inputs are classified in the following hierarchy:

 

  Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
     
   Level 2 inputs are directly or indirectly observable valuation inputs for the asset or liability, excluding Level 1 inputs.
     
  Level 3 inputs are unobservable inputs for the asset or liability.

 

Highest priority is given to Level 1 inputs and the lowest priority to Level 3 inputs. Acceptable valuation techniques include the market approach, income approach, and cost approach. In some cases, more than one valuation technique is used. The derivative liabilities were recognized at fair value on a recurring basis through the date of the settlement and June 30, 2020 and are level 3 measurements. There have been no transfers between levels during the six months ended June 30, 2020.

 

Acquisitions

 

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

 

10

 

 

Cash and Cash Equivalents

 

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

 

Accounts Receivable

 

Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company routinely sells, without recourse, trade receivables resulting from retail furniture sales to various financial institutions at an average service charge of 5.1% in 2020. Amounts sold during the six months ending June 30, 2020 were approximately $2,150,000. There were no sales of trade receivables during the six months ending June 30, 2019. Retail furniture receivables retained by the Company are generally collateralized by the merchandise sold, represent valid claims against debtors for sales arising on or before the balance sheet date and are reduced to their estimated net realizable value. In addition, the Company grants credit to Vytex customers without requiring collateral. The amount of accounting loss for which Vystar is at risk in these unsecured accounts receivable is limited to their carrying value. Management provides for uncollectible amounts through a charge to earnings and a credit to an allowance for doubtful accounts based upon its assessment of the current status of individual accounts. Balances that are still outstanding after management has performed reasonable collection efforts are written off through a charge to the allowance and a credit to accounts receivable. As of June 30, 2020 and December 31, 2019, the Company considers accounts receivable to be fully collectible and no allowance for doubtful accounts was recorded.

 

Inventories

 

Inventories include those costs directly attributable to the product before sale. Inventories consist primarily of finished goods of furniture, mattresses, foam toppers and pillows and are carried at net realizable value, which is defined as selling price less cost of completion, disposal and transportation. The Company evaluates the need to record write-downs for inventory on a regular basis. Appropriate consideration is given to obsolescence, slow-moving and other factors in evaluating net realizable values. Inventories not expected to be sold within 12 months are classified as long-term.

 

Prepaid Expenses and Other

 

Prepaid expenses and other 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 June 30, 2020, the Company believes the cost of the available-for-sale securities was recoverable in all material respects.

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation. 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 June 30, 2020, the net balance of property and equipment is $1,695,493 with accumulated depreciation of $393,045. As of December 31, 2019, the net balance of property and equipment is $1,879,739 with accumulated depreciation of $208,799.

 

11

 

 

Intangible Assets

 

Patents represent legal and other fees associated with the registration of patents. The Company has five issued patents with the United States Patent and Trade Office (“USPTO”) as well as five issued international Patent Cooperation Treaty (“PCT”) patents. Patents are carried at cost and are being amortized on a straight-line basis over their estimated useful lives, typically ranging from 9 to 20 years.

 

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

 

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

 

Long-Lived Assets

 

We review our long-lived assets for impairment whenever events or changes in circumstances indicate 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 six months ended June 30, 2020 and 2019, we did not recognize any impairment of our long-lived assets.

 

Goodwill

 

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

 

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

 

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

 

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.

 

12

 

 

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, as of June 30, 2020, the Company has classified all conversion features as derivative liabilities and has estimated the fair value of these embedded conversion features using a Monte Carlo simulation model.

 

Unearned Revenue

 

Unearned revenue consists of customer advance payments, deposits on sales of undelivered merchandise and deferred warranty revenue on self-insured stain protection warranty coverage. There was no unearned revenue during the six months ended June 30, 2019.

 

Changes to unearned revenue during the six months ended June 30, 2020 are summarized as follows:

 

Balance, December 31, 2019   $ 2,500,572  
         
Customer deposits received     7,426,477  
         
Warranty coverage purchased     112,121  
         
Gift cards purchased     4,000  
         
Revenue earned     (7,139,242 )
         
Balance, June 30, 2020   $ 2,903,928  

 

Loss Per Share

 

The Company presents basic and diluted loss per share. Because the Company reported a net loss for the six months ended June 30, 2020 and 2019, common stock equivalents, including stock options and warrants, were anti-dilutive; therefore, the amounts reported for basic and dilutive loss per share were the same. Excluded from the computation of diluted loss per share were options to purchase 27,883,271 and 27,898,271 shares of common stock for the six months ended June 30, 2020 and 2019, respectively, as their effect would be anti-dilutive. Warrants to purchase 14,218,051 and 14,373,493 shares of common stock for the six months ended June 30, 2020 and 2019, respectively, were also excluded from the computation of diluted loss per share as their effect would be anti-dilutive. In addition, preferred stock convertible to 4,731,260 and 4,451,880 shares of common stock for the six months ended June 30, 2020 and 2019, respectively, were excluded from the computation of diluted loss per share as their effect would be anti-dilutive.

 

13

 

 

Revenue

 

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

 

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

 

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

 

The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation. The transaction price is determined based on the consideration to which we will be entitled to receive in exchange for transferring goods to the customer. We issue refunds to retail, e-commerce and print media customers, upon request, within 30 days of delivery. We estimate the amount of potential refunds at each reporting period using a portfolio approach of historical data, adjusted for changes in expected customer experience, including seasonality and changes in economic factors. For retailers, distributors and wholesalers, we do not offer a right of return or refund and revenue is recognized at the time products are shipped to customers. In all cases, judgment is required in estimating these reserves. Actual claims for returns could be materially different from the estimates. As of June 30, 2020 and December 31, 2019, reserves for estimated sales returns totaled $3,000, respectively, and are included in the accompanying consolidated balance sheets as accrued expenses.

 

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

 

The Company also defers revenues for separately-priced stain protection warranty coverage for which it is ultimately self-insured. Revenue is recognized from the extended warranty sales on a straight-line basis over the respective contract term. The extended warranty terms primarily range from three to five years from the date of delivery. At June 30, 2020 and December 31, 2019, deferred warranty revenue was approximately $1,157,000 and $1,309,000, respectively, and is included in unearned revenue in the accompanying consolidated balance sheets. During the six months ended June 30, 2020, the Company recorded total proceeds of approximately $112,000 and recognized total revenues of approximately $264,000 related to deferred warranty revenue arrangements. There were no proceeds or deferred warranty revenues during the six months ended June 30, 2019. 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 June 30, 2020 and December 31, 2019, deferred commission costs were approximately $305,000 and $346,000, respectively, and are 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.

 

14

 

 

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. For the six months ended June 30, 2020 and 2019, Vystar’s research and development costs were not significant.

 

Advertising Costs

 

Advertising costs, which include television, radio, newspaper and other media advertising, are expensed upon first showing. Advertising costs included in general and administrative expenses in the accompanying consolidated statements of operations were approximately $681,000 and $43,000 for the six months ended June 30, 2020 and 2019, respectively.

 

Share-Based Compensation

 

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

 

Income Taxes

 

Vystar recognizes income taxes on an accrual basis based on a tax position taken or expected to be taken in its tax returns. A tax position is defined as a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets or liabilities. Tax positions are recognized only when it is more likely than not (i.e., likelihood of greater than 50%), based on technical merits, that the position would be sustained upon examination by taxing authorities. Tax positions that meet the more likely than not threshold will be measured using a probability-weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. A valuation allowance is established to reduce deferred tax assets if all, or some portion, of such assets will more likely than not be realized. Should they occur, interest and penalties related to tax positions are recorded as interest expense. No such interest or penalties have been incurred for the six months ended June 30, 2020 and 2019.

 

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.

 

15

 

 

Other Risks and Uncertainties

 

The Company is 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.

 

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 June 30, 2020, the Company had cash of $832,632 and a deficit in working capital of approximately $8.2 million. Further, at June 30, 2020 the accumulated deficit amounted to approximately $44.3 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.

 

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.

 

16

 

 

NOTE 4 - INVESTMENTS – EQUITY SECURITIES

 

Cost and fair value of investments - equity securities are as follows as of June 30, 2020:

 

      Gross     Fair  
Cost     Unrealized Losses     Value  
                     
$ 141,225     $ (30,370 )   $ 110,855  

 

Net unrealized holding losses on available-for-sale securities were approximately $39,000 in the first six months of 2020 and have been included in other income (expenses) in the accompanying statements of operations. There were no investments – equity securities prior to the Rotmans acquisition in July 2019. Investments represent equity securities in a publicly traded company.

 

NOTE 5 - PROPERTY AND EQUIPMENT

 

Property and equipment, net consists of the following: 

 

    June 30,     December 31,  
    2020     2019  
             
Furniture, fixtures and equipment   $ 1,354,665     $ 1,354,665  
Tooling and testing equipment     319,000       319,000  
Parking lots     365,707       365,707  
Motor vehicles     49,166       49,166  
                 
      2,088,538       2,088,538  
Accumulated depreciation     (393,045 )     (208,799 )
                 
Property and equipment, net   $ 1,695,493     $ 1,879,739  

 

Depreciation expense for the six months ended June 30, 2020 and 2019 was $279,369 and $20,422, respectively.

 

NOTE 6 - INTANGIBLE ASSETS

 

Intangible assets consist of the following:

 

                Amortization  
    June 30,     December 31,     Period  
    2020     2019     (in Years)  
Amortized intangible assets:                        
Customer relationships   $ 210,000     $ 210,000       6 - 10  
Proprietary technology     610,000       610,000       10  
Tradename and brand     1,380,000       1,380,000       5 - 10  
Marketing related     380,000       380,000       5  
Patents     359,101       355,418       6 - 20  
Noncompete     50,000       50,000       5  
                         
Total     2,989,101       2,985,418          
Accumulated amortization     (713,357 )     (504,878 )        
                         
Intangible assets, net     2,275,744       2,480,540          
Indefinite-lived intangible assets:                        
Trademarks     9,072       9,072          
                         
Total intangible assets   $ 2,284,816     $ 2,489,612          

 

17

 

 

Amortization expense for the six months ended June 30, 2020 and 2019 was $208,479 and $79,682, respectively. Estimated future amortization expense for finite-lived intangible assets is as follows: 

 

    Amount  
       
Remaining in 2020   $ 208,477  
2021     416,956  
2022     417,140  
2023     410,529  
2024     311,306  
Thereafter     511,336  
         
Total   $ 2,275,744  

 

NOTE 7 - LEASES

 

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

 

The table below presents the lease costs for the three and six months ended June 30, 2020:

 

    Three Months Ended     Six Months Ended  
    June 30, 2020     June 30, 2020  
             
Operating lease cost   $ 394,766     $ 789,114  
                 
Finance lease cost:                
                 
Amortization of right-of-use assets     47,561       95,122  
Interest on lease liabilities     11,141       22,831  
                 
Total lease cost   $ 453,468     $ 907,067  

 

During the six months ended June 30, 2020, the Company recognized sublease income of approximately $58,000, which in included in other income (expense), net in the accompanying condensed consolidated statements of operations.

 

There were no lease costs or sublease income for the three and six months ended June 30, 2019.

 

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

 

18

 

 

The following table presents other information related to leases:

 

    Three Months Ended     Six Months Ended  
    June 30, 2020     June 30, 2020  
             
Cash paid for amounts included in the measurement of lease liabilities:                
                 
Operating cash flows used for operating leases   $ 375,911     $ 748,795  
Financing cash flows used for financing leases     54,152       108,304  
                 
Assets obtained in exchange for finance lease liabilities     -       75,739  
                 
Weighted average remaining lease term:                
Operating leases     9 years       9 years  
Finance leases     5 years       5 years  
                 
Weighted average discount rate:                
Operating leases     5.53 %     5.53 %
Finance leases     5.16 %     5.16 %

 

The future minimum lease payments required under operating and financing lease obligations as of June 30, 2020 having initial or remaining non-cancelable lease terms in excess of one year are summarized as follows:

 

    Operating Leases     Finance Leases     Total  
                   
Remainder of 2020   $ 751,822     $ 106,004     $ 857,826  
2021     1,503,643       205,545       1,709,188  
2022     1,117,377       150,943       1,268,320  
2023     878,807       150,142       1,028,949  
2024     870,000       140,002       1,010,002  
Thereafter     5,220,000       207,475       5,427,475  
                         
Total undiscounted lease liabilities     10,341,649       960,111       11,301,760  
Less: imputed interest     (2,301,652 )     (124,598 )     (2,426,250 )
                         
Net lease liabilities   $ 8,039,997     $ 835,513     $ 8,875,510  

 

As of June 30, 2020, the Company does not have additional operating and finance leases that have not yet commenced.

 

NOTE 8 - NOTES PAYABLE AND LOAN FACILITY

 

Line of Credit

 

The Company formerly had a $2,500,000 revolving line of credit with Fidelity Co-operative Bank. Advances were limited to 50% of eligible inventory and bore interest at the prime rate plus 0.50% with a floor of 3.75%. The Company was not in compliance with certain covenants and was in default at March 31, 2020. The line was paid in full with proceeds from advances noted below and closed in May 2020.

 

Advances

 

On May 29, 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. Before the sale, the agent advanced the Company funds of approximately $2,300,000 to pay off the Fidelity line of credit and certain other vendors. 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. The outstanding balance is approximately $1,229,000 as of June 30, 2020 and is included in accounts payable in the accompanying consolidated balance sheet.

 

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Term Notes

 

On February 24, 2020, the Company entered into an agreement with Libertas Funding LLC (“Libertas”) to sell future sale receipts totaling $1,089,000 for a purchase price of $825,000. The sold amount of future sales receipts are delivered weekly to Libertas at predetermined amounts over a period of nine months. The agreement contains an early delivery discount fee for delivering the future revenues before the end of the contract term and an origination fee of $16,500, which has been capitalized and is being amortized over the term of the agreement. The implicit borrowing rate of the agreement is approximately 75%. The agreement is personally guaranteed by Steven Rotman. As of June 30, 2020, the outstanding balance on this obligation of $597,575 is included in current maturities of term notes. In June 2020, the Company and Libertas agreed to defer repayment on the loan until August 2020.

 

Other term debt totaling $7,443 and $16,374 at June 30, 2020 and December 31, 2019, respectively, represents three 0% loans on motor vehicles, requiring cumulative monthly payments of $1,488 through maturity in November 2020.

 

On 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.

 

Certain investors guaranteed $100,000 each with Ameris Bank (formerly 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 June 30, 2020 and December 31, 2019.

 

Shareholder, Convertible and Contingently Convertible Notes Payable

 

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

 

    June 30,     December 31,  
    2020     2019  
             
Shareholder, convertible and contingently convertible notes   $ 951,895     $ 951,895  
Accrued interest     70,366       46,569  
Debt discount     (69,758 )     (137,775 )
                 
      952,503       860,689  
                 
Less: current maturities     (806,911 )     (366,326 )
                 
    $ 145,592     $ 494,363  

 

Shareholder Convertible Notes Payable

 

During the year ended December 31, 2018, the Company issued shareholder contingently convertible notes payable (the “Notes”), some of which were for contract work performed by other entities in lieu of compensation and expense reimbursement, totaling approximately $335,000. The Notes are (i) unsecured, (ii) bear interest at an annual rate of five percent (5%) per annum from date of issuance, and (iii) are convertible at the Company’s option post April 19, 2018. The Notes mature one year from issuance but may be extended one (1) additional year by the Company. If converted, the Notes plus accrued interest are convertible into shares of the Company’s common stock at the prior twenty (20) day average closing price with a 50% discount. The outstanding balance of all of these Notes of as June 30, 2020 and December 31, 2019 is $338,195. The Notes matured in January 2020 and continue to accrue interest until settlement.

 

20

 

 

During the year ended December 31, 2019, the Company issued certain contingently convertible promissory notes in varying amounts to existing shareholders which totaled $613,700. The face amount of the note represents the amount due at maturity along with the accrued interest. The amount can be converted into shares of the Company’s stock, at the option of the Company, based on the average closing price for the trailing 20 days prior to conversion and carrying a 35% to 50% discount. These notes can be converted only after an acceleration event which involves a symbol change, uplisting, or reverse stock split and such conversion is in the control of the Company. All of these notes are outstanding as of June 30, 2020.

 

Based on the variable conversion price of these notes, the Company recorded the embedded conversion features as derivative liabilities, which amounted to $535,700 and $442,934 at June 30, 2020 and December 31, 2019, respectively.

 

Related Party Debt

 

The following table summarizes related party debt:

 

    June 30,     December 31,  
    2020     2019