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 September 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 November 23, 2020
Preferred Stock, $0.0001 par value per share   13,698 shares
Common Stock, $0.0001 par value per share   1,168,068,315 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 SEPTEMBER 30, 2020

 

INDEX

 

Part I. Financial Information  
     
Item 1. Financial Statements:  
     
  Condensed Consolidated Balance Sheets at September 30, 2020 (unaudited) and December 31, 2019 4
     
  Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 (unaudited) and 2019 (unaudited) 5
     
  Condensed Consolidated Statements of Stockholders’ Deficit for the Three and Nine Months Ended September 30, 2020 (unaudited) and 2019 (unaudited) 6-7
     
  Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 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 31
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 36
     
Item 4. Controls and Procedures 37
     
Part II. Other Information  
   
Item 1. Legal Proceedings 38
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 38
     
Item 3. Defaults Upon Senior Securities 38
     
Item 4. Mine Safety Disclosures 38
     
Item 5. Other Information 38
     
Item 6. Exhibits 38
     
SIGNATURES 39

 

3
 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    September 30,     December 31,  
    2020     2019  
ASSETS     (Unaudited)          
Current assets:                
Cash   $ 71,913     $ 72,355  
Accounts receivable     159,521       38,526  
Stock subscription receivable     -       49,250  
Inventories     5,298,561       4,114,977  
Investments - equity securities, at fair value     101,939       149,517  
Prepaid expenses and other     193,183       602,980  
Deferred commission costs     122,614       129,123  
                 
Total current assets     5,947,731       5,156,728  
                 
Property and equipment, net     1,727,652       1,879,739  
                 
Operating lease right-of-use assets     9,501,503       10,379,685  
                 
Finance lease right-of-use assets, net     776,123       849,209  
                 
Other assets:                
Intangible assets, net     2,180,578       2,489,612  
Goodwill     460,301       460,301  
Inventories, long-term     570,053       935,121  
Deferred commission costs, net of current portion     150,568       217,024  
Other     34,377       34,377  
                 
Total other assets     3,395,877       4,136,435  
                 
Total assets   $ 21,348,886     $ 22,401,796  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
Current liabilities:                
Line of credit   $ -     $ 2,413,539  
Term notes - current maturities     2,978       16,374  
Accounts payable     3,731,755       2,846,306  
Accrued expenses     2,104,285       681,758  
Stock subscription payable     2,961,837       1,150,125  
Operating lease liabilities - current maturities     1,095,500       1,055,000  
Finance lease liabilities - current maturities     172,900       167,000  
Shareholder, convertible and contingently convertible notes payable and accrued interest - current maturities     806,911       366,326  
Related party debt - current maturities     641,000       46,000  
Unearned revenue     2,753,496       1,677,171  
Derivative liabilities     1,864,700       1,499,800  
                 
Total current liabilities     16,135,362       11,919,399  
                 
Long-term liabilities:                
Term notes, net of current maturities     1,402,900       500,000  
Operating lease liabilities, net of current maturities     6,678,499       7,490,431  
Finance lease liabilities, net of current maturities     619,583       694,487  
Unearned revenue, net of current maturities     584,693       823,401  
Shareholder, convertible and contingently convertible notes payable and accrued interest, net of current maturities and debt discount     221,636       494,363  
Related party debt, net of current maturities and debt discount     2,415,701       1,712,259  
                 
Total long-term liabilities     11,923,012       11,714,941  
                 
Total liabilities     28,058,374       23,634,340  
                 
Stockholders’ deficit:                
Convertible preferred stock, $0.0001 par value 15,000,000 shares authorized; 13,698 and 13,828 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively (liquidation preference of $100,698 and $91,275 at September 30, 2020 and December 31, 2019 , respectively)     1       1  
Common stock, $0.0001 par value, 1,500,000,000 shares authorized; 1,159,998,315 and 1,105,762,080 shares issued at September 30, 2020 and December 31, 2019, respectively, and 1,159,968,315 and 1,105,732,080 shares outstanding at September 30, 2020 and December 31, 2019, respectively     115,996       110,573  
Additional paid-in capital     40,482,509       38,436,607  
Accumulated deficit     (47,929,390 )     (41,104,967 )
Common stock in treasury, at cost; 30,000 shares     (30 )     (30 )
                 
Total Vystar stockholders’ deficit     (7,330,914 )     (2,557,816 )
                 
Noncontrolling interest     621,426       1,325,272  
                 
Total stockholders’ deficit     (6,709,488 )     (1,232,544 )
                 
Total liabilities and stockholders’ deficit   $ 21,348,886     $ 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     Nine Months Ended  
    September 30,     September 30,  
    2020     2019     2020     2019  
                         
Revenue   $ 5,544,563     $ 6,040,201     $ 13,865,707     $ 6,417,431  
                                 
Cost of revenue     2,527,403       3,378,220       6,450,421       3,789,186  
                                 
Gross profit     3,017,160       2,661,981       7,415,286       2,628,245  
                                 
Operating expenses:                                
Salaries, wages and benefits     1,535,449       1,223,879       3,655,162       1,223,879  
Share-based compensation     716,161       305,673       1,024,788       2,406,409  
Agent fees     579,750       -       635,919       -  
Professional fees     311,514       153,965       855,397       525,950  
Advertising     469,383       495,421       1,150,540       539,000  
Rent     300,965       259,930       894,275       259,930  
Service charges     132,542       200,212       360,465       202,116  
Depreciation and amortization     249,834       158,409       737,682       258,513  
Other operating     892,239       1,073,793       2,161,852       1,407,598  
                                 
Total operating expenses     5,187,837       3,871,282       11,476,080       6,823,395  
                                 
Loss from operations     (2,170,677 )     (1,209,301 )     (4,060,794 )     (4,195,150 )
                                 
Other income (expense):                                
Interest expense     (430,711 )     (195,142 )     (1,646,104 )     (335,208 )
Change in fair value of derivative liabilities     143,000       -       (336,900 )     (1,044,250 )
Loss on settlement of debt, net     (1,419,461 )     (339,875 )     (1,419,461 )     (327,433 )
Loss on legal settlement     (101,000 )     -       (101,000 )     -  
Other income, net     15,316       7,956       35,990       7,802  
                                 
Total other expense, net     (1,792,856 )     (527,061 )     (3,467,475 )     (1,699,089 )
                                 
Net loss     (3,963,533 )     (1,736,362 )     (7,528,269 )     (5,894,239 )
                                 
Net loss attributable to noncontrolling interest     372,759       63,802       703,846       63,802  
                                 
Net loss attributable to Vystar   $ (3,590,774 )   $ (1,672,560 )   $ (6,824,423 )   $ (5,830,437 )
                                 
Basic and diluted loss per share:                                
Net loss per share   $ (0.00 )   $ (0.00 )   $ (0.01 )   $ (0.01 )
                                 
Basic and diluted weighted average number of common shares outstanding     1,159,968,315       1,115,132,332       1,159,968,315       984,587,635  

 

 

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

 

5
 

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020

(Unaudited)

 

    Attributable to Vystar              
    Number           Number                       Number           Total              
    of           of           Additional           of           Vystar           Total  
    Preferred     Preferred     Common     Common     Paid-in     Accumulated     Treasury     Treasury     Stockholders’     Noncontrolling     Stockholders’  
    Shares     Stock     Shares     Stock     Capital     Deficit     Shares     Stock     Deficit     Interest     Deficit  
                                                                   
Ending balance December 31, 2019     13,828     $ 1       1,105,762,080     $ 110,573     $ 38,436,607     $ (41,104,967 )     (30,000 )   $ (30 )   $       (2,557,816 )   $ 1,325,272     $       (1,232,544 )
                                                                                         
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  
                                                                                         
Net loss     -       -       -       -       -       (1,866,272 )     -       -       (1,866,272 )     (220,141 )     (2,086,413 )
                                                                                         

Ending balance

June 30, 2020

    13,828     $ 1       1,105,762,080     $ 110,573     $ 38,447,731     $ (44,338,616 )     (30,000 )   $ (30 )   $ (5,780,341 )   $ 994,185     $ (4,786,156 )
                                                                                         
Common stock issued for services                     12,941,878       1,294       259,325                               260,619               260,619  
                                                                                         
Share based compensation - options                                     5,832                               5,832               5,832  
                                                                                         
Preferred stock conversion     (130 )             44,357       4       (4 )                             -               -  
                                                                                         
Common stock issued for settlement of loan                     41,250,000       4,125       1,769,625                               1,773,750               1,773,750  
                                                                                         
Net loss     -       -       -       -       -       (3,590,774 )     -       -       (3,590,774 )     (372,759 )     (3,963,533 )
                                                                                         
Ending balance September 30, 2020     13,698     $ 1       1,159,998,315     $ 115,996     $ 40,482,509     $ (47,929,390 )     (30,000 )   $ (30 )   $ (7,330,914 )   $ 621,426     $ (6,709,488 )

 

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

 

6
 

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019

(Unaudited)

 

    Attributable to Vystar              
    Number           Number                       Number           Total              
    of           of           Additional           of           Vystar           Total  
    Preferred     Preferred     Common     Common     Paid-in     Accumulated     Treasury     Treasury     Stockholders’     Noncontrolling     Stockholders’  
    Shares     Stock     Shares     Stock     Capital     Deficit     Shares     Stock     Deficit     Interest     Deficit  
                                                                   
Ending balance December 31, 2018     13,828     $ 1       457,747,818     $ 45,774     $ 31,485,532     $ (33,400,345 )     -     $ -     $       (1,869,038 )   $ -     $       (1,869,038 )
                                                                                         
Common stock issued for services                     147,704,875       14,771       2,017,465                               2,032,236               2,032,236  
                                                                                         
Share based compensation - options                                     17,783                               17,783               17,783  
                                                                                         
Common stock issued for settlement of warrants                     77,246,324       7,725       324,717                               332,442               332,442  
                                                                                         
Common stock issued for cash received, net                     144,933,992       14,493       420,307                               434,800               434,800  
                                                                                         
Common stock issued for conversion of related party line of credit                     2,512,900       251       143,278                               143,529               143,529  
                                                                                         
Common stock issued upon conversion of convertible notes and settlement of derivatives                     227,336,218       22,732       1,320,931                               1,343,663               1,343,663  
                                                                                         
Treasury stock repurchases                                                     (30,000 )     (30 )     (30 )             (30 )
                                                                                         
Net loss     -       -       -       -       -       (3,133,174 )     -       -       (3,133,174 )     -       (3,133,174 )
                                                                                         

Ending balance

March 31, 2019

    13,828     $ 1       1,057,482,127     $ 105,746     $ 35,730,012     $ (36,533,520 )     (30,000 )   $ (30 )   $ (697,791 )     -     $ (697,791 )
                                                                                         
Common stock issued for services                     4,246,576       425       350,778                               351,203               351,203  
                                                                                         
Share based compensation - options                                     17,047                               17,047               17,047  
                                                                                         
Common stock issued for cash received, net                     11,781,392       1,179       147,321                               148,500               148,500  
                                                                                         
Common stock issued for conversion of related party line of credit                     12,487,100       1,250       885,156                               886,406               886,406  
                                                                                         
Common stock issued for asset purchase                     2,500,000       250       99,750                               100,000               100,000  
                                                                                         
Net loss     -       -       -       -       -       (1,024,702 )     -       -       (1,024,702 )     -       (1,024,702 )
                                                                                         

Ending balance

June 30, 2019

    13,828     $ 1       1,088,497,195     $ 108,850     $ 37,230,064     $ (37,558,222 )     (30,000 )   $ (30 )   $ (219,337 )     -     $ (219,337 )
                                                                                         
Share based compensation - options                                     6,876                               6,876               6,876  
                                                                                         
Common stock issued for cash received, net                     2,180,129       217       80,282                               80,499               80,499  
                                                                                         
Common stock issued for conversion of related party line of credit                     30,000,000       3,000       945,001                               948,001               948,001  
                                                                                         
Acquisition of noncontrolling interest                                                                     -       1,346,201       1,346,201  
                                                                                         
Net loss     -       -       -       -       -       (1,672,560 )     -       -       (1,672,560 )     (63,802 )     (1,736,362 )
                                                                                         
Ending balance September 30, 2019     13,828     $ 1       1,120,677,324     $ 112,067     $ 38,262,223     $ (39,230,782 )     (30,000 )   $ (30 )   $ (856,521 )   $ 1,282,399     $ 425,878  

 

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

 

7
 

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    Nine Months Ended  
    September 30,  
    2020     2019  
Cash flows from operating activities:                
Net loss   $ (7,528,269 )   $ (5,894,239 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Share-based compensation     1,024,788       2,406,409  
Depreciation     424,965       82,921  
Bad debts     14,150       -  
Amortization of intangible assets     312,717       175,592  
Noncash lease expense     96,612       18,454  
Amortization of debt discount     720,916       73,519  
Consulting     -       114,680  
Change in fair value of derivative liabilities     336,900       1,044,250  
Interest expense on issuance of common stock     160,000       -  
Amortized debt issuance costs     16,500       -  
Net unrealized loss on available-for-sale investments     47,578       (7,056 )
Loss on settlement of debt, net     1,419,461       327,433  
(Increase) decrease in assets:                
Accounts receivable     (135,145 )     5,772  
Inventories     (818,516 )     199,981  
Prepaid expenses and other     409,797       (72,203 )
Deferred commission costs     72,965       3,267  
Increase (decrease) in liabilities:                
Accounts payable     (1,317,889 )     231,160  
Accrued expenses and interest payable     1,550,909       (178,536 )
Unearned revenue     837,617       377,693  
                 
Net cash used in operating activities     (2,353,944 )     (1,090,903 )
                 
Cash flows from investing activities:                
Acquisition of property and equipment     (130,195 )     (500 )
Patents and trademark fees     (3,683 )     (9,519 )
                 
Net cash used in investing activities     (133,878 )     (10,019 )
                 
Cash flows from financing activities:                
Net repayments on line of credit     (210,200 )     (307,944 )
Proceeds from issuance of term debt     2,211,400       -  
Repayment of term debt     (794,106 )     (16,459 )
Repayment of finance lease obligations     (128,464 )     -  
Proceeds from the issuance of notes - related parties     645,000       577,648  
Proceeds from issuance of notes, net     -       30,881  
Advances from stock subscription payable     714,500       -  
Proceeds from stock subscription receivable     49,250       -  
Repayment of notes payable - related parties     -       (165,246 )
Issuance of common stock, net of costs     -       996,242  
Treasury stock repurchases     -       (30 )
                 
Net cash provided by financing activities     2,487,380       1,115,092  
                 
Net increase (decrease) in cash     (442 )     14,170  
                 
Cash - beginning of period     72,355       50,053  
                 
Cash - end of period   $ 71,913     $ 64,223  
                 
Cash paid during the period for:                
Interest   $ 608,894     $ 198,914  
                 
Non-cash transactions:                
Third-party settlement of the Company’s line of credit   $ 2,203,339     $ -  
Common stock issued for settlement of term debt and accrued interest     660,000       -  

Derivatives issued as a debt discount

    28,000       -  
Purchase of intangible assets with common stock     -       100,000  
Acquisition of Rotmans with notes payable     -       2,030,000  
Convertible notes and accrued interest payable converted to common stock     -       64,329  
Common stock issued for accrued compensation     201,200       2,383,437  
Common stock issued for settlement of related party line of credit     -       1,977,935  
Shareholder advances to related party on behalf of the Company     -       180,000  
Common stock issued in settlement of convertible notes, discount and 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 also 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 to our supply chains and suppliers, including problems with inventory availability with 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 nine months ended September 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 September 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 September 30, 2020 and are level 3 measurements. There have been no transfers between levels during the nine months ended September 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 4.0% in 2020. Amounts sold during the nine months ending September 30, 2020 were approximately $3,487,000. Retail furniture receivables retained by the Company are generally collateralized by the merchandise sold, represent valid claims against debtors for sales arising on or before the balance sheet date and are reduced to their estimated net realizable value. In addition, the Company grants credit to Vytex customers without requiring collateral. The amount of accounting loss for which Vystar is at risk in these unsecured accounts receivable is limited to their carrying value. Management provides for uncollectible amounts through a charge to earnings and a credit to an allowance for doubtful accounts based upon its assessment of the current status of individual accounts. Balances that are still outstanding after management has performed reasonable collection efforts are written off through a charge to the allowance and a credit to accounts receivable. As of September 30, 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 September 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 September 30, 2020, the net balance of property and equipment is $1,727,652 with accumulated depreciation of $491,080. 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 nine months ended September 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 September 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.

 

Changes to unearned revenue during the nine months ended September 30, 2020 and 2019 are summarized as follows:

 

    2020     2019  
             
Balance, beginning of the period   $ 2,500,572     $ -  
                 
Initial acquisition of Murida on July 17     -       2,508,623  
                 
Customer deposits received     13,350,179       5,951,179  
                 
Warranty coverage purchased     118,151       96,291  
                 
Gift cards purchased     4,150       1,975  
                 
Revenue earned     (12,634,863 )     (5,580,235 )
                 
Balance, end of the period   $ 3,338,189     $ 2,977,833  

 

Loss Per Share

 

The Company presents basic and diluted loss per share. Because the Company reported a net loss for the nine months ended September 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 27,874,938 and 27,733,271 shares of common stock for the nine months ended September 30, 2020 and 2019, respectively, as their effect would be anti-dilutive. Warrants to purchase 14,205,912 and 14,250,438 shares of common stock for the nine months ended September 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 4,753,550 and 4,521,020 shares of common stock for the nine months ended September 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 September 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.

 

14
 

 

The Company also defers revenues for separately-priced stain protection warranty coverage for which it is ultimately self-insured. Revenue is recognized from the extended warranty sales on a straight-line basis over the respective contract term. The extended warranty terms primarily range from three to five years from the date of delivery. At September 30, 2020 and December 31, 2019, deferred warranty revenue was approximately $1,037,000 and $1,309,000, respectively, and is included in unearned revenue in the accompanying consolidated balance sheets. During the nine months ended September 30, 2020, the Company recorded total proceeds of approximately $118,000 and recognized total revenues of approximately $390,000 related to deferred warranty revenue arrangements. During the period from July 18, 2019 through September 30, 2019, the Company recorded total proceeds of approximately $96,000 and recognized total revenues of approximately $110,000 related to deferred warranty revenue arrangements. Commission costs in obtaining extended warranty contracts are capitalized and recognized as expense on a straight-line basis over the period of the warranty contract. At September 30, 2020 and December 31, 2019, deferred commission costs were approximately $273,000 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.

 

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 nine months ended September 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 $1,151,000 and $539,000 for the nine months ended September 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 nine months ended September 30, 2020 and 2019.

 

The Company remains subject to income tax examinations from Federal and state taxing jurisdictions for 2017 through 2019.

 

15

 

 

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 risks pertinent to the operations of a retailer, including, but not limited to, the ability to acquire new customers and maintain a strong brand as well as broader economic factors such as interest rates and changes in customer spending patterns.

 

Recent Accounting Pronouncements

 

In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). The new ASU eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. The amendments in the ASU are effective for public business entities that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Board also specified that an entity should adopt the guidance as of the beginning of its annual fiscal year and is not permitted to adopt the guidance in an interim period. The Company is still evaluating the effect the adoption will have on its financial statements.

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, as part as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. ASU 02019-12 removes certain exceptions to the general principle of ASC 740 in order to reduce the cost and complexity of its application. ASU 2019-12 is effective for public business entities for annual reporting periods beginning after December 15, 2020, and interim periods within those reporting periods. Early adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. The Company does not believe adoption will have a material impact on its financial statements.

 

NOTE 3 - LIQUIDITY AND GOING CONCERN

 

The Company’s financial statements are prepared using the accrual method of accounting in accordance with U.S. GAAP and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. However, the Company has incurred significant losses and experienced negative cash flow since inception. At September 30, 2020, the Company had cash of $71,913 and a deficit in working capital of approximately $10.2 million. Further, at September 30, 2020 the accumulated deficit amounted to approximately $47.9 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 and stock issuances to new and 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 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 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:

 

          Gross     Gross      
    Cost     Unrealized Losses     Unrealized Gains     Fair Value  
September 30, 2020   $ 141,225     $ (39,286 )   $ -     $ 101,939  
                                 
December 31, 2019   $ 141,225     $ -     $ 8,292     $ 149,517  

 

Net unrealized holding losses on available-for-sale securities were approximately $48,000 in the first nine months of 2020 and have been included in other income (expenses) in the accompanying statements of operations. Investments represent equity securities in a publicly traded company.

 

NOTE 5 - PROPERTY AND EQUIPMENT

 

Property and equipment, net consists of the following:

 

    September 30,     December 31,  
    2020     2019  
             
Furniture, fixtures and equipment   $ 1,385,430     $ 1,354,665  
Tooling and testing equipment     338,572       319,000  
Parking lots     365,707       365,707  
Leasehold improvements     79,857       -  
Motor vehicles     49,166       49,166  
                 
      2,218,732       2,088,538  
Accumulated depreciation     (491,080 )     (208,799 )
                 
Property and equipment, net   $ 1,727,652     $ 1,879,739  

 

Depreciation expense for the nine months ended September 30, 2020 and 2019 was $424,965 and $82,921, respectively.

 

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NOTE 6 - INTANGIBLE ASSETS

 

Intangible assets consist of the following:

 

                Amortization  
    September 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     (817,595 )     (504,878 )      
                       
Intangible assets, net     2,171,506       2,480,540        
Indefinite-lived intangible assets:                      
Trademarks     9,072       9,072        
                       
Total intangible assets   $ 2,180,578     $ 2,489,612        

 

Amortization expense for the nine months ended September 30, 2020 and 2019 was $312,717 and $175,592, respectively. Estimated future amortization expense for finite-lived intangible assets is as follows:

 

    Amount  
       
Remaining in 2020   $ 104,238  
2021     416,956  
2022     417,140  
2023     410,529  
2024     311,306  
Thereafter     511,337  
         
Total   $ 2,171,506  

 

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 nine months ended September 30, 2020 and 2019:

 

    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2020     2019     2020     2019  
                         
Operating lease cost   $ 395,188     $ 323,239     $ 1,184,302     $ 323,239  
                                 
Finance lease cost:                                
                                 
Amortization of right-of-use assets     47,012       15,435       142,134       15,435  
Interest on lease liabilities     10,585       1,257       33,416       1,257  
                                 
Total lease cost   $ 452,785     $ 339,931     $ 1,359,852     $ 339,931  

 

18

 

 

During the nine months ended September 30, 2020, the Company recognized sublease income of approximately $81,000, which is included in other income (expense), net in the accompanying condensed consolidated statements of operations. There was no sublease income in 2019.

 

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

 

The following table presents other information related to leases:

 

    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2020     2019     2020     2019  
                         
Cash paid for amounts included in the measurement of lease liabilities:                                
                                 
Operating cash flows used for operating leases   $ 375,911     $ 278,988     $ 1,124,706     $ 278,988  
Financing cash flows used for financing leases     53,577       16,728       161,881       16,728  
                                 
Assets obtained in exchange for operating lease liabilities     -       9,975,859       -       9,975,859  
                                 
Assets obtained in exchange for finance lease liabilities     -       189,770       75,739       189,770  
                                 
Weighted average remaining lease term:                                
Operating leases     9 years       10 years       9 years       10 years  
Finance leases     5 years       6 years       5 years       6 years  
                                 
Weighted average discount rate:                                
Operating leases     5.54 %     6.00 %     5.54 %     6.00 %
Finance leases     5.16 %     3.00 %     5.16 %     3.00 %

 

The future minimum lease payments required under operating and financing lease obligations as of September 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   $ 375,911     $ 52,427     $ 428,338  
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     9,965,738       906,534       10,872,272  
Less: imputed interest     (2,191,739 )     (114,051 )     (2,305,790 )
                         
Net lease liabilities   $ 7,773,999     $ 792,483     $ 8,566,482  

 

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

 

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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 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 $796,000 as of September 30, 2020 and is included in accounts payable in the accompanying consolidated balance sheet.

 

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 were to be delivered weekly to Libertas at predetermined amounts over a period of nine months. Pursuant to a settlement agreement dated August 25, 2020, the amount owed to Libertas has been fully settled with the payment of $525,000 on September 4, 2020. Included in loss on settlement of debt, net in the accompanying statements of operations is a gain of approximately $44,000 realized on the Libertas settlement.

 

Other term debt totaling $2,978 and $16,374 at September 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, the proceeds of which were loaned to the Company. Since the inception of the loan, the Company has paid interest at a rate of 4.5% per annum to Ameris Bank on behalf of the investors. Concurrently, interest payable to the investors has accrued at a rate of 10.0% per annum. Pursuant to an agreement dated September 3, 2020, the balance of $500,000 plus accrued interest of $160,000 was deemed to be paid in full through the issuance of 41,250,000 shares of the Company’s common stock. Included in loss on settlement of debt, net in the accompanying statements of operations is a loss of approximately $1,114,000 incurred on the Ameris settlement.

 

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Shareholder, Convertible and Contingently Convertible Notes Payable

 

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

 

    September 30,     December 31,  
    2020     2019  
             
Shareholder, convertible and contingently convertible notes   $ 951,895     $ 951,895  
Accrued interest     82,265       46,569  
Debt discount     (5,613 )     (137,775 )
                 
      1,028,547       860,689  
                 
Less: current maturities     (806,911 )     (366,326 )
                 
    $ 221,636     $ 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 September 30, 2020 and December 31, 2019 is $338,195. The Notes matured in January 2020 and continue to accrue interest until settlement.

 

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 September 30, 2020.

 

Based on the variable conversion price of these notes, the Company recorded the embedded conversion features as derivative liabilities, which amounted to $513,700 and $442,934 at September 30, 2020 and December 31, 2019, respectively.

 

Related Party Debt

 

The following table summarizes related party debt:

 

    September 30,     December 31,  
    2020     2019  
             
Rotman Family convertible notes   $ 1,832,707     $ 1,782,707  
Rotman Family nonconvertible notes     1,102,500       507,500  
Accrued interest     145,840       53,152  
Debt discount     (24,346 )     (585,100 )
                 
      3,056,701       1,758,259  
Less: current maturities     (641,000 )     (46,000 )
                 
    $ 2,415,701     $ 1,712,259  

 

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Rotman Family Convertible Notes

 

On September 30, 2019, the Company issued contingently convertible promissory notes totaling $180,000, to Steven Rotman ($105,000) and Greg Rotman ($75,000). These notes are (i) unsecured, (ii) bear interest at an annual rate of eight percent (8%) per annum from date of issuance, (iii) are convertible at the Company’s option after December 31, 2019, and (iv) mature five years from issuance. If converted, the notes plus accrued interest are convertible into shares of the Company’s common stock at the average of the five lowest closing prices in the 90-day period prior to conversion with a 50% discount. The balance of the notes payable including accrued interest to Steven and Greg Rotman is approximately $116,000 and $61,000, respectively, at September 30, 2020 and approximately $109,000 and $57,000, respectively, at December 31, 2019.

 

On July 18, 2019, the Company issued contingently convertible notes totaling $1,522,500, to Steven Rotman ($1,102,500) and Bernard Rotman ($420,000) as partial consideration for the acquisition of 58% of Rotmans (see Note 18). These notes are (i) unsecured, and (ii) bear interest at an annual rate of eight percent (8%) per annum from date of issuance. These notes can be converted only after an acceleration event which involves a symbol change or reverse stock split. Steven Rotman’s note matures eight years from issuance and Bernard Rotman’s note matures four years from issuance. If converted, the notes plus accrued interest are convertible into shares of the Company’s common stock at a 20-day average closing price at a 50% discount. The balance of the notes payable including accrued interest to Steven and Bernard Rotman were approximately $1,169,000 and $445,000, respectively, at September 30, 2020 and approximately $1,128,000 and $430,000, respectively, at December 31, 2019.

 

On December 19, 2019, the Company issued a contingently convertible promissory note totaling $100,000, to Steven Rotman. The face amount of the note represents the amount due at maturity along with the accrued interest. The amount can be converted into shares of the Company’s stock, at the option of the Company, based on the average closing price for the trailing 20 days prior to conversion and carrying 50% discount. The note can be converted only after an acceleration event which involves a symbol change, uplisting or reverse stock split. The note matures two years from issuance. The balance of the note payable including accrued interest to Steven Rotman is approximately $104,000 and $100,000 at September 30, 2020 and December 31, 2019, respectively.

 

On February 20, 2020, the Company issued a contingently convertible promissory note totaling $50,000, to Steven Rotman. The face amount of the note represents the amount due at maturity along with the accrued interest. The amount can be converted into shares of the Company’s stock, at the option of the Company, based on the average closing price for the trailing 20 days prior to conversion and carrying 50% discount. The note can be converted only after an acceleration event which involves a symbol change, uplisting or reverse stock split. The note matures two years from issuance. The balance of the note payable including accrued interest to Steven Rotman is approximately $51,000, at September 30, 2020.

 

Based on the variable conversion price for all of these convertible notes, the Company recorded the embedded conversion features as derivative liabilities, which amounted to $1,351,000 and $1,056,866 at September 30, 2020 and December 31, 2019, respectively.

 

Rotman Family Nonconvertible Notes

 

In connection with the acquisition of 58% of Rotmans, 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 were scheduled to 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 $390,000 and $148,000, respectively, at September 30, 2020 and approximately $376,000 and $143,000, respectively, at December 31, 2019. No payments have been made by the Company as of September 30, 2020.

 

22

 

 

During the three months ended September 30, 2020, Steven Rotman advanced the Company funds totaling $595,000. In October 2020, the Company formalized the advances and issued a promissory note to Steven Rotman. The note bears interest at an annual rate of five percent (5%) and is due no later than July 1, 2021. The face amount of the notes represents the amount due at maturity along with accrued interest. The balance of the notes payable including accrued interest to Steven Rotman is approximately $597,000, at September 30, 2020.

 

Approximate maturities for the succeeding years are as follows:

 

Remainder of 2020   $ 46,000  
2021     654,000  
2022     62,000  
2023     85,000  
2024     34,000  
Thereafter     221,500  
         
    $ 1,102,500  

 

NOTE 9 - DERIVATIVE LIABILITIES

 

As of September 30, 2020 and December 31, 2019, the Company had a $1,864,700 and $1,499,800, respectively, derivative liability balance on the consolidated balance sheet and recorded a gain (loss) from change in fair value of derivative liabilities of $143,000 and $(336,900) for the three months and the nine months ended September 30, 2020, respectively. The Company recorded a loss from change in fair value of derivative liabilities of $1,044,250 for the nine months ended September 30, 2019. The derivative liability activity comes from the convertible notes payable. 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 September 30, 2020 and December 31, 2019:

 

Fair Value of Embedded Derivative Liabilities:

 

    2020     2019  
             
Balance, beginning of the period   $ 1,499,800     $ 235,085  
                 
Initial measurement of liabilities     28,000       1,464,600  
                 
Change in fair value     336,900       1,079,450  
                 
Settlement due to conversion     -       (1,279,335 )
                 
Balance, end of the period   $ 1,864,700     $ 1,499,800  

 

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NOTE 10 - STOCKHOLDERS’ DEFICIT

 

Cumulative Convertible Preferred Stock

 

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

 

As of September 30, 2020, the 13,698 shares of outstanding preferred stock had undeclared dividends of approximately $101,000 and could be converted into 4,753,550 shares of common stock, at the option of the holder.

 

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

 

Common Stock and Warrants

 

During the nine months ended September 30, 2020, no shares were issued under equity purchase agreements. Included in stock subscription payable at September 30, 2020, is $714,500 received under common stock subscription agreements for 47,633,403 shares during the three months ended September 30, 2020.

 

During the three months ended September 30, 2020, 44,357 shares of common stock were issued for the conversion of 130 shares of preferred stock for principal and interest totaling $2,218.

 

NOTE 11 - REVENUES

 

The following table presents our revenues disaggregated by each major product category and service for the three and nine months ended September 30, 2020 and 2019:

 

    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2020     2019     2020     2019  
          % of           % of           % of           % of  
    Net Sales     Net Sales     Net Sales     Net Sales     Net Sales     Net Sales     Net Sales     Net Sales  
Merchandise:                                                                
Case Goods                                                                
Bedroom Furniture   $       723,529                   13.0     $ 810,908                  13.4     $ 1,879,831                  13.6     $ 810,908                 12.6  
Dining Room Furniture     309,429       5.6       482,331       8.0       1,050,491       7.6       482,331       7.5  
Occasional     981,164       17.7       2,430,904       40.2       2,387,054       17.2       2,430,904       37.9  
      2,014,122       36.3       3,724,143       61.7       5,317,376       38.3       3,724,143       58.0  
Upholstery     1,582,989       28.6       63,442       1.1       3,850,867       27.8       63,442       1.0  
Mattresses and Toppers     899,693       16.2       1,435,910       23.8       2,291,156       16.5       1,754,253       27.3  
Broadloom, Flooring and Rugs     464,408       8.4       520,232       8.6       970,593       7.0       520,232       8.1  
Warranty     119,329       2.2       108,732       1.8       400,789       2.9       108,732       1.7  
Accessories and Other *     464,022       8.4       187,742       3.1       1,034,926       7.5       246,629       3.8  
    $ 5,544,563       100.0     $ 6,040,201       100.0     $ 13,865,707       100.0     $ 6,417,431       100.0  

 

  * Accessories and Other include sales of RxAir products, delivery fees, and other.

 

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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 $1,024,788 and $2,406,409 of stock-based compensation for the nine months ended September 30, 2020 and 2019, respectively, including shares to be issued related to consultants and board member stock options and common stock and warrants issued to non-employees. Included in stock subscription payable is accrued stock-based compensation of $2,143,587 and $845,175 at September 30, 2020 and December 31, 2019, respectively.

 

The Company used the Black-Scholes option pricing model to estimate the grant-date fair value of option and warrant awards:

 

  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 nine months ended September 30, 2020 and 2019, the Company recorded $16,957 and $2,100,736, respectively, of share-based compensation expense related to employee and Board Members’ stock options. The unrecognized compensation expense as of September 30, 2020 was $31,976 for non-vested share-based awards to be recognized over a period of approximately four years.

 

Options

 

During 2004, the Board of Directors of the Company adopted a stock option plan (the “Plan”) and authorized up to 4,000,000 shares to be issued under the Plan. In April 2009, the Company’s Board of Directors authorized an increase in the number of shares to be issued under the Plan to 10,000,000 shares and to include the independent Board Members in the Plan in lieu of continuing the previous practice of granting warrants each quarter to independent Board Members for services. At September 30, 2020, there are 2,251,729 shares of common stock available for issuance under the Plan. In 2014, the Board of Directors adopted an additional stock option plan which provides for an additional 5,000,000 shares which are all available as of September 30, 2020. In 2019, the Board of Directors adopted an additional stock option plan with provides for 50,000,000 shares which are all available as of September 30, 2020. The Plan is intended to permit stock options granted to employees to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (“Incentive Stock Options”). All options granted under the Plan that are not intended to qualify as Incentive Stock Options are deemed to be non-qualified options. Stock options are granted at an exercise price equal to the fair market value of the Company’s common stock on the date of grant, typically vest over periods up to 4 years and are typically exercisable up to 10 years.

 

There were no options granted during the nine months ended September 30, 2020.

 

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The following table summarizes all stock option activity of the Company for the nine months ended September 30, 2020:

 

                Weighted  
          Weighted     Average  
          Average     Remaining  
    Number     Exercise     Contractual  
    of Shares     Price     Life (Years)  
                   
Outstanding, December 31, 2019     27,983,271     $ 0.20       3.45  
                         
Granted     -       -       -  
                         
Exercised     -       -       -  
                         
Forfeited     (108,333 )     0.68       -  
                         
Outstanding, September 30, 2020     27,874,938     $ 0.20       2.72  
                         
Exercisable, September 30, 2020     27,124,938     $ 0.21       2.86  

 

As of September 30, 2020, the aggregate intrinsic value on the Company’s outstanding options was approximately $160. As of September 30, 2019, the aggregate intrinsic value of the Company’s outstanding options was approximately $2,000. 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 following table represents the Company’s warrant activity for the nine months ended September 30, 2020:

 

                      Weighted  
                Weighted     Average  
          Weighted     Average     Remaining  
    Number     Average     Exercise     Contractual  
    of Shares     Fair Value     Price     Life (Years)  
                         
Outstanding, December 31, 2019     14,237,646           $ 0.09       3.58  
                                 
Granted     -           -       -       -  
                                 
Exercised     -       -       -       -  
                                 
Forfeited     (31,734 )     -       1.29       -  
                                 
Expired     -       -       -       -  
                                 
Outstanding, September 30, 2020     14,205,912           $ 0.08       2.78  
                                 
Exercisable, September 30, 2020     14,205,912           $ 0.08       2.78  

 

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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. During the nine months ended September 30, 2020, the Company expensed approximately $338,000 related to this employment agreement. As of September 30, 2020, the Company had a stock subscription payable balance of $641,000, or approximately 23,826,000 shares to be issued in the future and $45,000 of reimbursable expenses payable.

 

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. As of September 30, 2020, the Company had a stock subscription payable balance of $42,000, for approximately 850,000 shares related to this party for services incurred and expensed in 2019.

 

Blue Oar Consulting, Inc.

 

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

 

Per Blue Oar’s consulting agreement, it is to be paid $15,000 per month in cash for expenses, and $12,500 per month to be paid in shares based on a 20-day average at a 50% discount to market. During the nine months ended September 30, 2020, the Company expensed approximately $374,000 related to the consulting agreement. As of September 30, 2020, the Company had a stock subscription payable balance of $569,000, or approximately 28,125,000 shares and a balance of $135,000 in accounts payable related to this related party.

 

In connection with litigation matters involving both Blue Oar and the Company, legal invoices totaling approximately $25,000 have been paid on Blue Oar’s behalf during the three months ended September 30, 2020 and expensed as consulting services.

 

NOTE 14 - COMMITMENTS

 

Employment and Consulting Agreements

 

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

 

There is currently one employment agreement in place with the CEO, Steven Rotman. See compensation terms in Note 13.

 

During the nine months ended September 30, 2020, the Company entered into various service agreements 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.

 

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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 upon 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 dismissing the first and third claims for relief and denied the motion for summary judgment as moot.

 

The Company subsequently filed an amended answer with counterclaims. The affirmative defenses if granted collectively preclude the relief sought. In addition, Vystar filed counterclaims asserting: (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.

 

On June 10, 2020, EMA filed a motion for summary judgment as to its remaining claims for relief and a motion to dismiss the Company’s affirmative defenses and counterclaims. The Company opposed the motion on July 10, 2020, and the same was fully submitted to the Court on July 28, 2020; the parties await the Court’s decision on the motions.

 

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. The parties are now in the discovery process and the litigation is proceeding. Based on the current status of the matter, the Company is unable to determine an amount due, if any.

 

Eric Maas Lawsuit

 

The Company and members of its Board of Directors, and certain employees and consultants, were added as defendants in the case Maas v. Zymbe, LLC, et al. The complaint was removed from Superior Court of the State of California to Federal District Court in California. The amended complaint alleged 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. After mediation, this matter was settled during the third quarter of 2020, and the case has been dismissed with prejudice. All costs related to this matter have been expensed and included in the accompanying statements of operations.

 

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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.

 

There were no significant vendor concentrations during the nine months ended September 30, 2020. During the nine months ended September 30, 2019, the Company made approximately 26% of its purchases from two major vendors. The Company owed its major vendors approximately $400,000 at September 30, 2019.

 

NOTE 16 - INCOME TAXES

 

The provision (benefit) for income taxes for the nine months ended September 30, 2020 and 2019 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:

 

    Nine Months Ended  
    September 30,  
    2020     2019  
             
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 September 30, 2020 and December 31, 2019 are as follows:

 

    2020     2019  
             
NOL carryforwards   $ 6,625,000     $ 5,490,000  
                 
Less valuation allowance     (6,625,000 )     (5,490,000 )
                 
Deferred tax assets   $ -     $ -  

 

Deferred taxes are caused primarily by net operating loss carryforwards. For federal income tax purposes, the Company has a net operating loss carryforward of approximately $31,500,000 as of September 30, 2020, of which approximately $18,400,000 expires beginning in 2024 and $13,100,000 which can be carried forward indefinitely. For state income tax purposes, the Company has a net operating loss carryforward of approximately $18,300,000 and $12,900,000 as of September 30, 2020 in Georgia and Massachusetts, respectively, which expires beginning in 2023.

 

In addition, as of September 30, 2020, Rotmans has a net operating loss carryforward of approximately $4,200,000 for federal income tax purposes of which $1,810,000 expires beginning in 2029 and $2,390,000 can be carried forward indefinitely. Rotmans has a state operating loss carryforward of approximately $3,300,000 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.

 

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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 2020. 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% in term notes payable over 4 to 8 years and 75% in notes convertible to common stock (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 following unaudited pro forma information presents a summary of the Company’s combined operating results for the three and nine months ended September 30, 2019, as if the acquisition and the related financing transactions had occurred on January 1, 2019. The following pro forma financial information is not necessarily indicative of the Company’s operating results as they would have been had the acquisition been effected on the assumed date, nor is it necessarily an indication of trends in future results for a number of reasons, including, but not limited to, differences between the assumptions used to prepare the pro forma information, basic shares outstanding and dilutive equivalents, cost savings from operating efficiencies, potential synergies, and the impact of incremental costs incurred in integrating the businesses.

 

    Three Months Ended     Nine Months Ended  
    September 30, 2019     September 30, 2019  
             
Total revenues   $ 7,219,641     $ 21,199,801  
Loss from operations   $ 1,510,982     $ 5,416,058  
Net loss   $ 2,075,341     $ 7,054,141  
Net loss attributable to Vystar   $ 1,833,148     $ 6,490,576  
Basic and dilated loss per share   $ 0.00     $ 0.01  

 

NOTE 19 - SUBSEQUENT EVENTS

 

The Company has evaluated subsequent events through the date of the filing of its Form 10-Q with the Securities and Exchange Commission.

 

The Company issued 8,100,000 shares of common stock included in stock subscription payable in the accompanying balance sheet as of September 30, 2020.

 

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

 

OVERVIEW

 

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

 

About RxAir

 

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

 

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

 

The RxAir and UV Flu product line includes:

 

  RxAir™ Residential Filterless Air Purifier
     
  UV400 ™ FDA cleared Class II Filterless Air Purifier
     
  RX3000™ Commercial FDA cleared Class II Air Purifier

 

Vystar will continue production of the RxAir and UV Flu product line with a new world-class manufacturer and an expert U.S. engineer with a full understanding of the RxAir technology. Vystar plans to sell RxAir residential and commercial units via distributors, online and through retail channels. Vystar is assembling the distribution network to relaunch sales of UV400 and Rx3000 units to the healthcare and medical markets, which UV Flu had ceased due to a lack of sales force, distribution and cash flow constraints. Once production and sales are firmly re-established, Vystar expects that the air purification products will produce margins of approximately 70%.

 

About Rotmans

 

Rotmans, the largest furniture and flooring store in New England and one of the largest independent furniture retailers in the U.S., encompassing over 200,000 square feet in Worcester, Mass., and employing 70 people, was founded and has been under the leadership of the Rotman family for the past 50 years. Rotmans is expected to add approximately $25 million annually to Vystar’s top line revenue and enable Vystar to capitalize on the infrastructure already in place for accounting, retail sales facilities and staff, customer service, warehousing, and delivery. Significant marketing and advertising opportunities are available for all of Vystar’s brands to Rotmans’ thousands of existing customers. As CEO of both Rotmans and Vystar, Steven Rotman provides continuity of management and customer-focused values for the Company.

 

Impact of COVID-19 on Our Business

 

The COVID-19 pandemic has resulted in significant economic disruption and adversely impacted our business. We closed the Rotmans showroom on March 24. At that time, most of our team members were furloughed. During this period, we paid the cost of enrolled health benefits of those furloughed. We successfully reopened the showroom on June 10. As we restart many aspects of our operation, we will work closely with local authorities and follow the guidance of the Centers for Disease Control and Prevention (“CDC”), implementing enhanced cleaning measures, social distancing and the utilization of face masks for the safety of team members, customers and communities.

 

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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.

 

As the COVID-19 pandemic is complex and rapidly evolving, we cannot reasonably estimate the duration and severity of the pandemic and its impact on our business, results of operations, financial position and cash flows.

 

RESULTS OF OPERATIONS

 

Comparison of the Three Months Ended September 30, 2020 with the Three Months Ended September 30, 2019

 

    Three Months Ended September 30,  
    2020     2019     $ Change     % Change  
                         
    CONSOLIDATED  
                         
Revenue   $ 5,544,563     $ 6,040,201     $ (495,638 )     -8.2 %
                                 
Cost of revenue     2,527,403       3,378,220       (850,817 )     -25.2 %
                                 
Gross profit     3,017,160       2,661,981       355,179       13.3 %
                                 
Operating expenses:                                
Salaries, wages and benefits     1,535,449       1,223,879       311,570       25.5 %
Share-based compensation     716,161       305,673       410,488       134.3 %
Agent fees     579,750       -       579,750       0.0 %
Professional fees     311,514       153,965       157,549       102.3 %
Advertising     469,383       495,421       (26,038 )     -5.3 %
Rent     300,965       259,930       41,035       15.8 %
Service charges     132,542       200,212       (67,670 )     -33.8 %
Depreciation and amortization     249,834       158,409       91,425       57.7 %
Other operating     892,239       1,073,793       (181,554 )     -16.9 %
                                 
Total operating expenses     5,187,837       3,871,282       1,316,555       34.0 %
                                 
Loss from operations     (2,170,677 )     (1,209,301 )     (961,376 )     79.5 %
                                 
Other income (expense):                                
Interest expense     (430,711 )     (195,142 )     (235,569 )     120.7 %
Change in fair value of derivative liabilities     143,000       -       143,000       100.0 %
Loss on settlement of debt, net     (1,419,461 )     (339,875 )     (1,079,586 )     317.6 %
Loss on legal settlement     (101,000 )     -       (101,000 )     0.0 %
Other income, net     15,316       7,956       7,360       92.5 %
                                 
Total other expense, net     (1,792,856 )     (527,061 )     (1,265,795 )     240.2 %
                                 
Net loss     (3,963,533 )     (1,736,362 )     (2,227,171 )     128.3 %
                                 
Net loss attributable to noncontrolling interest     372,759       63,802       308,957       484.2 %
                                 
Net loss attributable to Vystar   $ (3,590,774 )   $ (1,672,560 )   $ (1,918,214 )     114.7 %

 

Revenues

 

Revenues for the three months ended September 30, 2020 and 2019 were $5,544,563 and $6,040,201, respectively, for a decrease of $495,638 or 8.2%. The decrease in revenues was due to the impact of COVID-19 during the quarter. The Company’s showroom, although open for the entire quarter had significantly lower sales volume then the third quarter of 2019. We cannot estimate the full impact of COVID-19 on revenues at this time.

 

32

 

 

The Company reported a significant increase in gross profit to $3,017,160 for the three-month period ended September 30, 2020 compared to gross profit of $2,661,981 for the three-month period ended September 30, 2019, an increase of $355,179. The cost of revenue for the three months ended September 30, 2020 and 2019 was $2,527,403 and $3,378,220, respectively, a decrease of 25.2%. The increase in gross profit is primarily due to a change in purchasing. Merchandise is being purchased in large quantities from fewer vendors.

 

Operating Expenses

 

The Company’s operating expenses consist primarily of compensation and support costs for management and administrative staff, and for other general and administrative costs, including professional fees related to accounting, finance, and legal services as well as advertising, rent and other operating expenses. The Company’s operating expenses were $5,187,837 and $3,871,282 for the three months ended September 30, 2020 and 2019, respectively, an increase of $1,316,555 or 34.0%. The increase was due in part to fees incurred under an agreement with a third-party agent to assist the Company with a high-impact sale at Rotmans.

 

Other Income (Expense)

 

Other expense for the three months ended September 30, 2020 was $1,792,856, which primarily consisted of interest expense of $430,711, loss on settlement of debt, net of $1,419,461, change in fair value of derivative liabilities of $143,000, loss on legal settlement of $101,000 and other income of $15,316. This compares to other expense of $527,061 for the three months ended September 30, 2019, which primarily consisted of interest expense of $195,142, loss on settlement of convertible notes payable of $339,875 and other income of $7,956.

 

Net Loss

 

Net loss was $3,963,533 and $1,736,362 for the three months ended September 30, 2020 and 2019, respectively, an increase of $2,227,171. The larger net loss the Company experienced in the quarter ended September 30, 2020 versus the same period in 2019 was due to increased expenses from the operations of Rotmans, an increase in share-based compensation and legal fees and a loss on settlement of debt.

 

33

 

 

Comparison of the Nine Months Ended September 30, 2020 with the Nine Months Ended September 30, 2019

 

    Nine Months Ended September 30,  
    2020     2019     $ Change     % Change  
                         
    CONSOLIDATED  
                         
Revenue   $ 13,865,707     $ 6,417,431     $ 7,448,276       116.1 %
                                 
Cost of revenue     6,450,421       3,789,186       2,661,235       70.2 %
                                 
Gross profit     7,415,286       2,628,245       4,787,041       182.1 %
                                 
Operating expenses:                                
Salaries, wages and benefits     3,655,162       1,223,879       2,431,283       198.7 %
Share-based compensation     1,024,788       2,406,409       (1,381,621 )     -57.4 %
Agent fees     635,919       -       635,919       0.0 %
Professional fees     855,397       525,950       329,447       62.6 %
Advertising     1,150,540       539,000       611,540       113.5 %
Rent     894,275       259,930       634,345       244.0 %
Service charges     360,465       202,116       158,349       78.3 %
Depreciation and amortization     737,682       258,513       479,169       185.4 %
Other operating     2,161,852       1,407,598       754,254       53.6 %
                                 
Total operating expenses     11,476,080       6,823,395       4,652,685       68.2 %
                                 
Loss from operations     (4,060,794 )     (4,195,150 )     134,356       -3.2 %
                                 
Other income (expense):                                
Interest expense     (1,646,104 )     (335,208 )     (1,310,896 )     391.1 %
Change in fair value of derivative liabilities     (336,900 )     (1,044,250 )     707,350       -67.7 %
Loss on settlement of debt, net     (1,419,461 )     (327,433 )     (1,092,028 )     333.5 %
Loss on legal settlement     (101,000 )     -       (101,000 )     0.0 %
Other income, net     35,990       7,802       28,188       361.3 %
                                 
Total other expense, net     (3,467,475 )     (1,699,089 )     (1,768,386 )     104.1 %
                                 
Net loss     (7,528,269 )     (5,894,239 )     (1,634,030 )     27.7 %
                                 
Net loss attributable to noncontrolling interest     703,846       63,802       640,044       1003.2 %
                                 
Net loss attributable to Vystar   $ (6,824,423 )   $ (5,830,437 )   $ (993,986 )     17.0 %

 

Revenues

 

Revenues for the nine months ended September 30, and 2019 were $13,865,707 and $6,417,431, respectively, for an increase of $7,448,276 or 116.1%. The significant increase in revenues was due to the acquisition of Rotmans in July of 2019, which was partially offset by the impact of COVID-19 as the Rotmans showroom was closed from March 24 through June 10. During this period, the Company processed limited customer deliveries for prior orders and web sales and subsequent to this period, sales have not returned to pre-COVID-19 levels.

 

The Company reported a significant increase in gross profit to $7,415,286 for the nine-month period ended September 30, 2020 compared to gross profit of $2,628,245 for the nine-month period ended September 30, 2019, an increase of $4,787,041. The cost of revenue for the nine months ended September 30, 2020 and 2019 was $6,450,421 and $3,789,186, respectively, an increase of 70.2%. The increase is due to a change in merchandise buying in the third quarter of 2020. The Company is now buying items in large quantity rather than special order items.

 

Operating Expenses

 

The Company’s operating expenses consist primarily of compensation and support costs for management and administrative staff, and for other general and administrative costs, including professional fees related to accounting, finance, and legal services as well as advertising, rent and other operating expenses. The Company’s operating expenses were $11,476,080 and $6,823,395 for the nine months ended September 30, 2020 and 2019, respectively, an increase of $4,652,685 or 68.2%. The increase was due to the acquisition of Rotmans in July of 2019.

 

34

 

 

Other Income (Expense)

 

Other expense for the nine months ended September 30, 2020 was $3,467,475, which primarily consisted of interest expense of $1,646,104, loss on settlement of debt of 1,419,461, change in fair value of derivative liabilities of $336,900, loss on legal settlement of $101,000 and other income of $35,990. This compares to other expense of $1,699,089 for the nine months ended September 30, 2019, which consisted of change in fair value of derivative liabilities of $1,044,250, interest expense of $335,208, loss on settlement of convertible notes payable of $327,433 and other income of $7,802.

 

Net Loss

 

Net loss was $7,528,269 and $5,894,239 for the nine months ended September 30, 2020 and 2019, respectively, an increase of $1,634,030. The larger net loss the Company experienced in the nine months ended September 30, 2020 versus the same period in 2019 was due to increased revenues and gross profit from the operations of Rotmans which was partially offset by the impact of COVID-19 as the showroom was closed from March 24 through June 10, and an increase in interest expense due to amortization of debt discount of $721,000. The Company cannot reasonably estimate the effect of COVID-19 on its net loss at this time.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s financial statements are prepared using the accrual method of accounting in accordance with U.S. GAAP and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. However, we have incurred significant losses and experienced negative cash flow since inception. At September 30, 2020, the Company had cash of $71,913 and a deficit in working capital of approximately $10.2 million. Further, at September 30, 2020, the accumulated deficit amounted to approximately $47.9 million. We use working capital to finance our ongoing operations, and since those operations do not currently cover all of our operating costs, managing working capital is essential to our Company’s future success. Because of this history of losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.

 

A successful transition to profitable operations is dependent upon obtaining sufficient financing to fund the Company’s planned expenses and achieving a level of revenue adequate to support the Company’s cost structure.

 

Management plans to finance future operations using cash on hand, as well as increased revenue from RxAir air purifier sales and Vytex license fees. The Company will also raise capital with common stock subscription issuances and has raised $714,500 through September 30, 2020. In May, the Company entered into a sale promotion consulting agreement with a national sales event company to assist its recovery with a high-impact sale and monetary advance. The agreement has allowed Rotmans to meet its financial obligations through the shutdown and is expected to give the Company flexibility and time needed to develop a new retail furniture sale model.

 

There can be no assurances that we will be able to achieve projected levels of revenue in 2020 and beyond. If we are not able to achieve projected revenue and obtain alternate additional financing of equity or debt, we would need to significantly curtail or reorient operations during 2020, which could have a material adverse effect on our ability to achieve our business objectives, and as a result, may require the Company to file 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.

 

Our future expenditures will depend on numerous factors, including: the rate at which we can introduce RxAir products and license Vytex NRL raw material and the foam cores made from Vytex to manufacturers and subsequently retailers; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, along with market acceptance of our products, and services and competing technological developments. As we expand our activities and operations, our cash requirements are expected to increase at a rate consistent with revenue growth after we achieve sustained revenue generation.

 

35

 

 

Sources and Uses of Cash

 

Net cash used in operating activities was $2,353,944 for the nine months ended September 30, 2020 as compared to net cash used in operating activities of $1,090,903 for the nine months ended September 30, 2019. During the nine months ended September 30, 2020, cash used in operations was primarily due to the net loss for the period of $7,528,269 net of non-cash related add-back of share-based compensation expense, depreciation, amortization, amortization of debt discount, loss on settlement of debt and change in fair value of derivative liabilities.

 

The Company had cash used in investing activities of $133,878 during the nine months ended September 30, 2020 as compared to $10,019 for the nine months ended September 30, 2019.

 

Net cash provided by financing activities was $2,487,380 during the nine months ended September 30, 2020, as compared to cash provided of $1,115,092 during the nine months ended September 30, 2019. During the nine months ended September 30, 2020, cash was used in the net repayment on line of credit of $210,200, term debt in the amount of $794,106, finance lease obligations of $128,464, offset by proceeds from issuance of term debt of $2,211,400, stock subscription receivable of $49,250, advances from stock subscription payable of $714,500 and related party loan of $645,000.

 

The Company plans to service its current debt from profitability on RxAir product sales and equity infusions.

 

Off-Balance Sheet Arrangements

 

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

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

None

 

36

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

The Company’s Chief Executive Officer and Chief Financial Officer (the “Certifying Officer”) is responsible for establishing and maintaining disclosure controls and procedures for the Company. Although the Certifying Officer has designed such disclosure controls and procedures to ensure that material information is made known to them, particularly during the period in which this report was prepared, certain material weaknesses occurred during the period ended September 30, 2020 and subsequent to period end. The Certifying Officer has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e) (the “Rules”) under the Securities Exchange Act of 1934 (or “Exchange Act”) as of the end of the period covered by this Quarterly Report and is working on improving controls with an outside CPA firm and dedicated internal resources.

 

Management’s Report on Internal Control Over Financial Reporting

 

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

 

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

 

Management, under the supervision and with the participation of our Chief Executive Officer and our acting Chief Financial Officer, conducted an evaluation of our internal control over financial reporting as of September 30, 2020, based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) 2013. Based on our evaluation under the COSO framework, management concluded that our internal control over financial reporting was not effective as of September 30, 2020. Such conclusion was reached based on the following material weaknesses noted by management:

 

  a) We have a lack of segregation of duties due to the small size of the Company.
     
  b) The Company did not maintain reasonable control over records underlying transactions necessary to permit preparation of the Company’s financial statements.
     
  c) Lack of controls that provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposal of the Company’s assets that could have a material effect on the financial statements.
     
  d) Lack of a formal CFO position who can devote significant attention to financial reporting resulted in multiple audit adjustments.
     
  e) Lack of a functioning audit committee, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures. Management believes the lack of a functioning audit committee results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future period.

 

Management expects to strengthen internal control during 2020 by developing stronger business and financial processes for accounting for transactions such as warrant/stock issuances, which will enhance internal control for the Company.

 

37

 

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

The Company is subject to legal proceedings and claims that have not been fully resolved and have arisen in the ordinary course of business. See the discussion of pending legal proceedings in Note 14 of the Notes to Condensed Consolidated Financial Statements.

 

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

 

During the three months ended September 30, 2020, the Company entered into stock subscription agreements to issue common stock that were not registered under the Securities Act of 1933, as amended (the “Securities Act”). Total proceeds of $714,500 were received for 47,633,403 shares to be issued. The Company will issue the common stock in the next quarter. Proceeds were used for working capital.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable

 

ITEM 5. OTHER INFORMATION

 

None

 

ITEM 6. EXHIBITS

 

Exhibit Index

 

Number   Description
     
31.1 *   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1 *   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema Document
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith

 

38

 

 

SIGNATURES

 

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

 

  VYSTAR CORPORATION
     
Date: November 23, 2020 By: /s/ Steven Rotman
    Steven Rotman
   

President, Chief Executive Officer, Chief Financial Officer and Director

 

39

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