Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
| ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Fiscal Year Ended December 31, 2016
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 000-53754
VYSTAR CORPORATION
(Exact name of registrant as specified in its charter)
| GEORGIA | 20-2027731 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 2480 Briarcliff Road | ||
| Suite
6, #159 Atlanta, GA |
30329 | |
| (Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code: 866-674-5238
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.0001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
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 ☑
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☐ No ☑
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large Accelerated Filer ☐ | Accelerated Filer ☐ | Non-Accelerated Filer ☐ | Smaller Reporting Company ☑ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
As of April 13, 2017, the aggregate market value of shares held by non-affiliates of the registrant (based upon the closing sale price of such shares on the OTC Market on April 12, 2017) was $19,240,909. See Item 12.
As of April 13, 2017, there were 120,255,681 shares of the registrant’s common stock outstanding and 13,828 shares of the registrants Series A preferred stock.
Vystar Corporation
Annual Report on Form 10-K
For the Year Ended December 31, 2016
Table of Contents
CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain oral and written statements made by Vystar Corporation about future events and expectations, including statements in this Annual Report on Form 10-K (the “Report”) contain forward-looking statements, within the meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Securities Act of 1933, as amended ( the “Securities Act”), that involve risks and uncertainties. For those statements, we claim the protection of the safe-harbor for forward-looking statements contained in the Private Securities Litigation Act of 1995. In some cases, forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may” and similar expressions. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Report or the statement. All of these forward-looking statements are based on information available to us at this time, and we assume no obligation to update any of these statements. Actual results could differ from those projected in these forward-looking statements as a result of many factors, including those identified in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere. We urge you to review and consider the various disclosures made by us in this Report, and those detailed from time to time in our filings with the Securities and Exchange Commission (the “SEC”), that attempt to advise you of the risks and factors that may affect our future results. We qualify any forward-looking statements entirely by these cautionary factors.
The above mentioned risk factors are not all-inclusive. Given these uncertainties and that such statements, speak only as of the date made; you should not place undue reliance on forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
| ITEM 1. | BUSINESS |
Products and Services
Natural Rubber Latex
Vystar Corporation (“Vystar”, the “Company”, “we”, “us”, or “our”) is the creator and exclusive owner of the innovative technology to produce Vytex® Natural Rubber Latex (“NRL”). The Vytex Division contains our global multi-patented technology that reduces antigenic and total protein in natural rubber latex products to virtually undetectable levels. Vytex NRL, our “ultra-low protein” natural rubber latex has been introduced throughout the worldwide marketplace that uses NRL or latex substitutes as a raw material for end products. Natural rubber latex or latex substitutes are used in an extensive range of products including balloons, textiles, footwear and clothing (threads), adhesives, foams (mattresses, pillows, mattress toppers, etc.), furniture (foam and adhesives), carpet, paints, coatings, protective equipment, sporting equipment, and, especially health care products such as condoms, surgical and exam gloves, among others. Our challenge has been that a manufacturer’s conversion from the use of standard latex or synthetic raw material to Vytex NRL involves a protracted sales cycle ranging from eighteen to thirty six months. Additionally, in the past, our primary method of distribution was via toll manufacturing. We now have several licensing agreements in place for global distribution that have allowed us to focus on and transition to sales and marketing with a technical oversight.
Natural rubber latex is an agricultural product produced from the sap of the rubber tree, Hevea brasiliensis. According to the most recent data available and obtained on the International Rubber Study Group web site (www.rubberstudy.com) and dated January 6, 2015: the total world rubber demand is forecast to increase at 1.8% and 4.1% in 2015 and 2016 respectively, growing below the long-term growth rate of 3.7% under the IMF Scenario to 29.1 million tonnes in 2015 and to 30.3 million tonnes in 2016.
World Natural Rubber (NR) demand is forecasted to increase by 3.1% in 2015 under the IMF Scenario and by 4.4% in 2016. The world total NR consumption is expected to be 12.3 million tonnes in 2015, 12.9 million tonnes in 2016 and increasing to 16.5 million tonnes in 2023. World Synthetic Rubber (SR) demand is expected to increase to 16.8 million tonnes in 2015 and rise to 17.5 million tonnes in 2016 under the IMF Scenario. In 2023, the demand for SR will be 21.5 million tonnes. The outlook for NR supply is positive, sufficient to meet the demand of the industry for all forecast years under all three scenarios. Almost 60% of global consumption is by the world’s tyre manufacturing industry, with the remainder going into the ‘general rubber products’ sector; many thousands of different goods are manufactured by this sector, serving many industries, including transport, construction, health, mining, apparel, foam, etc.
Substantially all of the latex processors are located in Southeast Asia, India, Africa and Latin America and are owned by local groups or large multinational corporations. This future demand is awakening interest in other areas of the world where the climate is suitable, particularly in Guatemala, where focus now shifts to certifications from the Forestry Stewardship Council and Rainforest Alliance, as a specialty latex... In addition to the resurgence of Central and South America in natural rubber latex production, countries such as Vietnam and Cambodia have launched major efforts to meet the needs of the global liquid natural rubber latex market. Vietnam is now a major processor of our Vytex NRL and several trial runs of the specialty offerings discussed below that are in place for manufacturer trials and we now have two producers in Guatemala, one in the trial phase.
Our initial product portfolio included Vytex NRL in high ammonia (HA) and low ammonia (LA) formulations. New specialized formulations are projected to come to market over the next year with trials in ultra-low ammonia, pre-vulcanised and low nitrosamine versions currently taking place. Vystar has used its technology to work with customers to solve production issues and provide them with a point of difference and guidance as research using Vytex has headed into directions previously thought to be off-limits to natural rubber latex. It appears to be the removal of the vast majority of the proteins, the carotenoids and the non-rubbers that affords Vytex NRL this opportunity.
Board of Directors Member and Research & Development Director Ranjit K. Matthan, Ph.D., revealed ongoing developments in the formulation of Vytex NRL with reduced or no ammonia and nitrosamines at the International Latex Conference (ILC) session titled “Advances in Environmentally Friendly Ultra Low Protein Natural Rubber Specialty Latices” on August 12, 2015. The significant advances in aluminum hydroxide-treated Vytex NRL properties and applications are potential game-changers for the issues of volatile organic content and nitrosamines for some critical latex products, such as balloons, catheters, condoms, and other medical devices, as well as enabling cleaner and more sustainable work environments. The expanded Vystar product grades make it applicable in a wider range of latex products with the advantage of improved environmental impact through reduced leachables/extractables. The advances deliver a simplified, sustainable, totally safe raw material that Vystar can offer for several applications without reservations about nitrosamines. Production scale up of all three newer versions of Vytex NRL is currently being targeted as well as sample fulfillment.
| 3 |
Recently at the Nuremberg Toy Show (Speilwarenmesse) Vytex NRL was a targeted product for manufacturers of balloons, masks, etc. On the main page of the European Balloons and Party Council web site is a Yahoo video still plus a recent press release that discusses the benefits of Vytex NRL in items such as balloons. As there is a new proposal for limits on protein content of balloons by virtue of an EN listing, Vytex has now gone in to full prevulcanized testing to start the sampling process in this very large European manufacturing market (Italy, Austria, Spain, etc.) for balloons and has already spread to areas in Central and South America.
Over the course of several years, our technical groups has presented technical papers of varying topics that still hold relevance. Vytex NRL is produced at the latex processor level and can be integrated into the current processing environments without additional capital equipment investment. The protein removal and modification process that leads to Vytex NRL allows manufacturers to lower manufacturing costs with the benefit of reduced protein levels. Reduced leaching times and resulting reductions in energy, water and material handling consumption can lead to realized cost savings.
Also, “Eco-Friendly Manufacturing of High Performance Latex using Ultra Low Antigenic Protein Latex” reviewed some of the learnings Vystar had made since commercializing Vytex NRL. Among these discoveries were: improved air and helium retention in balloons; reduced leaching needs for some dipped products; truer colors for dyed dipped products (such as balloons); and low latex odor in foams, which has now led to unique research into areas previously considered off-limits to NRL. Vystar published and presented a paper, “Further Development of Vytex® Natural Rubber Latex Leads to Strong Niche Market Advances”, that added additional learnings related to slow release (memory) foam formulations and other technical improvements helping customers solve their new product development challenges.
Vystar has transitioned from toll manufacturing agreements to licensing agreements that eliminate the need to maintain a costly infrastructure along with the other investment and regulatory compliance costs to develop and operate a processing or manufacturing facility. All of these costs are or will be borne by our manufacturing and distribution contractors and/or customers. This means we must show the NRL producers and product manufacturers the economic value proposition of including Vytex NRL in their product lines, hence the technical paper presentations we have made and continue to make. In addition, as an all-natural raw material, Vytex NRL puts the main component in gloves and other products back in the environmentally friendly arena.
Increased interest in the exam glove arena has put Vystar in the enviable position of needing glove manufacturers to work with to handle the expected transition of healthcare companies, clinics and non-medical uses. Vystar is currently working with an American manufacturing facility to handle some of these needs as they prepare for production start up. Other glove manufacturers are also being sought.
To implement our licensing model, in March 2010 we signed a licensing agreement with Pica de Hule Natural, a division of Grupo Agroindustrial de Occidente (“Occidente”), located in Guatemala. Occidente is the largest processor of natural rubber latex in Latin America and the largest exporter serving more than 15 countries. Under the agreement, Occidente will manufacture, sell and market Vytex NRL throughout Latin America as well as supply Vytex NRL to North America and Europe. This agreement was continued in 2016.
In October 2010, we signed a second licensing agreement with KA Prevulcanized Latex (KAPVL) to manufacture and sell Vytex NRL in the SAARC region which includes India, Pakistan, Sri Lanka, Bangladesh, Bhutan and Nepal. India is the second largest consumer of concentrated latex behind China. In 2014 this agreement ended and we did not renew.
In addition, in January 2009, we entered into a Distribution Agreement with Centrotrade Minerals & Metals, US and Centrotrade Deutschland, GmbH, Germany, a leading global distributor of latex raw materials, to create a worldwide distribution network that will further enhance our ability to cost effectively reach and service manufacturer customers in these key manufacturing areas. This provides an expansive distribution network that facilitates both the licensing and toll manufacturing models and can assist with various processors in taking their products to market. On December 19, 2012, we amended our agreement with Centrotrade to expand Vytex NRL distribution rights to the world’s largest NRL consuming markets in Southeast Asia, specifically Malaysia and Thailand. Under this new license agreement, Centrotrade controls production scheduling of Vytex NRL, inventory in Thailand, sales, pricing and customer financing, while Vystar will focus on marketing, customized product development, as noted above, and support activities. Vystar currently has no exclusive areas under contract as RCMA, a Dutch based distributor was added in 2016.
The paper entitled, “The Non-Enzymatic Deproteinization of Natural Rubber Latex (DPNRL) Enabling the Greater Versatility in End Product Applications” discussed improvements that extend beyond the ultra-low allergenicity of the DPNRL and include improved color, absence of rubber odor, and improved physicochemical attributes. Improved air and helium retentions results were reported. The potential to extend applications into other non-conventional areas other than latex end products was discussed and we are currently in the final retail test market stages for the United States based manufacturing of mattresses, pillows and toppers to key furniture stores and buying groups, primarily in the Northeastern United States and signed a 5 year renewable agreement in January 2015 with Nature’s Home Solutions (NHS) to exclusively distribute these products in the United States. In September 2016, the Vystar Board of Directors voted to end the January 2015 NHS agreement and replace it with a global exclusive for foam manufactured with Vytex and sold into the home furnishings industry. This change reflects the global nature of the mattress, topper and pillow businesses, the need for local warehousing, and access to container loads of foam cores and pillows for European and Asian manufacturers.
| 4 |
Vystar has also expanded licensing arrangements into the consumer arena, with the licensing of foam products produced with and labeled as “Made with Vytex NRL”. Specifically working with partners, to introduce foam made with Vytex into the mattress, mattress topper and pillow arenas aligning with key foam manufacturers, mattress, mattress toppers and pillow producers, and furniture stores in specific areas of the Unites States. Vystar announced the signing of the aforementioned exclusive global distribution agreement with Worcester, MA based NHS who sources eco-friendly materials and technologies for use in furnishings and other markets. NHS has completed several trials with Vietnamese, European and Indian makers of foam products to use its Vytex NRL raw material in their current offerings in their own areas as well as to supply added needs for foam cores in both the mattress and topper arenas globally. The current requests from major mattress manufactures for Vytex foam trials involves different densities especially those used on the upper levels of mattresses. The samples have been presented to the manufacturers and feedback has been very positive with names such as Gold Bond, King Coil (Natura) and SpringAir (Nature’s Rest) adding Vytex to their current offerings. A similar trial occurred in October 2016 in Thailand focusing on specific densities and pillows, and a meeting with a Belgian foam maker using a unique drying concept occurred in May 2016 with discussions ongoing. In addition, working with NHS and a large Vietnamese foam manufacturer, Lien A, the group attended the International Sleep Products Association (ISPA) in Orlando in March 2016. The significance of ISPA is the focus on components for use with major mattress and pillow manufacturers, which takes Vytex foam to an additional audience.
Pricing of materials in the rubber and latex industries continues to fluctuate as noted by the graph below courtesy of Centrotrade. Prices of centrifuged latex, thus Vytex, have risen throughout 2016 and in to early 2017 due to various factors such as floods in southern Thailand, removal of older tress and replanting which is a seven-year process, newer plantations coming online, etc.
Competition
Natural Rubber Latex
Synthetic raw materials such as ethylene, propylene, styrene and butadiene compete with NRL. Currently, it is estimated that NRL processors have lost one-half of the overall latex market to synthetic latex. Despite the switch to non-latex alternatives, it is estimated that in U.S. hospitals as recently as September, 2010 over 70% of exam gloves and nearly 80% of surgical gloves were still made with NRL.
Several attempts, including new source crops, synthetic lattices and various treatment methods, have been made to eliminate problem proteins from Hevea NRL by biological, physical and/or chemical methods that act on proteins. One approach has been to introduce the latex articles to multiple leaching steps and chlorination. While it does reduce the protein levels in the finished product, it weakens the latex film thus compromising the desirable physical properties of the product. Another attempt to reduce proteins in NRL is the use of proteolytic enzymes to degrade the proteins in the latex solution but this approach introduces another protein (the enzyme) to the latex, which may itself be allergenic. Attempts to commercialize two other non-Hevea NRL materials have been made in the United States: guayule rubber latex and Taraxacum kok-saghyz, also known as the Russian dandelion. These materials are reported to be higher in cost compared to natural rubber latex and presently are available only in limited quantities.
These facts, coupled with the uncomplicated transition to the utilization of Vytex NRL, make it very attractive for processors to regain lost business by switching to Vytex NRL. We believe our unique patented technology offers a viable alternative to the marketplace. The licensing model will allow the message to spread through more sales channels than we could reach in the past.
Intellectual Property
Vystar has four issued patents by the United States Patent Trademark Office (“USPTO”) that were issued in 2005 (Patent No. 6,906,126), 2006 (Patent No. 7,056,970), 2011 (Patent No. 8,048,951) and 2012 (Patent No. 8,324,312). International patents include one issued patent from the Republic of South Africa in 2009 (2008/00886), a second foreign patent issued by China in 2011 (No. 200580051526.1), a third foreign patent issued by Japan in 2012 (No. 4944885) and a fourth foreign patent issued by Hong Kong in 2013 (HK1125959). In 2005, we sought international patent protection of our application that would become our U.S. Patent No. 6,906,126 pursuant to the Patent Cooperation Treaty (“PCT”) (No. PCT/US2005/025018), and this application has been nationalized in the following countries and regions: The European Union (No.05775523.3), Canada (No. 2,614,945), India (No.295/DELNP/2008), and Sri Lanka (No.14827). Additionally, this PCT was nationalized back into the United States to expand our protection to both method and composition claims (No.11/988,498). We expect patents to be issued in these countries without objection.
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On January 18, 2012, we converted the provisional patent filed January 18, 2011 (No. 61/433,853) to full utility applications based on new discoveries and unexpected results (No. 13/374,851). We also sought international protection for the new developments and unexpected results reflected in this 2009 USPTO patent application through another PCT application (No. PCT/US2009/031445). This PCT application was nationalized in the following countries in 2010: the European Union (No. 09702339.4), Brazil (No. PI0906513-0), Guatemala (No. 2010-000208), India (No.2487/KOLNP/2010), Indonesia (No. W-00201002436), and Malaysia (No. PI2010003317). In addition, we filed the same patent application that was the subject of our USPTO patent application No. 12/356,355 and PCT/US2009/031445 directly into Thailand (No. 0901000201). Thailand has informed us that our patent application is now published for open comments.
The European Patent Office issued a Decision to Grant Vystar’s patent application under European Patent Number 1 902 089 titled “Decreasing Allergenicity of Natural Latex Rubber Prior to Vulcanization” greatly expanding the territory covered by the Company’s intellectual property portfolio. The mention of the grant was published in the European Patent Bulletin 13/35 dated 28 August 2013. Vystar selected the United Kingdom (065143-011612/UK), Germany (065143-011611/DE), and Austria (065143-001610/AT) as validation points for this specific patent. Also, on September 14, 2014, we were notified by the Patents Office of Ireland that Patent 1902089 covering the same above titled patent was awarded to the Company on August 28, 2013.
On December 9, 2016 Vystar was notified by our Singaporean IP Counsel that Malaysia Application No PI 2010003317 entitled “Natural Rubber Latex Having Reduced Allergenicity and Method of Making” was cleared for issuance and that a Notice of Grant will be issued.
Vystar filed and has received registered trademark protected status in the United States for the marks “Vystar”, “Vytex” and “Created by Nature. Recreated by Science.” In 2010 Vystar filed for international trademark protection of “Vytex” in Malaysia (No.2010013149) and India (No. 1992991), which was granted in India. On November 18, 2014, the Company was informed that the “VYTEX” trademark was registered in Malaysia effective May 30, 2014. The aforementioned marks have been renewed successfully in each period as required.
While we believe that the pending patent and trademark applications will be granted without objection, there are no guarantees that all such patents or trademarks will be granted by each relevant governing body. No assurance can be given that such patent and trademark protection will provide substantial protection from competition. We realize that the market for Vytex NRL is an industrialized world concern and we are committed to aggressively challenging any infringements of our patents and/or trademarks. As of December 31, 2016, Vystar has expended, since inception, approximately $276,155 on such patent and trademark costs and has budgeted approximately $10,000 more for the year ended December 31, 2017 to continue to pursue and maintain its patents and trademarks around the world.
Research and Development
Vytex NRL has produced protein test results on finished products that are both “below detection” and “not detectable” in terms of the amount of proteins remaining in these finished goods made with Vytex NRL. These results have been reproduced in many subsequent tests. From inception through December 31, 2016, Vystar’s research and development costs have been approximately $2.4 million. These efforts past and future have been and will continue to be patented and/or trademarked.
Government Regulation
Vytex:
In the United States, healthcare and many food and food-based packaging products are subject to regulation by the Food and Drug Administration (FDA). Vystar is not directly subject to regulation by the FDA due to the fact that it does not manufacture a finished medical device or other product, but only provides Vytex NRL as a component or raw material to healthcare or other product manufacturers. However, there will be FDA regulation of the labeling of healthcare and food-based packaging products that are produced with Vytex NRL and the FDA has promulgated standards for good manufacturing practices for manufacturing the end products, which makes the end product manufacturers responsible for seeing that all of their components and component manufacturers, including Vytex NRL, are produced using good manufacturing processes. Additionally, the FDA prohibits the use of the term “hypoallergenic” or “low protein” on any natural rubber latex product it regulates. In order to make any such claim, the latex product manufacturer must seek a waiver from the FDA of such regulatory prohibitions. Commentary by the FDA in its guidance documents and other rulings indicate that the prohibition on the use of the “hypoallergenic” or “low protein” label is based, at least in part, on the fact that, although the use of such terms in such labeling may be intended to indicate that the risk of allergic reaction to residual levels of processing chemicals has been reduced, consumers may interpret the labeling to mean that the risk of allergic reactions to any component in the device would be minimal. Thus the hypoallergenic or low protein label is deemed misleading. There can be no assurance, however, that we will succeed in securing FDA approval for any claim regarding the “hypoallergenic” “low protein” or reduced allergy potential of latex produced with the Vytex NRL process. Failure to secure, if required, such FDA approval, could delay or otherwise detrimentally affect our introduction to natural rubber latex healthcare and/or food packaging products regulated by the FDA. Notwithstanding, the medical or food packaging manufacturer will be able to use the Vytex NRL trademark on its label if size permits to indicate only that the Vytex NRL component was used in the production of the healthcare product, and what protein levels the end product does contain, but no further claim is asserted. We have been able to provide sufficient testing data to the FDA to support our protein level claims with respect to the natural rubber latex antigenic and total proteins present in end products made with Vytex NRL. On May 1, 2009, a condom manufactured from Vytex NRL received 510(k) clearance from the U.S. Food and Drug Administration. This was the first medical product available in the U.S. made from Vytex NRL, which had less than 2 micrograms/dm2, virtually undetectable levels, of the antigenic proteins that cause an allergic response, while retaining and improving upon all of the desirable qualities of latex. While the product is no longer available, this condom is a predicate device for future products and the 510(k) is still in existence. Vystar continues to seek other U.S. and global manufacturers interested in pursuing similar claims for products.
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On July 22, 2009, a non-powdered medical exam glove manufactured with Vytex NRL received 510(k) clearance from the FDA, with an approved claim of less than 50 micrograms/gram of total proteins. As with the condom product, Vystar continues to pursue U.S. and global manufacturers using this exam glove as a predicate device and to help fill pending exam glove business. Late in 2016 the FDA banned the use of powder in medical gloves which took effect early in 2017 positioning the Vytex non-powdered exam glove in an excellent position.
Inflation and Seasonality
We do not believe that our operations are significantly impacted by inflation. Our NRL business is not seasonal in nature, but is subject to commodity pricing. Our NRL product is a commodity-based raw material and prices for such material fluctuate from day-to-day, though this will have less impact as we transition to sales via licensing fees.
Employees
As of December 31, 2016, Vystar had a total of one associate.
Corporate Information
Vystar Corporation is a Georgia corporation that was incorporated in 2003. Our predecessor company, Vystar LLC, was formed by our founder, Travis Honeycutt, in February 2000 as a Georgia limited liability company.
Our principal mailing address is 2480 Briarcliff Road, Ste 6, #159, Atlanta, GA 30329. Our website address is www.vytex.com. The information contained on, or that can be accessed through, our website is not a part of this Report. We have links on our website to reports, information statements, and other information that we file electronically with the Securities and Exchange Commission, or SEC, at the Internet website maintained by the SEC, www.sec.gov. In addition to visiting our website and the SEC’s website, you may read and copy public reports we file with or furnish to the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
| ITEM 1A. | RISK FACTORS |
Our business is subject to a number of risks and uncertainties — many of which are beyond our control — that may cause our actual operating results or financial performance to be materially different from our expectations. If one or more of the events discussed in the following risks were to occur, actual outcomes could differ materially from those expressed in or implied by any forward-looking statements we make in this report or our other filings with the SEC, and our business, financial condition, results of operations or liquidity could be materially adversely affected; furthermore, the trading price of our common stock could decline and our shareholders could lose all or part of their investment.
Neither of our business divisions presently generates the cash needed to finance our current and anticipated operations.
We have had very limited revenue in our history prior to 2011 and transitioned from the development stage to the operational stage during the fourth quarter of 2009. We are still in the early stage of establishing our business including attracting new customers and increasing sales; our financial success will be dependent upon the soundness of our business concept, our management’s ability to successfully and profitably execute our plan, and our ability to raise additional capital.
In the Vytex Division, while we anticipate that revenue will continue to grow from what we achieved after transitioning from the development stage to the operational stage, our limited operating history makes it difficult to evaluate our business. We expect to make significant future operating expenditures to develop and expand our business. We may incur significant losses in the future for a number of reasons, including due to the other risks described in this Report, and we may encounter unforeseen expenses, difficulties, complications and delays and other unknown events. Accordingly, we may not be able to achieve or maintain profitability, and we may incur significant losses for the foreseeable future. See additional discussion under Liquidity and Capital Resources.
At December 31, 2016 we had $36,282 cash on hand and an accumulated deficit of $26,813,911. We plan to finance our operations for the next twelve (12) months through the use of cash on hand, stock warrant exercises from existing shareholders, raising of capital through private placements and the possible acquisition of cash flow positive foam business in key areas of the furniture world that includes finished mattresses, component cores, topper cores and pillows. You should consider, among other factors, our prospects for success in light of the risks and uncertainties encountered by companies that, like us, have not generated net earnings on an annual basis. Various factors, such as economic conditions, regulatory and legislative considerations, and competition, may also impede our ability to expand our market presence. We may not successfully address these risks and uncertainties or successfully implement our operating strategies. If we fail to do so, it could materially harm our business and impair the value of our common stock. Even if we accomplish these objectives, we may not generate positive cash flows or profits we anticipate in the future.
The following risk factors apply to our Vytex Division:
Our Vytex operating results could fluctuate and differ considerably from our financial forecasts.
Our business model is based on assumptions derived from (i) the experience of the principals of the Company, and (ii) third party market information and analysis. There are no assurances that these assumptions will prove to be valid for our future operations or plans.
Our operating results may fluctuate significantly as a result of a variety of factors, including:
| ● | Acceptance by manufacturers of the Vytex Natural Rubber Latex technology; | |
| ● | Our ability to achieve and sustain profitability; | |
| ● | Consumer confidence in products manufactured using our Vytex Natural Rubber Latex technology; | |
| ● | Our ability to raise additional capital. |
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Our Vytex NRL Division business is totally dependent on market demand for, and acceptance of, the Vytex Natural Rubber Latex process.
We expect to derive most of our Vytex NRL Division revenue from the sales of our Vytex Natural Rubber Latex raw material to various manufacturers of rubber and rubber end products using NRL through our distribution agreement with Centrotrade Deutschland. We pay natural rubber latex processors a fee for the service of manufacturing and creating Vytex NRL for us under our toll manufacturing agreements. Conversely, Vystar collects a fee under the Centrotrade and Occidente (PICA) licensing models. The agreement in the bedding and furniture industries with NHS also provides income based on a license model. Our Vytex NRL product operates within broad, diverse and rapidly changing markets. As a result, widespread acceptance and use of product is critical to our future growth and success. If the market for our product fails to grow or grows more slowly than we currently anticipate, demand for our product could be negatively affected.
Our ability to generate significant revenue in the Vytex Division is substantially dependent upon the willingness of consumers to make discretionary purchases and the willingness of manufacturers to utilize capital for research and development and the retooling of their manufacturing process, both of which are impacted by the state of the economy.
The current state of the world economy has and likely will in the future impact upon our ability to increase revenue. Certain of the products that we anticipate will be manufactured with our Vystar NRL process, such as mattresses and sponge products, are considered discretionary consumer purchases which decline during economic downturns. Additionally, certain manufacturers who might otherwise utilize the Vytex NRL process in the manufacturing of products with NRL have determined not to expend capital to complete the research of the Vytex NRL process or to retool their manufacturing process because of the general downturn in the economy. As part of a strategy to increase awareness of the Vytex NRL brand, the Company has been aggressively seeking to have end products produced and labeled “made with Vytex NRL” such as mattresses, toppers and pillows. As these products enter the market, the Company plans to create consumer awareness of these end products and in so doing begin to develop consumer demand pull through as part of the Company’s efforts to complete the push-pull cycle using an ingredient branding strategy.
Assertions by a third party that our Vytex process infringes its intellectual property, whether or not correct, could subject us to costly and time-consuming litigation or expensive licenses.
There is frequent litigation based on allegations of infringement or other violations of intellectual property rights. As we face increasing competition and become increasingly visible as an operating company, the possibility of intellectual property rights claims against us may grow.
Any intellectual property rights claim against us or our customers, with or without merit, could be time-consuming, expensive to litigate or settle and could divert management attention and financial resources. An adverse determination also could prevent us from offering our process, require us to pay damages, require us to obtain a license or require that we stop using technology found to be in violation of a third party’s rights or procure or develop substitute services that do not infringe, which could require significant resources and expenses.
The latex market in which we will participate is competitive and if we do not compete effectively, our operating results may be harmed.
The markets for our product are competitive and rapidly changing. With the introduction of new technologies, increasing scrutiny of alternative lattices such as Russian dandelion, and market entrants, we expect competition to intensify in the future. In addition, pricing pressures and increased competition generally could result in reduced sales, reduced margins or the failure of our products to achieve or maintain widespread market acceptance.
While early interest was strong in a new innovative product in the natural rubber latex industry, pricing and regulatory approvals remain a key selling factor especially in the exam glove arena. There is no exam glove manufacturer signed to date that has accepted Vytex NRL into its product mix.
Our Vytex revenue will vary based on fluctuations in commodity prices for NRL.
NRL is a commodity and, as such, its price fluctuates on a daily basis. Since 2009 the market prices have been particularly volatile with prices rising 222% from a low of approximately $1080/wet metric tonne (mT) in January 2009 to a peak of over $3475/wet mT in February 2011. While prices have come down from this high to as low as $2100/wet mT in December 2011, 2012 prices started to rise again primarily due to seasonality. The pricing model for 2013 continued the rollercoaster ride and as of December 31, 2013 stood at $2576/wet mT. At the end of 2015 pricing for NRL was at about US$ 800 per mT and current pricing as of the end of March 2016 was approximately $1100 mT. Our revenue (even licensing fees) and cost of goods will also fluctuate upward or downward based upon changing market prices for the raw material used to produce Vytex NRL. Prolonged periods of lowered market prices can also cause manufacturers to review synthetic price drops as they look for even lower cost alternatives to NRL.
While Vytex NRL has received 510(k) clearance from the FDA for condoms and exam gloves, there is no assurance that future applications will be cleared.
In order for Vytex to be used in medical device applications, the manufacturer of the end product must submit an application to the FDA. If the device is classified by the FDA as Class II (e.g., condoms, surgical gloves, and most non-cardiac and non-renal/dialysis catheters) and in some cases Class I (e.g., exam gloves), a 510(k) application must be filed with the FDA seeking clearance to market the device based on the fact that there is at least one other predicate or similar device already marketed. If the product is classified as a Class III product (e.g., most cardiac and renal/dialysis catheters, certain adhesives and other in vivo devices), or is otherwise a new device with no predicate on the market already, then the manufacturer of the end product must submit a Pre-Market Approval (“PMA”) application seeking approval by the FDA to market the device. The PMA approval process is much more in depth and lengthy and requires a greater degree of clinical data and FDA review than does a 510(k) clearance process.
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Since Vytex is a raw material and not an end-product, Vystar is not the entity that files with the FDA for any clearance or approval to market a device. Instead, the end-product manufacturers who will be selling and marketing the device(s) must submit applications and seek FDA clearance or approval depending upon the device classification. Vystar’s role in this process is only as background support to the manufacturers to supply information and any technical or test data regarding the Vytex raw material if and to the extent needed.
An American manufacturer of condoms and exam gloves had been engaged in production work and had completed required testing and received FDA clearance for using Vytex NRL in their condom and exam glove lines. However this manufacturer is not currently producing products made with Vytex NRL or any other type of raw material. Notwithstanding such approvals, we have no assurance that future products will provide acceptable test results and even if they do, there is no certainty that the FDA will approve the applications.
Each of the above mentioned 510(k)s have been sold to other manufacturers.
Vytex may seek to have lower protein claims than what is currently on the market today for exam gloves, and may ultimately seek to have latex warnings removed from or modified on all FDA-regulated products, but it cannot guarantee that either of such actions will be approved by the FDA.
The FDA heavily scrutinizes any and all claims categorizing the protein levels and other claims of an NRL product. Currently, the FDA has allowed claims only stating the level of less than 50 micrograms/gram of total extractable proteins pursuant to only one of two FDA-recognized standards on exam or surgical gloves. Vystar intends to claim protein levels pursuant to both of the two FDA-recognized standards, which will result in claiming the lowest level of antigenic proteins for a Hevea NRL product currently on the market. Although the FDA has cleared such claims on the condom using Vytex NRL, the FDA rejected those claims for the exam glove. There is no guarantee that the FDA will ultimately or ever allow these claims on an exam glove.
Additionally, for many years, the FDA has required warnings on products containing latex due to the latex allergy issue that exists. Vystar plans on petitioning the FDA to have that label removed from or modified on products manufactured with Vytex NRL, by filing a Citizen’s Petition. The Petition will be filed when we see that the benefits of filing will far outweigh the costs since such Petition is likely to require clinical test results indicating acceptable allergic reactions associated with Vytex NRL. There are no assurances that the FDA will grant that request.
Manufacturers are implementing trials of Vytex NRL in their facilities but final data are not yet available from all these manufacturers on its viability for their particular environments.
Over the past several years, samples of Vytex NRL have been made available to over 50 natural rubber latex and latex substitute end product manufacturers, 30 of which have been in place since early 2009. Since the completion of the Vytex NRL Standard Operation Procedures (SOPs), Vytex has been produced at Revertex (Malaysia), Occidente (Guatemala), KAPVL (India) and most recently Mardec-Yala (Thailand) and MMG (Thailand). Manufacturers that have signed a ‘sampling’ agreement with us have been provided with samples of Vytex NRL for validating its use in their manufacturing processes. To date, a number of manufacturers have completed those runs and feedback is often minimal. Although most feedback to date has been positive, there is no assurance that such feedback continues to be satisfactory.
Another risk is the validity of the customer as testing completes. Recently Vystar has completed more than three years of a specialized version of Vytex NRL only to have the end product manufacturer fail to upgrade their production line and fulfill their own contract.
As part of the Company’s learnings, we have found that in listening closely to customer challenges and needs, our technical team has been able to develop solutions. The Company has come to realize that what we offer is not just a raw material but often a technology solution to a production or product development challenge.
While many of these new formulations look promising, there is no guarantee that these technological innovations will be successfully scaled up or successfully implemented by the customer.
The following risk factors apply to our company as a whole:
We do not expect to declare any dividends in the foreseeable future.
We do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future. Consequently, shareholders must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our common stock.
There is no assurance that any significant public market for our shares of common stock will develop.
While our shares of common stock trade on the OTC Bulletin Board under the symbol “VYST”, there is currently no significant public market for our common stock and there is no assurance that there will be any such significant public market for our common stock in the future.
The utilization of our tax losses could be substantially limited if we experience an ownership change as defined in the Internal Revenue Code.
Because of net operating losses we have experienced for federal income tax purposes at December 31, 2016, we had federal net operating loss (“NOL”) carry-forwards of approximately $18.7 million ($17.9 million for 2015) pretax available to offset future taxable income. Our ability to utilize NOL carry-forwards to reduce future taxable income may be limited under Section 382 of the Internal Revenue Code if certain ownership changes in our Company occur during a rolling three-year period. These ownership changes include purchases of common stock under share repurchase programs, the offering of stock by us, the purchase or sale of our stock by 5% shareholders, as defined in the Treasury regulations, or the issuance or exercise of rights to acquire our stock. If such ownership changes by 5% shareholders result in aggregate increases that exceed 50 percentage points during the three-year period, then Section 382 imposes an annual limitation on the amount of our taxable income that may be offset by our NOL carry-forwards or tax credit carry-forwards at the time of ownership change. The limitation may affect the amount of our deferred income tax asset and, depending on the limitation, a significant portion of our NOL carry-forwards or tax credit carry-forwards could expire before we are able to use them. In such an event, our business, financial condition, results of operations or cash flows could be adversely affected.
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We believe we have not experienced an ownership change under Section 382 of the Internal Revenue Code as of December 31, 2016; however, the amount by which our ownership may change in the future could be affected by purchases and sales of stock by 5% shareholders and new issuances of stock by us, should we choose to do so.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None
| ITEM 2. | PROPERTIES |
Although we believe that our current space is adequate for the foreseeable future, if additional office space is required, we believe that suitable space will be available at market rates.
| ITEM 3. | LEGAL PROCEEDINGS |
None
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND PURCHASES OF EQUITY SECURITIES |
Market Price Information
Our common stock is traded in the United States on the Over the Counter Bulletin Board (OTCBB) under the symbol “VYST.” The following table shows the range of high and low closing prices for our common stock.
| December 31, 2015 | High | Low | ||||||
| First Quarter | $ | 0.12 | $ | 0.05 | ||||
| Second Quarter | $ | 0.08 | $ | 0.04 | ||||
| Third Quarter | $ | 0.06 | $ | 0.03 | ||||
| Fourth Quarter | $ | 0.08 | $ | 0.03 | ||||
| December 31, 2016 | ||||||||
| First Quarter | $ | 0.10 | $ | 0.06 | ||||
| Second Quarter | $ | 0.08 | $ | 0.03 | ||||
| Third Quarter | $ | 0.12 | $ | 0.02 | ||||
| Fourth Quarter | $ | 0.22 | $ | 0.10 | ||||
Holders
As of December 31, 2016, there were 477 holders of record of our common stock.
Dividends
We have never paid or declared any cash dividends on our common stock and we do not intend to pay or declare dividends on our common stock in the near future. We presently expect to retain any future earnings to fund continuing development and growth of our business. Our payment of dividends is subject to the discretion of our board of directors and will depend on earnings, financial condition, capital requirements and other relevant factors.
Issuer Purchases of Equity Securities
We did not make any repurchases of our equity securities during the 2016 fiscal year.
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Securities Authorized for Issuance Under Equity Compensation Plans
Information concerning our equity compensation plans is set forth in Item 12 of Part III of this Annual Report on Form 10-K.
Recent Sales of Unregistered Securities
Common Stock and Warrant Grants
From January 1, 2016 through December 31, 2016, we issued 1,247,466 shares of our common stock valued at $70,000 for services rendered to the Company in 2016 and 14,180,000 shares were issued in investments valued at $709,000.
From January 1, 2016 through December 31, 2016, we issued warrants to purchase 217,580 shares of common stock for services rendered to the Company per the following:
| Warrants | Exercise Price per Share | |||
| 35,027 | $0.03 per share | |||
| 25,000 | $0.04 per share | |||
| 20,000 | $0.05 per share | |||
| 42,258 | $0.06 per share | |||
| 36,592 | $0.07 per share | |||
| 25,246 | $0.08 per share | |||
| 10,000 | $0.10 per share | |||
| 12,345 | $0.15 per share | |||
| 11,112 | $0.18 per share | |||
| 217,580 | ||||
Stock Option Grants
From January 1, 2016 through December 31, 2016, we issued 500,000 options to purchase common stock to Board members and employees per the following:
| Options | Exercise Price per Share | ||||
| 500,000 | $0.05 per share | ||||
Application of Securities Laws and Other Matters
No underwriters were involved in the foregoing sales of securities. The securities described above were issued to investors in reliance upon the exemption from the registration requirements of the Securities Act, as set forth in Section 4(2) under the Securities Act and Regulation D promulgated thereunder, as applicable, relative to sales by an issuer not involving any public offering, to the extent an exemption from such registration was required.
The issuance of stock options as described above were issued pursuant to written compensatory plans or arrangements with our employees, directors and consultants, in reliance on the exemption provided by Rule 701 promulgated under the Securities Act. All recipients either received adequate information about us or had access, through employment or other relationships, to such information.
All of the foregoing securities are deemed restricted securities for purposes of the Securities Act. All certificates representing the issued shares of common stock, warrants and options described above included appropriate legends setting forth that the securities had not been registered and the applicable restrictions on transfer.
| ITEM 6. | SELECTED FINANCIAL DATA |
As a smaller reporting company, we are not required to provide the information required by this Item pursuant to 301(c) of Regulation S-K.
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This analysis of our results of operations should be read in conjunction with the accompanying financial statements, including notes thereto, contained in Item 8 of this Report. This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. Statements that are predictive in nature and that depend upon or refer to future events or conditions are forward-looking statements. Although we believe that these statements are based upon reasonable expectations, we can give no assurance that projections will be achieved. Please refer to the discussion of forward-looking statements included in Part I of this Report.
Overview
Vystar LLC, the predecessor to the Company, was formed February 2, 2000, as a Georgia limited liability company by Travis W. Honeycutt. Operations under the LLC entity were focused substantially on the research, development and testing of the Vytex® Natural Rubber Latex (“NRL”) process, as well as attaining intellectual property rights. In 2003, the Company reorganized as Vystar Corporation, a Georgia corporation, at which time all assets and liabilities of the limited liability company became assets and liabilities of Vystar Corporation, including all intellectual property rights, patents and trademarks.
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We are the creator and exclusive owner of the innovative technology to produce Vytex NRL. This technology reduces antigenic protein in natural rubber latex products to virtually undetectable levels in both liquid NRL and finished latex products. The process also removes many of the naturally occurring non-rubber particles superfluous to end product function, resulting in a cleaner latex base material. We have introduced Vytex NRL, our “ultra-low protein” natural rubber latex, throughout the worldwide marketplace that uses NRL or latex substitutes as a component of manufactured products. Natural rubber latex is used in an extensive range of products including balloons, textiles, footwear and clothing (threads), adhesives, foams, furniture, carpet, paints, coatings, protective equipment, sporting equipment, and especially health care products such as condoms, surgical and exam gloves. We produce Vytex through toll manufacturing and licensing agreements and have introduced Vytex NRL into the supply channels with aggressive, targeted marketing campaigns directed to the end users.
We transitioned from a development stage company to the operating stage during the last quarter of 2009. During the last five years, our financial condition and results of operations have experienced substantial fluctuations as we provided introductory pricing in 2010 and then began to switch to a licensing rather than a toll model in 2011. Accordingly, the financial condition and results of operations reflected in our historical financial statements are not expected to be indicative of our future financial condition and results of operations.
We believe that the key for increased Vytex NRL product acceptance is to focus on companies seeking solutions to production challenges or ways to differentiate their product offering. Vystar’s technical team has been successful in developing customized formulations to meet specific manufacturer needs. Some of these formulations will become new line extensions. Vystar is becoming less of a raw material provider and more of a technology innovator through its technical consultation and formulation activities.
In addition to this technology focus, we are determined to have the “made with Vytex” claim added to products made using various forms of Vytex NRL. To help drive this effort we’re focusing on products that benefit from Vytex NRL low non-rubber features. As part of this effort, we are working with a licensee to launch a line of foam core products used in various bedding products including pillows, mattresses and mattress toppers.
In January 2015 Vystar announced that it had entered into an exclusive agreement with Nature’s Home Solutions (NHS) to distribute mattresses, mattress toppers and pillows made with its multi-patented Vytex NRL raw material. NHS is a distribution company led by Steve Rotman of Rotman’s Furniture and focuses on innovative, sustainably sourced, eco-friendly material and technologies for use in furnishings and other markets. Our Vytex NRL fits the needs of this unique new distributor which has already attracted such firms as mattress manufacturer Gold Bond that was formed in 1899 to manufacture and then distribute mattresses, toppers and pillows along with a plan to reach specific segments of the United States by targeting other manufacturers. This has been the focus of Vystar for 2015 and 2016 and will continue through 2017 as we display at furniture and mattress conventions and attend and sell at sleep products meetings such as ISPA 2016 (International Sleep Products Association) held in Orlando, FL and ISPA 2017 in Tampa, FL. Vystar will also continue to develop specialty versions of Vytex NRL after presenting to the International Latex Conference in Akron OH in July 2016 and 2017 and sending out samples for lab trials. Vystar is currently producing Vytex thread samples for an entry into the thread marketplace. In September 2016, the Vystar Board of Directors voted to end the January 2015 agreement and replace it with a global exclusive for foam manufactured with Vytex and sold into the home furnishings industry. This change reflects the global nature of the mattress, topper and pillow businesses.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. As such, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. Our management reviews its estimates on an on-going basis. We base our estimates and assumptions on historical experience, knowledge of current conditions and our understanding of what we believe to be reasonable that might occur in the future considering available information. Actual results may differ from these estimates, and material effects on our operating results and financial position may result.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.
Fair Value Inputs Related to Share-based and Other Equity Compensation
Generally accepted accounting principles require all share-based payments, including grants of employee stock options, stock grants and warrants, to be recognized in the financial statements based on their fair values. We compute the value of awards granted by utilizing the Black-Scholes valuation model based upon their expected lives, expected volatility, expected dividend yield, and the risk-free interest rate. The value of the awards is then straight-line expensed over the service period of the awards.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Our allowances for doubtful accounts amounted to $0 and 60,266 for December 31, 2016 and 2015 respectfully.
Fixed Asset Lives
We estimate the useful life of equipment and other fixed assets using judgment, conventions in the industries in which we operate, and research on resale values. We review equipment and fixed asset lives annually in our impairment analyses.
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Impairment Analyses
We review long-lived assets such as property and equipment for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. If the total of the estimated undiscounted future cash flows is less than the carrying value of the assets, an impairment loss is recognized for the excess of the carrying value over the fair value of the long-lived assets.
Income Taxes
We account for income taxes using the assets and liability method. This method requires that the deferred tax consequences of temporary differences between the amounts recorded in our financial statements and the amounts included in our federal and state income tax returns be recognized in the balance sheet. Estimates are often required with respect to, among other things, the potential utilization of any operating and capital loss carry-forwards for both federal and state income tax purposes and valuation allowances required, if any, for tax assets that may not be realizable in the future. We believe that it is more likely than not that the amounts recorded as deferred income tax assets will not be recoverable through future taxable income generated by us. As a result, the Company recorded a 100% valuation allowance against our net deferred tax assets as of December 31, 2016 and 2015. We believe the procedures and estimates used in our accounting for income taxes are reasonable and in accordance with established tax law. A tax benefit arising from an uncertain tax position can only be recognized for financial reporting purposes if, and to the extent that, the position is more likely than not to be sustained in an audit by the applicable taxing authority. We had no material unrecognized tax benefits and related tax liabilities at December 31, 2016 and 2015. Penalties related to uncertain tax positions would be recorded as a component of general and administrative expenses. Interest relating to uncertain tax positions would be recorded as a component of interest expense. We do not believe there will be any such uncertain tax position, costs or liabilities for any of the years under audit, and take a conservative approach to all tax matters.
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RESULTS OF OPERATIONS
Year ended December 31, 2016 compared to year ended December 31, 2015
| Year Ended December 31, | Continuing | Consolidated | ||||||||||||||||||||||||||||||||||||||
| 2016 | 2015 | $ change | % change | $ change | % change | |||||||||||||||||||||||||||||||||||
| Continuing | Discontinued | Consolidated | Continuing | Discontinued | Consolidated | |||||||||||||||||||||||||||||||||||
| Revenue, net | $ | 40,193 | $ | 82,353 | $ | 122,546 | $ | 47,268 | $ | 331,398 | $ | 378,666 | ($ | 7,075 | ) | (15.0 | %) | ($ | 256,120 | ) | (67.6 | %) | ||||||||||||||||||
| Cost of revenue | 20,473 | 20,222 | 40,695 | 18,621 | 249,478 | 268,099 | 1,852 | 9.9 | % | (227,404 | ) | (84.8 | %) | |||||||||||||||||||||||||||
| Gross profit | 19,720 | 62,131 | 81,851 | 28,647 | 81,920 | 110,567 | (8,927 | ) | (31.2 | %) | (28,716 | ) | (26.0 | %) | ||||||||||||||||||||||||||
| Operating Expenses | ||||||||||||||||||||||||||||||||||||||||
| General and administrative | 1,096,354 | 24,045 | 1,120,399 | 888,594 | 289,750 | 1,178,344 | 207,760 | 23.4 | % | (57,945 | ) | (4.9 | %) | |||||||||||||||||||||||||||
| Total operating expenses | 1,096,354 | 24,045 | 1,120,399 | 888,594 | 289,750 | 1,178,344 | 207,760 | 23.4 | % | (57,945 | ) | (4.9 | %) | |||||||||||||||||||||||||||
| Profit (Loss) from Operations | (1,076,634 | ) | 38,086 | (1,038,548 | ) | (859,947 | ) | (207,830 | ) | (1,067,777 | ) | (216,687 | ) | (25.2 | %) | 29,229 | 2.7 | % | ||||||||||||||||||||||
| Interest income | 1 | — | 1 | 42 | — | 42 | (41 | ) | (97.8 | %) | (41 | ) | (97.8 | %) | ||||||||||||||||||||||||||
| Interest expense | (168,188 | ) | 2,594 | (165,594 | ) | (146,888 | ) | (4,907 | ) | (151,795 | ) | (21,300 | ) | 14.5 | % | (13,799 | ) | 9.1 | % | |||||||||||||||||||||
| Other income/(expense) | (14,456 | ) | (2,701 | ) | (17,157 | ) | (19,348 | ) | — | (19,348 | ) | 4,892 | (25.3 | %) | 2,191 | (11.3 | %) | |||||||||||||||||||||||
| Total Other Income/Expense | (182,643 | ) | (107 | ) | (182,750 | ) | (166,194 | ) | (4,907 | ) | (171,101 | ) | (16,449 | ) | (9.9 | %) | (11,649 | ) | (6.8 | %) | ||||||||||||||||||||
| Net loss | ($ | 1,259,277 | ) | $ | 37,979 | ($ | 1,221,298 | ) | ($ | 1,026,141 | ) | ($ | 212,737 | ) | ($ | 1,238,878 | ) | ($ | 233,136 | ) | (22.7 | %) | $ | 17,580 | 1.4 | % | ||||||||||||||
| BASIC AND DILUTED LOSS PER SHARE: | ||||||||||||||||||||||||||||||||||||||||
| Net loss per share | ($ | 0.01 | ) | ($ | 0.00 | ) | ($ | 0.01 | ) | ($ | 0.01 | ) | ($ | 0.00 | ) | ($ | 0.02 | ) | ||||||||||||||||||||||
| Basic and Diluted Weighted Average Number of Common Shares Outstanding | 106,985,632 | 106,985,632 | 106,985,632 | 83,806,182 | 83,806,182 | 83,806,182 | ||||||||||||||||||||||||||||||||||
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Revenues
Consolidated revenues for the fiscal year ended December 31, 2016 and 2015 from the Company were $122,546 and $378,666, respectively, for a decrease of $256,120 or 67.6%. The decrease in revenues from operations was principally due to the closing of the Kiron division. Revenues for the fiscal year ended December 31, 2016 and 2015 from the Company’s continuing operations were $40,193 and $47,268, respectively, for a decrease of $7,075 or 15.0%. The decrease in revenues from continuing operations was due to lower latex prices.
Gross profit for the fiscal year ended December 31, 2016 and 2015 from the Company were $81,851 and $110,567, respectively for a decrease of $28,716 or 26.0%. Gross profit from continuing operations for the fiscal year ended December 31, 2016 and 2015 was $19,720 and $28,647, respectively, for a decrease of $8,927 or 31.2%. Cost of revenue from continuing operations for fiscal year ended December 31, 2016 and 2015 was $20,473 and $18,621, respectively an increase of $1,852 or 9.9%.
Operating Expenses
The Company’s operating expenses consist of general and administrative expenses. General and administrative 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 other operating expenses. The Company’s consolidated operating expenses were $1,120,399 and $1,178,344 for the fiscal year ended December 31, 2016 and 2015, respectively, for a decrease of $57,945 or 4.9%. The Company’s operating expenses from continuing operations for the fiscal year ended December 31, 2016 and 2015 were $1,096,354 and $888,594, respectively, for an increase decrease of $207,760 or 23.4%. This was primarily the result of increased legal, patent, marketing expense in 2016.
Other Income (Expense)
Other income (expense) for the fiscal year ended December 31, 2016 and 2015 were ($17,157) and ($19,348), respectively for a decrease of $2,191 or 11.3%. Interest expense for the fiscal year ended December 31, 2016 and 2015 were $165,594 and $151,795, respectively for an increase of $13,799 or 9.1%. This was a primarily a result of an increase in the LIBOR index rate on the CMA Loan as well as additional Shareholder Notes 2016.
Net Loss
Net loss for the fiscal year ended December 31, 2016 and 2015 were $1,221,298 and $1,238,878, respectively for a decrease of $17,580 or 1.4%. The smaller net loss the Company experienced in the fiscal year ended December 31, 2016 versus the same period in 2015 was primarily attributable to the reduction in third-party contract services.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. However, we have incurred significant losses and experienced negative cash flow since inception. At December 31, 2016, the Company had cash of approximately $36,282 and a deficit in working capital of $2,723,541. For the year ended December 31, 2016, the company had a net loss of $1,221,298 and an accumulated deficit of $26,814,649. For the year ended December 31, 2015, the company had a net loss of $1,238,878 and the accumulated deficit amounted to $25,593,351. 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.
Net cash used in operating activities was $907,441 for the year ended December 31, 2016 as compared to $656,829 for the year ended December 31, 2015. During the year ended December 31, 2016, cash used in operations was primarily due to the net loss for the year of $1,221,298 net of non-cash related add-back of share-based compensation expense of $242,159.
Net cash provided by investing activities was $2,701 during the year ended December 31, 2016 as this was a result of selling some equipment. During the year ended December 31, 2015, $281 was the result of selling some equipment as well.
Net cash provided by financing activities was $911,963 during the year ended December 31, 2016, as compared to cash provided of $611,837 during the year ended December 31, 2015. During 2016 cash was provided from the issuance of common stock in the amount of $723,456, $53,500 in cash was provided by the exercise of common stock warrants and options and $135,000 in proceeds from Shareholder Notes. In 2015, the cash provided was exclusively from the issuance of common stock.
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 through the use of cash on hand, increased revenue from Vytex license fees that now also include the company’s association with foam cores made out of Vytex used in mattresses, mattress toppers and pillows, stock warrant exercises from existing shareholders, and raising capital through private placement memoranda (see Note 15, Subsequent Events). As a result of this history of losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.
There can be no assurances that we will be able to achieve projected levels of revenue in 2017 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 2017, which could have a material adverse effect on our ability to achieve our business objectives and as a result, may require the Company to file for bankruptcy or cease operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities that might be necessary should the Company be forced to take any such actions.
| 15 |
Our future expenditures will depend on numerous factors, including: the rate at which we can introduce 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; and market acceptance of our products and services and competing technological developments. As we expand our activities and operations, our cash requirements are expected to increase at a rate consistent with revenue growth after we achieve sustained revenue generation.
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements.
Certain Relationships and Related Transactions
On April 29, 2011, the Company executed with CMA Investments, LLC, a Georgia limited liability company (“CMA”) a line of credit (Note 5) with a principal amount of up to $800,000 (the “CMA Note”). CMA is a limited liability company of which three of Vystar’s directors are CMA members. Proceeds under the line were drawn to pay off amounts owed under the Topping Lift Agreement and for general working capital purposes. Under the terms of the CMA Note, the Company may draw up to a maximum principal amount of $800,000. Interest and fees were paid by an affiliated entity of a director of the company. Pursuant to an agreement between the Company and such affiliate, the Company will issue common stock to such affiliate with a value equal to such interest and fees paid based on the closing price of the common stock on the OTC Bulletin Board on the date of such payments. The maturity date of the CMA Note was April 29, 2013. The CMA Note is unsecured and no payments of principal are due until the second anniversary of the CMA Note, at which time all outstanding principal is due and payable. As compensation to the directors for providing the CMA Note, the Company issued warrants to purchase 2,600,000 shares of the Company’s common stock to the directors at $.45 per share which was the closing price of the Company’s common stock on that day, which was later adjusted to $.27 per share, which was the closing price of the Company’s common stock on the day it was adjusted.
On September 14, 2011, the Company’s Board of Directors approved increasing the line of credit to $1,000,000 and the Company’s Chairman and Chief Executive Officer became a member of CMA. As compensation for increasing the credit line, the directors approved issuing warrants to purchase an additional 1,600,000 shares of the Company’s common stock at $.27 per share, which was the closing price of the Company’s common stock on that day.
On November 2, 2012, the Board of Directors approved an increase in the line of credit from $1,000,000 to $1,500,000. As compensation to the CMA members, we issued warrants to purchase an additional 2,100,000 shares of the Company’s common stock at $0.35 per share. The closing price of the Company’s stock on November 2, 2013 was $0.21. The warrants vest 20% immediately and 16% upon each $100,000 draw above $1,000,000. Substantially all of the additional $500,000 had been drawn as of December 31, 2012 and vesting was completed. Accordingly, $143,726 was capitalized into deferred financing costs for the warrants in 2012. These costs were amortized to interest expense over the remaining term of the CMA Note.
On April 29, 2013, the maturity date of the CMA Note was extended to April 29, 2014. As compensation to the CMA Directors for extending the maturity date of the CMA Note, the Board of Directors approved modifying the exercise price for the 6,300,000 compensatory stock purchase warrants previously issued to the Directors to $0.10 per share and the CMA Directors forfeited 630,000 of the warrants. Amortization of the financing costs associated with extending the CMA Note was amortized through interest expense.
As of April 29, 2015, the maturity date of the CMA Note was again extended for one year to April 29, 2016. No compensation was paid to the CMA Directors for this extension. The note is currently due on demand.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
As a smaller reporting company, we are not required to provide the information required by this Item pursuant to 301(c) of Regulation S-K.
| 16 |
| ITEM 8. | Index to Financial Statements |
| 17 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Vystar Corporation
Atlanta, Georgia
We have audited the accompanying balance sheets of Vystar Corporation (the Company) as of December 31, 2016 and 2015, and the related statements of loss, stockholders' deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Vystar Corporation as of December 31, 2016 and 2015, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company's recurring losses from operations, capital deficit, and limited capital resources raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters also are described in Note 2 to the financial statements. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Atlanta, Georgia
April 14, 2017
F-1
VYSTAR CORPORATION
For the Year Ended December 31,
| 2016 | 2015 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS | ||||||||
| Cash | $ | 36,282 | $ | 29,059 | ||||
| Accounts receivable, net of allowance for uncollectible amount of $0 and $60,266 at December 31, 2016 and 2015, respectively | 17,370 | — | ||||||
| Prepaid expenses | 41,300 | 233,816 | ||||||
| TOTAL CURRENT ASSETS | 94,952 | 262,875 | ||||||
| PROPERTY AND EQUIPMENT, NET | — | 2,979 | ||||||
| OTHER ASSETS | ||||||||
| Intangible assets, net | 139,562 | 155,423 | ||||||
| TOTAL ASSETS | $ | 234,514 | $ | 421,277 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES | ||||||||
| Related party line of credit | $ | 1,499,875 | $ | 1,499,875 | ||||
| Accounts payable | 488,784 | 592,739 | ||||||
| Accrued compensation | 2,917 | 40,137 | ||||||
| Shareholder notes payable | 595,837 | — | ||||||
| Accrued expenses | 231,080 | 209,486 | ||||||
| TOTAL CURRENT LIABILITIES | 2,818,493 | 2,342,237 | ||||||
| Shareholder notes payable | 239,231 | 700,068 | ||||||
| TOTAL LIABILITIES | $ | 3,057,724 | $ | 3,042,305 | ||||
| STOCKHOLDERS’ DEFICIT | ||||||||
| Preferred stock, $0.0001 par value, 15,000,000 shares authorized; 13,828 issued and outstanding at December 31, 2016 and 2015, respectively | 1 | 1 | ||||||
| Common stock, $0.0001 par value, 250,000,000 shares authorized; 114,951,593 and 96,443,907 shares issued and outstanding at December 31, 2016 and 2015, respectively | 11,495 | 9,644 | ||||||
| Additional paid-in capital | 23,979,943 | 22,962,678 | ||||||
| Accumulated deficit | (26,814,649 | ) | (25,593,351 | ) | ||||
| TOTAL STOCKHOLDERS’ DEFICIT | (2,823,210 | ) | (2,621,028 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 234,514 | $ | 421,277 | ||||
The accompanying notes are an integral part of these financial statements.
F-2
VYSTAR CORORATION
For the Year Ended December 31,
| 2016 | 2015 | |||||||
| REVENUE | $ | 40,193 | $ | 47,268 | ||||
| COST OF REVENUE | 20,473 | 18,621 | ||||||
| Gross Margin | 19,720 | 28,647 | ||||||
| OPERATING EXPENSES | ||||||||
| General and administrative, including non-cash share-based compensation of $434,381 and $561,086 in 2016 and 2015, respectively | 1,096,354 | 888,594 | ||||||
| Total Operating Expenses | 1,096,354 | 888,594 | ||||||
| LOSS FROM OPERATIONS | (1,076,634 | ) | (859,947 | ) | ||||
| OTHER INCOME (EXPENSE) | ||||||||
| Interest income | 1 | 42 | ||||||
| Other expense | (14,456 | ) | (19,348 | ) | ||||
| Interest expense | (168,188 | ) | (146,888 | ) | ||||
| Total Other Income (Expense) | (182,643 | ) | (166,194 | ) | ||||
| LOSS FROM CONTINUING OPERATIONS | (1,259,277 | ) | (1,026,141 | ) | ||||
| DISCONTINUED OPERATIONS | 37,979 | (212,737 | ) | |||||
| NET LOSS | ($ | 1,221,298 | ) | ($ | 1,238,878 | ) | ||
| BASIC AND DILUTED LOSS PER SHARE: | ||||||||
| Net loss per share | ($ | 0.01 | ) | ($ | 0.02 | ) | ||
| Basic and Diluted Weighted Average Number of Common Shares Outstanding | 106,985,632 | 83,806,182 | ||||||
The accompanying notes are an integral part of these financial statements.
F-3
VYSTAR CORPORATION
STATEMENTS OF STOCKHOLDERS’ DEFICIT
For the Years Ended December 31, 2016 and 2015
| Number of Preferred Shares | Preferred Shares | Number of Common Shares | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total | ||||||||||||||||||||||
| Ending Balance, December 21, 2014 | 30,085 | $ | 3 | 68,559,669 | $ | 6,856 | $ | 21,792,541 | ($ | 24,354,473 | ) | ($ | 2,555,076 | ) | ||||||||||||||
| Common stock issued in private placement | 9,010,000 | 901 | 449,599 | 450,500 | ||||||||||||||||||||||||
| Common stock issued upon exercise of common stock warrants | 5,364,622 | 536 | 160,801 | 161,338 | ||||||||||||||||||||||||
| Share-based compensation to employees - warrants | 75,320 | 75,320 | ||||||||||||||||||||||||||
| Share-based compensation to employees - options | 48,523 | 48,523 | ||||||||||||||||||||||||||
| Common stock and warrants issued for services | 9,667,619 | 967 | 420,377 | 421,344 | ||||||||||||||||||||||||
| Common stock issued upon conversion of preferred stock | (16,257 | ) | (2 | ) | 3,841,997 | 384 | (382 | ) | ||||||||||||||||||||
| Warrant/Option Repricing | 15,899 | 15,899 | ||||||||||||||||||||||||||
| Net Loss | (1,238,878 | ) | (1,238,878 | ) | ||||||||||||||||||||||||
| Ending Balance, December 31, 2015 | 13,828 | $ | 1 | 96,443,907 | $ | 9,644 | $ | 22,962,678 | ($ | 25,593,351 | ) | ($ | 2,621,028 | ) | ||||||||||||||
| Common stock issued in private placement | 14,180,000 | 1,418 | 707,582 | 709,000 | ||||||||||||||||||||||||
| Common stock issued upon exercise of common stock warrants | 3,080,220 | 308 | 53,192 | 53,500 | ||||||||||||||||||||||||
| Share-based compensation to employees - warrants | 100,291 | 100,291 | ||||||||||||||||||||||||||
| Common stock and warrants issued for services | 1,247,466 | 125 | 141,744 | 141,869 | ||||||||||||||||||||||||
| Warrant/Option Repricing | 14,456 | 14,456 | ||||||||||||||||||||||||||
| Net Loss | (1,221,298 | ) | (1,221,298 | ) | ||||||||||||||||||||||||
| Ending Balance, December 31, 2016 | 13,828 | $ | 1 | 114,951,593 | $ | 11,495 | $ | 23,979,943 | ($ | 26,814,649 | ) | ($ | 2,823,210 | ) | ||||||||||||||
The accompanying notes are an integral part of these financial statements.
F-4
VYSTAR CORPORATION
For the Years Ended December 31,
| 2016 | 2015 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | ($ | 1,221,298 | ) | ($ | 1,238,878 | ) | ||
| Adjustments to reconcile net loss to cash used in operating activities | ||||||||
| Share-based compensation | 242,159 | 561,086 | ||||||
| Allowance for uncollectible accounts receivable | (60,266 | ) | 6,949 | |||||
| Depreciation | 278 | 1,608 | ||||||
| Amortization of intangible assets | 15,861 | 15,680 | ||||||
| (Increase) decrease in assets | ||||||||
| Accounts receivable | 40,409 | 57,241 | ||||||
| Inventory | — | 3,449 | ||||||
| Prepaid expenses | 192,516 | (83,055 | ) | |||||
| Increase (decrease) in liabilities | ||||||||
| Accounts payable | (91,020 | ) | (75,202 | ) | ||||
| Accrued compensation and expenses | (26,080 | ) | 94,293 | |||||
| Net cash used in operating activities | (907,441 | ) | (656,829 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Disposal of equipment, net | 2,701 | 281 | ||||||
| Net cash provided by investing activities | 2,701 | 281 | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Net Advances D&O Financing | 7 | — | ||||||
| Issuance of common stock, net of costs | 723,456 | 611,837 | ||||||
| Proceeds from exercise of common stock warrants | 53,500 | — | ||||||
| Proceeds from Shareholder Notes | 135,000 | — | ||||||
| Net cash provided by financing activities | 911,963 | 611,837 | ||||||
| NET INCREASE (DECREASE) IN CASH | 7,223 | (44,711 | ) | |||||
| CASH - BEGINNING OF YEAR | 29,059 | 73,770 | ||||||
| CASH - END OF YEAR | $ | 36,282 | $ | 29,059 | ||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||
| NON-CASH TRANSACTIONS | ||||||||
| Common stock issued for services rendered | $ | 242,160 | $ | 392,667 | ||||
| Conversion of preferred stock to common stock | — | 2 | ||||||
| CASH PAID DURING THE PERIOD FOR | ||||||||
| Interest | $ | 97,989 | $ | 81,141 | ||||
The accompanying notes are an integral part of these financial statements.
F-5
VYSTAR CORPORATION
December 31, 2016 and 2015
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
History and Nature of Business
Vystar Corporation (“Vystar”, the “Company”, “we”, “us”, or “our”) is the creator and exclusive owner of the innovative technology to produce Vytex® Natural Rubber Latex (“NRL”). In addition, on June 28, 2013, Vystar Corporation (the “Company”) completed the acquisition of Kiron Clinical Sleep Lab, LLC (“Kiron”) a vertically integrated sleep diagnostic practice located in Durham, NC. We effectively closed Kiron in April 2016 due to changes in the healthcare insurance marketplace resulting in higher insurance deductibles and challenges in getting new studies and payment for completed studies. In essence, since the acquisition, changes to the health care insurance market shifted expenses for sleep studies and DME for many, back to the patients who need to meet higher deductibles before insurance coverage begins. This impacted getting new studies scheduled and challenges to getting payment for past studies. Also, the physician managing the practice left the practice and the remaining staff was ineffective in running the operation without direct supervision, which was impossible to provide from Vystar Corporation headquarters in Atlanta. Because of the closure of Kiron and previous closure of SleepHealth, Vystar Corporation has returned its focus to expanding the licensing and utilization of its proprietary source natural rubber latex technology. Vytex NRL uses a global multi-patented technology and proprietary formulation to reduce non-rubber particles including the antigenic proteins associated with latex allergies, resulting in a cleaner form of latex. In fact, the antigenic protein levels are reduced to virtually undetectable levels. This new licensing of branded consumer products was noted in a press release dated March 19, 2014. On January 22, 2015, Vystar announced the signing of an exclusive domestic distribution agreement with Worcester, MA based Nature’s Home Solutions (NHS) who sources eco-friendly materials and technologies for use in furnishings and other markets. On March 4, 2015, the Company announced that Hartford, CT based Gold Bond formed a strategic alliance with NHS to produce and market the world’s first Vytex NRL based mattress which was introduced at the High Point (NC) Market mid-April 2015. In June 2015, the first mattresses made with Vytex (hybrid and pure Vytex) were placed on the sales floor at Rotman’s Furniture and Carpet Store in Worcester, MA using the “Evaya” brand and Gold Bond had shipped four versions of their “Brilliance” inner coil and pure foam mattresses (Emerald, Ruby, Sapphire Plush and Sapphire Firm) to over 30 stores from Maine to Florida.
Basis of Presentation
The financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification.
The Company has evaluated subsequent events through the date of the filing of its Form 10-K with the Securities and Exchange Commission. Other than those events disclosed in Note 15, 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.
Reclassification
Certain items in the prior year’s financial statements have been reclassified in order to conform with the current year presentation. Specifically note such reclassifications for discontinued operations.
Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures. 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. Examples include valuation allowances for deferred tax assets, provisions for bad debts, and fair values of share-based compensation and other equity issuances.
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 we monitor 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, we have experienced no loss or lack of access to our cash; however, we can provide no assurances that access to our cash will not be impacted by adverse conditions in the financial markets.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for uncollectible amounts through a charge to earnings and a credit to an allowance for doubtful accounts based upon its assessment of the current status of individual accounts. Balances that are still outstanding after management has performed reasonable collection efforts are written off through a charge to the allowance and a credit to accounts receivable. As of December 31, 2016 and 2015, we have provided for uncollectible amounts through a charge to earnings and the income statement of $0 and $60,266, respectively. We grant credit to our customers without requiring collateral. The amount of accounting loss for which we are at risk in these unsecured accounts receivable is limited to their carrying value.
Vytex customers are located in both the United States and internationally.
F-6
Property and Equipment
Property and equipment is stated at cost. Depreciation is provided by the use of the straight-line and accelerated methods for financial and tax reporting purposes, respectively, over the estimated useful lives of the assets, generally 5 years.
Intangible Assets
Patents represent legal and other fees associated with the registration of patents. The Company has four issued patents with the United States Patent and Trade Office (USPTO) as well as four issued international PCT (Patent Cooperation Treaty) patents. Patents are carried at cost and are being amortized on a straight-line basis over their estimated useful lives, typically 20 years.
The Company has trademark protection for “Vystar”, “Vytex”, and “Created by Nature. Recreated by Science.” Trademarks are carried at cost and since their estimated life is indeterminable, no amortization is recognized. Instead, they are evaluated annually for impairment.
Impairment of Long-lived Assets
Long-lived assets, including property and equipment and intangible assets with finite lives, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recognized in the amount that the carrying amount of the asset exceeds its fair value. Fair value is determined based on discounted future net cash flows associated with the use of the asset.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash, accounts receivable, accounts payable, accrued expenses, lines of credit, shareholder notes payable, and long-term debt. The carrying values of all the Company’s financial instruments approximate fair value because of their short maturities. In addition to the short maturities, the carrying amounts of our line of credit and shareholder notes payable approximate fair value because the interest rates at December 31, 2016 and 2015 approximate market interest rates for the respective borrowings.
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.
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 are 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. A valuation allowance for the full amount of the net deferred tax asset was recorded for the years ended December 31, 2016 and 2015. Should they occur, interest and penalties related to tax positions are recorded as interest expense. No such interest or penalties have been incurred as of December 31, 2016 and 2015. The Company is no longer subject to federal examination for years prior to 2011.
Loss Per Share
The Company presents basic and diluted loss per share. Because the Company reported a net loss in 2016 and 2015, 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 9,418,271 and 9,381,573 shares of common stock for 2016 and 2015, respectively, as their effect would be anti-dilutive. Warrants to purchase 16,122,332 and 17,551,784 shares of common stock for 2016 and 2015, 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 3,761,417 and 3,484,100 shares of common stock for 2016 and 2015, respectively, were excluded from the computation of diluted loss per share as their effect would be anti-dilutive.
Revenue
The Vytex segment derives revenue from sales of or license fees of Vytex NRL raw material to manufacturers and distributors of rubber and rubber end products. Under both the direct and licensing agreement sales, the Vytex segment recognizes revenue at the time product is shipped and title passes to the customer. Revenue is recognized when the following four criteria are met: (1) persuasive evidence of an arrangement exists; (2) shipment or delivery has occurred; (3) the price is fixed or determinable and (4) collectability is reasonably assured.
F-7
Cost of Revenue
For Vytex, cost of revenue consists primarily of product and freight costs.
Research and Development
Research and development costs are expensed when incurred. Research and development costs include all costs incurred related to the research, development and testing of the Company’s process to produce Vytex NRL.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers, a new standard on revenue recognition. The new standard will supersede existing revenue recognition guidance and apply to all entities that enter into contracts to provide goods or services to customers. The guidance also addresses the measurement and recognition of gains and losses on the sale of certain non-financial assets, such as real estate, property and equipment. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which defers the effective date of the guidance in ASU 2014-09 by one year. This update is now effective for annual and interim period beginning after December 15, 2017, which will require us to adopt these provisions in the first quarter of fiscal year 2018. Early application is permitted for annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. This update permits the use of either the retrospective or cumulative effect transition method. The Company is currently assessing the impact that this guidance will have on its financial statements. In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 requires lessees to recognize the assets and liabilities on their balance sheet for the rights and obligations created by most leases and continue to recognize expenses on their income statements over the lease term. It will also require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted. The Company is currently assessing the impact that this guidance will have on its financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Receipts and Cash Payments. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently assessing the impact that this guidance will have on its financial statements.
NOTE 2 – LIQUIDITY AND GOING CONCERN
The Company’s financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. However, we have incurred significant losses and experienced negative cash flow since inception. At December 31, 2016, the Company had cash of approximately $36,282 and a deficit in working capital of $2,723,541. For the year ended December 31, 2016, the Company had a net loss of $1,221,298 and an accumulated deficit of $26,814,649. For the year ended December 31, 2015, the Company had a net loss of $1,238,878 and the accumulated deficit amounted to $25,593,351. 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.
Net cash used in operating activities was $907,441 for the year ended December 31, 2016 as compared to $656,829 for the year ended December 31, 2015. During the year ended December 31, 2016, cash used in operations was primarily due to the net loss for the year of $1,221,298 net of non-cash related add-back of share-based compensation expense of $242,159.
Net cash provided by investing activities was $2,701 during the year ended December 31, 2016 as this was a result of selling some equipment. During the year ended December 31, 2015, $281 was the result of selling some equipment as well.
Net cash provided by financing activities was $911,963 during the year ended December 31, 2016, as compared to cash provided of $611,837 during the year ended December 31, 2015. During 2016 cash was provided from the issuance of common stock in the amount of $723,456. $53,500 in cash was provided by the exercise of common stock warrants and options and $135,000 in proceeds from Shareholder Notes. In 2015, the cash provided was exclusively from the issuance of common stock.
As discussed in detail in Note 5, the CMA Note matured on April 29, 2013, and has been extended through April 29, 2016. The note is currently due on demand. All the Shareholder Notes which matured on various dates from March 11 through May 31, 2013 were either converted to preferred stock or had their maturity dates extended or Vystar management is working with the holders of the Shareholder Notes to extend the maturity dates until 2018.
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 through the use of cash on hand, increased revenue from Vytex division license fees, stock warrant exercises from existing shareholders, and raising capital through private placement memoranda (see Note 15, Subsequent Events).
F-8
As a result of this history of losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.
There can be no assurances that the Company will be able to achieve projected levels of revenue in 2017 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 2017, 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 for bankruptcy or cease operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities that might be necessary should the Company be forced to take any such actions.
The Company’s future expenditures will depend on numerous factors, including: the rate at which the Company can introduce and license Vytex NRL to manufacturers; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and market acceptance of the Company’s products and services and competing technological developments. As the Company expands our activities and operations, cash requirements are expected to increase at a rate consistent with revenue growth after the Company has achieved sustained revenue generation.
NOTE 3 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
| 2016 | 2015 | |||||||
| Furniture, fixtures and equipment | $ | 8,522 | $ | 150,119 | ||||
| Accumulated depreciation | (8,522 | ) | (147,140 | ) | ||||
| $ | — | $ | 2,979 | |||||
Depreciation expense for the years ended December 31, 2016 and 2015 was $278 and $1,608, respectively.
NOTE 4 – INTANGIBLE ASSETS
Intangible assets were as follows at December 31:
| 2016 | 2015 | |||||||
| Patents | $ | 238,551 | $ | 238,551 | ||||
| Trademarks & trade name | 9,072 | 9,072 | ||||||
| Subtotal | 247,623 | 247,623 | ||||||
| Accumulated amortization | (108,061 | ) | (92,200 | ) | ||||
| Intangible assets, net | $ | 139,562 | $ | 155,423 | ||||
Amortization expense for the years ended December 31, 2016 and 2015 was $15,861.
Estimated future amortization expense for finite-lived intangible assets is as follows:
| 2017 | 2018 | 2019 | 2020 | 2021 | Thereafter | |||||||||||||||||||
| Patents & trade name | $ | 15,680 | $ | 15,680 | $ | 15,680 | $ | 15,680 | $ | 15,680 | $ | 61,162 | ||||||||||||
NOTE 5 – NOTES PAYABLE AND LOAN FACILITY
Related Party Line of Credit (CMA Note Payable)
On April 29, 2011, the Company executed with CMA Investments, LLC, a Georgia limited liability company (“CMA”), an unsecured line of credit with a principal amount of up to $800,000 (the “CMA Note”). CMA is a limited liability company of which three of the directors of the Company (“CMA directors”) are the members. Pursuant to the original terms of the CMA Note, the Company could draw up to a maximum principal amount of $800,000. Interest, which is computed at LIBOR plus 5.25% per annum on amounts drawn and fees, will be paid by a director of the Company, to CMA. The weighted average interest rate in effect on the borrowings for the year ended December 31, 2015 and 2014 was 5.45% and 5.44%, respectively. Pursuant to an agreement between the Company and CMA, the Company will issue common stock with a value equal to the interest and fees paid based on the closing price of the common stock on the OTC Bulletin Board on the date of such payments. From June through December 2011, 110,848 shares of common stock were issued valued at $43,839 for interest and fees related to the CMA Note and in January and February 2012, 28,138 shares of common stock were issued valued at $9,005 for interest for the related party CMA Note. This agreement was modified during February 2012 and the Company assumed responsibility for payment of such interest and fees. The original maturity date of the CMA Note was April 29, 2013.
F-9
Other terms of the CMA Note include:
| ● | No payments of principal were due until the second anniversary of the CMA Note, at which time all outstanding principal was due and payable; and | |
| ● | As compensation to the directors for providing the CMA Note, the Company issued warrants to purchase 2,600,000 shares of the Company’s common stock to the CMA Directors at $0.45 per share, (the closing price of the Company’s stock on April 29, 2011), which vested 20% immediately and 10% upon each draw by the Company of $100,000 under the CMA Note. Because the warrants were issued and valued prior to the receipt of funds under this loan, no discount could be recorded and, accordingly, the value of the warrants was capitalized as a financing cost. These costs were amortized on a straight line basis over the term of the CMA Note. |
On September 14, 2011, the Company’s Board of Directors approved increasing the line of credit with CMA by $200,000 to a maximum principal amount of $1,000,000 and the Company’s Chairman and Chief Executive Officer became a member of CMA. As compensation to the CMA Directors for increasing the amount available under the CMA Note, the Board of Directors approved modifying the exercise price for the 2,600,000 compensatory stock purchase warrants previously issued to the directors from $0.45 to $0.27 per share, (the closing price of the Company’s common stock on that date) and the Company also issued warrants to purchase an additional 1,600,000 shares of the Company’s stock at $0.27 per share, (the closing price of the Company’s common stock on September 14, 2011), which vest upon the original terms of the CMA Note. The costs incurred in the modification of the exercise price of the 2,600,000 compensatory stock purchase warrants issued on April 29, 2011 and the additional 1,600,000 warrants issued on September 14, 2011 were amortized to interest expense over the remaining term of the CMA Note.
On November 2, 2012, the Board of Directors approved an increase in the CMA line of credit from $1,000,000 to $1,500,000. As compensation to the CMA Directors for increasing the amount available under the CMA Note, warrants to purchase an additional 2,100,000 shares of the Company’s stock at $0.35 per share were issued and recorded as deferred financing costs to be amortized through interest expense over the remaining term of the CMA Note.
On April 29, 2013, the maturity date of the CMA Note was extended to April 29, 2014. As compensation to the CMA Directors for extending the maturity date of the CMA Note, the Board of Directors approved modifying the exercise price for the 6,300,000 compensatory stock purchase warrants previously issued to the Directors to $0.10 per share and the CMA Directors forfeited 630,000 of the warrants. Amortization of the financing costs associated with extending the CMA Note was amortized through interest expense.
On April 29, 2014, the maturity date of the CMA Note was extended to April 29, 2015 with no compensation to CMA directors.
As of April 29, 2015, the maturity date of the CMA Note was again extended for one year to April 29, 2016. No compensation was paid to the CMA Directors for this extension. The note is currently due on demand.
Shareholder Notes Payable
Shareholder notes payable outstanding as of December 31, 2016 and 2015 totaled $835,068 and $700,068, respectively.
On March 11, 2011, the Company issued to existing shareholders of the Company an aggregate of $400,000 of convertible promissory notes together with warrants to purchase an aggregate of 160,000 shares of the Company’s common stock at $0.68 per share for two years from the date of issuance. Such notes are (i) unsecured, (ii) bear interest at an annual rate of ten percent (10%) per annum, and (iii) are convertible into shares of common stock at the conversion rate of $0.68 of principal and interest for each such share. The principal and accrued interest came due on March 11, 2013. Four of the holders of these notes with a total initial principal amount of $200,000 agreed to convert their notes and accumulated interest to the Company’s 10% Series A Cumulative Convertible Preferred Stock. The outstanding notes are currently due on demand and Vystar is currently working with the subscription holders of the matured notes to extend the maturity date until 2018.
On May 31, 2011, the Company issued to existing shareholders of the Company an aggregate of $125,000 of convertible promissory notes together with warrants to purchase an aggregate of 50,000 shares of the Company’s common stock at $0.49 per share for two years from the date of issuance. Such notes are (i) unsecured, (ii) bear interest at an annual rate of ten percent (10%) per annum, and (iii) are convertible into shares of common stock at a conversion rate of $0.49 of principal and interest for each such share. Accumulated interest and principal came due on May 31, 2013. One of the Shareholder Notes with an outstanding balance of $30,000 was retired. The holders of the other two Shareholder Notes having an initial principal balance of $100,000 agreed to extend the maturity date by two years and these notes with accumulated interest were due on May 31, 2015. The outstanding notes are currently due on demand and Vystar is currently working with the subscription holders of the matured notes to extend the maturity date until 2018. One subscription holder demanded payment for their matured note. The subscription holder and Vystar have agreed to three installment payments of $52,785, the first of which was made in the fourth quarter of 2016. The second payment is due in the second quarter of 2017 and the third and final payment is due in the third quarter of 2017.
On May 6, 2013, the Company issued to an existing shareholder of the Company an aggregate of $112,500 of convertible promissory notes (the “Note”). The Note is (i) unsecured, (ii) bears interest at an annual rate of ten percent (10%) per annum from date of issuance, and (iii) is convertible at any time until maturity at the holder’s option into shares of the Company’s common stock at a weighted average conversion rate of $0.075 of principal and interest for each such share. The outstanding notes are currently due on demand and Vystar is currently working with the subscription holder to extend the maturity date until 2018.
On September 6, 2013, the Company issued to the Chief Executive Officer a convertible promissory note with a face value of $40,769 (the “Note”) in lieu of compensation. The Note is (i) unsecured, (ii) bears interest at an annual rate of ten percent (10%) per annum from date of issuance, and (iii) is convertible at any time until maturity at the holder’s option into shares of the Company’s common stock at a weighted average conversion rate of $0.075 of principal and interest for each such share. No payments of interest or principal are payable until September 6, 2018.
F-10
On December 30, 2013, the Company issued to the Chief Executive Officer a convertible promissory note with a face value of $25,962 (the “Note”) in lieu of compensation. The Note is (i) unsecured, (ii) bears interest at an annual rate of ten percent (10%) per annum from date of issuance, and (iii) is convertible at any time until maturity at the holder’s option into shares of the Company’s common stock at a weighted average conversion rate of $0.05 of principal and interest for each such share. No payments of interest or principal were payable until December 30, 2015. The note is currently due on demand but The Chief Executive Officer has agreed to extend the maturity date until 2018.
On December 31, 2015, the Company issued to the Chief Executive Officer a convertible promissory note with a face value of $37,500 (the “Note”) in lieu of compensation. The Note is (i) unsecured, (ii) bears interest at an annual rate of ten percent (10%) per annum from date of issuance, and (iii) is convertible at any time until maturity at the holder’s option into shares of the Company’s common stock at a weighted average conversion rate of $0.08 of principal and interest for each such share. No payments of interest or principal are payable until December 30, 2018.
On December 31, 2016, the Company issued to an existing shareholder of the Company an aggregate of $135,000 of convertible promissory notes (the “Note”). The Note is (i) unsecured, (ii) bears interest at an annual rate of five percent (5%) per annum from date of issuance, and (iii) is convertible at any time after December 31, 2018 until maturity at the holder’s option into shares of the Company’s common stock at a weighted average conversion rate of $0.05 of principal and interest for each such share.
The current base weighted-average conversion price for the above referenced Shareholder and Promissory Notes with an outstanding balance as of December 31, 2016 of $1,066,148 including accrued interest of $231,080, is $0.064 per share or 16,705,538 shares of the Company’s common stock. The face value of the Shareholder Notes at December 31, 2016 is $835,068.
The maturities (by year) of the principal amount of Shareholder Notes Payable as of December 31, 2016 are as follows:
| Matured | $ | 595,837 | |||
| 2017 | — | ||||
| 2018 | 104,231 | ||||
| 2019 | — | ||||
| 2020 | — | ||||
| 2021 & thereafter | 135,000 |
NOTE 6 – COMMITMENTS
Employment Agreements
The Company has entered into an employment agreement with executive management, as appropriate, which includes provisions for the continued payment of salary and benefits for periods ranging from 3 months to 6 months, as well as a percentage of base salary for compliance with specified covenants in the agreements, upon termination of employment by the Company without cause, as defined.
NOTE 7 – DISCONTINUED OPERATIONS
Kiron Clinical Sleep Lab’s post acquisition performance fell far below Vystar’s expectations. As part of the Company’s strategy to focus on realizing the potential of the Vytex foam business in the pillow and mattress markets as well as part of the Company’s cost reduction plan, the Company made the decision to discontinue the operations of the Kiron division acquired in June 2013.
The Kiron division revenue was $82,353 and $331,398 for the fiscal years ended December 31, 2016 and 2015, respectively. Kiron’s net gain (loss) from discontinued operations was $35,733 and ($189,514) for the fiscal years ended December 31, 2016 and 2015, respectively.
The discontinued operations of the Sleephealth division had a net gain (loss) of $2,246 and ($23,223) for the fiscal years ended December 31, 2016 and 2015 respectively.
NOTE 8 – STOCKHOLDERS’ EQUITY
Preferred Stock
At December 31, 2016 and 2015, the 13,828 shares of outstanding preferred stock had accumulated undeclared dividends of approximately $49,791 and $36,000 and could be converted into 3,761,417 and 3,484,100 shares of common stock, at the option of the holder, respectively.
Common Stock and Warrants
As part of a September 2014 Private Placement Memorandum, updated in February 2015 and September 2015, the Company issued 9,010,000 shares of common stock to thirteen (13) accredited investors. Total gross proceeds of the issuances were $450,500. No commissions were paid. The shares of common stock were offered and sold in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder.
On February 26, 2015, the Company issued 420,000 common shares as compensation for an extension to the Company’s Consulting Agreement executed in December 2013 as amended in February 2014 with Jason Leaf and 1,440,000 common shares as compensation for an extension to the Company’s Business Development Agreement with Blue Oar Consulting, Inc. executed in March 2013 as amended in August 2013 and amended February 2014.
On March 6, 2015, the Company issued 1,560,000 common shares as compensation for a public relations contract with Accentuate PR.
F-11
Beginning in June 2015 through December 2015, the Company’s Board offered the investors from the November 2013 Private Placement holding common stock warrants an incentive to exercise their $0.05 warrants for $0.03 per common stock share. The Company had investors exercise 5,344,622 warrants at $0.03 per share for net proceeds of $160,337. This incentive resulted in an expense of $15,899 appearing as other expense on the Company’s Statement of Loss. The Company also had 20,000 warrants exercised at $0.05 for $1,000.
In June 2015, the Company issued 200,000 shares as compensation to third-party contractors in lieu of cash compensation.
On November 15, 2015, the Company issued 1,000,000 common shares as compensation for an amendment and extension to the Company’s Consulting Agreement with Jason Leaf, issued 1,000,000 common shares as compensation for an amendment and extension to the Company’s Consulting Agreement with Steven Rotman, and 1,333,333 common shares as compensation for an amendment and extension to the Company’s Business Development Agreement with Blue Oar Consulting, Inc. The Company also issued 2,714,286 common shares as compensation for a website development and maintenance contract to Zymbe, Inc, which was subsequently divided equally between Gregory P. Rotman, Jason Leaf and Eric Maas as individuals.
As part of a September 2014 Private Placement Memorandum, updated in February 2015 and September 2015, the Company issued 12,480,000 shares of common stock to six (6) accredited investors during the fiscal year ended December 31, 2016. Total gross proceeds of the issuances were $624,000. No commissions were paid. The shares of common stock were offered and sold in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder.
As part of a November 2016 Private Placement Memorandum, the Company issued 1,700,000 shares of common stock to four (4) accredited investors during the fiscal year ended December 31, 2016. Total gross proceeds of the issuances were $85,000. No commissions were paid. The shares of common stock were offered and sold in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder.
During the year ended December 31, 2016, the Company had 1,783,335 common stock warrants exercised at $0.03 per share for $53,500 and issued 1,296,885 common shares for cashless warrants that were exercised.
On June 30, 2016, the Company issued 997,466 common shares as compensation under the Company’s Business Development Agreement with Blue Oar Consulting, Inc. executed in March 2013 as amended in August 2013 and amended February 2014 and 250,000 common shares as compensation under the Company’s Business Development Agreement with Byron Novosad executed in February 26, 2014.
NOTE 9 – SHARE-BASED COMPENSATION
Generally accepted accounting principles require share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values at the date of grant, net of estimated forfeitures.
The Company used the Black-Scholes option pricing model to estimate the grant-date fair value of awards granted during 2016 and 2015. The following assumptions were used:
| ● | Expected Dividend Yield – because the Company does not currently pay dividends, the expected dividend yield is zero; | |
| ● | Expected Volatility in Stock Price – Expected volatility calculations were based on the Company’s trading activity which ranged between and 117.28% and 154.79% during 2016; | |
| ● | Risk-free Interest Rate – reflects the average rate on a United States Treasury bond with maturity equal to the expected term of the option or warrant, ranging from 1.46% to 2.45% during 2016; and | |
| ● | Expected Life of Awards – because the Company has minimal experience with the exercise of options or warrants for use in determining the expected life for each award, the simplified method was used to calculate an expected life based on the end of the contractual term of the stock award. |
In total, the Company recorded $55,143 and $48,523 for the years ended December 31, 2016 and 2015, respectively, of share-based compensation expense related to employee and Board members’ stock options. The unrecognized compensation expense as of December 31, 2016 was $157,838 for non-vested share-based awards to be recognized over a period of approximately five years.
Stock Options
During 2004, the Board of Directors of the Company adopted a stock option plan (the “Plan”) and authorized up to 4,000,000 shares to be issued under the Plan. In April 2009, the Company’s Board of Directors authorized an increase in the number of shares to be issued under the Plan to 10,000,000 shares and to include the independent Board Members in the Plan in lieu of continuing the previous practice of granting warrants each quarter to independent Board Members for services. At December 31, 2016, there were 181,729 shares of common stock reserved for issuance under the Plan. In 2014, the Board adopted an additional stock option plan which provides for an additional 5,000,000 shares which are all available as of December 31, 2016. 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.
The weighted-average assumptions used in the option pricing model for stock option grants were as follows:
| 2016 | 2015 | |||||||
| Expected Dividend Yield | 0.00 | % | 0.00 | % | ||||
| Expected Volatility in Stock Price | 145.82 | % | 144.40 | % | ||||
| Risk-Free Interest Rate | 1.87 | % | 2.15 | % | ||||
| Expected Life of Stock Awards – Years | 10.0 | 9.5 | ||||||
| Weighted Average Fair Value at Grant Date | $ | 0.05 | $ | 0.06 | ||||
F-12
The following tables summarize all stock option activity of the Company for the years ended December 31, 2016 and 2015:
| Number of Shares | Weighted Average Exercise Price | ||||||||
| Outstanding, December 31, 2014 | 8,364,906 | $ | 0.19 | ||||||
| Granted | 1,100,000 | $ | 0.06 | ||||||
| Forfeited | (83,333 | ) | $ | 1.45 | |||||
| Outstanding, December 31, 2015 | 9,381,573 | $ | 0.19 | ||||||
| Granted | 500,000 | $ | 0.05 | ||||||
| Exercised | (400,000 | ) | $ | 0.05 | |||||
| Forfeited | (63,302 | ) | $ | 0.07 | |||||
| Outstanding, December 31, 2016 | 9,418,271 | $ | 0.16 | ||||||
| Exercisable, December 31, 2016 | 6,783,271 | $ | 0.21 | ||||||
Additional details, including the average remaining contractual life of the options, as well as the range of exercise prices are shown in the table below:
| Number of Shares | Weighted Average Remaining Contractual Life (Years) | Range of Exercise Prices | |||||||||||
| Outstanding, December 31, 2014 | 8,364,906 | 5.49 | $ | 0.05 - $1.50 | |||||||||
| Granted | 1,100,000 | 9.10 | $ | 0.05 - $0.08 | |||||||||
| Forfeited | (83,333 | ) | $ | 0.25 - $1.50 | |||||||||
| Outstanding, December 31, 2015 | 9,381,573 | 5.10 | $ | 0.05 - $0.68 | |||||||||
| Exercisable, December 31, 2015 | 6,508,271 | 6.29 | $ | 0.05 - $0.68 | |||||||||
| Granted | 500,000 | 9.10 | $ | 0.05 | |||||||||
| Exercised | (400,000 | ) | $ | 0.05 | |||||||||
| Forfeited | (63,302 | ) | $ | 0.07 | |||||||||
| Outstanding, December 31, 2016 | 9,418,271 | 4.43 | $ | .05 - $0.68 | |||||||||
| Exercisable, December 31, 2016 | 6,783,271 | 5.99 | $ | 0.10 - $0.68 | |||||||||
F-13
The Company added a director on March 12, 2015 and another on December 2, 2015. Each director was granted 500,000 options with a ten-year term and an exercise price of $0.08 and $0.03 respectively, the closing price of the Company’s common stock on the OTCBB on the grant date. The options vest 25,000 shares quarterly beginning on March 30, 2015 and March 30, 2016 for a period of five years ending December 31, 2019 and December 31, 2020 respectively.
As of December 31, 2016, the aggregate intrinsic value of the Company’s outstanding options was $570,128. The aggregate intrinsic value will change based on the fair market value of the Company’s common stock.
Warrants
Warrants are issued to third parties as payment for services, debt financing compensation and conversion and in conjunction with the issuance of common stock. The fair value of each common stock warrant issued for services is estimated on the date of grant using the Black-Scholes option pricing model.
The weighted-average assumptions used in the option pricing model for stock warrant grants were as follows:
| 2016 | 2015 | |||||||
| Expected Dividend Yield | 0.00 | % | 0.00 | % | ||||
| Expected Volatility in Stock Price | 121.20 | % | 127.26 | % | ||||
| Risk-Free Interest Rate | 2.18 | % | 1.75 | % | ||||
| Expected Life of Stock Awards – Years | 10.0 | 8.2 | ||||||
The following table represents the Company’s warrant activity for the years ended December 31, 2016 and 2015:
| Number of Shares | Weighted Average Grant Date Fair Value | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | ||||||||||||||
| Outstanding, December 31, 2014 | 22,235,812 | $ | 0.11 | 5.07 | |||||||||||||
| Granted | 1,905,193 | $ | 0.05 | $ | 0.11 | ||||||||||||
| Exercised | (5,364,622 | ) | $ | 0.03 | |||||||||||||
| Forfeited | (591,003 | ) | $ | 0.05 | |||||||||||||
| Expired | (7,222 | ) | $ | 0.80 | |||||||||||||
| Outstanding, December 31, 2015 | 18,178,158 | $ | 0.13 | 5.54 | |||||||||||||
| Granted | 1,713,244 | $ | 0.07 | $ | 0.07 | 9.07 | |||||||||||
| Exercised | (3,163,336 | ) | $ | 0.05 | 0.3 | ||||||||||||
| Forfeited | (605,734 | ) | |||||||||||||||
| Outstanding, December 31, 2016 | 16,122,332 | $ | 0.10 | 6.1 | |||||||||||||
| Exercisable, December 31, 2016 | 16,122,332 | $ | 0.10 | 6.1 | |||||||||||||
F-14
The stock compensation expense for 2016 and 2015 related to warrants was $115,054 and $104,538 respectively.
NOTE 10 – RELATED PARTY TRANSACTIONS
Officers and Directors
During April 2009, the Company’s Board of Directors authorized the inclusion of the Board members in the Company’s stock option plan in lieu of continuing the previous practice of granting warrants each quarter to independent Board members. Each Board member was granted options to purchase 400,000 shares of the Company’s common stock, valued at approximately $233,000 each, an exercise price range between $0.05 and $0.68 per share. Vesting occurs at the end of each complete calendar quarter served as an independent Board member of the Company at a rate of 20,000 shares each per quarter. The options are exercisable in whole or in part before September 30, 2019. In 2014, the Board adopted an additional stock option plan which provides for an additional 5,000,000 shares. Two board members’ unvested options were forfeited when they resigned the Board in 2014.
NOTE 11 – DEFINED CONTRIBUTION PLAN
The Company maintained a tax-qualified retirement plan that provides all regular employees with an opportunity to save for retirement on a tax-advantaged basis during 2015. Under the 401(k) plan, 100 percent of participants’ contributions up to a maximum of 3 percent of compensation and 50 percent of participants’ contributions up to an additional 2 percent of compensation are matched. Company contributions under the plan were approximately $2,000 in 2016 and $4,000 for 2015. This plan was terminated in 2016.
NOTE 12 – 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.
Vytex Division:
During 2016, the Vytex Division had product revenue from three major customers Natures Home Solutions, RCMA, and Centrotrade, which collectively comprised 100% total Vytex revenue. During 2015, the Vytex Division had product revenue from two major customers Natures Homes Solutions and Centrotrade, which comprised 100% of total Vytex revenue. No amounts were owed to major vendors at December 31, 2016 and December 31, 2015.
NOTE 13 – RISKS AND UNCERTAINTIES
The Company is exposed to commodity price risk, mainly associated with variations in the market price for NRL as well as wintering of the Hevea trees, which differs for each country. The timing and magnitude of industry cycles are difficult to predict and are impacted by general economic conditions including the buying climate in China. The Company responds to changes in NRL prices by adjusting sales prices on a weekly basis and by turning rather than holding inventory in anticipation of higher prices. The Company actively manages its exposure to commodity price risk and monitors the actual and expected spread between forward selling prices and purchase costs and processing and shipping expense. The Company also currently spreads the processing of Vytex NRL among three continents. Sales contracts are based on forward market prices, and generally orders are placed 30 to 90 days ahead of shipment date due to these fluctuations. However, financial results may be negatively impacted where selling prices fall more quickly than purchase price adjustments can be made or when levels of inventory have an anticipated net realizable value that is below cost.
NOTE 14 – SEGMENT INFORMATION AND GEOGRAPHIC DATA
The Company has only one operating segment, the Vytex Division.
NOTE 15 – SUBSEQUENT EVENTS
On January 18, 2017 Vystar was informed that the Indian Patent Office approved our application (2487/KOLNP/2010) entitled, “Natural Rubber Latex Having Reduced Allergenicity and Method of Making” under Patent Number 279323. There is one more patent under consideration by the Indian Patent Office.
On February 8, 2017 Vystar received notice of grant from the Guatemalan Patent Office for application number 2010-000208 entitled, “Natural Rubber Latex Having Reduced Allergenicity and Method of Making” and is awaiting a grant number.
As part of the November 2016 Private Placement Memorandum, the Company issued 2,690,000 shares of common stock to nine (9) accredited investors during the period from January 1, 2017 to April 14, 2017. Total gross proceeds of the issuances were $134,500. No commissions were paid. The shares of common stock were offered and sold in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder.
During the period from January 1, 2017 to April 14, 2017, the Company issued 1,464,087 common stock shares as the result of four (4) accredited investors exercising warrants and options utilizing a cash-less feature in those warrants and options. There were no proceeds in connection with the exercise of these warrants and options.
On March 15, 2017, the Company issued 400,000 common shares as compensation under the Company’s Business Development Agreement with FMW Media Works Corporation and 750,000 common shares as compensation under the Company’s Business Development Agreement with Joseph Savanyo.
F-15
| ITEM 9. | CHANGES IN DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None
| ITEM 9.A | 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 year ended December 31, 2016 and subsequent to year 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 Annual Report and believe that the Company’s disclosure controls and procedures are effective to the reasonable assurance level based on the required evaluation.
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 December 31, 2016 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the COSO framework, management concluded that our internal control over financial reporting was not effective as of December 31, 2016. Such conclusion was reached based on the following material deficiencies 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.
Management expects to strengthen internal control during 2017 by developing stronger business and financial processes for accounting for transactions such as warrant/stock issuances, which will enhance internal control for the Company.
| ITEM 9B. | OTHER INFORMATION |
None
18
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Board of Directors
The following tables set forth the name and information of each director of Vystar as of December 31, 2016. Each director is elected to serve until the next Annual Meeting of Stockholders.
| Name | Principal Occupation During Last Five Years | Age | Director Since | |||
| William R. Doyle | Mr. Doyle, The Chairman of the Board, President and Chief Executive Officer, joined Vystar in 2004 as Vice President Sales & Marketing. He became President and Chief Operating Officer in December 2005. He became Chairman of the Board, President and Chief Executive Officer of Vystar in March 2008. Prior to that, Mr. Doyle served as Vice President of Marketing, Women’s Health, for Matria Healthcare, Inc., a disease management company, from 1999 to 2004. Mr. Doyle spearheaded the initial branding efforts at Matria as well as held responsibility for sales development, training, public relations, and marketing. He has worked in many aspects of healthcare industry for over twenty years encompassing manufacturing, sales, marketing and advertising. In addition to Matria, he has experience with such companies as Isolyser Company, Inc., McGaw, Inc., Lederle Laboratories (now Wyeth), and in an advertising capacity for Novartis Ophthalmics. Mr. Doyle is a member of the Board of Directors of the Georgia Chapter of the March of Dimes. He holds a Bachelor of Science in Biochemistry from Penn State University and Master of Business Administration from Pepperdine University.
|
59 | 2005 | |||
| Mitsy Y. Mangum | Ms Mangum is currently a managing director/partner of Lakeview Capital Partners, LLC. From July 2009 to September 2015, Ms. Mangum was Vice President, Investments, WMS, RPC at American Capital Partners LLC., an independent investment banking firm in Atlanta, GA. From July 2004 to July 2009, Ms. Mangum was a Vice President-Investments, Financial Advisor WMS, RPC with Raymond James & Associates in the Atlanta area. Ms. Mangum is an accomplished investment professional with over 24 years of financial service and industry experience both from the retail side as well as the institutional side. Ms. Mangum maintains an in-depth knowledge of the financial markets, professional money management and managing portfolios. She has a Bachelor of Science in Business Administration/ Management from College of Charleston. | 53 | 2008 | |||
Michael X. Ianacone
|
Mr. Ianacone has over forty years of successful experience in leading large organizations and improving performance of operating units across the US. He has a proven track record of growing revenue and profit, forming executive teams and working cross organizationally to deliver results.
He recently retired from Xerox Corporation where during his 38 year tenure he held senior executive management positions in sales, marketing, operations and strategy in the US. These positions included both headquarters and field locations. He was a key member of the US senior team during Xerox’s turnaround in the early 2000s.
Michael holds an A.B. degree from Georgetown University in Washington, D.C. and currently resides in Atlanta, GA.
|
69
|
2014
| |||
| Ranjit K. Matthan | On March 12, 2015, Ranjit K. Matthan, Ph.D., an internationally renowned latex and rubber expert, joined the Company’s Board of Directors. Dr. Matthan has been a consultant to Vystar Corporation since 2008 and has played a significant role in the manufacturing scale up of reduced-protein Vytex® natural rubber latex (NRL) in Malaysia and refining the research and development of manufacturing processes for applications using Vytex NRL, such as latex foam, condoms, adhesives, medical devices, etc.
Dr. Matthan has been associated with the development of natural rubber and rubber based industries manufacturing in South Asia since the 1970s and introduced technically specified natural rubber into India. He has advised national and international companies and research bodies including the Government of India, the Malaysian Rubber Research and Development Board, Asian Development Bank, Industrial Development Bank of India, Revertex (Malaysia) as well as many private companies engaged in latex production and manufacturing. A founding Director of the Bangkok-based Asia Pacific Elastomer Science and Technology (APEST), he has played a key role in sustainability initiatives for natural rubber. He has also been associated with the development and commercial introduction of several eco-friendly natural rubber grades, including Vytex NRL.
Dr. Matthan has received numerous industry awards, including: the prestigious 2014 Institute of Materials, Minerals and Mining, U.K.’s Hancock Medal for his contributions to the development of the environmentally friendly sustainable growth of the global natural rubber industry, and the 2006 KMPhilip Award from the All India Rubber Industries Association for significant contributions toward the development of the Indian Rubber Industry. Dr. Matthan has published over 50 scientific and technical papers on natural rubber and lattices and is an invited speaker at several international conferences including the International Latex Conference.
Dr. Matthan holds an undergraduate degree from St. Stephens College, Delhi University, India and he earned his Ph.D. in Polymer Chemistry from the National College of Rubber Technology, London, England, where he was the first Ph.D. student of Dr. D.C. Blackley whose books and high polymer lattices and emulsion polymerization are the industry standard references.
|
74 | 2015 | |||
| Jason Meggs | Jason Meggs, based in Raleigh, North Carolina, is currently Senior Vice President, Business Finance for INC Research Holdings, Inc., and leads a global team with responsibility for all business unit financial reporting and analysis, budgeting and forecasting and global customer pricing and contracting. Previously he was Global Vice President, Internal Audit for Quintiles Transnational Corp. after holding other senior global financial roles within the company. Prior to that, he was an Audit Manager and Senior Auditor for Deloitte and Arthur Andersen LLP. He received his bachelor of Business Administration, Accounting from Western Carolina University.
|
41 | 2015 | |||
Keith Osborn
|
Dr. Osborn is a board-certified Orthopaedic Spine Surgeon with 30 years of experience after completing his Spine Fellowship at Harvard University. He received his medical degree from the University of Maryland School of Medicine and performed his residency at Harvard University and Johns Hopkins Hospital. Dr. Osborn currently specializes in Spinal Surgery at Resurgens Orthopaedics in Atlanta with a focus on adult spinal disorders and total disc arthroplasty.
|
60 | 2016 |
19
Director Independence
Under Rule 5605(b)(1) of the Nasdaq Marketplace Rules, independent directors must comprise a majority of a listed company’s board of directors within one year of listing. In addition, Nasdaq Marketplace Rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and governance committees be independent. While Vystar does not currently qualify for listing on Nasdaq and will likely not qualify for some time after the date of this proxy statement, it does intend to seek such listing as soon as possible and complies with its Marketplace Rules. Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended. Under Nasdaq Marketplace Rule 5605(a)(2), a director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In order to be considered to be independent for purposes of Rule 10A-3, a member of an audit committee of a public company may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee: (1) accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the public company or any of its subsidiaries; or (2) be an affiliated person of the listed company or any of its subsidiaries.
In March of 2013, our Board undertook a review of its composition, the composition of its committees and the independence of each director. Based upon information requested from and provided by each director concerning his or her background, employment and affiliations, including family relationships, our Board has determined none of the directors has a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is “independent” as that term is defined under Nasdaq Marketplace Rule 5605(a)(2).
On August 9, 2016, Thomas L. Mills resigned from his positions with the Company as Chairman of the Board of Directors and a director. Mr. Mills’ resignations did not result from any disagreement with the Company.
Audit Committee
The Board member serving on our Audit Committee is Ms. Mangum. Ms. Mangum chairs and is the sole member of the Audit Committee. Our Board has determined that Ms. Mangum satisfies the requirements for financial literacy under the current requirements of the Nasdaq Marketplace Rules. Ms. Mangum is an “audit committee financial expert,” as defined by SEC rules and satisfies the financial sophistication requirements of The NASDAQ Global Market. Our Audit Committee assists our Board in its oversight of our accounting and financial reporting process and the audits of our financial statements. The Audit Committee’s responsibilities include:
| ● | appointing, approving the compensation of, and assessing the independence of our independent registered public accounting firm; |
| ● | overseeing the work of our independent registered public accounting firm, including through the receipt and consideration of reports from such firm; |
| ● | reviewing and discussing with management and the independent registered public accounting firm our annual and quarterly financial statements and related disclosures; |
| ● | monitoring our internal control over financial reporting, disclosure controls and procedures and code of business conduct and ethics; |
| ● | discussing our risk management policies; |
| ● | establishing policies regarding hiring employees from the independent registered public accounting firm and procedures for the receipt and resolution of accounting related complaints and concerns; |
| ● | meeting independently with our independent registered public accounting firm and management; |
| ● | reviewing and approving or ratifying any related person transactions; and |
| ● | preparing the audit committee report required by SEC rules. |
All audit and non-audit services, other than de minimus non-audit services, to be provided to us by our independent registered public accounting firm must be approved in advance by our Audit Committee.
Audit Committee Charter
We have adopted an Audit Committee Charter which sets out the duties and responsibilities of our Audit Committee. The Audit Committee Charter is available on our website at www.vytex.com. Any amendments to the Charter, or any waivers of its requirements, will be disclosed on our website.
20
Meetings of the Board and Committees
During fiscal year 2016, our Board held eleven meetings, and its Audit Committee held four meetings. Each director attended at least 75% of the meetings of the Board in fiscal year 2016. Members of our Board are encouraged to attend our annual meetings of shareholders.
CORPORATE GOVERNANCE
Corporate Governance Guidelines
We believe in sound corporate governance practices and have adopted formal Corporate Governance Guidelines to enhance our effectiveness. Our Board adopted these Corporate Governance Guidelines in order to ensure that it has the necessary practices in place to review and evaluate our business operations as needed and to make decisions that are independent of our management. The Corporate Governance Guidelines are also intended to align the interests of directors and management with those of our shareholders. The Corporate Governance Guidelines set forth the practices our Board follows with respect to Board and committee composition and selection, Board meetings, chief executive officer performance evaluation and management development and succession planning for senior management, including the chief executive officer position. A copy of our Corporate Governance Guidelines is available on our website at www.vytex.com.
Code of Business Conduct and Ethics
We adopted a Code of Business Conduct and Ethics applicable to all officers, directors and employees of Vystar that comply with NASDAQ listing standards. The Code of Business Conduct and Ethics includes an enforcement mechanism, and any waivers for directors or executive officers must be approved by our Board and disclosed in a current report on Form 8-K with the SEC. This Code of Business Conduct is publicly available on our website at www.vytex.com. There were no waivers of the Code of Business Conduct and Ethics for any of our directors or executive officers during fiscal year 2016.
| ITEM 11. | EXECUTIVE COMPENSATION |
Overview
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information regarding compensation earned by our, Chief Executive Officer and President for 2016 and 2015 and our Chief Financial Officer during 2014.
| Name and Principal Position | Salary | Option Awards (1) | All
Other Compensation (2) | Total | ||||||||||||
| William R. Doyle (3) | ||||||||||||||||
| Chairman, Chief Executive Officer and President | ||||||||||||||||
| 2016 | $ | 150,000 | $ | 100,291 | $ | 2,000 | $ | 252,291 | ||||||||
| 2015 | $ | 112,500 | $ | 66,294 | $ | 39,900 | $ | 218,694 | ||||||||
| (1) | These amounts do not reflect the actual economic value realized by the executive officers. In accordance with SEC rules, the amounts in this column for 2016 and 2015 represent the dollar amount recognized as compensation expense by Vystar for financial statement reporting purposes for fiscal years 2016 and 2015 for stock options granted to each of the executive officers in each such fiscal year in accordance with applicable accounting guidance related to stock-based compensation. Pursuant to SEC rules, the amounts shown disregard the impact of estimated forfeitures related to service-based vesting conditions. |
| (2) | Amounts consist of medical, insurance premiums and 401(K) contributions paid by us on behalf of the named executive officer. |
In 2015, the Company issued to Mr. Doyle a convertible promissory note with a face value of $37,500 (the “Note”) in lieu of compensation. The Note is (i) unsecured, (ii) bears interest at an annual rate of ten percent (10%) per annum from date of issuance, and (iii) is convertible at any time until maturity at the holder’s option into shares of the Company’s common stock at a weighted average conversion rate of $0.08 of principal and interest for each such share. No payments of interest or principal are payable until December 30, 2018.
Employment Agreements
On November 11, 2008, Vystar entered into an employment agreement with William R. Doyle to continue to serve as Vystar’s President, Chief Executive Officer and Chairman of the Board. The term of the agreement is effective until terminated by either party in accordance with the terms of the agreement. Under the agreement, Mr. Doyle receives a base salary of $185,000 per year, as such base salary may be adjusted by the Board, and an annual bonus equal to a maximum of 125% of Mr. Doyle’s base salary based on the success of the Company in meeting its objectives, as determined by the Board; provided, that no cash bonus is payable to Mr. Doyle on any date unless he is employed by the Company on that date. The amount of the annual bonus is determined by the Board based on the percentage of achievement of the stated company objectives. The effective date of the annual bonus calculation is the Company’s fiscal year-end and is payable in one or more installments as determined by the Board beginning in the first quarter of the following fiscal year. Mr. Doyle’s employment agreement is terminable at will by the Company for cause or without cause as defined in the agreement. However, if Mr. Doyle’s employment is terminated by Vystar without cause, Vystar is obligated to pay Mr. Doyle compensation earned through the date of termination plus a severance payment equal to six (6) months base salary from the date of termination payable as if he had remained an employee of the Company, plus, assuming Mr. Doyle complies with non-compete and non-solicitation covenants contained in the employment agreement, an amount equal to 75% of Mr. Doyle’s base salary amount for the one (1) year period after the date of termination. If Mr. Doyle is terminated for cause or he terminates the employment agreement without cause, he is only entitled to compensation accrued through the date of termination.
21
On January 13, 2015, the Board approved a change in Mr. Doyle’s compensation package that included a base annual salary of $150,000 paid monthly and an immediate award of $50,000 in warrants that vest at the end of each month of employment through the end of 2015.
On January 15, 2016, the Board approved a change in Mr. Doyle’s compensation package that included a base annual salary of $150,000 paid monthly and an immediate award of $50,000 in warrants that vest at the end of each month of employment through the end of 2016.
On February 15, 2017, the Board approved a change in Mr. Doyle’s compensation package that included a base annual salary of $150,000 paid monthly and an immediate award of $50,000 in warrants that vest at the end of each month of employment through the end of 2017.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth certain information with respect to the value of all unexercised options previously awarded to our executive officer as of December 31, 2016:
| Name | Number
of Securities Underlying Unexercised Options Exercisable (#) |
Number
of Securities Underlying Unexercised Options Unexercisable (#) |
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) |
Options
Exercise Price ($) |
Option Expiration Date | |||||||||||
| William R. Doyle | 1,750,000 | $ | 0.05 | 2/11/2018 | ||||||||||||
| 250,000 | $ | 0.05 | 3/14/2021 | |||||||||||||
| 500,000 | $ | 0.05 | 7/9/2024 | |||||||||||||
| 100,000 | $ | 0.05 | 6/30/2020 | |||||||||||||
Risk Analysis of Performance-Based Compensation Programs
The Board of Directors believes that our executive compensation programs do not encourage or result in excessive risk taking. Such programs consist of base salaries, cash bonuses (none of which have been paid to date), and stock option grants. Cash bonuses None so this needs to come out and the vesting of stock option grants for Mr. Doyle, our Chief Executive Officer, Chairman and President are based on milestones Not true to be set by our Board of Directors. We anticipate that such bonuses and stock options will be based on attaining specified percentages of the company’s earnings before interest, taxes, depreciation and amortization (“EBITDA”). As a result, such bonuses will likely be focused on increasing revenue and managing expenses, all of which is consistent with the interests of our shareholders. Further, the cash bonuses will likely be capped at a percentage of his base salary. We believe this cap will limit the incentive for excessive risk-taking. This entire paragraph has no merit.
No other officers of the Company have employment agreements that specify compensation programs.
Retirement and Deferred Compensation Plan Benefits
We do not provide our employees, including the executive officers, with a defined benefit pension plan, any supplemental executive retirement plans, or retiree health benefits.
Potential Payments upon Termination Without Cause
The following table sets forth the estimated potential payments and benefits payable to our one (1) executive officer in the event of a termination of employment without cause.
| Executive Officer | Monthly Severance Programs (1) |
Additional Monthly Severance Payments (2) |
Continuing Benefits (3) |
TOTALS | ||||||||||||
| William R. Doyle | $ | 92,500 | $ | 138,750 | $ | 962 | $ | 232,212 | ||||||||
| (1) | The amounts represent the aggregate of monthly payments for six (6) months for Mr. Doyle. |
| (2) | In the event that Mr. Doyle complies with certain restrictive covenants in his employment agreement, after termination without cause, he is additionally entitled to this amount (75% of his base salary) payable in monthly installments over a one (1) year period following the initial six (6) month period of monthly severance payments. |
| (3) | Consists of health insurance premiums. |
22
DIRECTOR COMPENSATION
The following table sets forth certain information with respect to compensation awarded to, paid to or earned by each of Vystar’s non-employee directors during fiscal year 2016.
| Name | Fees
Earned or Paid in Cash ($) |
Stock Awards ($) | Option Awards ($) (1) | Total ($) (2) | ||||||||
| Mitsy Y. Mangum | 10,702 | 10,702 | ||||||||||
| Michael X. Ianacone | 9,640 | 9,640 | ||||||||||
| Ranjit K. Matthan | 7,837 | 7,837 | ||||||||||
| Jason M. Meggs | 2,943 | 2,943 | ||||||||||
| Keith D. Osborn | 3,678 | 3,678 | ||||||||||
| (1) | In 2014, Ms. Mangum as a non-employee director was granted 500,000 options at $0.11 per share which vest 25,000 options at the end of each fiscal quarter for five (5) years beginning September 30, 2014.
On September 15, 2014, Mr. Ianacone as non-employee directors were granted 500,000 options at $0.10 per share which vest 25,000 options at the end of each fiscal quarter for five (5) years beginning September 30, 2014.
On March 12, 2015, Dr. Matthan as a non-employee director was granted 500,000 options at $0.08 per share which vest 25,000 options at the end of each fiscal quarter for five (5) years beginning March 30, 2015.
On December 2, 2015, Mr. Meggs as a non-employee director was granted 500,000 options at $0.03 per share which vest 25,000 options at the end of each fiscal quarter for five (5) years beginning March 30, 2016.
On May, 18, 2016, Dr. Osborn as a non-employee director was granted 500,000 options at $0.05 per share which vest 25,000 options at the end of each fiscal quarter for five (5) years beginning September 30, 2016.
The amounts included represent the portion of the original total grant date fair value of options that vested in 2016 together with the dollar amount recognized as compensation expense by Vystar for financial statement reporting purposes for fiscal year 2016 in accordance with applicable accounting guidance related to stock-based compensation.
|
| (2) | These amounts do not reflect the actual economic value realized by the directors. In accordance with SEC rules, this column represents the dollar amount recognized as compensation expense by Vystar for financial statement reporting purposes for fiscal year 2016 for stock options granted to each of the non-employee directors during fiscal years 2015 and 2016, in accordance with applicable accounting guidance related to stock-based compensation. Pursuant to SEC rules, the amounts shown disregard the impact of estimated forfeitures related to service-based vesting conditions. |
| 5% Stockholders | ||||||||
| Joseph
C Allegra, M.D. Atlanta, GA | 14,951,831 | 12.812 | % | |||||
| Lam
Ngoc Minh Vietnam | 10,000,000 | 8.699 | % | |||||
| Officers & Directors | ||||||||
| William
R Doyle Atlanta, GA | 11,618,167 | 9.196 | % | |||||
| Keith
Osborn Atlanta, GA | 22,984,273 | 18.285 | % | |||||
| Michelle
Mangum Atlanta, GA | 2,315,000 | 1.979 | % | |||||
| Michael
X. Ianacone Atlanta, GA | 1,028,589 | 0.893 | % | |||||
| Ranjit
K. Matthan India | 205,000 | 0.178 | % | |||||
| Jason
M. Meggs Raleigh, NC | 100,000 | 0.087 | % | |||||
| All Directors and Executive Officers as a Group | 38,251,029 | 33.276 | % | |||||
| Total Shares Outstanding | 114,951,594 | |||||||
Compensation Philosophy
The current policy of our Board is that compensation for non-employee directors should be equity-based compensation to reward directors for quarterly periods of service in fulfilling their oversight responsibilities.
Expenses
We reimburse our directors for their travel and related expenses in connection with attending Board and committee meetings, as well as costs and expenses incurred in attending director education programs and other Vystar-related seminars and conferences.
23
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS |
The following table sets forth the beneficial ownership of our common stock as of December 31, 2016 by each entity or person who is known to beneficially own 5% or more of our common stock, each of our directors, each Executive Officer identified in “Executive Compensation—Summary Compensation Table” contained in this proxy statement and all of our directors and current executive officers as a group. This table is based upon information supplied by executive officers, directors and principal shareholders. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, each of the shareholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned. None of the shares beneficially owned by our executive officers and directors are pledged as security. Applicable percentages are based on shares outstanding on December 31, 2016, adjusted as required by rules promulgated by the SEC.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our executive officers and directors, and any person or entity who owns more than ten percent of a registered class of our common stock or other equity securities, to file with the SEC certain reports of ownership and changes in ownership of our securities. Executive officers, directors and shareholders who hold more than ten percent of our outstanding common stock are required by the SEC to furnish us with copies of all required forms filed under Section 16(a). We prepare Section 16(a) forms on behalf of our executive officers and directors based on the information provided by them.
Based solely on review of this information and written representations by our executive officers and directors that no other reports were required, we believe that, during fiscal year 2016 each director filed the forms required by Section 16(a) of the Exchange Act on a timely basis with respect to the repricing of option and warrants.
EQUITY COMPENSATION PLAN INFORMATION
The following table shows information related to our common stock which may be issued under our 2004 Long-Term Incentive Compensation Plan, as amended, as of December 31, 2016:
| Plan Category | Number
of securities to be issued upon exercise of outstanding options by Executive Officers | Number
of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in first column) | ||||||
| 2004 Long-Term Incentive Compensation Plan, as amended, approved by shareholders | 9,381,573 | 618,427 | ||||||
| 2014 Long-Term Incentive Compensation Plan | 0 | 5,000,000 | ||||||
| Total | 9,381,573 | 5,618,427 | ||||||
Our 2004 Long-Term Incentive Compensation Plan, as amended, which we refer to as the 2004 Plan, was adopted by our Board in 2004, and amended and approved by our shareholders in 2009. A maximum of 10,000,000 shares of common stock were authorized for issuance under the 2004 Plan.
The 2004 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock and other stock-based awards. Our officers, employees, consultants and directors are eligible to receive awards under the 2004 Plan; however, incentive stock options may only be granted to our employees. In accordance with the terms of the 2004 Plan, our Board administers the 2004 Plan and, subject to any limitations in the 2004 Plan, selects the recipients of awards and determines:
| ● | the number of shares of common stock covered by options and the dates upon which those options become exercisable; | |
| ● | the exercise prices of options; | |
| ● | the duration of options; | |
| ● | the methods of payment of the exercise price; and | |
| ● | the number of shares of common stock subject to any restricted stock or other stock-based awards and the terms and conditions of those awards, including the conditions for repurchase, issue price and repurchase price. |
24
Pursuant to the terms of the 2004 Plan, in the event of a change in control of our company, each outstanding option under the 2004 Plan will vest, but the holders shall have the right, assuming the holder still maintains a continuous service relationship with us, immediately prior to such dissolution or liquidation, to exercise the option to the extent exercisable on the date of such dissolution or liquidation.
In the event of a merger or other reorganization event, our Board shall have the discretion to provide for any or all of the following: (a) the acceleration of vesting or the termination of our repurchase rights of any or all of the outstanding awards, (b) the assumption or substitution of all options by the acquitting or succeeding entity or (c) the termination of all options that remain outstanding at the time of the merger or other reorganization event.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Review, Approval or Ratification of Transactions with Related Persons
Vystar’s Code of Business Conduct requires that all employees and directors avoid conflicts of interests that interfere with the performance of their duties or are not in the best interests of Vystar.
In addition, pursuant to its written charter, the Audit Committee considers and approves or disapproves any related person transaction as defined under Item 404 of Regulation S-K promulgated by the SEC, after examining each such transaction for potential conflicts of interest and other improprieties. The Audit Committee has not adopted any specific written procedures for conducting such reviews and considers each transaction in light of the specific facts and circumstances presented.
Transactions with Related Persons
On April 29, 2011, the Company executed with CMA Investments, LLC, a Georgia limited liability company (“CMA”) a line of credit with a principal amount of up to $800,000 (the “CMA Note”). CMA is a limited liability company of which three of the directors of the Company were the members at such date. Proceeds under the line were drawn for general working capital purposes. Under the terms of the CMA Note, the Company may draw up to a maximum principal amount of $800,000. Interest on amounts drawn and fees were paid by an affiliate of Joseph C. Allegra, M.D., a director of the Company, to CMA, until February 6, 2012, at which time the Company took over responsibility for the payment of such interest and fees. Pursuant to an agreement between the Company and such affiliate, the Company issued common stock to such affiliate with a value equal to such interest and fees paid based on the closing price of the common stock on the OTC Bulletin Board on the date of such payments. The maturity date of the Note is April 29, 2013 and was subsequently renewed for one year. The CMA Note is unsecured and no payments of principal are due until the second anniversary of the Note, at which time all outstanding principal is due and payable. As compensation to the directors for providing the CMA Note, the Company issued warrants to purchase 2,600,000 shares of the Company’s common stock to the directors at $.45 per share which was the closing price of the Company’s common stock on that day, later adjusted to $.27 per share, which was the closing price of the Company’s common stock on the day it was adjusted.
CMA is a limited liability company of which Joseph C. Allegra, M.D., J. Douglas Craft and Michelle Y. Mangum, each a director of the Company, are the members. Effective year ending December 31, 2014, Joseph C. Allegra, M.D. and J. Douglas Craft are no longer members of Vystar’s board of directors.
On September 14, 2011, the Company’s Board of Directors approved increasing the line of credit to $1,000,000 and William R. Doyle, the Company’s Chairman and Chief Executive Officer became a member of CMA. As compensation for increasing the line and for Mr. Doyle joining CMA, the directors approved issuing warrants to purchase an additional 1,600,000 shares of the Company’s common stock at $.27 per share, which was the closing price of the Company’s common stock on that day.
On November 2, 2012, the Board of Directors approved an increase in the CMA line of credit from $1,000,000 to $1,500,000. On January 10, 2013, as compensation to the CMA members for providing the increased CMA Note, the Company issued warrants to purchase 2,100,000 shares of the Company’s common stock to the CMA members at $0.35 per share and recorded as deferred financing cost to be amortized through interest expense over the remaining term of the CMA Note.
On April 29, 2013, the maturity date of the CMA Note was extended to April 29, 2014. As compensation to the CMA Directors for extending the maturity date of the CMA Note, the Board of Directors approved modifying the exercise price for the 6,300,000 compensatory stock purchase warrants previously issued to the Directors to $0.10 per share and the CMA Directors forfeited 630,000 of the warrants. Amortization of the financing costs associated with extending the CMA Note was amortized through interest expense.
On April 29, 2014, the maturity date of the CMA Note was extended to April 29, 2015 with no compensation being paid to the CMA Directors for this extension.
As of April 29, 2015, the maturity date of the CMA Note was again extended for one year to April 29, 2016. No compensation was paid to the CMA Directors for this extension. The note is currently due on demand.
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Director Independence
Under Rule 5605(b)(1) of the Nasdaq Marketplace Rules, independent directors must comprise a majority of a listed company’s board of directors within one year of listing. In addition, Nasdaq Marketplace Rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and governance committees be independent. While Vystar does not currently qualify for listing on Nasdaq and will likely not qualify for some time after the date of this proxy statement, it does intend to seek such listing as soon as possible and complies with its Marketplace Rules. Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended. Under Nasdaq Marketplace Rule 5605(a)(2), a director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In order to be considered to be independent for purposes of Rule 10A-3, a member of an audit committee of a public company may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee: (1) accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the public company or any of its subsidiaries; or (2) be an affiliated person of the listed company or any of its subsidiaries.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
During fiscal year 2016 and 2015, we retained the firm of Porter Keadle Moore, LLC (“PKM”) to provide services in the following categories and amounts:
| Fee Category | 2016($) | 2015($) | ||||||
| Audit Fees | 68,750 | 63,215 | ||||||
| Audit-Related Fees | — | — | ||||||
| Tax Fees | — | — | ||||||
| All Other Fees | — | — | ||||||
| Total | 68,750 | 63,215 | ||||||
Audit fees include the audit of Vystar’s annual financial statements, review of financial statements included in each of our Quarterly Reports on Form 10-Q, and services that are normally provided in connection with statutory and regulatory filings or engagements for those fiscal years.
Audit-related fees consist of fees for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements. This category includes fees related to accounting-related consulting services.
Tax fees consist of fees for professional services for tax compliance, tax advice and tax planning. This category includes fees primarily related to the preparation and review of federal, state and international tax returns and assistance with tax audits.
All other fees include assurance services not related to the audit or review of our financial statements.
Our Audit Committee determined that the rendering of non-audit services by PKM was compatible with maintaining the independence of each firm.
AUDIT COMMITTEE PRE-APPROVAL OF SERVICES PERFORMED BY OUR
INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
It is the policy of our Audit Committee to pre-approve all audit and permissible non-audit services to be performed by PKM. Our Audit Committee pre-approves services by authorizing specific projects within the categories outlined above, subject to a budget for each category. Our Audit Committee’s charter delegates to one or more members of the Audit Committee the authority to address any requests for pre-approval of services between Audit Committee meetings, and the subcommittee or such member or members must report any pre-approval decisions to our Audit Committee at its next scheduled meeting.
All services related to audit fees, audit-related fees, tax fees and all other fees provided by PKM during fiscal year 2016 and 2015 were pre-approved by the Audit Committee in accordance with the pre-approval policy described above.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee’s role includes the oversight of our financial, accounting and reporting processes; our system of internal accounting and financial controls; our enterprise risk management program; and our compliance with related legal, regulatory and ethical requirements. The Audit Committee oversees the appointment, compensation, engagement, retention, termination and services of our independent registered public accounting firm, including conducting a review of its independence; reviewing and approving the planned scope of our annual audit; overseeing our independent registered public accounting firm’s audit work; reviewing and pre-approving any audit and non-audit services that may be performed by it; reviewing with management and our independent registered public accounting firm the adequacy of our internal financial and disclosure controls; reviewing our critical accounting policies and the application of accounting principles; and monitoring the rotation of partners of our independent registered public accounting firm on our audit engagement team as required by regulation. The Audit Committee establishes procedures, as required under applicable regulation, for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or auditing matters and the submission by employees of concerns regarding questionable accounting or auditing matters. The Audit Committee’s role also includes meeting to review our annual audited financial statements and quarterly financial statements with management and our independent registered public accounting firm. The Audit Committee held four meetings during fiscal year 2016.
The sole member of the Audit Committee meets the independence criteria prescribed by applicable regulation and the rules of the SEC for audit committee membership and is an “independent director” within the meaning of NASDAQ listing standards. The Audit Committee member meets NASDAQ’s financial literacy requirements, and the Board further determined that Ms. Mangum is a “audit committee financial expert” is a “ as such term is defined in Item 407(d) of Regulation S-K promulgated by the SEC also meets NASDAQ’s financial sophistication requirements. The Audit Committee acts pursuant to a written charter, which complies with the applicable provisions of the Sarbanes-Oxley Act of 2002 and related rules of the SEC and NASDAQ, a copy of which can be found on our website at www.vytex.com.
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We have reviewed and discussed with management and PKM Vystar’s audited financial statements. We discussed with PKM and Vystar’s Chief Financial Officer the overall scope and plans of PKM’s audits. We met with PKM, with and without management present, to discuss results of its examinations, its evaluation of Vystar’s internal controls, and the overall quality of Vystar’s financial reporting.
We have reviewed and discussed with PKM matters required to be discussed pursuant to Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1. AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T. We have received from PKM the written disclosures and letter required by the applicable requirements of the Public Company Accounting Oversight Board regarding PKM’s communications with the Audit Committee concerning independence. We have discussed with PKM matters relating to its independence, including a review of both audit and non-audit fees, and considered the compatibility of non-audit services with PKM’s independence.
Based on the reviews and discussions referred to above and our review of Vystar’s audited financial statements for fiscal year 2016, we recommended to the Board that Vystar’s audited financial statements be included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2016, for filing with the SEC.
Respectfully submitted,
AUDIT COMMITTEE
Mitsy Y. Mangum, Chair
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| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
1. FINANCIAL STATEMENTS
The following financial statements and notes thereto of Vystar Corporation, and the related Report of Independent Registered Public Accounting Firm are set forth in Item 8.
| Report of Independent Registered Public Accounting Firm | F-1 | |
| Balance Sheets | F-2 | |
| Statements of Loss | F-3 | |
| Statements of Stockholders’ Equity (Deficit) | F-4 | |
| Statements of Cash Flows | F-5 | |
| Notes to Financial Statements | F-6 |
2. FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable accounting regulations of the SEC have been omitted because they are not applicable or the required information is included in the financial statements or notes thereto.
3. EXHIBITS
Exhibit Index *
* Some Exhibits have certain confidential information redacted pursuant to a request for confidential treatment
| Number | Description | |
| 3.1 | Articles of Incorporation of Vystar Acquisition Corporation (now named Vystar Corporation) dated December 17, 2003 (as amended) (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344) | |
| 3.2 | Articles of Amendment to the Articles of Incorporation of Vystar Corporation | |
| 3.3 | Bylaws of Vystar Corporation (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344) | |
| 4.1 | Specimen Certificate evidencing shares of Vystar common stock (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344) | |
| 4.2 | Form of Share Subscription Agreements and Investment Letter (First Private Placement) (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344) | |
| 4.3 | Form of Share Subscription Agreement and Investment Letter (Second Private Placement) (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344) | |
| 4.4 | Form of Vystar Corporation Investor Questionnaire and Subscription Agreement (Third Private Placement) (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344) | |
| 4.5 | Warrant to Purchase Shares of Common Stock of Vystar Corporation dated March 11, 2011 issued to Topping Lift Capital LLC (incorporated by reference to Vystar’s Current Report on Form 8-K dated March 11, 2011 and filed on March 15, 2011) | |
| 4.6 | Form of Warrant issued to Investor note holders (incorporated by reference to Vystar’s Current Report on Form 8-K dated March 11, 2011 and filed on March 15, 2011) | |
| 4.7 | Form of Series A-1 Warrant (incorporated by reference to Vystar’s Current Report on Form 8-K filed on June 11, 2012) |
| 10.1* | Manufacturing Agreement between Vystar Corporation and Revertex (Malaysia) Sdn. Bhd. effective April 1, 2008 (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344) | |
| 10.2 | Executive Employment Agreement between Vystar Corporation and William R. Doyle, dated November 11, 2008 (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344) | |
| 10.3 | Management Agreement dated January 31, 2008 between Universal Capital Management, Inc. and Vystar Corporation (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344) |
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| 10.4 | Letter Agreement dated August 15, 2008 between Universal Capital Management, Inc. and Vystar Corporation (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344) | |
| 10.5 | Addendum to Management Agreement dated February 29, 2008 between Universal Capital Management, Inc. and Vystar Corporation (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344) | |
| 10.6 | Warrant Purchase Agreement dated January 31, 2008 between Universal Capital Management, Inc. and Vystar Corporation (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344) | |
| 10.7 | Management Agreement dated April 30, 2008 between Universal Capital Management, Inc. and Vystar Corporation (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344) | |
| 10.8 | Warrant Purchase Agreement dated April 30, 2008 between Universal Capital Management, Inc. and Vystar Corporation (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344) | |
| 10.9 | Vystar Corporation 2004 Long-Term Compensation Plan, as amended (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344) | |
| 10.10 | Employment Agreement between Vystar Corporation and Sandra Parker dated April 1, 2008 (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344) | |
| 10.10* | Distributor Agreement among Vystar Corporation, Centrotrade Minerals & Metals, Inc. and Centrotrade Deutschland, GmbH dated January 6, 2009 (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344) | |
| 10.11 | Note agreement between Vystar Corporation and Climax Global Energy, Inc. dated August 15, 2008 (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344) | |
| 10.12 | Form of Investor Note (incorporated by reference to Vystar’s Current Report on Form 8-K dated March 11, 2011 and filed on March 15, 2011) | |
| 10.13 | Promissory Grid Note dated April 29, 2011, in a principal amount of $800,000 from Vystar Corporation to CMA Investments, LLC (incorporated by reference to Vystar’s Current Report on Form 8-K dated April 29, 2011 and filed on May 2, 2011) |
| 10.14 | First Amendment to Agreement dated September 9, 2011, between Vystar Corporation, CMA Investments, LLC and Italia-Eire, LP, a Georgia limited partnership |
| 10.15 | Form of Securities Purchase Agreement dated May 2012 between Vystar and investors (incorporated by reference to Vystar’s Quarterly Report on Form 10-Q filed on August 10, 2012) | |
| 10.16 | LLC Ownership Interest Purchase Agreement dated September 13, 2012, between Vystar and Mary Ailene Miller (incorporated by reference to Vystar’s Current Report on Form 8-K filed on September 19, 2012) | |
| 10.17 | Second Amendment to Agreement dated November 2, 2012, among Vystar, CMA Investments, LLC and Italia – Eire LP (incorporated by reference to Vystar’s Quarterly Report on Form 10-Q filed on November 11, 2012) | |
| 10.18** | Employment Agreement between W. Dean Waters and Vystar dated April 1, 2013 | |
| 10.19 | LLC Ownership Interest Purchase Agreement dated June 28, 2013, between the Company and Michal Soo, M.D. (incorporated by reference to the Company’s Current Report on Form 8-K filed on July 2, 2013) | |
| 10.20 | Note Subscription Agreement dated June 28, 2013 between the Company and the Investors (incorporated by reference to the Company’s Current Report on Form 8-K filed on July 2, 2013) | |
| 10.21 | Form of Senior Secured Convertible Promissory Note dated June 30, 2013 (incorporated by reference to the Company’s Current Report on Form 8-K filed on July 2, 2013) | |
| 10.22 | Form of Security Agreement dated July 1, 2013 (incorporated by reference to the Company’s Current Report on Form 8-K filed on July 2, 2013) | |
| 31*** | Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| 32*** | 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 |
* Some Exhibits have certain confidential information redacted pursuant to a request for confidential treatment.
** Exhibits and schedules to this exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company will furnish copies of the omitted exhibits and schedules to the Securities and Exchange Commission upon its request. Confidential treatment has been requested as to a portion of this exhibit, which portion has been omitted and filed separately with the Securities and Exchange Commission.
*** Filed herewith.
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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: April 14, 2017 | By: | /s/ William R. Doyle |
| William R. Doyle | ||
| Chairman, President, Chief Executive Officer (Principal Executive Officer), Chief Financial Officer (Principal Financial and Accounting Officer and Director | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on April 14, 2017.
| Signature | Title | |
| /s/ William R. Doyle | Chairman, President, Chief Executive Officer, and Chief Financial Officer | |
| William R. Doyle | ||
| /s/ Keith D. Osborn | Director | |
| Keith D. Osborn | ||
| /s Michael X. Ianacone | Director | |
| Michael X. Ianacone | ||
| /s/ Mitsy Y. Mangum | Director | |
| Mitsy Y. Mangum | ||
| /s/ Ranjit Matthan | Director | |
| Ranjit Matthan | ||
| /s/ Jason Meggs | Director | |
| Jason Meggs |
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