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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

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

 

For the Fiscal Year Ended December 31, 2019

 

OR

 

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

 

Commission File No. 000-53754

 

VYSTAR CORPORATION

(Exact name of registrant as specified in its charter)

 

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

 

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

 

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

 

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

 

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

 

Common Stock, par value $0.0001 per share

 

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

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [  ] No [X]

 

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

 

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

 

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

 

Large Accelerated Filer [  ]   Accelerated Filer [  ]   Non-Accelerated Filer [  ]   Smaller Reporting Company [X]
             
            Emerging growth Company [  ]

 

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

 

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

 

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

 

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

 

 

 

 

 

 

Vystar Corporation

Annual Report on Form 10-K

For the Year Ended December 31, 2019

Table of Contents

 

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

 

2

 

 

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

 

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

 

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

 

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PART I

 

ITEM 1. BUSINESS

 

Products and Services

 

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

 

Vystar Corporation (“Vystar”, the “Company”, “we,” “us,” or “our”) is based in Worcester, Massachusetts. The Company uses patented technology to produce a line of innovative air purifiers, which destroy viruses and bacteria through the use of ultraviolet light. In addition, Vystar manufactures and sells reduced allergen natural rubber latex used primarily in various bedding products.

 

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

 

Company Background

 

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

 

In May of 2018, Vystar acquired substantially all of the assets of UV Flu Technologies, Inc., formerly traded on the OTC under the ticker UVFT, whose patented ViraTech™ UV light air purification technology destroys greater than 99% of airborne bacteria, viruses and other microorganisms and virtually eliminates concentrations of odors and volatile organic compounds (VOCs).

 

UV Flu’s product line includes:

 

  RXair™ Residential Filterless Air Purifier
     
  UV400 ™ FDA cleared Class II Filterless Air Purifier
     
  RX3000™ Commercial FDA cleared Class II Air Purifier (news video with RX3000)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

5

 

 

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

 

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

 

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

 

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

 

In April of 2018, Vystar acquired the assets of NHS Holdings, LLC (NHS) executing on the first part of the Company’s vision to move into direct product offerings made from Vytex® latex. NHS was the exclusive U.S. distributor of Vystar’s Vytex® natural rubber latex foam to manufacturers for use in over 200 home furnishings products, including mattresses, toppers, pillows and upholstery, sold through multiple channels. This acquisition provides Vystar with roll packing and cutting equipment to support our bedding manufacturing partners, while lowering the cost of Vytex to the manufacturer by eliminating the middleman.

 

Now unified under the Vytex brand, we anticipate developing additional product offerings and solidifying partnerships with multiple major manufacturing partners throughout the home furnishings industry. We anticipate our new offerings will include cushions and padding for use in seating and other products which we believe will achieve higher margins.

 

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

 

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

 

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

 

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

 

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

 

In May of 2019, Vystar acquired the assets of Fluid Energy Conversion Inc. (“FEC”), primarily consisting of its patent on the Hughes Reactor, which has the ability to control, enhance, and focus energy in flowing liquids and gases. Included in stock subscription payable is $103,750 representing the shares to be issued to FEC in 2020 for these assets. Vystar intends to use this technology to enhance the effectiveness of Vystar’s RxAir purification system to destroy airborne pathogens while decreasing the cost and size of Vystar’s RxAir units.

 

In July of 2019, Vystar acquired 58% of the outstanding shares of common stock of Murida Furniture Co., Inc. dba Rotmans Furniture (“Rotmans”), the largest furniture and flooring store in New England and one of the largest independent furniture retailers in the U.S. Rotmans sells a broad line of residential furniture and decorative accessories and serves customers throughout the New England region. The acquisition is expected to add approximately $30 million in top line revenue and enable Vystar to capitalize on the infrastructure already in place at Rotmans for accounting, retail sales facilities and staff, customer service, warehousing, and delivery. In addition, Rotmans will offer significant marketing and advertising opportunities for all of Vystar’s brands to Rotmans’ thousands of existing customers. The Company and Rotmans are exploring a number of initiatives relating to environmentally friendly product development and distribution that will utilize the access to the capital markets afforded by this combination.

 

Competition

 

Natural Rubber Latex

 

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

 

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

 

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

 

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

 

Furniture Store

 

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

 

Intellectual Property

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Government Regulation

 

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

 

9

 

 

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

 

Inflation and Seasonality

 

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

 

Employees

 

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

 

Corporate Information

 

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

 

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

 

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

 

ITEM 1A. RISK FACTORS

 

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

 

10

 

 

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

 

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

 

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

 

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

 

The following risk factors apply to our Vytex business:

 

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

 

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

 

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

 

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

 

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

 

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

 

11

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

12

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

13

 

 

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

 

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

 

The following risk factors apply to our furniture business:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

14

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

15

 

 

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

 

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

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

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

 

ITEM 3. LEGAL PROCEEDINGS

 

EMA Financial

 

On February 19, 2019, EMA Financial, Inc. filed a lawsuit in the Southern District of New York against the Company. The lawsuit alleged various breaches of an underlying convertible promissory note and stock purchase agreement, and sought four claims for relief: (i) specific performance to enforce a stock conversion and contractual obligations; (ii) breach of contract; (iii) permanent injunction to enforce the stock conversion and contractual obligations; and (iv) legal fees and costs of the litigation. The complaint was filed with a motion seeking: (i) a preliminary injunction seeking an immediate resolution of the case through the stock conversion; (ii) a consolidation of the trial with the preliminary injunctive hearing; and (iii) summary judgment on the first and third claims for relief.

 

The Company filed an opposition to the motion and at oral argument the motion for injunctive relief was denied. On April 5, 2019, the Company filed the opposition papers as well as a motion to dismiss the first and third causes of action in the complaint.

 

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

 

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

 

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

 

16

 

 

Robert LaChapelle Class Action

 

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

 

Eric Maas Lawsuit

 

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

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

PART II.

 

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

 

Market Price Information

 

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

 

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

 

17

 

 

Holders of Record

 

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

 

Dividend Policy

 

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

 

Issuer Purchases of Equity Securities

 

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

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

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

 

Recent Sales of Unregistered Securities

 

Common Stock and Warrant Grants

 

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

 

Stock Option Grants

 

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

 

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

 

From January 1, 2019 through December 31, 2019, the Company issued certain contingently convertible promissory notes in varying amounts, in the aggregate of $713,700, to existing shareholders including a $100,000 note to Steven Rotman. The face amount of the notes represents the amount due at maturity in two years, along with accrued interest at a rate of 5%, at which time that amount may be converted into shares of the Company stock based on the average closing price for the trailing 20 days prior to conversion and carrying a 35% to 50% discount. These notes can be converted only after an acceleration event which involves a symbol change, uplisting, or reverse stock split and such conversion is in the control of the Company.

 

On June 30, 2019, the Company issued contingently convertible promissory notes totaling $180,000 to Steven Rotman ($105,000) and Greg Rotman ($75,000). The notes bear interest at a rate of 8%, are convertible at the Company’s option after December 31, 2019 and mature in five years. If converted. The notes plus interest are convertible into shares of the Company’s common stock at the average of the five lowest closing prices in the 90-day period prior to conversion with a 50% discount.

 

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On July 18, 2019, the Company issued contingently convertible promissory notes totaling $1,522,500 to Steven Rotman ($1,102,500) and Bernard Rotman ($420,000) as partial consideration for the acquisition of Rotmans (see Note 18). These notes bear interest at a rate of 8% and can be converted only after an acceleration event, which involves a symbol change, or reverse stock split and such conversion is in the control of the Company. Steven Rotman’s note matures eight years from issuance and Bernard Rotman’s note matures four years from issuance. If converted, the notes plus accrued interest are convertible into shares of the Company’s common stock at a 20-day average closing price at a 50% discount. The remaining consideration for the Rotmans acquisition were nonconvertible notes totaling $507,500 to Steven Rotman ($367,500) and Bernard Rotman ($140,000). These notes bear interest at an annual rate of five percent (5%). Steven Rotman’s note matures eight years from issuance and Bernard Rotman’s note matures four years from issuance.

 

Application of Securities Laws and Other Matters

 

No underwriters were involved in the foregoing sales of securities. The securities described above were issued to investors in reliance upon the exemption from the registration requirements of the Securities Act, as set forth in Section 4 (2) under the Securities Act and Regulation D promulgated thereunder, as applicable, relative to sales by an issuer not involving any public offering, to the extent an exemption from such registration was required.

 

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

 

All of the foregoing securities are deemed restricted securities for purposes of the Securities Act. All certificates representing the issued shares of common stock, warrants and options described above included appropriate legends setting forth that the securities had not been registered and the applicable restrictions on transfer.

 

ITEM 6. SELECTED FINANCIAL DATA

 

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

 

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

 

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

 

Overview

 

Vystar LLC, the predecessor to the Company, was formed February 2, 2000, as a Georgia limited liability company by Travis W. Honeycutt. Operations under the LLC entity were focused substantially on the research, development and testing of the Vytex® Natural Rubber Latex (“NRL”) process, as well as attaining intellectual property rights. In 2003, the Company reorganized as Vystar Corporation, a Georgia corporation, at which time all assets and liabilities of the limited liability company became assets and liabilities of Vystar Corporation, including all intellectual property rights, patents and trademarks.

 

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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 licensing agreements and have introduced Vytex NRL into the supply channels with aggressive, targeted marketing campaigns directed to the end users.

 

We transitioned from a development stage company to the operating stage during the last quarter of 2009. During the period of 2010 to 2015, our financial condition and results of operations have experienced substantial fluctuations as we provided introductory pricing in 2010 and then began to switch to a licensing rather than a toll model in 2011. Our licensing model will continue in 2019 for the raw material business and we will continue our focus in 2019 onward on the licensing contracts associated with the foam and furniture offerings. Accordingly, the financial condition and results of operations reflected in our historical financial statements are not expected to be indicative of our future financial condition and results of operations.

 

We believe that the key for increased Vytex NRL product acceptance is to focus on companies seeking solutions to production challenges or ways to differentiate their product offering. Vystar’s technical team has been successful in developing customized formulations to meet specific manufacturer needs. Some of these formulations will become new line extensions. Vystar is becoming less of a raw material provider and more of a technology innovator through its technical consultation and formulation activities.

 

In addition to this technology focus, we are determined to have the “made with Vytex” claim added to products made using various forms of Vytex NRL. To help drive this effort we’re focusing on products that benefit from Vytex NRL low non-rubber features. As part of this effort, we are working with a licensee to launch a line of foam core products used in various bedding products including pillows, mattresses and mattress toppers.

 

In January 2015 Vystar announced that it had entered into an exclusive agreement with NHS to distribute mattresses, mattress toppers and pillows made with its multi-patented Vytex NRL raw material. NHS is a distribution company led by Steven Rotman of Rotmans Furniture and as of December 18, 2017 is the CEO of Vystar and focuses on innovative, sustainably sourced, eco-friendly material and technologies for use in furnishings and other markets. Our Vytex NRL fits the needs of this unique new distributor which has already attracted such firms as mattress manufacturer Gold Bond that was formed in 1899 to manufacture and then distribute mattresses, toppers and pillows along with a plan to reach specific segments of the United States by targeting other manufacturers. Vystar has focused on these segments since 2015 and will continue into 2019 as we display at furniture and mattress conventions and attend and sell at sleep products meetings such as ISPA 2016 (International Sleep Products Association) held in Orlando, FL and ISPA 2017 in Tampa, FL and attended ISPA 2018 in Charlotte, NC. Vystar will also continue to develop specialty versions of Vytex NRL after presenting to the International Latex Conference in Akron OH in July 2016 and 2017 and sending out samples for lab trials. Vystar is currently producing Vytex thread samples for an entry into the thread marketplace. In September 2016, the Vystar Board of Directors voted to end the January 2015 agreement with NHS and replace it with a global exclusive for foam manufactured with Vytex and sold into the home furnishings industry. This change reflects the global nature of the mattress, topper and pillow businesses.

 

In April of 2018 Vystar acquired the assets of NHS Holdings, LLC (NHS) executing on the first part of the company’s vision to move into direct product offerings made from Vytex® latex. NHS was the exclusive U.S. distributor of Vystar’s Vytex® natural rubber latex foam to manufacturers for use in over 200 home furnishings products, including mattresses, toppers, pillows and upholstery, sold through multiple channels. This acquisition provides Vystar with roll packing and cutting equipment to support our bedding manufacturing partners, while lowering the cost of Vytex to the manufacturer by eliminating the middleman.

 

Now unified under the Vytex brand, we anticipate developing additional product offerings and solidifying partnerships with multiple major manufacturing partners throughout the home furnishings industry. We anticipate our new offerings will include cushions and padding for use in seating and other products which we believe will achieve higher margins.

 

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In May of 2018 Vystar acquired substantially all of the assets of UV Flu Technologies, Inc., formerly traded on the OTC under the ticker UVFT, whose patented ViraTech™ UV light air purification technology destroys greater than 99% of airborne bacteria, viruses and other microorganisms and virtually eliminates concentrations of odors and volatile organic compounds (VOCs).

 

As part of Vystar’s mission to offer eco-friendly, sustainable materials and products that create a better environment for consumers and workers throughout the product lifecycle, UV Flu Technologies is an excellent counterpart to our Vytex materials and Vytex bedding products. Vystar products will help create a perfect natural sleep environment starting with Vytex bedding made from the purest latex in the world and UV Flu’s RxAir™ air purifier ensuring every breath is free of harmful pathogens, VOCs and odors.”

 

UV Flu products use 48 inches of high-intensity germicidal UV lamps that destroy bacteria, viruses and other germs instead of just trapping them, setting it apart from ordinary air filtration units. RxAir is one of the few UV air purifiers that have been proven in independent EPA- and FDA-certified testing laboratories to destroy on the first pass 99.6% of harmful airborne viruses and bacteria. In addition to inactivating airborne viruses that cause influenza (flu) and colds, RxAir’s device disarms the airborne pathogens that cause MRSA (staph), strep (whooping cough), tuberculosis (TB), measles, pneumonia and a myriad of other antibiotic-resistant and viral infections. (see news video with RX3000 in use)

 

UV Flu’s product line includes:

 

  RXair™ Residential Filterless Air Purifier
  UV400 ™ FDA cleared Class II Filterless Air Purifier
  RX3000™ Commercial FDA cleared Class II Air Purifier (news video with RX3000)

 

Vystar acquired all UV Flu intellectual property and multiple patents, product lines, tooling, FDA clearances, research data, websites and other assets related to the business for the purchase price of $975,000 or 27,918,000 shares of Vystar restricted common stock which may not be assigned or sold by UV Flu for 12 months.

 

In May of 2019, Vystar acquired the assets of Fluid Energy Conversion Inc. (“FEC”), primarily consisting of its patent on the Hughes Reactor, which has the ability to control, enhance, and focus energy in flowing liquids and gases. Included in stock subscription payable is $103,750 representing the shares to be issued to FEC in 2020 for these assets. Vystar intends to use this technology to enhance the effectiveness of Vystar’s RxAir purification system to destroy airborne pathogens while decreasing the cost and size of Vystar’s RxAir units.

 

In July of 2019, Vystar acquired 58% of the outstanding shares of common stock of Murida Furniture Co., Inc. dba Rotmans Furniture (“Rotmans”), the largest furniture and flooring store in New England and one of the largest independent furniture retailers in the U.S. Rotmans sells a broad line of residential furniture and decorative accessories and serves customers throughout the New England region. The acquisition is expected to add approximately $30 million in annual top line revenue and enable Vystar to capitalize on the infrastructure already in place at Rotmans for accounting, retail sales facilities and staff, customer service, warehousing, and delivery. In addition, Rotmans will offer significant marketing and advertising opportunities for all of Vystar’s brands to Rotmans’ thousands of existing customers. The Company and Rotmans are exploring a number of initiatives relating to environmentally friendly product development and distribution that will utilize the access to the capital markets afforded by this combination.

 

Manufacturing, Distribution and Sales

 

Vystar will continue production of UV Flu product lines with BOI, a world-class manufacturer. Vystar plans to sell RxAir residential and commercial units via Distributors, online and through retail channels.

 

Vystar is assembling the distribution network to relaunch sales of UV400 and Rx3000 units to the healthcare and medical markets, which UV Flu had ceased due to sales force, distribution and cash flow constraints. Once production and sales are firmly re-established, Vystar expects that the air purification products will produce margins of approximately 75%.

 

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UV Flu’s products have world class engineering, are made to the highest quality standards and are extremely effective in settings ranging from homes to offices, healthcare facilities, salons, restaurants and nursing homes.

 

About RxAir

 

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

 

Critical Accounting Policies and Estimates

 

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

 

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

 

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

 

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

 

Inventories

 

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

 

Revenue

 

We recognize revenue when we satisfy a performance obligation in a contract by transferring control over a product to a customer when product is shipped based on fulfillment by the Company. The Company considers fulfillment when it passes all liability at the point of shipping through third party carriers. Consideration is typically paid prior to shipment via credit card or check when our products are sold direct to consumers, which is typically within a 1 to 2 days or approximately 30 days from the time control is transferred when sold to wholesalers, distributors and retailers. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of product sales.

 

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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.

 

Accounting for Derivative Financial Instruments

 

The Company evaluates stock options, stock warrants, notes payable or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under the relevant sections of ASC 815-40, Derivative Instruments and Hedging: Contracts in Entity’s Own Equity. The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative instrument and is marked-to-market at each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income or other expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially classified as equity that become subject to reclassification under ASC 815-40 are reclassified to a liability account at the fair value of the instrument on the reclassification date.

 

Purchase Accounting for Acquisition

 

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

 

Leases

 

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

 

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RESULTS OF OPERATIONS

 

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

 

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

  

Revenues

 

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

 

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

 

Operating Expenses

 

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

 

Other Income (Expense)

 

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

 

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Net Loss

 

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

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. However, we have incurred significant losses and experienced negative cash flow since inception. At December 31, 2019, the Company had cash of $72,355 and a deficit in working capital of $6,762,671. For the year ended December 31, 2019, the Company had a net loss of $7,725,551 and an accumulated deficit of $41,104,967 . For the year ended December 31, 2018, the Company had a net loss of $5,401,222 and the accumulated deficit amounted to $33,400,345. We use working capital to finance our ongoing operations, and since those operations do not currently cover all of our operating costs, managing working capital is essential to our Company’s future success. Because of this history of losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.

 

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

 

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

 

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

 

A successful transition to profitable operations is dependent upon obtaining sufficient financing to fund the Company’s planned expenses and achieving a level of revenue adequate to support the Company’s cost structure. Management plans to finance future operations using cash on hand, as well as increased revenue from RxAir air purifier sales and Vytex license fees that now also include the Company’s association with foam cores made from Vytex used in mattresses, mattress toppers and pillows.

 

There can be no assurances that we will be able to achieve projected levels of revenue in 2020 and beyond. If we are not able to achieve projected revenue and obtain alternate additional financing of equity or debt, we would need to significantly curtail or reorient operations during 2020, which could have a material adverse effect on our ability to achieve our business objectives and as a result, may require the Company to file for bankruptcy or cease operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities that might be necessary should the Company be forced to take any such actions.

 

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

 

Off-Balance Sheet Arrangements

 

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

 

Certain Relationships and Related Transactions

 

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

 

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

 

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

 

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

 

In July 2019, the Company issued an additional 30 million shares to CMA to settle the shortfall. The details are as follows:

 

  Upon delivery of the 30 million shares for the second and third tranches, the debt was fully satisfied. CMA can sell the shares at least six months after issue at no less than $0.01399 per share (subject to adjustment for stock split, reorganization, recapitalization, reclassification, reverse stock split or stock dividend).

 

  The agreement specifies CMA must purchase up to 19 million shares of the Company if the average sale prices of the shares in the second and third tranches are at or above certain thresholds. There have been no additional purchases of Company shares by CMA.

 

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

 

Per Steven Rotman’s Employment agreement dated July 22, 2019, he is to be paid $125,000 per year in cash, $10,417 per month to be paid in shares based on a 20-day average price at a 50% discount to market, $5,000 per month in cash for expenses as well as access to a Company provided vehicle and health and life insurance. Under the terms of his previous employment agreement, he was paid approximately $1 per year in cash and $20,833 per month to be paid in shares based on a 20-day average at a 0% discount to market. During the year ended December 31, 2019, the Company issued Steven Rotman 28,016,022 shares that were accrued and expensed as of December 31, 2018. The Company expensed approximately $201,000 during the year ended December 31, 2019 related to 4,000,000 shares issued for Steven Rotman’s services as a Board Member of the Company. In addition, the Company accrued and expensed approximately $442,000 in 2019 related to approximately 12,771,000 shares to be issued in the future.

 

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

 

Designcenters.com (“Design”) is owned by Jamie Rotman, who is the daughter of the Company’s CEO, Steven Rotman. Design provided bookkeeping and management services to the Company through July 2019. In exchange for such services, the Company had entered into a consulting agreement with the related party entity. Per Design’s consulting agreement, it is to be paid approximately $7,100 per month in cash or shares based on a 20-day average at a 50% discount to market and a $10,000 quarterly bonus to be paid in shares using the same formula. During the year ended December 31, 2019, the Company issued Design 20,030,407 shares in accordance with the consulting agreement that were accrued and expensed in 2018. The Company expensed approximately $83,000 related to the consulting agreement during the year ended December 31, 2019. Of the expensed amount, approximately $41,000 was paid in cash, with the remaining $42,000 included in stock subscription payable for approximately 850,000 shares to be issued in the future.

 

27

 

 

Blue Oar Consulting, Inc. (“Blue Oar”) is owned by Gregory Rotman, who is the son of the Company’s CEO, Steven Rotman. Blue Oar provides business consulting services to the Company. In exchange for such services, the Company has entered into a consulting agreement with the related party entity. Per Blue Oar’s consulting agreement, it is to be paid approximately $15,000 per month in cash for expenses and $12,500 per month to be paid in shares based on a 20-day average at a 50% discount to market. During the year ended December 31, 2019, the Company issued Blue Oar 33,618,226 shares in accordance with the consulting agreement that were accrued and expensed in 2018. During the year ended December 31, 2019, the Company expensed approximately $510,000 related to the consulting agreement . Of the expensed amount, approximately $180,000 was paid in cash, with the remaining $330,000 included in stock subscription payable for approximately 10,562,000 shares to be issued in the future.

 

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

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

ITEM 8. Index to Financial Statements

 

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

 

28

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

  

To the Board of Directors and Stockholders of Vystar Corporation

 

Opinion on the Financial Statements

 

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

 

Going Concern

 

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

 

Basis for Opinion

 

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

 

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

 

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

 

 

 

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

 

Irvine, CA

 

July 6, 2020

 

F-1

 

 

VYSTAR CORPORATION

CONSOLIDATED BALANCE SHEETS

 

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

Deferred commission costs, net of current portion

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

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

   494,363    - 

Related party debt, net of current maturities and debt discount

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

 

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

 

F-2

 

 

VYSTAR CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

 

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

 

          
Total operating expenses    

11,294,257

     

3,671,356

 
           

Loss from operations

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

 

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

 

F-3

 

 

VYSTAR CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018

 

   Attributable to Vystar         
   Number       Number               Number       Total         
   of       of       Additional       of       Vystar       Total 
   Preferred   Preferred   Common   Common   Paid-in   Accumulated   Treasury   Treasury   Stockholders’   Noncontrolling   Stockholders’ 
   Shares   Stock   Shares   Stock   Capital   Deficit   Shares   Stock   Deficit   Interest   Deficit 
                                             
Ending balance December 31, 2017   13,828   $1    132,809,218   $13,280   $25,128,476   $(27,999,123)   -   $-   $(2,857,366)  $-   $(2,857,366)
                                                        
Common stock issued in acquisitions             55,687,500    5,569    2,925,450                   2,931,019         2,931,019 
                                                        
Common stock issued for signing bonus             721,408    72    34,734                   34,806         34,806 
                                                        
Share-based compensation - options                       1,161,132                   1,161,132         1,161,132 
                                                        
Common stock issued for cash received             54,999,997    5,500    159,500                   165,000         165,000 
                                                        
Common stock issued for conversion of payables             8,333,333    833    43,334                   44,167         44,167 
                                                        
Reclassification of derivative upon conversion                       500,359                   500,359         500,359 
                                                        
Relative fair value of warrants issued with convertible debt                       18,747                   18,747         18,747 
                                                        
Common stock and warrants issued for services             1,928,571    193    89,807                   90,000         90,000 
                                                        
Common stock issued upon conversion of convertible notes and settlement of debt             203,267,791    20,327    1,423,993                   1,444,320         1,444,320 
                                                        
Net loss   -    -    -    -    -    (5,401,222)   -    -    (5,401,222)   -    (5,401,222)
                                                        
Ending balance December 31, 2018   13,828   $1    457,747,818   $45,774   $31,485,532   $(33,400,345)   -   $-   $(1,869,038)  $-   $(1,869,038)
                                                        
Common stock issued for services             142,538,209     14,253      2,628,683                    2,642,936         2,642,936 
                                                        
Share based compensation - options                       50,789                   50,789         50,789 
                                                        
Common stock issued for settlement of warrants             77,912,991    7,791    386,459                   394,250         394,250 
                                                        
Common stock issued for cash received, net              155,226,844      15,522      590,778                    606,300         606,300 
                                                        
Common stock issued for conversion of related party line of credit             45,000,000    4,500    1,973,435                   1,977,935         1,977,935 
                                                        
Common stock issued upon conversion of convertible notes and settlement of derivatives             227,336,218    22,733    1,320,931                   1,343,664         1,343,664 
                                                        
Treasury stock repurchases                                 (30,000)   (30)   (30)        (30)
                                                        
Acquisition of noncontrolling interest                                           -    1,346,201    1,346,201 
                                                        
Net loss   -    -    -    -    -     (7,704,622 )   -    -     (7,704,622 )    (20,929 )    (7,725,551)
                                                        
Ending balance December 31, 2019   13,828   $1     1,105,762,080    $ 110,573    $ 38,436,607    $ (41,104,967 )   (30,000)  $(30)  $ (2,557,816 )  $ 1,325,272    $(1,232,544)

 

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

 

F-4

 

 

VYSTAR CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

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

1,079,450

    269,539 

Interest on derivative liabilities

   

741,725

     -  
Interest charged on related party line of credit   121,957    - 
Net unrealized gain on available-for-sale investments   (8,292)   - 
(Increase) decrease in assets:          
Accounts receivable   (5,131)   (15,769)
Stock subscription receivable     (49,250 )     (49,250 )
Inventories   424,988    (330,730)
Prepaid expenses and other assets   (375,990)   159,408 
Deferred commission costs   3,842    - 
Increase (decrease) in liabilities:          
Accounts payable   300,000    539,933 
Accrued expenses   134,263    601,803 
Unearned revenue   (8,051)   - 
Net cash used in operating activities    (1,513,997 )   (1,508,036)
           
Cash flows from investing activities:          
Patents and trademark fees   (9,519)   (3,598)
           
Cash flows from financing activities:          
Net borrowings on line of credit   39,449    - 
Proceeds of Fidelity Bank loan   -    500,000 
Repayment of long-term debt   (8,931)   (78,060)
Repayment of finance lease obligations   (32,921)   - 
Proceeds from the issuance of notes - related parties   713,700    195,635 
Repayment of notes payable - related parties   (19,793)   (4,940)
Proceeds from the issuance of notes, net   -    786,050 
Repayment of convertible notes   (146,206)   - 
Issuance of common stock, net of costs    1,000,550     149,500 
Treasury stock repurchases   (30)   - 
           
Net cash provided by financing activities    1,545,818     1,548,185 
           
Net increase in cash   22,302    36,551 
           
Cash - beginning of year   50,053    13,502 
           
Cash - end of year  $72,355   $50,053 
           
Cash paid during the year for:          
Interest  $ 410,164    $93,540 
           
Non-cash transactions:          
Purchase of tangible and intangible assets with common stock  $103,750   $2,925,450 
Purchase of tangible and intangible assets with long-term debt (see Note 18)    2,030,000    - 
Shareholder and convertible notes and accrued interest payable converted to common stock   1,343,664    1,467,325 
Common stock issued for accrued compensation   771,203    - 
Common stock issued for settlement of related party line of credit   1,977,935    - 
Common stock issued for settlement of warrant exercises   32,442    - 
Shareholder advances to related party on behalf of the Company   180,000    - 
Derivatives issued as a debt discount   722,875    430,579 

Settlement of derivative liabilities

   1,279,335    500,359 

 

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

 

F-5

 

 

VYSTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2019 and 2018

 

NOTE 1 - DESCRIPTION OF BUSINESS

 

History and Nature of Business

 

Vystar Corporation (“Vystar”, the “Company”, “we,” “us,” or “our”) is based in Worcester, Massachusetts. The Company uses patented technology to produce a line of innovative air purifiers, which destroy viruses and bacteria through the use of ultraviolet light. Vystar also manufactures and sells reduced allergen natural rubber latex used primarily in various bedding products. In addition, Vystar has a majority ownership in Murida Furniture Co., Inc. dba Rotmans Furniture (“Rotmans”), the largest furniture and flooring store in New England and one of the largest independent furniture retailers in the U.S.

 

Vystar is the creator and exclusive owner of the innovative technology to produce Vytex® Natural Rubber Latex (“NRL”). Vytex NRL uses a global multi-patented technology and proprietary formulation to reduce non-rubber particles including the antigenic proteins associated with latex allergies, resulting in a cleaner form of latex. The antigenic protein levels are reduced to virtually undetectable levels. On January 22, 2015, Vystar announced the signing of an exclusive domestic distribution agreement with Worcester, MA based Nature’s Home Solutions who sources eco-friendly materials and technologies for use in furnishings and other markets. On March 4, 2015, the Company announced that Hartford, CT based Gold Bond formed a strategic alliance with NHS Holdings, LLC (“NHS”) to produce and market the world’s first Vytex NRL based mattress. In June 2015, the first mattresses made with Vytex (hybrid and pure Vytex) were placed on the sales floor at Rotmans in Worcester, MA using the “Evaya” brand and Gold Bond had shipped four versions of their “Brilliance” inner coil and pure foam mattresses (Emerald, Ruby, Sapphire Plush and Sapphire Firm) to over 30 stores from Maine to Florida.

 

In April of 2018, Vystar acquired the assets of NHS Holdings, LLC executing on the first part of the Company’s vision to move into direct product offerings made from Vytex® latex. NHS was the exclusive U.S. distributor of Vystar’s Vytex® natural rubber latex foam to manufacturers for use in over 200 home furnishings products, including mattresses, toppers, pillows and upholstery, sold through multiple channels. This acquisition provides Vystar with roll packing and cutting equipment to support our bedding manufacturing partners, while lowering the cost of Vytex to the manufacturer by eliminating the middleman.

 

In May of 2018, Vystar acquired substantially all of the assets of UV Flu Technologies, Inc., formerly traded on the OTC under the ticker UVFT, whose patented ViraTech™ UV light air purification technology destroys greater than 99% of airborne bacteria, viruses and other microorganisms and virtually eliminates concentrations of odors and volatile organic compounds (“VOCs”).

 

As part of Vystar’s mission to offer eco-friendly, sustainable materials and products that create a better environment for consumers and workers throughout the product lifecycle, UV Flu Technologies is an excellent counterpart to our Vytex materials and Vytex bedding products. Vystar products will help create a perfect natural sleep environment starting with Vytex bedding made from the purest latex in the world and UV Flu Technologies’ RxAir™ air purifier ensuring every breath is free of harmful pathogens, VOCs and odors.

 

In May of 2019, Vystar acquired the assets of Fluid Energy Conversion Inc. (“FEC”), primarily consisting of its patent on the Hughes Reactor, which has the ability to control, enhance, and focus energy in flowing liquids and gases. Vystar intends to use this technology to enhance the effectiveness of Vystar’s RxAir purification system to destroy airborne pathogens while decreasing the cost and size of Vystar’s RxAir units.

 

In July of 2019, Vystar acquired 58% of the outstanding shares of common stock of Rotmans. Rotmans sells a broad line of residential furniture and decorative accessories and serves customers throughout the New England region. The acquisition is expected to add approximately $30 million in annual top line revenue and enable Vystar to capitalize on the infrastructure already in place at Rotmans for accounting, retail sales facilities and staff, customer service, warehousing, and delivery. In addition, Rotmans will offer significant marketing and advertising opportunities for all of Vystar’s brands to Rotmans’ thousands of existing customers. The Company and Rotmans are exploring a number of initiatives relating to environmentally friendly product development and distribution that will utilize the access to the capital markets afforded by this combination.

 

F-6

 

 

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

 

Basis of Presentation

 

The consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification.

 

The Company has evaluated subsequent events through the date of the filing of its Form 10-K with the Securities and Exchange Commission. Other than those events disclosed in Note 19, the Company is not aware of any other significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on the Company’s financial statements.

 

Basis of Consolidation

 

The consolidated financial statements include the accounts of the Company and its wholly-owned or controlled operating subsidiaries. All significant intercompany accounts and transactions have been eliminated.

 

Segment Reporting

 

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

 

Estimates

 

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

 

Fair Value of Financial Instruments

 

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

 

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

 

F-7

 

 

Valuation inputs are classified in the following hierarchy:

 

  Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

 

  Level 2 inputs are directly or indirectly observable valuation inputs for the asset or liability, excluding Level 1 inputs.

 

  Level 3 inputs are unobservable inputs for the asset or liability.

 

Highest priority is given to Level 1 inputs and the lowest priority to Level 3 inputs. Acceptable valuation techniques include the market approach, income approach, and cost approach. In some cases, more than one valuation technique is used. The derivative liabilities were recognized at fair value on a recurring basis through the date of the settlement and December 31, 2019 and 2018 and are level 3 measurements. There have been no transfers between levels during the year ended December 31, 2019.

 

Acquisitions

 

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

 

Cash and Cash Equivalents

 

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

 

Accounts Receivable

 

Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company routinely sells, without recourse, trade receivables resulting from retail furniture sales to various financial institutions at an average service charge of 6.6% in 2019. Amounts sold during the period from the Rotmans acquisition of July 18, 2019 through December 31, 2019 was $4,123,000. Retail furniture receivables retained by the Company are generally collateralized by the merchandise sold, represent valid claims against debtors for sales arising on or before the balance sheet date and are reduced to their estimated net realizable value. In addition, the Company grants credit to Vytex customers without requiring collateral. The amount of accounting loss for which Vystar is at risk in these unsecured accounts receivable is limited to their carrying value. Management provides for uncollectible amounts through a charge to earnings and a credit to an allowance for doubtful accounts based upon its assessment of the current status of individual accounts. Balances that are still outstanding after management has performed reasonable collection efforts are written off through a charge to the allowance and a credit to accounts receivable. As of December 31, 2019 and 2018, the Company considers accounts receivable to be fully collectible and no allowance for doubtful accounts was recorded.

 

Inventories

 

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

 

Prepaid Expenses and Other Assets

 

Prepaid expenses and other assets include amounts related to prepaid insurance policies, which are expensed on a straight-line basis over the life of the underlying policy, and other expenses.

 

F-8

 

 

Investments - Equity Securities

 

Marketable equity securities have been categorized as available-for-sale and, as a result, are stated at fair value. Unrealized gains and losses are reflected in the statement of operations. The Company periodically reviews the available-for-sale securities for other than temporary declines in fair value below cost and more frequently when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As of December 31, 2019, the Company believes that the c arrying value of the available-for-sale securities was recoverable in all material respects.

 

Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation. Depreciation is provided over the estimated useful lives of the assets, generally 5 to 10 years, using straight-line and accelerated methods.

 

Expenditures for major renewals and betterments are capitalized, while routine repairs and maintenance are expensed as incurred. When property items are retired or otherwise disposed of, the asset and related reserve accounts are relieved of the cost and accumulated depreciation, respectively, and the resultant gain or loss is reflected in earnings. As of December 31, 2019, the net balance of property and equipment is $1,879,739 with accumulated depreciation of $208,799. As of December 31, 2018, the net balance of property and equipment is $291,346 with accumulated depreciation of $31,485.

 

Intangible Assets

 

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

 

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

 

Customer relationships, tradename and marketing related intangibles are carried at cost and are being amortized on a straight-line basis over their estimated useful lives, typically ranging from 5 to 10 years. See Note 18 for further discussion.

 

Long-Lived Assets

 

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. We evaluate assets for potential impairment by comparing estimated future undiscounted net cash flows to the carrying amount of the assets. If the carrying amount of the assets exceeds the estimated future undiscounted cash flows, impairment is measured based on the difference between the carrying amount of the assets and fair value. Assets to be disposed of would be separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet, if material. During the year ended December 31, 2019, we did not recognize any impairment of our long-lived assets. During the year ended December 31, 2018, we recognized an impairment charge of $848,462 related to the increase in the value of the Company’s common stock from the time of negotiation to closing and the fair value of the underlying assets.

 

Goodwill

 

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

 

F-9

 

 

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

 

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

 

The following table reflects goodwill activity for the years ended December 31, 2019 and 2018:

 

    2019     2018  
             
Balance, beginning of the year   $ 147,092     $ -  
                 
Acquisitions     313,210       995,554  
                 
Loss on impairment     -       (848,462 )
                 
Balance, end of the year   $ 460,302     $ 147,092  

 

Convertible Notes Payable

 

Borrowings are recognized initially at the principal amount received. Borrowings are subsequently carried at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized as interest expense in the statements of operations over the period of the borrowings using the effective interest method.

 

Derivatives

 

The Company evaluates its debt instruments or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under the relevant sections of Accounting Standards Codification (“ASC”) Topic 815-40, Derivative Instruments and Hedging: Contracts in Entity’s Own Equity. The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative instrument and is marked-to-market at each balance sheet date and recorded as a liability. In the event the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations as other income or other expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815-40 are reclassified to a liability account at the fair value of the instrument on the reclassification date.

 

The Company applies the accounting standard that provides guidance for determining whether an equity-linked financial instrument, or embedded feature, is indexed to an entity’s own stock. The standard applies to any freestanding financial instrument or embedded features that have the characteristics of a derivative, and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. From time to time, the Company has issued notes with embedded conversion features. Certain of the embedded conversion features contain price protection or anti-dilution features that result in these instruments being treated as derivatives for accounting purposes. Accordingly, during the years ended December 31, 2019 and 2018, the Company has classified all conversion features as derivative liabilities and has estimated the fair value of these embedded conversion features using a Monte Carlo simulation model.

 

Unearned Revenue

 

Unearned revenue consists of customer advance payments, deposits on sales of undelivered merchandise and deferred warranty revenue on self-insured stain protection warranty coverage. During the year ended December 31, 2019, all of the recognized revenue related to deferred revenues which originated from the acquisition of Rotmans.

 

Changes to unearned revenue during the year ended December 31, 2019 are summarized as follows:

 

Balance, beginning of the year   $ -  
         
Balance acquired with acquisition     2,508,623  
         
Customer deposits received     11,392,251  
         
Warranty coverage purchased     229,646  
         
Gift cards purchased     17,750  
         
Revenue earned     (11,647,698 )
         
Balance, end of the year   $ 2,500,572  

 

F-10

 

 

Loss Per Share

 

The Company presents basic and diluted loss per share. Because the Company reported a net loss in 2019 and 2018, common stock equivalents, including stock options and warrants, were anti-dilutive; therefore, the amounts reported for basic and dilutive loss per share were the same. Excluded from the computation of diluted loss per share were options to purchase 27,983,271 and 29,098,271 shares of common stock for 2019 and 2018, respectively, as their effect would be anti-dilutive. Warrants to purchase 14,237,646 and 15,488,832 shares of common stock for 2019 and 2018, respectively, were also excluded from the computation of diluted loss per share as their effect would be anti-dilutive. In addition, preferred stock convertible to 4,591,100 and 4,314,537 shares of common stock and common shares to be issued for share-based compensation of 24,939,402 and 108,871,543 in 2019 and 2018, respectively, were excluded from the computation of diluted loss per share as their effect would be anti-dilutive.

 

Revenue

 

On January 1, 2018, we adopted FASB ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”). The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects to receive in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance.

 

We reviewed all contracts at the date of initial application and elected to use the modified retrospective transition method, where the cumulative effect of the initial application is recognized as an adjustment to opening retained earnings at January 1, 2018. The adoption of the new revenue recognition guidance on January 1, 2018 was immaterial to our consolidated financial statements.

 

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

 

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

 

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

 

The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation. The transaction price is determined based on the consideration to which we will be entitled to receive in exchange for transferring goods to the customer. We issue refunds to retail, e-commerce and print media customers, upon request, within 30 days of delivery. We estimate the amount of potential refunds at each reporting period using a portfolio approach of historical data, adjusted for changes in expected customer experience, including seasonality and changes in economic factors. For retailers, distributors and wholesalers, we do not offer a right of return or refund and revenue is recognized at the time products are shipped to customers. In all cases, judgment is required in estimating these reserves. Actual claims for returns could be materially different from the estimates. As of December 31, 2019 and 2018, reserves for estimated sales returns totaled $3,000 and are included in the accompanying consolidated balance sheets as accrued expenses.

 

F-11

 

 

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

 

The Company also defers revenues for separately-priced stain protection warranty coverage for which it is ultimately self-insured. Revenue is recognized from the extended warranty sales on a straight-line basis over the respective contract term. The extended warranty terms primarily range from three to five years from the date of delivery. At December 31, 2019, deferred warranty revenue is approximately $1,309,000 and is included in unearned revenue in the accompanying consolidated balance sheets. During the year ended December 31, 2019, the Company recorded total proceeds of approximately $230,000 and recognized total revenues of approximately $245,000 related to deferred warranty revenue arrangements. Commission costs in obtaining extended warranty contracts are capitalized and recognized as expense on a straight-line basis over the period of the warranty contract. At December 31, 2019, deferred commission costs are approximately $346,000 and included in the accompanying consolidated balance sheets. All other costs, such as costs of services performed under the contract, general and administrative expenses, and advertising costs are expensed as incurred.

 

Cost of Revenue

 

Cost of revenue consists primarily of product and freight costs and fees paid to online retailers.

 

Research and Development

 

Research and development costs are expensed when incurred. Research and development costs include all costs incurred related to the research, development and testing of the Company’s process to produce Vytex NRL.

 

Vytex NRL has produced protein test results on finished products that are both “below detection” and “not detectable” in terms of the amount of proteins remaining in these finished goods made with Vytex NRL. These results have been reproduced in many subsequent tests. For the years ended December 31, 2019 and 2018, Vystar’s research and development costs were not significant.

 

Advertising Costs

 

Advertising costs, which include television, radio, newspaper and other media advertising, are expensed upon first showing. Advertising costs included in general and administrative expenses in the accompanying consolidated statements of operations were approximately $1,050,000 and $77,000 for the years ended December 31, 2019 and 2018, respectively.

 

Share-Based Compensation

 

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

 

F-12

 

 

Income Taxes

 

Vystar recognizes income taxes on an accrual basis based on a tax position taken or expected to be taken in its tax returns. A tax position is defined as a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets or liabilities. Tax positions are recognized only when it is more likely than not (i.e., likelihood of greater than 50%), based on technical merits, that the position would be sustained upon examination by taxing authorities. Tax positions that meet the more likely than not threshold will be measured using a probability-weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. A valuation allowance is established to reduce deferred tax assets if all, or some portion, of such assets will more likely than not be realized. Should they occur, interest and penalties related to tax positions are recorded as interest expense. No such interest or penalties have been incurred for the years ended December 31, 2019 and 2018.

 

The Company remains subject to income tax examinations from Federal and state taxing jurisdictions for 2016 through 2019.

 

Concentration of Credit Risk

 

Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of cash and accounts receivable. Cash held in operating accounts may exceed the Federal Deposit Insurance Corporation, or FDIC, insurance limits. While the Company monitors cash balances in our operating accounts on a regular basis and adjust the balances as appropriate, these balances could be impacted if the underlying financial institutions fail. To date, the Company has experienced no loss or lack of access to our cash; however, the Company can provide no assurances that access to our cash will not be impacted by adverse conditions in the financial markets. Credit concentration risk related to accounts receivable is mitigated as customer credit is checked prior to the sales and accounts receivable consists of a high number of relatively small balances.

 

Other Risks and Uncertainties

 

The Company is exposed to commodity price risk, mainly associated with variations in the market price for NRL as well as wintering of the Hevea trees, which differs for each country. The timing and magnitude of industry cycles are difficult to predict and are impacted by general economic conditions including the buying climate in China. The Company responds to changes in NRL prices by adjusting sales prices on a weekly basis and by turning rather than holding inventory in anticipation of higher prices. The Company actively manages its exposure to commodity price risk and monitors the actual and expected spread between forward selling prices and purchase costs and processing and shipping expense. The Company also currently spreads the processing of Vytex NRL among three continents. Sales contracts are based on forward market prices, and generally orders are placed 30 to 90 days ahead of shipment date due to these fluctuations. However, financial results may be negatively impacted where selling prices fall more quickly than purchase price adjustments can be made or when levels of inventory have an anticipated net realizable value that is below cost. The Company is also exposed to risks pertinent to the operations of a retailer, including, but not limited to, the ability to acquire new customers and maintain a strong brand as well as broader economic factors such as interest rates and changes in customer spending patterns.

 

Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 requires lessees to recognize the assets and liabilities on their balance sheet for the rights and obligations created by most leases and continue to recognize expenses on their income statements over the lease term. It will also require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted. The Company has adopted this standard (see Note 7), and it had no significant impact upon adoption but significant impact to the Company’s balance sheet upon the acquisition of Rotmans (see Note 18).

 

F-13

 

 

In January 2017, the FASB issued ASU 2017-04, Intangibles—Goodwill and Other (“ASC 350”), Simplifying the Test for Goodwill Impairment. The guidance removes Step 2 of the goodwill impairment test and eliminates the need to determine the fair value of individual assets and liabilities to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The guidance will be applied prospectively and is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for any impairment tests performed on testing dates after January 1, 2017. The Company has adopted ASU 2017-04 and no impairment was recorded on its financial statements.

 

In July 2017, the FASB issued ASU 2017-11, Earnings per share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivatives and Hedging (Topic 815): Accounting for Certain Financial Instruments with Down Round Features. The update addresses the complexity of accounting for certain financial instruments with “down round” features and the liability or equity classification of financial instruments with warrants or convertible features. The guidance eliminates the requirement to consider “down round” features when determining whether certain equity-linked financial instruments or embedded features are indexed to an entity’s own stock. The ASU is effective for annual periods beginning after December 15, 2018, and for interim periods within those years, with early adoption permitted. The Company has adopted ASU 2017-11 and it did not have a material impact on its financial statements.

 

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718) to expand the scope of ASC 718, Compensation - Stock Compensation (Topic 718) (“ASU 2017-07”), to include share-based payment transactions for acquiring goods and services from non-employees. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company has adopted ASU 2018-17 and it did not have a material impact on its financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements, including eliminating the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and requiring the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption, either of the entire standard or only the provisions that eliminate or modify requirements, is permitted. The Company has evaluated the disclosure requirements of this standard and does not expect it to have a material impact on the Company’s financial statements.

 

NOTE 3 - LIQUIDITY AND GOING CONCERN

 

The Company’s financial statements are prepared using the accrual method of accounting in accordance with U.S. GAAP and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. However, the Company has incurred significant losses and experienced negative cash flow since inception. At December 31, 2019, the Company had cash of $72,355 and a deficit in working capital of approximately $6.8 million. Further, at December 31, 2019 the accumulated deficit amounted to approximately $41.1 million. We use working capital to finance our ongoing operations, and since those operations do not currently cover all our operating costs, managing working capital is essential to our Company’s future success. Because of this history of losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.

 

F-14

 

 

A successful transition to attaining profitable operations is dependent upon obtaining sufficient financing to fund the Company’s planned expenses and achieving a level of revenue adequate to support the Company’s cost structure. Management plans to finance future operations using cash on hand, increased revenue from RxAir air purification units and Vytex license fees that now also include the Company’s association with foam cores made from Vytex used in mattresses, mattress toppers and pillows, and stock warrant exercises from existing shareholders. The Company has also focused the efforts of key internal employees on the goal of creating efficiencies in each department in our retail furniture business, including purchasing, marketing, inventory control, advertising, accounting, warehousing and customer service. In addition, the Company has invested in new accounting and operations software, which will improve our ability to control inventory levels and monitor the financial performance of our operations.

 

There can be no assurances that the Company will be able to achieve projected levels of revenue in 2020 and beyond. If the Company is not able to achieve projected revenue and obtain alternate additional financing of equity or debt, the Company would need to significantly curtail or reorient operations during 2020, which could have a material adverse effect on the ability to achieve the business objectives, and as a result, may require the Company to file bankruptcy or cease operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities that might be necessary should the Company be forced to take any such actions.

 

The Company’s future expenditures will depend on numerous factors, including: the rate at which the Company can introduce RxAir air purification units and license Vytex NRL raw materials and foam cores made from Vytex to manufacturers, and subsequently retailers; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; market acceptance of the Company’s products, services and competing technological developments; the Company’s ability to successfully realize synergies through the integration of the merged companies, acquire new customers and maintain a strong brand; the success of our efforts to reduce expenses in our retail furniture business; and broader economic factors such as interest rates and changes in customer spending patterns. As the Company expands its activities and operations, cash requirements are expected to increase at a rate consistent with revenue growth after the Company has achieved sustained revenue generation.

 

NOTE 4 - INVESTMENTS – EQUITY SECURITIES

 

Cost and fair value of investments - equity securities are as follows as of December 31, 2019:

 

    Gross   Fair 
Cost   Unrealized Gains   Value 
             
$141,225   $8,292   $149,517 

 

Net unrealized holding gains on available-for-sale securities were approximately $8,000 since the date of the Rotmans acquisition and have been included in other income (expense) in the accompanying statements of operations. There were no investments – equity securities prior to the Rotmans acquisition in July 2019. Investments represent equity securities in a publicly traded company.

 

F-15

 

 

NOTE 5 - PROPERTY AND EQUIPMENT

 

Property and equipment, net consists of the following at December 31:

 

   2019   2018 
         
Furniture, fixtures and equipment  $1,354,665   $3,831 
Tooling and testing equipment   319,000    319,000 
Parking lots   365,707    - 
Motor vehicles   49,166    - 
           
    2,088,538    322,831 
Accumulated depreciation   (208,799)   (31,485)
           
Property and equipment, net  $1,879,739   $291,346 

 

Depreciation expense for the years ended December 31, 2019 and 2018 was $177,314 and $31,485, respectively.

 

NOTE 6 - INTANGIBLE ASSETS

 

Intangible assets consist of the following at December 31:

 

           Amortization
           Period
   2019   2018   (in Years)
Amortized intangible assets:             
Customer relationships  $210,000   $100,000   6 - 10
Proprietary technology   610,000    610,000   10
Tradename and brand   1,380,000    610,000   5 - 10
Marketing related   380,000    -   5
Patents   355,418    242,149   6 - 20
Noncompete   50,000    50,000   5
              
Total   2,985,418    1,612,149    
Accumulated amortization   (504,878)   (237,302)   
              
Intangible assets, net   2,480,540    1,374,847    
Indefinite-lived intangible assets:             
Trademarks   9,072    9,072    
              
Total intangible assets  $2,489,612   $1,383,919    

 

Amortization expense for the years ended December 31, 2019 and 2018 was $267,576 and $113,561, respectively. Estimated future amortization expense for finite-lived intangible assets is as follows:

 

F-16

 

 

   Amount 
     
2020  $416,955 
2021   416,955 
2022   416,955 
2023   410,344 
2024   375,288 
Thereafter   444,043 
      
Total  $2,480,540 

 

As discussed in Note 18, amortized intangible assets of $1,260,000 were recognized with the acquisition of Rotmans. In addition, patents increased $103,750 with the acquisition of FEC in May of 2019. Included in stock subscription payable is $103,750 representing the shares to be issued to FEC in 2020 for these assets. In determining the fair value of the intangible assets related to the purchase, the Company considered, among other factors, the best use of the acquired assets, analysis of historical financial performance of the Company and estimates of future performance. This helped determine the fair values of the identified intangibles assets related to customer relationships, tradename and brand and marketing.

 

NOTE 7 - LEASES

 

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

 

The table below presents the lease costs for the year ended December 31, 2019:

 

   Year Ended 
   December 31, 2019 
     
Operating lease cost  $724,609 
      
Finance lease cost:     
      
Amortization of right-of-use assets   37,121 
Interest on lease liabilities   4,826 
      
Total lease cost  $766,556 

 

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

 

F-17

 

 

The following table presents other information related to leases:

 

   Year Ended December 31, 2019 
     
Cash paid for amounts included in the measurement of lease liabilities:     
      
Operating cash flows used for operating leases  $635,377 
Financing cash flows used for financing leases  $32,921 
      
Assets obtained in exchange for operating lease liabilities  $

10,215,153

 
      
Assets obtained in exchange for finance lease liabilities  $880,189 
      
Weighted average remaining lease term:     
Operating leases   9 years 
Finance leases   6 years 
      
Weighted average discount rate:     
Operating leases   5.53%
Finance leases   5.16%

 

The future minimum lease payments required under operating and financing lease obligations as of December 31, 2019 having initial or remaining non-cancelable lease terms in excess of one year are summarized as follows:

 

   Operating Leases   Finance Leases   Total 
             
2020  $ 1,500,616    $ 200,568    $ 1,701,184  
2021   1,503,643     191,805      1,695,448  
2022    1,153,799      137,203      1,291,002  
2023    878,807      136,402      1,015,209  
2024   870,000     126,262      996,262  
Thereafter    5,292,500      186,865      5,479,365  
                      
Total undiscounted lease liabilities    11,199,365      979,105      12,178,470  
Less: imputed interest    (2,637,694 )    (133,858 )    (2,771,552 )
                      
Net lease liabilities  $ 8,561,671    $ 845,247    $9,406,918 

 

As of December 31, 2019, the Company has an additional finance lease that will commence in January 2020. The right of use asset totals $75,739 and requires monthly installments of $1,145 for 78 months.

 

NOTE 8 - NOTES PAYABLE AND LOAN FACILITY

 

Line of Credit

 

The Company has a $2,500,000 revolving line of credit with Fidelity Co-operative Bank. Advances are limited to 50% of eligible inventory and bear interest at the prime rate plus 0.50% with a floor of 3.75%. The interest rate was 5.25% at December 31, 2019. The line of credit is due upon demand and is subject to renewal annually. It is secured by all assets of the Company. The credit line is subject to certain financial and non-financial covenants. The Company was not in compliance with certain covenants as of December 31, 2019 and was in default in March 2020. The credit line was subsequently paid off on May 29, 2020. See Note 19 for additional discussion. Indebtedness to existing and future Rotman Family notes were subordinated to the bank debt. The line was also secured with a mortgage on a property of a wholly-owned entity of Steven Rotman.

 

Borrowings under this agreement at December 31, 2019 were approximately $2,414,000.

 

F-18

 

 

Related Party Line of Credit (CMA Note Payable)

 

On November 2, 2012, the Company executed a $1,500,000 unsecured line of credit agreement with CMA Investments, LLC (“CMA”), a related party and a Georgia limited liability company (the “CMA Note”). Three of the directors of the Company (“CMA directors”) were initially the members of CMA Investments, LLC. Pursuant to the terms of the CMA Note, interest is computed at LIBOR plus 5.25% on amounts drawn and fees.

 

In July 2018, the Company issued 15 million shares in escrow, which CMA began to sell in March 2019 at the end of the six-month restrictive period. The shares were sold at their discretion to bring down the balance of the CMA Note. In accordance with the agreement, CMA had to sell all shares at no less than $0.035 per share. As of September 30, 2019, the Company reduced the amounts due by $0.9 million of the $1.5 million CMA Note through the issuance and sale of 15 million shares of its common stock that were previously held in escrow. The total value received upon the sale of the 15 million shares was less than the total obligation outstanding after all shares were sold through April 2019.

 

In July 2019, the Company issued an additional 30 million shares to CMA to settle the shortfall. The details are as follows:

 

  Upon delivery of the 30 million shares for the second and third tranches, the debt was fully satisfied. CMA can sell the shares at least six months after issue at no less than $0.01399 per share (subject to adjustment for stock split, reorganization, recapitalization, reclassification, reverse stock split or stock dividend).
     
  The agreement specifies CMA must purchase up to 19 million shares of the Company if the average sale prices of the shares in the second and third tranches are at or above certain thresholds. There have been no additional purchases of Company shares by CMA through June 2020.

 

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

 

Term Notes

 

During the year ended December 31, 2018, certain investors guaranteed $100,000 each with Fidelity Bank to establish a $500,000 revolving line of credit. At the present time, the Company is paying interest only at a rate of 4.5% per annum, with a balloon payment of $500,000 due in 2033. The balance is $500,000 as of December 31, 2019 and 2018.

 

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

 

Shareholder, Convertible and Contingently Convertible Notes Payable

 

The following table summarizes shareholder, convertible and contingently convertible notes payable as of December 31:

 

   2019   2018 
         
Shareholder, convertible and contingently convertible notes  $951,895   $542,528 
Accrued interest   46,569    35,140 
Debt discount   (137,775)   (73,519)
           
    860,689    504,149 
Less: current maturities   (366,326)   (504,149)
           
   $494,363   $- 

 

F-19

 

 

Shareholder Convertible Notes Payable

 

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

 

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

 

Based on the variable conversion price, the Company recorded derivative liabilities of $442,934 at December 31, 2019.

 

F-20

 

 

Convertible and Contingently Convertible Notes Payable

 

The following table summarizes convertible and contingently convertible notes payable as of December 31:

 

    2019     2018  
             
Power Up Lending Group LTD   $ -     $ 149,305  
Crown Bridge Partners, LLC     -       50,000  
Auctus Fund LLC     -       9,375  
EMA Financial LLC     -       653  
First Fire Global Opportunities Fund, LLC     -       (5,000 )
                 
      -       204,333  
Accrued interest     -       21,139  
Debt discount     -       (73,519 )
                 
    $ -     $ 151,953  

 

From January 1, 2018 and through the date of these consolidated financial statements, the Company had issued certain convertible and contingently convertible notes payable in varying amounts, in the aggregate of $710,000. The face amount of the notes represented the amount due at maturity along with the accrued interest, at which time that amount may be converted into shares of the Company stock based on the lowest 2 day closing price for the trailing 20 days prior to conversion and carrying a 35% discount. The convertible and contingently convertible notes provided for interest to accrue at an interest rate equal to 12% per annum or the maximum rate permitted under applicable law after the occurrence of any event of default as provided in the notes. At any time after 180 days from the issue date, the holder, at its option, may convert the outstanding principal balance and accrued interest into shares of common stock of the Company. The initial conversion price for the principal and interest in connection with voluntary conversions by a holder of the convertible and contingently convertible notes ranges from $0.05 to $0.10 per share, subject to adjustment as provided therein. The total outstanding balance of the convertible and contingently convertible notes was converted as of December 31, 2019 into approximately 303 million shares of the Company’s common stock. Based on the variable conversion price, the Company recorded initial derivative liabilities of $465,905. The remaining balance of $235,085, net of discount, as of December 31, 2018 was reduced to zero in 2019 after a change in fair value of $1,044,250 and a decrease of $1,279,335 to the balance of the derivative liabilities upon the date all notes were converted.

 

In connection with the issuance of the convertible and contingently convertible notes, the Company issued warrants to purchase 411,875 shares of the Company’s common stock. The exercise term of the warrants ranges from issuance to any time on or after the six (6) month anniversary or prior to the maturity of the related note. The exercise price of the warrants is $0.40 per share of the Company’s common stock, as may be adjusted from time to time pursuant to the antidilution provisions of the related warrant. Pursuant to ASU 2017-11, such antidilution features do not subject the Company to derivative accounting pursuant to ASC 815. All warrants were forfeited during the year ended December 31, 2019 upon negotiation and conversion of the remaining outstanding balances.

 

Peak One Opportunity Fund, L.P.

 

During the year ended December 31, 2018, the Company entered into a financing agreement with Peak One Opportunity Fund, L.P. to receive $435,000 of original issue discount notes in three tranches as follows:

 

  1. July 17, 2018, principal $85,000 with an imputed interest rate of 6%, discounted by 10%, and $5,000 for legal fees, for a net of $71,500 due three years from the funding date. The Company has the option of receiving two additional amounts ninety days apart;
     
  2. September 14, 2018: $150,000 principal, $135,000 net.
     
  3. November 13, 2018: a final $200,000 principal, $180,000 net.

 

Peak One Opportunity Fund is entitled to convert the note into common stock at a price equal to 65% of the lowest traded price for the twenty trading days immediately preceding the date of the date of conversion. The Company had the option to redeem the note at varying prices based upon the redemption date. As of December 31, 2018, the entire balance had been converted into shares of common stock.

 

Crown Bridge Partners, LLC

 

During the year ended December 31, 2018, the Company entered into a financing agreement with Crown Bridge Partners, LLC to receive $100,000 of original issue discount notes in two tranches as follows:

 

  1. August 6, 2018: principal $50,000 bearing interest at 8%, discounted by 10%, and $2,000 for legal fees, for a net of $43,000 due one year from the funding date;
     
  2. The remaining tranche may be funded at the holder’s discretion.

 

F-21

 

 

Crown Bridge Partners has converted the first tranche into common stock at a price equal to 65% of the average of the two lowest traded prices for the twenty-five trading days immediately preceding the date of the date of conversion. As of December 31, 2019, the entire balance has been converted into 32,240,000 shares of common stock.

 

Other Notes Payable

 

The following notes were also convertible after six months from the issue date:

 

   Face   Interest       Net Cash   Amount 
Issue Date and Name  Amount   Rate    Maturity   Proceeds   Converted/Paid 
                     
Jan 29, 2018 EMA  $80,000    12%   Jan 29, 2019   $72,300   $80,000 
Feb 14, 2018 Auctus  $80,000    12%   Nov 14, 2018   $72,500   $80,000 
Feb 13, 2018 FirstFire Global  $76,500    5%   Nov 13, 2018   $72,500   $81,500 
May 2, 2018 Power Up #3  $83,000    12%   May 23, 2019   $80,000   $83,000 
Oct 10, 2018 Power Up #4  $103,000    12%   Oct 10, 2019   $103,000   $103,000 

 

During the year ended December 31, 2019, approximately $63,000 of the convertible notes above and approximately $21,000 of accrued interest were exchanged for approximately 227,000,000 shares of common stock. In addition, approximately $142,000 of the Power Up notes have been settled in cash. All convertible notes above have been paid in full or fully converted as of December 31, 2019.

 

Related Party Debt

 

The following table summarizes related party debt as of December 31, 2019:

 

   2019 
     
Rotman Family convertible notes  $1,782,707 
Rotman Family nonconvertible notes   507,500 
Accrued interest    53,152  
Debt discount   (585,100)
      
     1,758,259  
Less: current maturities   (46,000)
      
   $ 1,712,259  

 

Rotman Family Convertible Notes

 

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

 

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

 

F-22

 

 

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

 

Based on the variable conversion price for all of these convertible notes, the Company recorded derivative liabilities of $1,056,866 at December 31, 2019.

 

Rotman Family Nonconvertible Notes

 

In connection with the acquisition of 58% of Rotmans (see Note 18), Steven and Bernard Rotman were issued related party notes payable in the amounts of $367,500 and $140,000, respectively. The notes bear interest at an annual rate of five percent (5%). Steven Rotman’s note matures eight years from issuance and Bernard Rotman’s note matures four years from issuance. Payments of $3,828 and $2,917 to Steven and Bernard Rotman, respectively, per month begin six months from issuance until maturity in December 2027 and 2023, respectively. The balance of these notes payable including accrued interest to Steven and Bernard Rotman is approximately $376,000 and $143,000, respectively, at December 31, 2019.

 

Approximate maturities for the succeeding years are as follows:

 

2020  $46,000 
2021   59,000 
2022   62,000 
2023   85,000 
2024   34,000 
Thereafter   221,500 
      
   $507,500 

 

NOTE 9 - DERIVATIVE LIABILITIES

 

As of December 31, 2019, the Company had a $1,499,800 derivative liability balance on the consolidated balance sheet and recorded a loss from change in fair value of derivative liabilities of $1,079,450 for the year ended December 31, 2019. The derivative liability activity comes from certain convertible notes payable (and any related warrants). The Company analyzed the conversion features and warrants of the various note agreements for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the embedded conversion features should be classified as a derivative because the exercise price of these convertible notes are subject to a variable conversion rate. The Company has determined that the conversion feature is not considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment. In accordance with ASC 815, the Company has bifurcated the conversion feature of the notes and recorded a derivative liability.

 

The embedded derivatives for the notes are carried on the Company’s consolidated balance sheet at fair value. The derivative liability is marked-to-market each measurement period and any unrealized change in fair value is recorded as a component of the consolidated statement of operations and the associated fair value carrying amount on the consolidated balance sheet is adjusted by the change. The Company fair values the embedded derivative using a lattice-based valuation model or Monte Carlo simulation.

 

F-23

 

 

The following table summarizes the derivative liabilities included in the consolidated balance sheet at December 31, 2019 and 2018:

 

Fair Value of Embedded Derivative and Warrant Liabilities:

 

    2019     2018  
             
Balance, beginning of the year   $ 235,085     $ -  
                 
Initial measurement of liabilities     1,464,600       465,905  
                 
Change in fair value     1,079,450       269,539  
                 
Settlement due to conversion     (1,279,335 )     (500,359 )
                 
Balance, end of the year   $ 1,499,800     $ 235,085  

 

NOTE 10 - STOCKHOLDERS’ EQUITY (DEFICIT)

 

Cumulative Convertible Preferred Stock

 

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

 

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

 

As of December 31, 2018, the 13,828 shares of outstanding preferred stock had undeclared dividends of approximately $77,000 and could be converted into 4,314,537 shares of common stock, at the option of the holder.

 

Common Stock and Warrants

 

In January 2019, the Company repurchased 30,000 shares of common stock from an existing shareholder for $30 in cash. The transaction was recorded as treasury stock repurchased and is included in the accompanying consolidated financial statements as a separate item in the consolidated statements of stockholders’ deficit.

 

During the first quarter of 2019, through majority shareholder consent, the Company increased the amount of authorized common stock shares to 1,500,000,000.

 

During the year ended December 31, 2019, the Company issued 155,226,844 shares under equity purchase agreements for cash proceeds totaling $606,300. Included in this amount are 22,999,999 of shares purchased for $69,000 from related parties. Approximately 54,999,997 shares were issued during 2019 but were included in shares issued and outstanding at December 31, 2018 as the related cash was received prior to year-end 2018. There were additional share issuances to First Fire Global Opportunities Fund, LLC and Crown Bridge Partners, LLC for cash related to the settlement of warrants previously attached to convertible notes payable. See discussion below in Other Shares Issued.

 

F-24

 

 

During the year ended December 31, 2019, the Company issued 227,336,218 shares due to the conversion of principal and interest of notes payable totaling $85,000. The fair value at dates of conversion totaled approximately $1.3 million which were offset by the settlement of derivative liabilities upon conversion of approximately $1.3 million. The difference was recognized as a gain on settlement of debt of approximately $21,000 and is included in the consolidated statements of operations in other income (expense) for the year ended December 31, 2019. See Note 8 for further details on conversion of the contingently convertible notes.

 

As discussed in Note 8, in July 2018, the Company issued 15,000,000 shares in escrow which CMA Investments, LLC began to sell in March 2019 at the end of the restrictive six-month period. The shares were sold at their discretion to bring down the balance of the debt. In accordance with the agreement, CMA Investments, LLC had to sell all shares at no less than $0.035 per share. During the year ended December 31, 2019, the Company issued an additional 30,000,000 shares of its common stock to fully satisfy the CMA note.

 

Other Shares Issued

 

In January 2019, the Company issued 14,746,324 shares to Peak One Opportunity Fund, L.P. as part of a settlement. The shares were issued to settle any exercise of the 600,000 warrants previously granted to the investor related to convertible debt that was already converted, in addition to under conversion of previously outstanding convertible notes payable. As part of settlement to consider any remaining dispute over convertible notes payable and to avoid returning shares to the Company, the parties agreed the debt would be considered fully converted as of March 31, 2019. As part of that settlement agreement, the previously issued warrants were forfeited in exchange for shares noted above. On the date of settlement, the shares had a fair value of $32,442.

 

In March 2019, the Company issued a total of 31,333,333 shares for $200,000 in cash received from First Fire Global Opportunities Fund, LLC. The shares were issued to settle any exercise of the 286,875 warrants previously granted to the investor related to convertible debt that was already converted, in addition to over conversion of previously outstanding convertible notes payable. These warrants were issued in connection with convertible notes payable. As part of settlement to consider any remaining dispute over convertible notes payable and to avoid returning shares to the Company, the parties agreed the debt would be considered fully converted as of March 31, 2019. As part of that settlement agreement, the previously issued warrants were forfeited in exchange for shares issued for cash noted above. On the date of the settlement, the shares had a fair value of $2,193,333.

 

In January and March of 2019, the Company issued 31,833,334 shares for $200,000 in cash from Crown Bridge Partners, LLC. The shares were issued to settle any exercise of the 125,000 warrants previously granted to the investor related to convertible debt that was already converted. As part of settlement to consider any remaining dispute over convertible notes payable, the parties agreed the debt would be considered fully converted as of March 31, 2019. As part of that settlement agreement, the previously issued warrants were forfeited in exchange for shares issued for cash noted above. On the date of the settlement, the shares had a fair value of $1,457,967.

 

During the year ended December 31, 2019, the Company issued 142,538,209 shares for consulting services valued at $2,642,936 based on the respective measurement dates. Of these shares, 85,664,655 were issued to related parties, see further detail of related party shares in Note 13.

 

F-25

 

 

NOTE 11 - REVENUES

 

The following table presents our revenues disaggregated by each major product category and service for the last two years:

 

   Year Ended December 31, 
   2019   2018 
       % of       % of 
   Net Sales   Net Sales   Net Sales   Net Sales 
Merchandise:                
Case Goods                    
Bedroom Furniture  $1,812,867    13.2   $-    - 
Dining Room Furniture   1,135,807    8.3    -    - 
Occasional   2,239,769    16.4    -    - 
    5,188,443    37.9    -    - 
Upholstery   3,523,817    25.7    -    - 
Mattresses and Toppers   3,038,471    22.2    319,523    93.4 
Broadloom, Flooring and Rugs   1,172,318    8.6    -    - 
Warranty   245,002    1.8    -    - 
Accessories and Other   517,821    3.8    22,526    6.6 
   $13,685,872    100.0   $342,049    100.0 

 

NOTE 12 - SHARE-BASED COMPENSATION

 

Generally accepted accounting principles require share-based payments to employees, including grants of employee stock options, warrants, and common stock to be recognized in the income statement based on their fair values at the date of grant, net of estimated forfeitures.

 

In total, the Company recorded $2,968,898 and $1,285,938 of stock-based compensation for the years ended December 31, 2019 and 2018, respectively, including shares to be issued related to consultants and board member stock options and common stock and warrants issued to non-employees. Included in stock subscription payable is accrued stock-based compensation of $845,175 and $771,203 at December 31, 2019 and 2018, respectively.

 

The Company used the Black-Scholes option pricing model to estimate the grant-date fair value of option and warrant awards granted. The following assumptions were used for warrant awards during the year ended December 31, 2019:

 

  Expected Dividend Yield – because the Company does not currently pay dividends, the expected dividend yield is zero;
     
  Expected Volatility in Stock Price - volatility based on the Company’s trading activity was used to determine expected volatility;
     
  Risk-free Interest Rate - reflects the average rate on a United States Treasury Bond with a maturity equal to the expected term of the option; and
     
  Expected Life of Award - because we have minimal experience with the exercise of options or warrants for use in determining the expected life of each award, we used the option or warrant’s contractual term as the expected life.

 

In total for the years ended December 31, 2019 and 2018, the Company recorded $50,789 and $1,161,132, respectively, of share-based compensation expense related to employee and Board Members’ stock options. The unrecognized compensation expense as of December 31, 2019 was $48,933 for non-vested share-based awards to be recognized over a period of approximately four years.

 

F-26

 

 

Options

 

During 2004, the Board of Directors of the Company adopted a stock option plan (the “Plan”) and authorized up to 4,000,000 shares to be issued under the Plan. In April 2009, the Company’s Board of Directors authorized an increase in the number of shares to be issued under the Plan to 10,000,000 shares and to include the independent Board Members in the Plan in lieu of continuing the previous practice of granting warrants each quarter to independent Board Members for services. At December 31, 2019, there are 2,251,729 shares of common stock available for issuance under the Plan. In 2014, the Board of Directors adopted an additional stock option plan which provides for an additional 5,000,000 shares which are all available as of December 31, 2019. During 2019, the Board of Directors adopted the 2019 Equity Incentive Plan (the “Plan”) and authorized up to 50,000,000 shares to be issued under the Plan. All employees, consultants and independent Board members are eligible to participate in the Plan.

 

The Plan is intended to permit stock options granted to employees to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (“Incentive Stock Options”). All options granted under the Plan that are not intended to qualify as Incentive Stock Options are deemed to be non-qualified options. Stock options are granted at an exercise price equal to the fair market value of the Company’s common stock on the date of grant, typically vest over periods up to 4 years and are typically exercisable up to 10 years.

 

There were no options and 21,800,000 non-plan options granted during the year ended December 31, 2019 and 2018, respectively.

 

The weighted average assumptions used in the option pricing model for stock option grants were as follows:

 

   2019   2018 
Expected Dividend Yield    -    0.00%
Expected Volatility in Stock Price    -    263.33%
Risk-Free Interest Rate    -    2.25%
Expected Life of Stock Awards - Years    -     10.00 
Weighted Average Fair Value at Grant Date  -    $0.05 

 

F-27

 

 

The following table summarizes all stock option activity of the Company for the years ended December 31, 2019 and 2018:

 

           Weighted 
       Weighted   Average 
       Average   Remaining 
   Number   Exercise   Contractual 
   of Shares   Price   Life (Years) 
             
Outstanding, December 31, 2017   7,748,271   $0.16    5.80 
                
Granted   21,800,000   $0.02    5.00 
                
Exercised   -    -      
                
Forfeited   (450,000)  $0.68      
                
Outstanding, December 31, 2018   29,098,271   $0.06    4.49 
                
Exercisable, December 31, 2018   27,258,270   $0.06    6.48 
                
Granted   -           
                
Exercised   -           
                
Forfeited   (1,115,000)  $0.21      
                
Outstanding, December 31, 2019   27,983,271   $0.20    3.45 
                
Exercisable, December 31, 2019   26,783,271   $0.21    3.69 

 

As of December 31, 2019, and 2018, the aggregate intrinsic value of the Company’s outstanding options was approximately $1,000 and $22,000, respectively. The aggregate intrinsic value will change based on the fair market value of the Company’s common stock.

 

Warrants

 

Warrants are issued to third parties as payment for services, debt financing compensation and conversion and in conjunction with the issuance of common stock. The fair value of each common stock warrant issued for services is estimated on the date of grant using the Black-Scholes option pricing model.

 

The weighted-average assumptions used in the option pricing model for stock warrant grants were as follows:

 

   2019   2018 
Expected Dividend Yield    -    0.00%
Expected Volatility in Stock Price    -    295.00%
Risk-Free Interest Rate    -    3.05%
Expected Life of Stock Awards     -     8.52 

 

F-28

 

 

The following table represents the Company’s warrant activity for the year ended December 31, 2019 and 2018:

 

               Weighted 
               Average 
       Weighted   Weighted   Remaining 
   Number   Average   Average   Contractual 
   of Shares   Fair Value   Exercise Price   Life (Years) 
                 
Outstanding, December 31, 2017   14,699,582        $0.10    5.41 
                     
Granted   1,011,875   $0.05   $0.40    3.36 
                     
Exercised   -    -    -      
                     
Forfeited   -    -    -      
                     
Expired   (222,625)       $0.90    3.36 
                     
Outstanding, December 31, 2018   15,488,832        $0.12    4.27 
                     
Granted   -    -    -      
                     
Exercised   -    -    -      
                     
Forfeited   (1,251,186)       $0.48      
                     
Expired   -    -    -      
                     
Outstanding, December 31, 2019   14,237,646        $0.07    3.58 
                     
Exercisable, December 31, 2019   14,237,646        $0.07    3.58 

 

NOTE 13 - RELATED PARTY TRANSACTIONS

 

Officers and Directors

 

Per Steven Rotman’s Employment agreement dated July 22, 2019, he is to be paid $125,000 per year in cash, $10,417 per month in shares based on a 20-day average price at a 50% discount to market, $5,000 per month in cash for expenses as well as access to a Company provided vehicle and health and life insurance. Under the terms of his previous employment agreement, he was paid approximately $1 per year in cash and $20,833 per month to be paid in shares based on a 20-day average at a 0% discount to market. During the year ended December 31, 2019, the Company issued Steven Rotman 28,016,022 shares that were accrued and expensed as of December 31, 2018. The Company expensed $201,200 during the year ended December 31, 2019 related to 4,000,000 shares issued for Steven Rotman’s services as a Board Member of the Company. In addition, the Company accrued and expensed approximately $442,000 in 2019 related to approximately 12,771,000 shares to be issued in the future.

 

F-29

 

 

Designcenters.com

 

This entity is owned by Jamie Rotman, who is the daughter of the Company’s CEO, Steven Rotman. Designcenters.com (“Design”) provided bookkeeping and management services to the Company through July 2019. In exchange for such services, the Company had entered into a consulting agreement with the related party entity.

 

Per the Design’s consulting agreement, Design was to receive approximately $7,100 per month to be paid in cash or shares based on a 20-day average at a 50% discount to market and a $10,000 quarterly bonus to be paid in shares using the same formula. During the year ended December 31, 2019, the Company issued Design 20,030,407 shares in accordance with the consulting agreement that were accrued and expensed as of December 31, 2018. During the year ended December 31, 2019, the Company expensed approximately $83,000 related to the consulting agreement. Of the expensed amount, approximately $41,000 was paid in cash. As of December 31, 2019, the Company had a stock subscription payable balance of $42,000, for approximately 850,000 shares related to this party.

 

Blue Oar Consulting, Inc.

 

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

 

Per Blue Oar’s consulting agreement, it is to be paid $15,000 per month in cash for expenses, and $12,500 per month to be paid in shares based on a 20-day average at a 50% discount to market. During the year ended December 31, 2019, the Company issued Blue Oar 33,618,226 shares in accordance with the consulting agreement that were accrued and expensed as of December 31, 2018. During the year ended December 31, 2019, the Company expensed approximately $510,000 related to the consulting agreement . Of the expensed amount, approximately $180,000 was paid in cash. As of December 31, 2019, the Company had a stock subscription payable balance of $330,000, for approximately 10,562,000 shares related to this party.

 

Polymer Consultancy Services, Ltd.

 

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

 

Fluid Energy Conversion Inc.

 

In May of 2019, the Company acquired the assets of Fluid Energy Conversion Inc. (“FEC”) for 2,500,000 shares of common stock to be issued in 2020. FEC is owned by Dr. Bryan Stone, one of the Company’s directors. The assets consist of a patent on the Hughes Reactor, which has the ability to control, enhance and focus energy in flowing liquids and gases. Included in subscription stock payable at December 31, 2019 is $103,750 representing the value of the 2,500,000 shares on the purchase date.

 

Rotmans Furniture

 

During the year ended December 31, 2019, the Company had sales of approximately $49,000 to Murida Furniture Co., Inc., DBA Rotmans Furniture (“Rotmans”). All significant intercompany transactions since the acquisition date of July 18, 2019 have been eliminated in the accompanying consolidated financial statements. The Company utilized certain warehouse staff, warehouse and office space/services and an executive assistant of Rotmans for the Company’s purposes. The Company was charged approximately $821,000 for these services in 2019.

 

F-30

 

 

NOTE 14 - COMMITMENTS

 

Employment and Consulting Agreements

 

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

 

There is currently one employment agreement in place for 2019 with the CEO, Steven Rotman. See compensation terms in Note 13.

 

During the year ended December 31, 2019, the Company entered into various services agreement with consultants for financial reporting, advisory, and compliance services.

 

Litigation

 

From time to time, the Company is party to certain legal proceedings that arise in the ordinary course and are incidental to our business. Future events or circumstances, currently unknown to management, will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on our consolidated financial position, liquidity or results of operations in any future reporting periods.

 

EMA Financial

 

On February 19, 2019, EMA Financial, Inc. filed a lawsuit in the Southern District of New York against the Company. The lawsuit alleged various breaches of an underlying convertible promissory note and stock purchase agreement and sought four claims for relief: (i) specific performance to enforce a stock conversion and contractual obligations; (ii) breach of contract; (iii) permanent injunction to enforce the stock conversion and contractual obligations; and (iv) legal fees and costs of the litigation. The complaint was filed with a motion seeking: (i) a preliminary injunction seeking an immediate resolution of the case through the stock conversion; (ii) a consolidation of the trial with the preliminary injunctive hearing; and (iii) summary judgment on the first and third claims for relief.

 

The Company filed an opposition to the motion and at oral argument the motion for injunctive relief was denied. The Court issued a decision permitting a motion for summary judgment to proceed and permitted the Company the opportunity to supplement its opposition papers together with the plaintiff who was also provided opportunity to submit reply papers. On April 5, 2019, the Company filed the opposition papers as well as a motion to dismiss the first and third causes of action in the complaint.

 

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

 

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

 

Robert LaChapelle Class Action

 

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

 

F-31

 

 

Eric Maas Lawsuit

 

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

 

NOTE 15 - MAJOR CUSTOMERS AND VENDORS

 

Major customers and vendors are defined as a customer or vendor from which the Company derives at least 10% of its revenue and cost of revenue, respectively.

 

During 2019, the Company made approximately 15% of its purchases from one major vendor. The Company owed its major vendor approximately $219,000 at December 31, 2019. There were no significant vendor concentrations in 2018.

 

During 2018, revenue came from three major customers. At December 31, 2018, receivables from major customers totaled approximately $17,000. There were no significant customer concentrations in 2019.

 

NOTE 16 - INCOME TAXES

 

The provision (benefit) for income taxes for the years ended December 31, 2019 and 2018 assumes a 21% effective tax rate for federal income taxes. A reconciliation of the federal statutory income tax rate and the effective income tax rate as a percentage of income before income taxes is as follows:

 

   Year Ended December 31, 
   2019   2018 
         
Federal statutory income tax rate   (21.0%)   (21.0%)
           
Change in valuation allowance on net operating loss carryforwards   21.0    21.0 
           
Effective income tax rate   0.0%   0.0%

 

Deferred tax assets as of December 31, 2019 and 2018 are as follows:

 

   2019   2018 
         
NOL carryforwards  $ 5,490,000    $4,190,000 
           
Less valuation allowance    (5,490,000 )   (4,190,000)
           
Deferred tax assets  $-   $- 

 

Deferred taxes are caused primarily by net operating loss carryforwards. For federal income tax purposes, the Company, excluding Rotmans, has a net operating loss carryforward of approximately $26,100,000 as of December 31, 2019, of which approximately $18,400,000 expires beginning in 2024 and $7,700,000 which can be carried forward indefinitely. For state income tax purposes, the Company, excluding Rotmans, has a net operating loss carryforward of approximately $18,300,000 and $7,700,000 as of December 31, 2019 in Georgia and Massachusetts, respectively, which expires beginning in 2023.

 

F-32

 

 

In addition, as of December 31, 2019, Rotmans has a net operating loss carryforward of approximately $2,700,000 for federal income tax purposes of which $1,800,000 expires beginning in 2029 and $900,000 can be carried forward indefinitely. Rotmans has a state operating loss carryforward of approximately $1,800,000 which expires beginning in 2022.

 

Pursuant to Internal Revenue Code Section 382, the future realization of our net operating loss carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that may have occurred previously or that could occur in the future.

 

NOTE 17 - PROFIT SHARING PLAN

 

The Company sponsors a qualified 401(k) profit sharing plan covering all eligible employees. The plan permits participants to make tax-deferred contributions to the plan by salary reduction. Company contributions are discretionary and are determined annually by the Board of Directors.

 

There were no Company contributions in 2019. Participant and Company contributions are limited to amounts allowed under the Internal Revenue Code.

 

The Company offers no post-retirement benefits other than the plan discussed above and no significant post-employment benefits.

 

NOTE 18 - ACQUISITION OF ROTMANS

 

On July 18, 2019, the Company acquired 58% of the outstanding shares of common stock of Rotmans, the largest furniture and flooring store in New England, for an aggregate purchase price of $2,030,000. The consideration is to be paid in 25% notes payable over 4 to 8 years and 75% in notes convertible to common shares (see Note 8). The Company and Rotmans are exploring a number of initiatives relating to environmentally friendly product development and distribution that will utilize the access to the capital markets afforded by this combination.

 

F-33

 

 

The transaction has been accounted for using the acquisition method of accounting which requires, among other things, the assets acquired and liabilities assumed to be recognized at their fair values at the date of acquisition. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

 

Consideration Paid:    
Notes payable  $507,500 
Convertible notes payable   1,522,500 
      
Total consideration  $2,030,000 
      
Purchase Price Allocation:     
Accounts receivable  $15,847 
Inventories   4,904,499 
Other current assets   471,532 
Operating lease right-of-use assets   10,848,241 
Finance lease right-of-use assets, net   173,596 
Property and equipment   1,765,707 
Other assets   274,366 
Customer relationships   110,000 
Trade name   770,000 
Marketing related intangibles   380,000 
Goodwill   313,210 
      
Total identifiable assets   20,026,998 
Line of credit   (2,374,090)
Notes payable   (25,305)
Accounts payable   (2,000,146)
Accrued expenses   (544,971)
Operating lease liabilities   (9,008,241)
Finance lease liabilities   (189,421)
Unearned revenue   (2,508,623)
Noncontrolling interest in net assets   (1,346,201)
      
Net assets acquired  $2,030,000 

 

Goodwill of $313,210 was recognized in the acquisition of Rotmans which represents the value derived from t he combined capabilities of our two organizations, including improved infrastructure in support of purchasing, marketing, inventory control, advertising, accounting, warehousing and customer service create an opportunity to grow our brands and accelerate long term growth and value for our people, customers, and suppliers. The addition of Rotmans to Vystar’s platform, positions the Company as an authority in our customers’ homes and also creates a showcase for Vystar’s products. This partnership represents a key opportunity to drive long-term growth and value creation for our shareholders. The Company has invested approximately $400,000 in the completion of the merger and has committed a considerable amount of staff resources, most of which is a one-time cost.

 

In determining the fair value of the intangible assets, the Company considered, among other factors, the best use of the acquired assets such as the customer relationships, trade name and marketing related intangibles. The Company finalized the purchase price allocation through the use of management analysis and certain other factors. The preliminary allocation was properly adjusted for the finalized figures. Accordingly, any differences between preliminary estimates and the final allocation to the intangible assets have been reflected in the accompanying consolidated financial statements.

 

Unaudited pro forma financial information

 

The following unaudited pro forma information presents a summary of the Company’s combined operating results for the years ended December 31, 2019 and 2018, as if the acquisition and the related financing transactions had occurred on January 1, 2018. The following pro forma financial information is not necessarily indicative of the Company’s operating results as they would have been had the acquisition been effected on the assumed date, nor is it necessarily an indication of trends in future results for a number of reasons, including, but not limited to, differences between the assumptions used to prepare the pro forma information, basic shares outstanding and dilutive equivalents, cost savings from operating efficiencies, potential synergies, and the impact of incremental costs incurred in integrating the businesses.

 

F-34

 

 

    Year Ended December 31,  
    2019     2018  
Total revenues   $ 28,534,224     $ 31,663,294  
Loss from operations   $ (5,941,018 )   $ (5,345,935 )
Net loss   $ (8,817,917 )   $ (7,240,829 )
Net loss attributable to Vystar   $ (8,360,970 )   $ (6,513,098 )
Basic and dilated loss per share   $ (0.01 )   $ (0.03 )

 

NOTE 19 - SUBSEQUENT EVENTS

 

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

 

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

 

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

 

In January 2020, Rotmans entered into an agreement with NEHDS Logistics, LLC (“NEHDS”) to provide delivery services for all delivered customer sales. Prior to the agreement, Rotmans had maintained an in-house delivery service. Existing fleet operating leases are being subleased to NEHDS according to the same terms and conditions as the original lease agreements.

 

On February 24, 2020, the Company entered into an agreement with Libertas Funding LLC (“Libertas”) to sell future sale receipts totaling $1,089,000 for a purchase price of $825,000. The sold amount of future sale receipts will be delivered weekly to Libertas at predetermined amounts over a period of nine months. The agreement contains an early delivery discount fee for delivering the future receivables before the end of the contract term and an origination fee of $16,500, which has been capitalized and will be amortized over the term of the agreement. The agreement is personally guaranteed by Steven Rotman.

 

In March 2020, due to a breach of a covenant clause, the Company was in default under the line of credit agreement with Fidelity Co-operative Bank (“Fidelity”). According to the terms of a tentative agreement with Fidelity, interest only payments will be payable on the outstanding loan balance until July 24, 2020, at which date the entire loan will be due. The entire loan was paid off on May 29, 2020 pursuant to an agreement with a third-party agent.

 

On April 16, 2020, Rotmans received $1,402,900 in loan funding from the Paycheck Protection Program (the “PPP”), established pursuant to the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and administered by the U.S. Small Business Administration (“SBA”). The unsecured loan (the “PPP Loan”) is evidenced by a promissory note of the Company dated April 16, 2020 (the “Note”) in the principal amount of $1,402,900 with United Community Bank (the “Bank”), the lender.

 

F-35

 

 

Under the terms of the Note and the PPP Loan, interest accrues on the outstanding principal at the rate of 1.0% per annum. The term of the Note is two years, though it may be payable sooner in connection with an event of default under the Note. To the extent the loan amount is not forgiven under the PPP, Rotmans is obligated to make equal monthly payments of principal and interest, beginning seven months from the date of the Note, until the maturity date.

 

The CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed. Under the PPP, Rotmans may apply for forgiveness for all or a part of the PPP Loan. The amount of loan proceeds eligible for forgiveness is based on a formula that takes into account a number of factors, including the amount of loan proceeds used by Rotmans during the twenty-four week period after the loan origination for certain purposes including payroll costs, interest on certain mortgage obligations, rent payments on certain leases, and certain qualified utility payments, provided that at least 60% of the loan amount is used for eligible payroll costs; the employer maintaining or rehiring employees and maintaining salaries at certain levels; and other factors. Subject to the other requirements and limitations on loan forgiveness, only loan proceeds spent on payroll and other eligible costs during the covered twenty-four week period will qualify for forgiveness.

 

The Note may be prepaid in part or in full, at any time, without penalty. The Note provides for certain customary events of default, including (i) failing to make a payment when due under the Note, (ii) failure to do anything required by the Note or any other loan document, (iii) defaults of any other loan with the Bank, (iv) failure to disclose any material fact or make a materially false or misleading representation to the Bank or SBA, (v) default on any loan or agreement with another creditor, if the Bank believes the default may materially affect Rotmans ability to pay the Note, (vi) failure to pay any taxes when due, (vii) becoming the subject of a proceeding under any bankruptcy or insolvency law, having a receiver or liquidator appointed for any part of the Rotmans business or property, or making an assignment for the benefit of creditors, (viii) having any adverse change in financial condition or business operation that the Bank believes may materially affect Rotmans ability to pay the Note, (ix) if Rotmans reorganizes, merges, consolidates, or otherwise changes ownership or business structure without the Bank’s prior written consent, or (x) becoming the subject of a civil or criminal action that the Bank believes may materially affect Rotmans ability to pay the Note. Upon the occurrence of an event of default, the Bank has customary remedies and may, among other things, require immediate payment of all amounts owed under the Note, collect all amounts owing from Rotmans, and file suit and obtain judgment against Rotmans.

 

In May 2020, Rotmans entered into a sale promotion consulting agreement with a national furniture sales event company. Under the agreement, Rotmans appointed the third-party as its exclusive agent to assist with a high-impact sale to pay off the Fidelity loan. Before the sale, the agent lent the Company funds to pay off the Fidelity loan. The agent will be reimbursed for the advance from the proceeds of the sale. In addition, the agent has a senior first priority security interest and lien in Rotmans inventories and other assets until all obligations and liabilities are satisfied. Profits of the sale will be distributed according to the specific terms of the agreement. The agreement will expire 240 days from the commencement date of May 29, 2020.

 

On July 1, 2020, 130 preferred shares were converted into 44,357 shares of common stock.

 

F-36

 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. 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, 2019 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 is working on improving controls with an outside CPA firm and a more dedicated internal resources.

 

Management’s Report on Internal Control Over Financial Reporting

 

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

 

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

 

Management, under the supervision and with the participation of our Chief Executive Officer and our acting Chief Financial Officer, conducted an evaluation of our internal control over financial reporting as of December 31, 2019 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) 2013. Based on our evaluation under the COSO framework, management concluded that our internal control over financial reporting was not effective as of December 31, 2019. Such conclusion was reached based on the following material weaknesses noted by management:

 

a) We have a lack of segregation of duties due to the small size of the Company.

 

b) The Company did not maintain reasonable control over records underlying transactions necessary to permit preparation of the Company’s financial statements.

 

c) Lack of controls that provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposal of the Company’s assets that could have a material effect on the financial statements.

 

d) Lack of a formal CFO position who can devote significant attention to financial reporting resulted in multiple audit adjustments.

 

e) Lack of a functioning audit committee, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures. Management believes the lack of a functioning audit committee results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future period.

 

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

 

ITEM 9B. OTHER INFORMATION

 

None.

 

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PART III

 

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, 2019. Each director is elected to serve until the next Annual Meeting of Stockholders.

 

Name   Principal Occupation During Last Five Years   Age   Director
Since
             
Joseph C. Allegra, Jr. PhD   Joseph Allegra, PhD was elected Chairman of the Board on February 14, 2018 and has followed Vystar’s progress for numerous years and has assisted as an investment advisor and investor, providing insight into positioning the company to attract investors, particularly in the healthcare sector. He currently is an Instructor of Epidemiology and Biostatistics at the University of Georgia and an Investment Advisor at Lincoln Lee Investments in Atlanta. Previously he was a Senior Drug Safety Associate at Genentech. Dr. Allegra received his BA in Psychology from Boston University, and his Master of Public Health and Doctor of Philosophy degrees from the University of Georgia.   40   2017
             
Steven Rotman   Steven Rotman was elected Chief Executive Officer and a Director of Vystar Corporation. Mr. Rotman has been President and CEO of Rotmans, one of the oldest and largest, furniture and carpet retailers in New England, for more than 40 years. In addition, he is the founder and managing partner of NHS Holdings, a company that in 2015 became the exclusive distributor of Vytex™ natural rubber latex foam in the U.S. and laid the groundwork for Vytex’s entrance to the home furnishings industry. Mr. Rotman received a BBA degree from Clark University and an MS from New York University.   81   2017
             
Ranjit K. Matthan PhD  

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.

  75   2015

 

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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.

       
             
Bryan Stone, MD  

Bryan Stone, M.D, has advised Vystar over the past years relating to product development for the healthcare industry and brings to the Board an understanding of the challenges of new product development for start-up companies. He is the Chairman of Medicine at Desert Regional Medical Center in Palm Springs, Calif., and is the Medical Director at multiple DaVita Dialysis Centers. He is also an entrepreneur, serving as the Interim CEO of Fluid Energy Conversion, Inc., a firm specializing in molecular fluid mechanics, specifically high efficiency mass producible energy conversion technologies.

  52   2017
             

Keith D. Osborn, MD

 

 

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.

  61   2016

 

31

 

 

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 December 17, 2017, William R Doyle retired from his positions with the Company as Chairman of the Board of Directors, a director and President and CEO of the Corporation. Mr. Doyle’s retirement did not result from any disagreement with the Company and he remains a Product Development Consultant.

 

On April 19, 2019, Paul Oristaglio resigned from his position with the Company as a director. Mr. Oristaglio’s resignation did not result from any disagreement with the Company.

 

On April 23, 2019, Michelle Mangum resigned from her position with the Company as a director. Ms. Mangum’s resignation did not result from any disagreement with the Company.

 

On December 31, 2019, Michael X. Ianacone retired from his position with the Company as a director. Mr. Ianacone’s resignation did not result from any disagreement with the Company.

 

Audit Committee

 

The Board members serving on our Audit Committee were Mr. Ianacone, Ms. Mangum and Mr. Oristaglio through their resignations on December 31, 2019, April 23, 2019 and April 19, 2019, respectively. Beginning January 1, 2020, Dr. Bryan Stone is serving on the Audit Committee. Our Board has determined that Mr. Ianacone, Ms. Mangum, Mr. Oristaglio and Dr. Stone satisfy the requirements for financial literacy under the current requirements of the Nasdaq Marketplace Rules. Both are “audit committee financial experts,” as defined by SEC rules and satisfy 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;

 

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  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.vystarcorp.com. Any amendments to the Charter, or any waivers of its requirements, will be disclosed on our website.

 

Meetings of the Board and Committees

 

During fiscal year 2019, our Board held two meetings, and its Audit Committee held one meeting. Each director attended at least one of the meetings of the Board in fiscal year 2019, with average attendance at 90%. Members of our Board are encouraged to attend our annual meetings of shareholders.

 

33

 

 

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.vystarcorp.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.vystarcorp.com. There were no waivers of the Code of Business Conduct and Ethics for any of our directors or executive officers during fiscal year 2019.

 

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 2019 and 2018.

 

Name and Principal Position  Salary(2)   Option
Awards(1)
   Total 
Steven Rotman - 2019  $50,000   $648,121   $698,121 
Chief Executive Officer, Chief Financial Officer and President               
                
Steven Rotman - 2018  $200,000   $550,000   $750,000 
Chief Executive Officer, Chief Financial Officer and President               

 

(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 2019 and 2018 represent the dollar amount recognized as compensation expense by Vystar for financial statement reporting purposes for fiscal years 2019 and 2018 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) $200,000 was related to a performance bonus that was agree upon in 2018. Of this amount for Steven Rotman, $195,000 was paid in cash for the bonus for the year ended December 31, 2018. In addition, 27,000,000 shares of common stock valued at approximately $222,000 were accrued as of December 31, 2018.

 

34

 

 

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 2019.

 

   Fees             
   Earned             
   or   Stock         
   Paid in   Awards       Total 
Name  Cash ($)   ($) (3)   Option Awards ($) (1)   ($)(2) 
Joseph C. Allegra, Jr., PhD   -    201,200    4,921    206,121 
Michael X. Ianacone   -    201,200    4,820    206,020 
Michelle Y. Mangum   -    201,200    5,351    206,551 
Ranjit K. Matthan, PhD   -    201,200    7,837    209,037 
Paul R. Oristaglio   -    276,000    -    276,000 
Keith D. Osborn   -    201,200    4,904    206,104 
Bryan Stone, M.D.   -    201,200    4,921    206,121 

 

(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 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.
   
  On December 15, 2017, Dr. Stone and Dr. Allegra as non-employee directors were 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 December 31, 2017.
   
  The amounts included represent the portion of the original total grant date fair value of options that vested in 2019 together with the dollar amount recognized as compensation expense by Vystar for financial statement reporting purposes for fiscal year 2019 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 2019 for stock options granted to each of the non-employee directors during fiscal years 2015 through 2019 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.
   
(3) As of December 31, 2019, a payable of $201,200 for 4,000,000 shares of common stock is included in stock subscription payable for amounts owed to the Board of Directors for stock awards.

 

35

 

 

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.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth the beneficial ownership of our common stock as of December 31, 2019 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, 2019, adjusted as required by rules promulgated by the SEC.

 

Officers and Directors        
         
Steven Rotman          
Worcester, MA   44,748,724    4.035%
           
Keith D. Osborn, M.D.          
Atlanta, GA   39,997,552    3.607%
           
Ranjit K. Matthan PhD          
India   4,517,500    0.407%
           
Bryan Stone, M.D.          
Palm Springs, CA   12,937,137    1.167%
           
Joseph Carmen Allegra, Jr. PhD          
Atlanta, GA   4,500,000    0.406%
           
All Directors and Executive Officers as a Group   106,700,913    9.621%
           
Total Shares Outstanding    1,105,732,080       

 

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 2019 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.

 

36

 

 

EQUITY COMPENSATION PLAN INFORMATION

 

The following table shows information related to our common stock which may be issued under our compensation plans , as amended, as of December 31, 2019:

 

Plan Category 

Number of securities

to be issued
upon

exercise of

outstanding options

  

Number of

securities

to be issued upon

exercise of

outstanding

options

  

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   7,748,271   $5.80    2,251,729 
2014 Long-Term Incentive Compensation Plan   0    0    5,000,000 
2019 Equity Incentive Plan     0       0      

50,000,000

 
Total   7,748,271   $5.80     57,251,729  

 

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.

 

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.

 

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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. is a member. 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.

 

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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.

 

Pursuant to the terms of the CMA Note, interest is computed at LIBOR plus 5.25% (8.22% at December 31, 2018), on amounts drawn and fees. The weighted average interest rate in effect on the borrowings for the year ended December 31, 2018 was 7.99%. There are no available borrowings under the CMA note at December 31, 2018. The holders of CMA Investments, LLC agreed as of July 10, 2018 to new terms express in Note 8 of the accompanying financial statements. Lastly, in July 2019, the Company settled the debt with the issuance of an additional 30 million shares.

 

Per Steven Rotman’s Employment agreement dated July 22, 2019, he is to be paid $125,000 per year in cash, $10,417 per month to be paid in shares based on a 20-day average price at a 50% discount to market, $5,000 per month in cash for expenses as well as access to a Company provided vehicle and health and life insurance. Under the terms of his previous employment agreement, he was paid approximately $1 per year in cash and $20,833 per month to be paid in shares based on a 20-day average at a 0% discount to market. During the year ended December 31, 2019, the Company issued Steven Rotman 28,016,022 shares that were accrued and expensed as of December 31, 2018. The Company expensed approximately $201,000 during the year ended December 31, 2019 related to 4,000,000 shares issued for Steven Rotman’s services as a Board Member of the Company. In addition, the Company accrued and expensed approximately $442,000 in 2019 related to approximately 12,771,000 shares to be issued in the future.

 

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

 

Designcenters.com (“Design”) is owned by Jamie Rotman, who is the daughter of the Company’s CEO, Steven Rotman. Design provided bookkeeping and management services to the Company through July 2019. In exchange for such services, the Company had entered into a consulting agreement with the related party entity. Per Design’s consulting agreement, it is to be paid approximately $7,100 per month in cash or shares based on a 20-day average at a 50% discount to market and a $10,000 quarterly bonus to be paid in shares using the same formula. During the year ended December 31, 2019, the Company issued Design 20,030,407 shares in accordance with the consulting agreement that were accrued and expensed in 2018. The Company expensed approximately $83,000 related to the consulting agreement during the year ended December 31, 2019. Of the expensed amount, approximately $41,000 was paid in cash, with the remaining $42,000 included in subscription stock payable for approximately 850,000 shares to be issued in the future.

 

Blue Oar Consulting, Inc. (“Blue Oar”) is owned by Gregory Rotman, who is the son of the Company’s CEO, Steven Rotman. Blue Oar provides business consulting services to the Company. In exchange for such services, the Company has entered into a consulting agreement with the related party entity. Per Blue Oar’s consulting agreement, it is to be paid approximately $15,000 per month in cash for expenses and $12,500 per month to be paid in shares based on a 20-day average at a 50% discount to market. During the year ended December 31, 2019, the Company issued Blue Oar 33,618,226 shares in accordance with the consulting agreement that were accrued and expensed in 2018. During the year ended December 31, 2019, the Company expensed approximately $510,000 related to the consulting agreement . Of the expensed amount, approximately $180,000 was paid in cash, with the remaining $330,000 included in subscription stock payable for approximately 10,562,000 shares to be issued in the future.

 

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

 

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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 2019 and 2018, we retained the firm of Hall and Company (“Hall”) to provide services in the following categories and amounts:

 

Fee Category   2019($)   2018($)
Audit Fees    160,000     90,000 
Audit-Related Fees    90,000      
Tax Fees        
All Other Fees        
Total    250,000     90,000 

 

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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. Audit-related fees incurred for the current period represent fees incurred in connection with audits of Murida Furniture Co., Inc..

 

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. No tax fees incurred for the current or previous period.

 

All other fees include assurance services not related to the audit or review of our financial statements. No other fees incurred for the current or previous period.

 

There were no non-audit services provided by Hall for the current or previous period.

 

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 Hall. 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 provided by Hall during fiscal year 2019 and 2018 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 one meeting during fiscal year 2019.

 

The members of the Audit Committee meet the independence criteria prescribed by applicable regulation and the rules of the SEC for audit committee membership and are “independent director” within the meaning of NASDAQ listing standards. The Audit Committee members meets NASDAQ’s financial literacy requirements, and the Board further determined that both members are “audit committee financial experts” “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.vystarcorp.com.

 

We have reviewed and discussed with management and Hall Vystar’s audited financial statements. We discussed with Hall and Vystar’s Chief Financial Officer the overall scope and plans of Hall’s audit. We met with Hall, 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 Hall 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 Hall the written disclosures and letter required by the applicable requirements of the Public Company Accounting Oversight Board regarding Hall’s communications with the Audit Committee concerning independence. We have discussed with Hall matters relating to its independence.

 

Based on the reviews and discussions referred to above and our review of Vystar’s audited financial statements for fiscal year 2019, 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, 2019, for filing with the SEC.

 

Respectfully submitted,

 

AUDIT COMMITTEE

 

Bryan Stone, M.D., Chair

 

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PART IV

 

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
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Stockholders’ Deficit F-4
Consolidated Statements of Cash Flows F-5

 

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 (incorporated by reference to Vystar Corporation’s Annual Report on Form 10-K for the year ended December 31, 2015 filed on April 14, 2016.)
     
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)

 

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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)
     
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)

 

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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 (incorporated by reference from Exhibit 10.14 to Vystar Corporation’s Annual Report on Form 10-K for the year ended December 31, 2011 filed on March 30, 2012)

 

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   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)

 

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10.19   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)
     
10.20   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)
     
10.21   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
     
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

 

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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.

 

ITEM 16. FORM 10-K SUMMARY

 

Not applicable.

 

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SIGNATURES

 

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

 

  VYSTAR CORPORATION
     
Date: July 6, 2020 By: /s/ Steven Rotman
  Steven Rotman
  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 July 6, 2020.

 

Signature   Title
     
/s/ Steven Rotman   President, Chief Executive Officer, and Chief Financial Officer
Steven Rotman    
     
/s/ Joseph Allegra   Chairman of the Board of Directors
Joseph Allegra, PhD    
     
/s/ Keith D. Osborn   Director
Keith D. Osborn, MD    
     
/s/ Ranjit Matthan   Director
Ranjit Matthan, PhD    
     
/s/ Bryan Stone   Director
Bryan Stone, MD    

 

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