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EX-32 - Vystar Corpex32.htm
EX-31 - Vystar Corpex31.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2020

 

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

 

For the transition period from _______________ to ________________

 

Commission File Number 000-53754

 

VYSTAR CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

Georgia   20-2027731

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

725 Southbridge St

Worcester, MA 01610

(Address of Principal Executive Offices, Zip Code)

 

(508) 791-9114

(Registrant’s telephone number including area code)

 

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

 

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

 

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

YES [  ] NO [X]

 

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

 

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

 

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

 

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

 

Class   Outstanding as of November 23, 2020
Preferred Stock, $0.0001 par value per share   13,698 shares
Common Stock, $0.0001 par value per share   1,168,068,315 shares

 

 

 

 
 

 

INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

2
 

 

VYSTAR CORPORATION

 

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

 

INDEX

 

Part I. Financial Information  
     
Item 1. Financial Statements:  
     
  Condensed Consolidated Balance Sheets at September 30, 2020 (unaudited) and December 31, 2019 4
     
  Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 (unaudited) and 2019 (unaudited) 5
     
  Condensed Consolidated Statements of Stockholders’ Deficit for the Three and Nine Months Ended September 30, 2020 (unaudited) and 2019 (unaudited) 6-7
     
  Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 (unaudited) and 2019 (unaudited) 8
     
  Notes to Condensed Consolidated Financial Statements (unaudited) 9
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 31
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 36
     
Item 4. Controls and Procedures 37
     
Part II. Other Information  
   
Item 1. Legal Proceedings 38
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 38
     
Item 3. Defaults Upon Senior Securities 38
     
Item 4. Mine Safety Disclosures 38
     
Item 5. Other Information 38
     
Item 6. Exhibits 38
     
SIGNATURES 39

 

3
 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   September 30,   December 31, 
   2020   2019 
ASSETS   (Unaudited)      
Current assets:          
Cash  $71,913   $72,355 
Accounts receivable   159,521    38,526 
Stock subscription receivable   -    49,250 
Inventories   5,298,561    4,114,977 
Investments - equity securities, at fair value   101,939    149,517 
Prepaid expenses and other   193,183    602,980 
Deferred commission costs   122,614    129,123 
           
Total current assets   5,947,731    5,156,728 
           
Property and equipment, net   1,727,652    1,879,739 
           
Operating lease right-of-use assets   9,501,503    10,379,685 
           
Finance lease right-of-use assets, net   776,123    849,209 
           
Other assets:          
Intangible assets, net   2,180,578    2,489,612 
Goodwill   460,301    460,301 
Inventories, long-term   570,053    935,121 
Deferred commission costs, net of current portion   150,568    217,024 
Other   34,377    34,377 
           
Total other assets   3,395,877    4,136,435 
           
Total assets  $21,348,886   $22,401,796 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
           
Current liabilities:          
Line of credit  $-   $2,413,539 
Term notes - current maturities   2,978    16,374 
Accounts payable   3,731,755    2,846,306 
Accrued expenses   2,104,285    681,758 
Stock subscription payable   2,961,837    1,150,125 
Operating lease liabilities - current maturities   1,095,500    1,055,000 
Finance lease liabilities - current maturities   172,900    167,000 
Shareholder, convertible and contingently convertible notes payable and accrued interest - current maturities   806,911    366,326 
Related party debt - current maturities   641,000    46,000 
Unearned revenue   2,753,496    1,677,171 
Derivative liabilities   1,864,700    1,499,800 
           
Total current liabilities   16,135,362    11,919,399 
           
Long-term liabilities:          
Term notes, net of current maturities   1,402,900    500,000 
Operating lease liabilities, net of current maturities   6,678,499    7,490,431 
Finance lease liabilities, net of current maturities   619,583    694,487 
Unearned revenue, net of current maturities   584,693    823,401 
Shareholder, convertible and contingently convertible notes payable and accrued interest, net of current maturities and debt discount   221,636    494,363 
Related party debt, net of current maturities and debt discount   2,415,701    1,712,259 
           
Total long-term liabilities   11,923,012    11,714,941 
           
Total liabilities   28,058,374    23,634,340 
           
Stockholders’ deficit:          
Convertible preferred stock, $0.0001 par value 15,000,000 shares authorized; 13,698 and 13,828 shares issued and outstanding at September 30, 2020 and December 31, 2019, respectively (liquidation preference of $100,698 and $91,275 at September 30, 2020 and December 31, 2019 , respectively)   1    1 
Common stock, $0.0001 par value, 1,500,000,000 shares authorized; 1,159,998,315 and 1,105,762,080 shares issued at September 30, 2020 and December 31, 2019, respectively, and 1,159,968,315 and 1,105,732,080 shares outstanding at September 30, 2020 and December 31, 2019, respectively   115,996    110,573 
Additional paid-in capital   40,482,509    38,436,607 
Accumulated deficit   (47,929,390)   (41,104,967)
Common stock in treasury, at cost; 30,000 shares   (30)   (30)
           
Total Vystar stockholders’ deficit   (7,330,914)   (2,557,816)
           
Noncontrolling interest   621,426    1,325,272 
           
Total stockholders’ deficit   (6,709,488)   (1,232,544)
           
Total liabilities and stockholders’ deficit  $21,348,886   $22,401,796 

 

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

 

4
 

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2020   2019   2020   2019 
                 
Revenue  $5,544,563   $6,040,201   $13,865,707   $6,417,431 
                     
Cost of revenue   2,527,403    3,378,220    6,450,421    3,789,186 
                     
Gross profit   3,017,160    2,661,981    7,415,286    2,628,245 
                     
Operating expenses:                    
Salaries, wages and benefits   1,535,449    1,223,879    3,655,162    1,223,879 
Share-based compensation   716,161    305,673    1,024,788    2,406,409 
Agent fees   579,750    -    635,919    - 
Professional fees   311,514    153,965    855,397    525,950 
Advertising   469,383    495,421    1,150,540    539,000 
Rent   300,965    259,930    894,275    259,930 
Service charges   132,542    200,212    360,465    202,116 
Depreciation and amortization   249,834    158,409    737,682    258,513 
Other operating   892,239    1,073,793    2,161,852    1,407,598 
                     
Total operating expenses   5,187,837    3,871,282    11,476,080    6,823,395 
                     
Loss from operations   (2,170,677)   (1,209,301)   (4,060,794)   (4,195,150)
                     
Other income (expense):                    
Interest expense   (430,711)   (195,142)   (1,646,104)   (335,208)
Change in fair value of derivative liabilities   143,000    -    (336,900)   (1,044,250)
Loss on settlement of debt, net   (1,419,461)   (339,875)   (1,419,461)   (327,433)
Loss on legal settlement   (101,000)   -    (101,000)   - 
Other income, net   15,316    7,956    35,990    7,802 
                     
Total other expense, net   (1,792,856)   (527,061)   (3,467,475)   (1,699,089)
                     
Net loss   (3,963,533)   (1,736,362)   (7,528,269)   (5,894,239)
                     
Net loss attributable to noncontrolling interest   372,759    63,802    703,846    63,802 
                     
Net loss attributable to Vystar  $(3,590,774)  $(1,672,560)  $(6,824,423)  $(5,830,437)
                     
Basic and diluted loss per share:                    
Net loss per share  $(0.00)  $(0.00)  $(0.01)  $(0.01)
                     
Basic and diluted weighted average number of common shares outstanding   1,159,968,315    1,115,132,332    1,159,968,315    984,587,635 

 

 

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

 

5
 

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020

(Unaudited)

 

   Attributable to Vystar         
   Number       Number               Number       Total         
   of       of       Additional       of       Vystar       Total 
   Preferred   Preferred   Common   Common   Paid-in   Accumulated   Treasury   Treasury   Stockholders’   Noncontrolling   Stockholders’ 
   Shares   Stock   Shares   Stock   Capital   Deficit   Shares   Stock   Deficit   Interest   Deficit 
                                             
Ending balance December 31, 2019   13,828   $1    1,105,762,080   $110,573   $38,436,607   $(41,104,967)   (30,000)  $(30)  $      (2,557,816)  $1,325,272   $      (1,232,544)
                                                        
Share based compensation - options                       5,562                   5,562         5,562 
                                                        
Net loss   -    -    -    -    -    (1,367,377)   -    -    (1,367,377)   (110,946)   (1,478,323)
                                                        

Ending balance

March 31, 2020

   13,828   $1    1,105,762,080   $110,573   $38,442,169   $(42,472,344)   (30,000)  $(30)  $(3,919,631)  $1,214,326   $(2,705,305)
                                                        
Share based compensation - options                       5,562                   5,562         5,562 
                                                        
Net loss   -    -    -    -    -    (1,866,272)   -    -    (1,866,272)   (220,141)   (2,086,413)
                                                        

Ending balance

June 30, 2020

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

 

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

 

6
 

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019

(Unaudited)

 

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

Ending balance

March 31, 2019

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

Ending balance

June 30, 2019

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

 

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

 

7
 

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

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

Derivatives issued as a debt discount

   28,000    - 
Purchase of intangible assets with common stock   -    100,000 
Acquisition of Rotmans with notes payable   -    2,030,000 
Convertible notes and accrued interest payable converted to common stock   -    64,329 
Common stock issued for accrued compensation   201,200    2,383,437 
Common stock issued for settlement of related party line of credit   -    1,977,935 
Shareholder advances to related party on behalf of the Company   -    180,000 
Common stock issued in settlement of convertible notes, discount and derivative liabilities   -    1,279,335 

 

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

 

8
 

 

VYSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - DESCRIPTION OF BUSINESS

 

Nature of Business

 

Vystar Corporation (“Vystar”, the “Company”, “we,” “us,” or “our”) is based in Worcester, Massachusetts and produces a line of innovative air purifiers, which destroy viruses and bacteria through the use of ultraviolet light. Vystar is also the creator and exclusive owner of the innovative technology to produce Vytex® Natural Rubber Latex (“NRL”). Vystar manufactures and sells NRL used primarily in various bedding products. In addition, Vystar has a majority ownership in Murida Furniture Co., Inc. dba Rotmans Furniture (“Rotmans”), the largest furniture and flooring stores in New England and one of the largest independent furniture retailers in the U.S.

 

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

 

Basis of Presentation

 

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

 

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

 

Basis of Consolidation

 

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

 

COVID-19

 

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

 

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

 

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

 

9
 

 

Segment Reporting

 

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

 

Estimates

 

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

 

Fair Value of Financial Instruments

 

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

 

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

 

Valuation inputs are classified in the following hierarchy:

 

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

 

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

 

Acquisitions

 

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

 

10
 

 

Cash and Cash Equivalents

 

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

 

Accounts Receivable

 

Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company routinely sells, without recourse, trade receivables resulting from retail furniture sales to various financial institutions at an average service charge of 4.0% in 2020. Amounts sold during the nine months ending September 30, 2020 were approximately $3,487,000. Retail furniture receivables retained by the Company are generally collateralized by the merchandise sold, represent valid claims against debtors for sales arising on or before the balance sheet date and are reduced to their estimated net realizable value. In addition, the Company grants credit to Vytex customers without requiring collateral. The amount of accounting loss for which Vystar is at risk in these unsecured accounts receivable is limited to their carrying value. Management provides for uncollectible amounts through a charge to earnings and a credit to an allowance for doubtful accounts based upon its assessment of the current status of individual accounts. Balances that are still outstanding after management has performed reasonable collection efforts are written off through a charge to the allowance and a credit to accounts receivable. As of September 30, 2020 and December 31, 2019, the Company considers accounts receivable to be fully collectible and no allowance for doubtful accounts was recorded.

 

Inventories

 

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

 

Prepaid Expenses and Other

 

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

 

Investments - Equity Securities

 

Marketable equity securities have been categorized as available-for-sale and, as a result, are stated at fair value. Unrealized gains and losses are reflected in the statement of operations. The Company periodically reviews the available-for-sale securities for other than temporary declines in fair value below cost and more frequently when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As of September 30, 2020, the Company believes the cost of the available-for-sale securities was recoverable in all material respects.

 

Property and Equipment

 

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

 

Expenditures for major renewals and betterments are capitalized, while routine repairs and maintenance are expensed as incurred. When property items are retired or otherwise disposed of, the asset and related reserve accounts are relieved of the cost and accumulated depreciation, respectively, and the resultant gain or loss is reflected in earnings. As of September 30, 2020, the net balance of property and equipment is $1,727,652 with accumulated depreciation of $491,080. As of December 31, 2019, the net balance of property and equipment is $1,879,739 with accumulated depreciation of $208,799.

 

11
 

 

Intangible Assets

 

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

 

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

 

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

 

Long-Lived Assets

 

We review our long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be fully recoverable. We evaluate assets for potential impairment by comparing estimated future undiscounted net cash flows to the carrying amount of the assets. If the carrying amount of the assets exceeds the estimated future undiscounted cash flows, impairment is measured based on the difference between the carrying amount of the assets and fair value. Assets to be disposed of would be separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet, if material. During the nine months ended September 30, 2020 and 2019, we did not recognize any impairment of our long-lived assets.

 

Goodwill

 

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

 

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

 

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

 

Convertible Notes Payable

 

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

 

12
 

 

Derivatives

 

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

 

The Company applies the accounting standard that provides guidance for determining whether an equity-linked financial instrument, or embedded feature, is indexed to an entity’s own stock. The standard applies to any freestanding financial instrument or embedded features that have the characteristics of a derivative, and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. From time to time, the Company has issued notes with embedded conversion features. Certain of the embedded conversion features contain price protection or anti-dilution features that result in these instruments being treated as derivatives for accounting purposes. Accordingly, as of September 30, 2020, the Company has classified all conversion features as derivative liabilities and has estimated the fair value of these embedded conversion features using a Monte Carlo simulation model.

 

Unearned Revenue

 

Unearned revenue consists of customer advance payments, deposits on sales of undelivered merchandise and deferred warranty revenue on self-insured stain protection warranty coverage.

 

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

 

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

 

Loss Per Share

 

The Company presents basic and diluted loss per share. Because the Company reported a net loss for the nine months ended September 30, 2020 and 2019, common stock equivalents, including stock options and warrants, were anti-dilutive; therefore, the amounts reported for basic and dilutive loss per share were the same. Excluded from the computation of diluted loss per share were options to purchase 27,874,938 and 27,733,271 shares of common stock for the nine months ended September 30, 2020 and 2019, respectively, as their effect would be anti-dilutive. Warrants to purchase 14,205,912 and 14,250,438 shares of common stock for the nine months ended September 30, 2020 and 2019, respectively, were also excluded from the computation of diluted loss per share as their effect would be anti-dilutive. In addition, preferred stock convertible to 4,753,550 and 4,521,020 shares of common stock for the nine months ended September 30, 2020 and 2019, respectively, were excluded from the computation of diluted loss per share as their effect would be anti-dilutive.

 

13
 

 

Revenue

 

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

 

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

 

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

 

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

 

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

 

14
 

 

The Company also defers revenues for separately-priced stain protection warranty coverage for which it is ultimately self-insured. Revenue is recognized from the extended warranty sales on a straight-line basis over the respective contract term. The extended warranty terms primarily range from three to five years from the date of delivery. At September 30, 2020 and December 31, 2019, deferred warranty revenue was approximately $1,037,000 and $1,309,000, respectively, and is included in unearned revenue in the accompanying consolidated balance sheets. During the nine months ended September 30, 2020, the Company recorded total proceeds of approximately $118,000 and recognized total revenues of approximately $390,000 related to deferred warranty revenue arrangements. During the period from July 18, 2019 through September 30, 2019, the Company recorded total proceeds of approximately $96,000 and recognized total revenues of approximately $110,000 related to deferred warranty revenue arrangements. Commission costs in obtaining extended warranty contracts are capitalized and recognized as expense on a straight-line basis over the period of the warranty contract. At September 30, 2020 and December 31, 2019, deferred commission costs were approximately $273,000 and $346,000, respectively, and are included in the accompanying consolidated balance sheets. All other costs, such as costs of services performed under the contract, general and administrative expenses, and advertising costs are expensed as incurred.

 

Cost of Revenue

 

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

 

Research and Development

 

Research and development costs are expensed when incurred. Research and development costs include all costs incurred related to the research, development and testing. For the nine months ended September 30, 2020 and 2019, Vystar’s research and development costs were not significant.

 

Advertising Costs

 

Advertising costs, which include television, radio, newspaper and other media advertising, are expensed upon first showing. Advertising costs included in general and administrative expenses in the accompanying consolidated statements of operations were approximately $1,151,000 and $539,000 for the nine months ended September 30, 2020 and 2019, respectively.

 

Share-Based Compensation

 

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

 

Income Taxes

 

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

 

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

 

15

 

 

Concentration of Credit Risk

 

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

 

Other Risks and Uncertainties

 

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

 

Recent Accounting Pronouncements

 

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

 

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

 

NOTE 3 - LIQUIDITY AND GOING CONCERN

 

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

 

A successful transition to attaining profitable operations is dependent upon obtaining sufficient financing to fund the Company’s planned expenses and achieving a level of revenue adequate to support the Company’s cost structure. Management plans to finance future operations using cash on hand, increased revenue from RxAir air purification units and Vytex license fees and stock issuances to new and existing shareholders. The Company has also focused the efforts of key internal employees on the goal of creating efficiencies in each department in our retail furniture business, including purchasing, marketing, inventory control, advertising, accounting, warehousing and customer service.

 

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

 

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

 

16

 

 

NOTE 4 - INVESTMENTS – EQUITY SECURITIES

 

Cost and fair value of investments - equity securities are as follows:

 

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

 

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

 

NOTE 5 - PROPERTY AND EQUIPMENT

 

Property and equipment, net consists of the following:

 

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

 

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

 

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NOTE 6 - INTANGIBLE ASSETS

 

Intangible assets consist of the following:

 

           Amortization 
   September 30,   December 31,   Period 
   2020   2019   (in Years) 
Amortized intangible assets:              
Customer relationships  $210,000   $210,000   6 - 10 
Proprietary technology   610,000    610,000   10 
Tradename and brand   1,380,000    1,380,000   5 - 10 
Marketing related   380,000    380,000   5 
Patents   359,101    355,418   6 - 20 
Noncompete   50,000    50,000   5 
               
Total   2,989,101    2,985,418     
Accumulated amortization   (817,595)   (504,878)    
               
Intangible assets, net   2,171,506    2,480,540     
Indefinite-lived intangible assets:              
Trademarks   9,072    9,072     
               
Total intangible assets  $2,180,578   $2,489,612     

 

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

 

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

 

NOTE 7 - LEASES

 

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

 

The table below presents the lease costs for the three and nine months ended September 30, 2020 and 2019:

 

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

 

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

 

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

 

The following table presents other information related to leases:

 

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

 

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

 

   Operating Leases   Finance Leases   Total 
             
Remainder of 2020  $375,911   $52,427   $428,338 
2021   1,503,643    205,545    1,709,188 
2022   1,117,377    150,943    1,268,320 
2023   878,807    150,142    1,028,949 
2024   870,000    140,002    1,010,002 
Thereafter   5,220,000    207,475    5,427,475 
                
Total undiscounted lease liabilities   9,965,738    906,534    10,872,272 
Less: imputed interest   (2,191,739)   (114,051)   (2,305,790)
                
Net lease liabilities  $7,773,999   $792,483   $8,566,482 

 

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

 

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NOTE 8 - NOTES PAYABLE AND LOAN FACILITY

 

Line of Credit

 

The Company formerly had a $2,500,000 revolving line of credit with Fidelity Co-operative Bank. Advances were limited to 50% of eligible inventory and bore interest at the prime rate plus 0.50% with a floor of 3.75%. The line was paid in full with proceeds from advances noted below and closed in May 2020.

 

Advances

 

On May 29, 2020, Rotmans entered into a sale promotion consulting agreement with a national furniture sales event company. Under the agreement, Rotmans appointed the third-party as its exclusive agent to assist with a high-impact sale. Before the sale, the agent advanced the Company funds of approximately $2,300,000 to pay off the Fidelity line of credit and certain other vendors. The agent will be reimbursed for the advance from the proceeds of the sale. In addition, the agent has a senior first priority security interest and lien in Rotmans inventories and other assets until all obligations and liabilities are satisfied. Profits of the sale will be distributed according to the specific terms of the agreement. The agreement will expire 240 days from the commencement date of May 29, 2020. The outstanding balance is approximately $796,000 as of September 30, 2020 and is included in accounts payable in the accompanying consolidated balance sheet.

 

Term Notes

 

On February 24, 2020, the Company entered into an agreement with Libertas Funding LLC (“Libertas”) to sell future sale receipts totaling $1,089,000 for a purchase price of $825,000. The sold amount of future sales receipts were to be delivered weekly to Libertas at predetermined amounts over a period of nine months. Pursuant to a settlement agreement dated August 25, 2020, the amount owed to Libertas has been fully settled with the payment of $525,000 on September 4, 2020. Included in loss on settlement of debt, net in the accompanying statements of operations is a gain of approximately $44,000 realized on the Libertas settlement.

 

Other term debt totaling $2,978 and $16,374 at September 30, 2020 and December 31, 2019, respectively, represents three 0% loans on motor vehicles, requiring cumulative monthly payments of $1,488 through maturity in November 2020.

 

On April 16, 2020, Rotmans received $1,402,900 in loan funding from the Paycheck Protection Program (the “PPP”), established pursuant to the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and administered by the U.S. Small Business Administration (“SBA”). The unsecured loan (the “PPP Loan”) is evidenced by a promissory note of the Company dated April 16, 2020 (the “Note”) in the principal amount of $1,402,900 with United Community Bank (the “Bank”), the lender. Under the terms of the Note and the PPP Loan, interest accrues on the outstanding principal at the rate of 1.0% per annum. The term of the Note is two years, though it may be payable sooner in connection with an event of default under the Note. To the extent the loan amount is not forgiven under the PPP, Rotmans is obligated to make equal monthly payments of principal and interest, beginning seven months from the date of the Note, until the maturity date.

 

Certain investors guaranteed $100,000 each with Ameris Bank (formerly Fidelity Bank) to establish a $500,000 revolving line of credit, the proceeds of which were loaned to the Company. Since the inception of the loan, the Company has paid interest at a rate of 4.5% per annum to Ameris Bank on behalf of the investors. Concurrently, interest payable to the investors has accrued at a rate of 10.0% per annum. Pursuant to an agreement dated September 3, 2020, the balance of $500,000 plus accrued interest of $160,000 was deemed to be paid in full through the issuance of 41,250,000 shares of the Company’s common stock. Included in loss on settlement of debt, net in the accompanying statements of operations is a loss of approximately $1,114,000 incurred on the Ameris settlement.

 

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Shareholder, Convertible and Contingently Convertible Notes Payable

 

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

 

   September 30,   December 31, 
   2020   2019 
         
Shareholder, convertible and contingently convertible notes  $951,895   $951,895 
Accrued interest   82,265    46,569 
Debt discount   (5,613)   (137,775)
           
    1,028,547    860,689 
           
Less: current maturities   (806,911)   (366,326)
           
   $221,636   $494,363 

 

Shareholder Convertible Notes Payable

 

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

 

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

 

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

 

Related Party Debt

 

The following table summarizes related party debt:

 

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

 

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Rotman Family Convertible Notes

 

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

 

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

 

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

 

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

 

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

 

Rotman Family Nonconvertible Notes

 

In connection with the acquisition of 58% of Rotmans, Steven and Bernard Rotman were issued related party notes payable in the amounts of $367,500 and $140,000, respectively. The notes bear interest at an annual rate of five percent (5%). Steven Rotman’s note matures eight years from issuance and Bernard Rotman’s note matures four years from issuance. Payments of $3,828 and $2,917 to Steven and Bernard Rotman, respectively, per month were scheduled to begin six months from issuance until maturity in December 2027 and 2023, respectively. The balance of these notes payable including accrued interest to Steven and Bernard Rotman is approximately $390,000 and $148,000, respectively, at September 30, 2020 and approximately $376,000 and $143,000, respectively, at December 31, 2019. No payments have been made by the Company as of September 30, 2020.

 

22

 

 

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

 

Approximate maturities for the succeeding years are as follows:

 

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

 

NOTE 9 - DERIVATIVE LIABILITIES

 

As of September 30, 2020 and December 31, 2019, the Company had a $1,864,700 and $1,499,800, respectively, derivative liability balance on the consolidated balance sheet and recorded a gain (loss) from change in fair value of derivative liabilities of $143,000 and $(336,900) for the three months and the nine months ended September 30, 2020, respectively. The Company recorded a loss from change in fair value of derivative liabilities of $1,044,250 for the nine months ended September 30, 2019. The derivative liability activity comes from the convertible notes payable. The Company analyzed the conversion features and warrants of the various note agreements for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the embedded conversion features should be classified as a derivative because the exercise price of these Convertible notes are subject to a variable conversion rate. The Company has determined that the conversion feature is not considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment. In accordance with ASC 815, the Company has bifurcated the conversion feature of the notes and recorded a derivative liability.

 

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

 

The following table summarizes the derivative liabilities included in the consolidated balance sheet at September 30, 2020 and December 31, 2019:

 

Fair Value of Embedded Derivative Liabilities:

 

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

 

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NOTE 10 - STOCKHOLDERS’ DEFICIT

 

Cumulative Convertible Preferred Stock

 

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

 

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

 

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

 

Common Stock and Warrants

 

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

 

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

 

NOTE 11 - REVENUES

 

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

 

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

 

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

 

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NOTE 12 - SHARE-BASED COMPENSATION

 

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

 

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

 

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

 

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

 

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

 

Options

 

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

 

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

 

25

 

 

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

 

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

 

As of September 30, 2020, the aggregate intrinsic value on the Company’s outstanding options was approximately $160. As of September 30, 2019, the aggregate intrinsic value of the Company’s outstanding options was approximately $2,000. The aggregate intrinsic value will change based on the fair market value of the Company’s common stock.

 

Warrants

 

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

 

The following table represents the Company’s warrant activity for the nine months ended September 30, 2020: