UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

For the quarterly period ended JuneSeptember 30, 2013

For the transition period from __________________ to ______________________________________to____________________

Commission File Number 000-53754

VYSTAR CORPORATION

(Exact Name of Registrant as Specified in its Charter)

20-2027731

2484 Briarcliff Rd, #22

Suite 159

Atlanta, GA 30329

None(Address of Principal Executive Offices, Zip Code)

(866) 674-5238

(FormerRegistrant's telephone number including area code)

3235 Satellite Blvd.

Building 400, Suite 290

Duluth, GA 30096

 (Former name, former address and former fiscal year, if changed since last report)

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  þ[X]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES  þ[X] NO  ¨[  ]

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)  YES¨  [ ]  NOþ  [X]

As of August 30, 2013,April 14, 2014 there were 32,101,28548,143,588 shares of the Registrant’s common stock, par value $0.0001 per share, outstanding.

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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, 2012.  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 important factors, including those set forth in Item 1A – “Risk Factors” of our Form 10-K for the year ended December 31, 2012 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”, “Vystar”, “SleepHealth” or “SleepHealth”“Kiron” in this Quarterly Report on Form 10-Q mean Vystar Corporation, its subsidiaries and affiliates.

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Vystar Corporation

Form 10-Q for the Quarter Ended JuneSeptember 30, 2013

Index

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Part I.       FINANCIAL INFORMATION

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

VYSTAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

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

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VYSTAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

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

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VYSTAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

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

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VYSTAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1

DESCRIPTION OF BUSINESS

Vystar Corporation (“Vystar”, the “Company”, “we”, “us”, or “our”) is the creator and exclusive owner of the innovative technology to produce Vytex® Natural Rubber Latex ("NRL").  In addition, onOn September 13, 2012, the Company acquired SleepHealth, LLC and SleepHealth North Carolina, LLC (“SleepHealth”), privately-held sleep diagnostic companies headquartered in Monroe, Georgia.  SleepHealth provides sleep lab management services to physicians’ offices, specialty and multi-specialty clinics in Georgia, North Carolina and South Carolina. In addition, on June 28, 2013, Vystar Corporation (the “Company”) completed the acquisition of Kiron Clinical Sleep Lab, LLC (“Kiron”) a vertically integrated sleep diagnostic practice located in Durham, NC.  As a result of the acquisition, Vystar Corporation is comprised of two segments, a Vytex Division, focused on expanding the licensing and utilization of its proprietary source natural rubber latex technology and a SleepHealth Division focused on the sleep diagnostic and Durable Medical Equipment (“DME”) businesses.

NOTE 2

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles of the United States of America (“GAAP”) for interim financial information.  Accordingly, certain information and footnotes required by GAAP for complete financial statements may be condensed or omitted.  These interim financial statements should be read in conjunction with our audited financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission ("SEC").  In the opinion of Vystar management, these financial statements contain all adjustments (which comprise only normal and recurring accruals) necessary to present fairly the financial position and results of operations as of and for the three and sixnine month periods ended JuneSeptember 30, 2013 and 2012.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”)GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures.  Although these estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future, actual results could differ from these estimates.  Examples include valuation allowances for deferred tax assets, provisions for bad debts, and fair values of share-based compensation.

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 banks in many cases exceeds the Federal Deposit Insurance Corporation, or FDIC, insurance limits.  While the Company monitors itswe monitor our cash balances on a regular basis and adjustsadjust the balances as appropriate, these balances could be impacted if the underlying financial institutions fail.  To date, the Company haswe have experienced no loss or lack of access to itsour cash; however, the Companywe can provide no assurances that access to itsour cash will not be impacted by adverse conditions in the financial markets.

Inventory

Inventory consisting of Vytex NRL is stated at the lower of cost or market and cost is determined using the first-in, first-out (FIFO) method.

Loss Per Share

Because the Company reported a net loss for the sixnine month periods ended JuneSeptember 30, 2013 and 2012, 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 outstanding to purchase 7,738,3507,188,239 shares and 6,487,5005,051,667 shares of common stock for the sixnine months ended JuneSeptember 30, 2013 and 2012, respectively, as their effect would be anti-dilutive.  Warrants to purchase 11,855,35212,204,706 shares and 10,177,77410,184,308 shares of common stock for the sixnine months ended JuneSeptember 30, 2013 and 2012, respectively, were also excluded from the computation of diluted loss per share as their effect would be anti-dilutive.

Revenues

The Vytex segment derives revenue from sales of or license fees of Vytex NRL raw material to manufacturers and distributors of rubber and rubber end products.  Under both the direct and licensing agreement sales, the Vytex segment recognizes revenue at the time product is shipped and title passes to the customer. Revenue is recognized when the following four criteria are met: (1) persuasive evidence of an arrangement exists; (2) shipment or delivery has occurred; (3) the price is fixed or determinable and (4) collectability is reasonably assured.

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The SleepHealth segment bills its physician base of customers at the end of each month for services provided in that month and is not dependent on the physician collecting from insurance providers or from the patients.  The SleepHealth segment recognizes revenue each month for sleep diagnostic services as services are provided.

The Kiron segment bills insurance providers and patients directly and is dependent on the practice’s ability to collect from healthcare insurance providers and from its patients.  The Kiron segment recognizes revenue each month for sleep services as services are provided.

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash, accounts receivable, accounts payable, accrued expenses, line of credit and shareholder notes payable.  The carrying values of all the Company’s financial instruments approximate fair value because of their short maturities.  In addition to the short maturities, the carrying amounts of our line of credit and shareholder notes payable approximate fair value because the interest rates at JuneSeptember 30, 2013 approximate market interest rates for the respective borrowings.

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

Valuation inputs are classified in the following hierarchy:

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.

NOTE 3

ACQUISITON OF KIRON CLINICAL SLEEP LAB, LLC

On September 13, 2012,June 28, 2013, Vystar Corporation entered into an LLC Ownership Interest Purchase Agreement (the “Agreement”“Agreement”) with Michael Soo, M.D. (“Seller”), the sole member of Kiron Clinical Sleep Lab, LLC, a North Carolina limited liability company (“Kiron”) to purchase all the outstanding membership and ownership interests of SleepHealth, LLC , a Georgia limited liability company (“SleepHealth”)Kiron, and on the same dateJuly 1, 2013 completed such purchase (the “Purchase”“Purchase”). This strategicPursuant to the Agreement, the Company:

(a)   Paid $90,000 cash to Seller;

(b)   Issued 727,434 shares of Vystar common stock to Seller; and

(c)   Shall pay two percent (2%) of Kiron’s gross receipts received by the Company after the Closing Date of the Acquisition for a period of five (5) years.

In addition, the Company agreed to pay an additional $60,000 (the “Adjustment Amount”), $10,000 in cash and $50,000 in shares of Vystar common stock, in the event the audited financial results of Kiron for the year-end 2011, 2012, and the first six (6) months of 2013 were within two percent (2%) variability of the Statement of Revenues and Expenses provided by the Seller at closing for the periods referenced above.  In the event the audited financial results were within three percent (3%) variability, fifty percent (50%) of the Adjustment Amount would be paid to the Seller.  As this calculation is subject to audit, management’s current estimate is subject to change. The current estimate of the fair value of the contingent consideration is $0.

The completed audit of Kiron’s 2011 and 2012 financial statements showed financial results that exceeded the three percent (3%) variability allowed under the Agreement and thus the $60,000 Adjustment Amount was forfeited.  In addition, the Seller resigned from the role of Medical Director and as such has forfeited the two percent (2%) of gross receipts for five (5) years that was included in the original consideration.  The Purchase Consideration was therefore adjusted to $140,000 and all initial Goodwill associated with the purchase was written-off.

At closing, the Company and Seller entered into an agreement (“Contract”) pursuant to which the Seller through his medical practice, Durham Neurology, PLLC, a wholly owned professional limited liability company would provide ongoing clinical and medical services to the Company and Kiron as Medical Director.  The Seller subsequently dissolved Durham Neurology, PLLC in October 2013 leaving Kiron without a Medical Director.  On March 10, 2014, Vystar and Kiron filed Civil Suit 74A-07997-1 IN THE SUPERIOR COURT OF GWINNETT COUNTY, STATE OF GEORGIA against Michael Soo, MD and Durham Neurology, PLLC for multiple breaches of the Agreement and Contract.  Potential settlement discussions are currently taking place but there is no evidence that they will be successful.

The acquisition was expected to be mutually beneficialaccounted for as a business combination as defined by providing each company with new expansion options.ASC Topic 805 – Business Combinations.  As a result of the substantive changesdate of this filing, the purchase price allocation and valuation has not been finalized, and is subject to the projected future results of the SleepHealth segment, management determined there to be a triggering event and accordingly completed an evaluation of the carrying value of goodwill. This evaluation resulted in impairment to goodwill of $67,355, leaving the goodwill balance at $640 as of June 30, 2013. The impairment charge was netted against a Notes Payable due the previous owner of SleepHealth.change.

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Based on the timing of the acquisition, the Company, for comparability purposes, has disclosed the following pro-forma earnings information for the sixnine months ended JuneSeptember 30, 2012,2013, as if the acquisition had occurred effective January 1, 2012.  As such, the actual and pro-forma earnings information for the sixnine months ended JuneSeptember 30, 2013 and JuneSeptember 30, 2012 was as follows:

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VYSTAR CORPORATION AND SUBSIDIARIES

Unaudited Pro Forma Combined Statement of Operations

For the Nine Months Ended September 30

The 2012 supplementalaccompanying notes are an integral part of these financial statements.

Pro Forma Financial Statement Adjustments

The following pro forma earnings were adjusted to include $6,732adjustments are included in the Company’s unaudited pro forma combined financial statements:

(A)

To record the 727,434 shares of amortization costs related to $48,000 in recorded intangible assets and a depreciation adjustment of $2,904. The shares outstanding used in calculating the lossVystar common stock, valued at $50,000 or $0.0688 per share, issued to Seller.

(B)

To record Medical Director Fee Expense of $64,600 and Medical Insurance Billing Software of $1,194 for 2012 was adjusted to include the 636,098 shares issued as partsix month period ending June 30, 2013.

(C)

To record Medical Director Fee of $98,775 and Medical Insurance Billing Software of $1,791 for the purchase price assuming they had been issued on January 1,nine month period ending September 30, 2012.

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NOTE 4

LIQUIDITY AND GOING CONCERN

The Company's financial statements are prepared using the accrual method of accounting in accordance with GAAPaccounting 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, the Company has incurred significant losses.losses and experienced negative cash flow since its inception.  At JuneSeptember 30, 2013, the Company had cash of $209,145$35,875 and a deficit in working capital of $2,240,347.$2,238,969.  Further, at JuneSeptember 30, 2013, the accumulated deficit amounted to $21,855,923.$22,368,546.  As a result of the Company's history of losses and financial condition, there is substantial doubt about the ability of the Company 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 has completed a year-long cost cutting and reorganization plan culminating in the closing of SleepHealth, LLC division in January 2014.  Management plans to finance future operations through the use of cash on hand, increased revenue from better utilization of existing SleepHealth facilities and opening of newKiron facilities, increased revenue from Vytex division license fees, our credit facility, accounts receivable financing, stock warrant exercises from existing shareholders, raising capital through private placements of capital stock and debt.

Our future expenditures will depend on numerous factors, including: the rate at which we can introduce and license Vytex NRL to manufacturers; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; market acceptance of our products and services; competing technological developments; rate at which we can open new SleepHealth facilities; and the rate at which we are able to build aKiron’s Sleep Diagnostic and Durable Medical Equipment (“DME”) business.  As we expand our activities and operations, our cash requirements are expected to increase at a rate consistent with revenue growth after we have achieved sustained revenue generation.

There can be no assurances that the Company will be able to achieve its projected level of revenue in 2013 and beyond.  If the Company is unable to achieve its projected revenue and is not able to obtain alternate additional financing of equity or debt, the Company would need to significantly curtail or reorient its operations during 2013, which could have a material adverse effect on the Company’s ability to achieve its 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.

NOTE 5

PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

Depreciation expense for the three months ended JuneSeptember 30, 2013 and 2012 was $17,637$22,172 and $222,$3,657, respectively and for the sixnine months ended JuneSeptember 30, 2013 and 2012 was $35,497and $445,$54,265 and $4,103, respectively.

NOTE 6

INTANGIBLE ASSETS

Patents represent legal and other fees associated with the registration of patents.  The Company has two patents and two provisional patent submissions with the United States Patent and Trade Office (USPTO), as well as an international PCT (Patent Cooperation Treaty) patent.

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Intangible assets are as follows:

Amortization expense for the three months ended JuneSeptember 30, 2013 and 2012 was $7,200$7,257 and $3,402, respectively, and for$6,155, respectively.  For the sixnine months ended JuneSeptember 30, 2013 and 2012, amortization was $14,393$21,650 and $6,654,$12,809, respectively.

NOTE 7

INCOME TAXES

There is no income tax benefit recorded for the losses for the three and sixnine months ended JuneSeptember 30, 2013 and 2012 since management has determined that the realization of the net deferred tax asset is not assured and has created a valuation allowance for the entire amount of the net deferred tax asset.

NOTE 8

NOTES PAYABLE AND LOAN FACILITY

Secured Borrowing

On March 7, 2013, the Company executed with Summit Financial Resources, L.P. a Hawaii limited partnership (“Summit”), a Financing and Security Agreement (“A/R Financing Facility” or “Facility”) with a maximum credit line of $250,000 in which the Company receives advances on its Eligible Receivables, as defined in the Agreement.  Summit will advance up to 65% of a receivable’s face value and interest accrues on the outstanding advances at a rate of Prime + 1.25% (as of JuneSeptember 30, 2013 the rate on the facility was 4.50%) and a management fee of 0.4% of the receivable’s face amount is charged for each 15 day period the receivable remains unpaid.  The advances are repaid upon collection of the receivables.  As of JuneSeptember 30, 2013 the outstanding balance under the Facility was $8,502.$31,036.

With the closing of the Sleephealth division in January of 2014, this Facility was no longer needed and on April 4, 2014 Vystar made a final payment to close this line of credit established with Summit.

Bank Line of Credit

On September 13, 2012, the Company as part of the acquisition of SleepHealth, LLC, assumed a line of credit with Wells Fargo Bank, N.A. which is (i) unsecured, (ii) bears interest at an annual rate of Prime plus 1.1% (as of JuneSeptember 30, 2013 was 4.35%), and (iii) is payable upon demand.  As of JuneSeptember 30, 2013 the balance under the line of credit was $49,738.$49,737.

Related Party Line of Credit (CMA Note Payable)

On April 29, 2011, the Company executed with CMA Investments, LLC, a Georgia limited liability company (“CMA”), 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 (“CMA directors”) were initially the members.  Pursuant to the terms of the CMA Note, the Company may draw up to a maximum principal amount of $800,000.  Interest, is computed at LIBOR plus 5.25% (5.44%(5.47% at JuneSeptember 30, 2013), on amounts drawn and fees.  The weighted average interest rate in effect on the borrowings for the sixnine months ended JuneSeptember 30, 2013 was 5.45%5.48%.

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Other terms of the CMA Note include:

·

The Note is unsecured.

·

No payments of principal are due until the second anniversary of the Note, at which time all outstanding principal is due and payable; and

·

As compensation to the directors for providing the Note, the Company issued warrants to purchase 2,600,000 shares of the Company’s common stock to the CMA Directors at $0.45 per share, which was the closing price of the Company’s stock on April 29, 2011, which vest 20% immediately and 10% upon each draw by the Company of $100,000 under the Note.  Because the warrants were issued and valued prior to the receipt of funds under this loan, no discount could be recorded and, accordingly, the value of the warrants was capitalized as a financing cost.  The costs are being amortized on a straight line basis over the term of the Note.  

On September 14, 2011, the Company’s Board of Directors approved increasing the line of credit with CMA by $200,000 to a maximum principal amount of $1,000,000 and the Company’s Chairman and Chief Executive Officer became a member of CMA.  As compensation to the CMA Directors for increasing the amount available under the CMA Note, the Board of Directors approved modifying the exercise price for the 2,600,000 compensatory stock purchase warrants previously issued to the Directors from $0.45 to $0.27 per share, which was the closing price of the Company’s common stock on that date and the Company also issued warrants to purchase an additional 1,600,000 shares of the Company’s stock at $0.27 per share, which was the closing price of the Company’s common stock on September 14, 2011, which vest upon the original terms of the CMA Note.  The costs incurred in the modification of the exercise price of the 2,600,000 compensatory stock purchase warrants issued on April 29, 2011 and the additional 1,600,000 warrants issued on September 14, 2011 are being amortized on a straight line basis over the remaining term of the CMA Note.

On November 2, 2012, the Board of Directors approved an increase in the CMA line of credit from $1,000,000 to $1,500,000.  As compensation to the CMA Directors for increasing the amount available under the CMA Note, warrants to purchase an additional 2,100,000 shares of the Company’s stock at $0.35 per share were issued and recorded as deferred financing cost to be amortized through interest expense over the remaining term of the CMA Note.  Amortization of the financing costs associated with the CMA Note amounted to $20,329 and $89,435$96,433 for the three months ended JuneSeptember 30, 2012 and $198,124 and $289,299 for the nine months ended September 30, 2013 and 2012 and $198,124 and $192,866respectively.  There was no amortization cost for the sixthree months ended JuneSeptember 30, 2013 and 2012 respectively.2013.

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.

Shareholder Notes Payable

All of the Company’s Shareholder Promissory Notes are carried on the balance sheet at face value under Long Term Debt, net of accrued interest which is carried on the balance sheet under Accrued Expenses.  

On March 11, 2011, the Company issued to seven existing shareholders of the Company an aggregate of $400,000 of convertible Shareholder Notes (the “Notes”) together with warrants to purchase an aggregate of 160,000 shares of the Company’s common stock at $0.68 per share for two years from the date of issuance.  Such Notes are (i) unsecured, (ii) bear interest at an annual rate of ten percent (10%) per annum from January 1, 2011, and (iii) are convertible into shares of the Company’s common stock at the conversion rate of $0.68 of principal and interest for each such share.  The principal and accrued interest came due on March 11, 2013.  Four of the holders of these notes with a total initial principal amount of $200,000 agreed to convert their notes and accumulated interest to the Company’s 10% Series A Cumulative Convertible Preferred Stock.  One holderThe remaining holders of a note with an initial principal balance of $150,000notes have agreed to extend the maturity date until March 11, 2015. The Company is working with the remaining two Shareholders to either extend the maturity date of their Shareholder Note or convert it to the Company’s 10% Series A Cumulative Convertible Preferred Stock. The outstanding balance including accumulated interest on these two Shareholder Notes was $63,069 on August 30, 2013.

On May 31, 2011, the Company issued to three existing shareholders of the Company an aggregate of $125,000 of convertible promissory notes (the “Shareholder Notes”) together with warrants to purchase an aggregate of 50,000 shares of the Company’s common stock at $0.49 per share for two years from the date of issuance.  Such Shareholder Notes are (i) unsecured, (ii) bear interest at an annual rate of ten percent (10%) per annum from date of issuance, and (iii) are convertible at any time until maturity at the holder’s option into shares of the Company’s common stock at a weighted average conversion rate of $0.49 of principal and interest for each such share.  Accumulated interest and principal came due on May 31, 2013.  One of the Shareholder Notes with an outstanding balance of $30,000 was retired.  The holders of the other two Shareholder Notes issued on May 31, 2011 having an initial principal balance of $100,000 agreed to extend the maturity date by two years and these notes with accumulated interest will be due on May 31, 2015.

The computed value of the warrants issued in connection with the Shareholder Notes issued in March and May 2011, was determined to be $29,287 and was reflected as a debt discount and netted against the Shareholder Notes on the balance sheet.  Additionally, in conjunction with this transaction, the Company recorded a beneficial conversion feature, given the price allocated to the Shareholder Notes was less than the market price on the date of issuance, creating an intrinsic value in the conversion option.  An additional $29,287 was recorded as a reduction in the Shareholder Notes and an increase in paid in capital for the intrinsic value of the conversion feature.  The debt discount and beneficial conversion feature amount are being amortized to interest expense over the life of the Shareholder Notes under the effective interest method at 15.58%.

The current base conversion price for the Shareholder Notes is $0.68 per share or 1,470.59 shares of the Company’s common stock for each $1,000 of principal and accrued interest. As of June 30, 2013 there had been no conversions.13

On October 7, 2011, the Company’s Board of Directors approved modifying the exercise price for the 210,000 stock purchase warrants previously issued to existing shareholders holding convertible promissory notes to $0.27 per share, the closing price of the Company’s common stock on September 14, 2011, the date when the exercise price of warrants previously issued to the Company’s CMA Directors for providing the CMA Note were modified to $0.27 per share.  The Company incurred $10,105 in interest expense for the repricing of the warrants.  As of JuneSeptember 30, 2013 none of the warrants had been exercised.exercised and all have expired.

The current base conversion price for the above referenced Shareholder Notes with an outstanding balance as of September 30, 2013 of $645,252 including accrued interest, is $0.10 per share or 6,452,530 shares of the Company’s common stock.  The face value of the Shareholder Notes is

On May 6, 2013, the Company issued to an existing shareholder of the Company an aggregate of $112,500 of convertible promissory notes (the “Note”).  The Note is (i) unsecured, (ii) bears interest at an annual rate of ten percent (10%) per annum from date of issuance, and (iii) is convertible at any time until maturity at the holder’s option into shares of the Company’s common stock at a weighted average conversion rate of $0.075 of principal and interest for each such share.  No payments of interest or principal are payable until May 6, 2015.

On September 6, 2013, the Company issued to the Chief Executive Office, William R. Doyle a convertible promissory note with a face value of $40,770 (the “Note”) in lieu of compensation.  The Note is (i) unsecured, (ii) bears interest at an annual rate of ten percent (10%) per annum from date of issuance, and (iii) is convertible at any time until maturity at the holder’s option into shares of the Company’s common stock at a weighted average conversion rate of $0.075 of principal and interest for each such share.  No payments of interest or principal are payable until September 6, 2018.

On December 30, 2013, the Company issued to the Chief Executive Office, William R. Doyle a convertible promissory note with a face value of $25,962 (the “Note”) in lieu of compensation.  The Note is (i) unsecured, (ii) bears interest at an annual rate of ten percent (10%) per annum from date of issuance, and (iii) is convertible at any time until maturity at the holder’s option into shares of the Company’s common stock at a weighted average conversion rate of $0.075 of principal and interest for each such share.  No payments of interest or principal are payable until December 30, 2015.

Kiron Acquisition Notes

On June 28, 2013, the Company entered into a note subscription agreement (the "NSA") with two investors (the “Investors") pursuant to which the Company agreed to issue to the Investors senior secured convertible promissory notes due June 30, 2018 bearing semi-annual interest at ten percent (10%) (the "Acquisition Notes") in the principal amount of $200,000.  The Acquisition Notes are convertible into common stock at a price equal to the greater of $0.075 per share or eighty percent (80%) of the volume weighted average 20 day trailing closing price prior to the applicable conversion date.  The financing resulted in $200,000 of cash proceeds to the Company and was used for the acquisition of Kiron Clinical Sleep Lab, LLC (“Kiron”). The Company's obligations under the Notes are secured by a first priority lien on all of the Kiron limited liability corporate membership and ownership interest pursuant to the terms of a security agreement ("Security Agreement") dated July 1, 2013 among the Company and the Investors.

On March 6, 2014, Sound Investment Partners, LLC converted its 10% Convertible Promissory Note due June 30, 2018.  The face value of the $100,000 Note converted to 1,333,334 shares of common stock and the accrued interest of $6,972 converted to 232,408 shares of common stock and 166,204 warrants with a $0.05 exercise price and two year expiration.  On March 31, 2014, Italia-Eire, LP converted its 10% Convertible Promissory Note due June 30, 2018.  The face value of the $50,000 Note converted to 666,667 shares of common stock and the accrued interest of $3,833 converted to 127,778 shares of common stock and 63,889 warrants with a $0.05 exercise price and two year expiration.  On March 31, 2014, Diamond II Investments, LLC converted its 10% Convertible Promissory Note due June 30, 2018.  The face value of the $50,000 Note converted to 666,667 shares of common stock and the accrued interest of $3,833 converted to 127,778 shares of common stock and 63,889 warrants with a $0.05 exercise price and two year expiration.

NOTE 9

STOCKHOLDERS’ EQUITY

Common Stock and Warrants

In January 2013, under the terms of the private placement offering which commenced on May 4, 2012, the Company sold 20,000 shares of common stock at $0.25 per share and 20,000 warrants to purchase common stock at $0.35 per share for proceeds of $5,000.

In March 2013, the Company issued 200,000 shares valued at $40,000 as compensation for a business development contract.

InBetween April 2013 and August 2013 the Company sold 400,000501,333 shares of common stock at $0.075 per share forto three (3) accredited investors in a private offering. Total gross proceeds of $30,000.the issuances were $37,600. No commissions were paid.  The shares of common stock were offered and sold in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.  The Company also issued 4,433,333 shares to investors in the Company’s 2012 private placement of common stock who were the beneficiary of a “ratchet clause” trigger.

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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 $10.00 per share for a value of $2,000,000.  The preferred stock accumulates a 10% per annum dividend and is convertible at a conversion price of $0.075 per common share at the option of the holder after a six month holding period.  The holder may convert up to 5% of the shares to common shares per month.  The preferred shares have full voting rights as if converted and have a fully participating liquidation preference. As of August

On May 30, 2013, the Company hasissued 133,333 common shares to its CEO, William R. Doyle in lieu of expense reimbursement.

On July 1, 2013, the Company issued to the prior owner of Kiron Clinical Sleep Lab, LLC (“Kiron”), Michael Soo, M.D. a total of 727,434 common shares in connection with the purchase of Kiron.

On August 8, 2013, the Company issued a total of 239,733 common shares upon the cashless warrant exercise of 429,000 of the Company’s outstanding and exercisable warrants.

On August 28, 2013, the Company issued a total of 3,300,000 common shares as compensation for an amendment to the Company’s Consulting Agreement with Blue Oar Consulting, Inc.

As of August 29, 2013 the Company had received net investment of $197,110 and issued 19,711 shares of preferred stock under the terms of the offering.  The Company has also issued an additional 10,374 shares of preferred stock in connection with the conversion of four of the Shareholder Notes issued on March 11, 2011 with a collective outstanding balance including accumulated interest on the date of conversion of $103,740 (please see Note 8 for more detail).

On June 28,Between August 1, 2013 and September 30, 2013, the Company issued 133,3331,200,000 shares of common stock to three (3) accredited investors in a private offering.  Total gross proceeds of the issuances were $60,000. No commissions were paid.  The shares of common stock and warrants were offered and sold in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

Between November 1, 2013 and December 1, 2013, the Company issued 2,066,667 shares of common stock and warrants to purchase 1,033,334 shares of common stock to twelve (12) accredited investors in a private offering.  Total gross proceeds of the issuances were $62,000. No commissions were paid.  All warrants issued to investors (a) are exercisable at $0.05 per share of common stock, (b) do not have cashless exercise rights, and (c) are exercisable for two years. The shares of common stock and warrants were offered and sold in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

On December 12, 2013, the Company issued 500,000 common shares to Jason Leaf as compensation for a business development and consulting contract (“Consulting Agreement”).

On December 30, 2013, the Company issued 36,773 common shares for reimbursement of a $1,103 account payable; 346,154 common shares to its CEO, William R. Doyle in lieu of expense reimbursement.salary payable for fiscal year 2013; and 1,692,308 common shares to its CFO, Wilson D. Waters in lieu of salary payable for fiscal year 2013.

On July 1, 2013,February 26, 2014, the Company issued to the prior owner of Kiron Clinical Sleep Lab, LLC (“Kiron”), Michael Soo, M.D. a total of 727,434 common shares in connection with the purchase of Kiron.

On August 8, 2013, the Company issued a total of 239,733 common shares upon the cashless warrant exercise of 429,000 of the Company’s outstanding and exercisable warrants.

On August 28, 2013, the Company issued a total of 3,300,0001,000,000 common shares as compensation for an amendment and extension to the Company’s Consulting Agreement executed in December 2013 with Jason Leaf and 1,500,000 common shares as compensation for a second amendment and extension to the Company’s Business Development Agreement with Blue Oar Consulting, Inc. executed in March 2013 as amended in August 2013.

The Company recorded $60,000$75,000 and $90,000 in amortization$105,000 of deferred compensation expense during the six month periodnine months ended JuneSeptember 30, 2013 and 2012, respectively, related to 2013 and 2012 common stock and warrants issuances for services.respectively.

NOTE 10

SHARE-BASED COMPENSATION

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

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Options

The Company used the Black-Scholes option pricing model to estimate the grant-date fair value of awards granted.   The following assumptions were used for option awards during the sixnine months ended JuneSeptember 30, 2013.  There were noNo option awards were granted during the sixnine months ended JuneSeptember 30, 2012: