UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20172020
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________________to___________________________________ to ________________
Commission File Number000-53754
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.) |
2480 Briarcliff Rd, #6725 Southbridge St
Suite 159Worcester, MA 01610
Atlanta, GA 30329
(Address(Address of Principal Executive Offices, Zip Code)
(866) 674-5238
(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 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 ☒[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 | |
| (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 |
As of November 14, 2017, there were 132,189,001 shares of the Registrant’s common stock, par value $0.0001 per share, outstanding.
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, 2016.2019. 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, 20162019 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”, or “Kiron” in this Quarterly Report on Form 10-Q mean Vystar Corporation, and affiliates.
Vystar Corporation
Form 10-Q for the Quarter Ended September 30, 2017VYSTAR CORPORATION
IndexFORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2020
INDEX
2
PartPART I. FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||||||
| 2017 | 2016 | |||||||||||
| ASSETS | ||||||||||||
| CURRENT ASSETS | ||||||||||||
| Cash | $ | 6,651 | $ | 36,282 | ||||||||
| Accounts receivable, net of allowance for uncollectible amount of $0 at September 30, 2017 and December 31, 2016, respectively | 5,440 | 17,370 | ||||||||||
| Prepaid expenses | 270,954 | 41,300 | ||||||||||
| TOTAL CURRENT ASSETS | 283,045 | 94,952 | ||||||||||
| OTHER ASSETS | ||||||||||||
| Intangible assets, net | 127,802 | 139,562 | ||||||||||
| TOTAL ASSETS | $ | 410,847 | $ | 234,514 | ||||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||||||
| CURRENT LIABILITIES | ||||||||||||
| Related party line of credit | $ | 1,499,875 | $ | 1,499,875 | ||||||||
| Accounts payable | 394,824 | 488,784 | ||||||||||
| Accrued compensation | — | 2,917 | ||||||||||
| Shareholder notes payable | 591,529 | 595,837 | ||||||||||
| Accrued expenses | 339,946 | 231,080 | ||||||||||
| TOTAL CURRENT LIABILITIES | 2,826,174 | 2,818,493 | ||||||||||
| Shareholder notes payable | 198,461 | 239,231 | ||||||||||
| TOTAL LIABILITIES | $ | 3,024,635 | $ | 3,057,724 | ||||||||
| STOCKHOLDERS’ DEFICIT | ||||||||||||
| Preferred stock, $0.0001 par value, 15,000,000 shares authorized; 13,828 issued and outstanding at September 30, 2017 and December 31, 2016 respectively | 1 | 1 | ||||||||||
| Common stock, $0.0001 par value, 250,000,000 shares authorized; 130,495,927 and 114,951,594 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively | 13,050 | 11,495 | ||||||||||
| Additional paid-in capital | 25,060,524 | 23,979,943 | ||||||||||
| Accumulated deficit | (27,687,363 | ) | (26,814,649 | ) | ||||||||
| TOTAL STOCKHOLDERS’ DEFICIT | (2,613,788 | ) | (2,823,210 | ) | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | $ | 410,847 | $ | 234,514 | ||||||||
| 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.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)(Unaudited)
| Three Months Ended June 30, | Nine Months Ended September 30, | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| REVENUE | $ | 5,400 | $ | 29,642 | $ | 11,723 | $ | 37,264 | ||||||||
| COST OF REVENUE | 4,775 | 3,000 | 15,800 | 15,973 | ||||||||||||
| Gross Margin | 625 | 26,642 | (4,077 | ) | 21,291 | |||||||||||
| OPERATING EXPENSES | ||||||||||||||||
| General and administrative, including non-cash share-based compensation of $242,038 and $74,253 for the three months ended September 30, 2017 and 2016, respectively and $427,998 and $379,301 for the nine months ended September 30, 2017 and 2016, respectively | 331,807 | 247,422 | 860,589 | 902,286 | ||||||||||||
| Total Operating Expenses | 331,807 | 247,422 | 860,589 | 902,286 | ||||||||||||
| LOSS FROM OPERATIONS | (331,182 | ) | (220,780 | ) | (864,666 | ) | (880,995 | ) | ||||||||
| OTHER INCOME (EXPENSE) | ||||||||||||||||
| Interest income | — | — | — | 1 | ||||||||||||
| Other income | 78,513 | (14,456 | ) | 78,513 | (14,456 | ) | ||||||||||
| Interest expense | (43,710 | ) | (40,125 | ) | (128,943 | ) | (134,233 | ) | ||||||||
| Total Other Income (Expense) | 34,803 | (54,581 | ) | (50,430 | ) | (148,688 | ) | |||||||||
| LOSS FROM CONTINUING OPERATIONS | (296,379 | ) | (275,361 | ) | (915,096 | ) | (1,029,683 | ) | ||||||||
| INCOME (LOSS) FROM DISCONTINUED OPERATIONS | 47,229 | (31,030 | ) | 42,382 | 43,207 | |||||||||||
| NET LOSS | $ | (249,150 | ) | $ | (306,391 | ) | $ | (872,714 | ) | $ | (986,476 | ) | ||||
| 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 | 127,657,923 | 111,954,708 | 122,514,759 | 104,995,141 | ||||||||||||
| 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.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSSTOCKHOLDERS’ DEFICIT
(unaudited)FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2020
(Unaudited)
| Nine months ended September 30, | ||||||||
| 2017 | 2016 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net loss | $ | (872,714 | ) | $ | (986,476 | ) | ||
| Adjustments to reconcile net loss to cash used in operating activities | ||||||||
| Share-based compensation | 427,998 | 379,301 | ||||||
| Allowance for uncollectible accounts receivable | — | (60,266 | ) | |||||
| Depreciation | — | 278 | ||||||
| Amortization of intangible assets | 11,760 | 11,760 | ||||||
| (Increase) decrease in assets | ||||||||
| Accounts receivable | 11,930 | 31,766 | ||||||
| Prepaid expenses | (15,487 | ) | 52,445 | |||||
| Increase (decrease) in liabilities | ||||||||
| Accounts payable | (31,159 | ) | 4,666 | |||||
| Accrued compensation and expenses | 53,541 | 28,906 | ||||||
| Net cash used in operating activities | (414,131 | ) | (537,620 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Disposal of equipment, net | — | 2,701 | ||||||
| Net cash provided by investing activities | — | 2,701 | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Issuance of common stock, net of costs | 384,500 | 570,000 | ||||||
| Exercise of warrants/options | — | 53,500 | ||||||
| Net cash provided by financing activities | 384,500 | 623,500 | ||||||
| NET INCREASE (DECREASE) IN CASH | (29,631 | ) | 88,581 | |||||
| CASH - BEGINNING OF YEAR | 36,282 | 29,059 | ||||||
| CASH - END OF PERIOD | $ | 6,651 | $ | 117,640 | ||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: | ||||||||
| NON-CASH TRANSACTIONS | ||||||||
| Common stock issued for services to be rendered | $ | 214,167 | — | |||||
Shareholder notes converted to common stock | $ | 55,470 | — | |||||
| CASH PAID DURING THE PERIOD FOR | ||||||||
| Interest | $ | 73,875 | $ | 96,176 | ||||
| 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.
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.
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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
| NOTE 1 - | DESCRIPTION OF BUSINESS |
Nature of Business
Vystar Corporation (“Vystar”, the “Company”, “we”, “us”,“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®Vytex® Natural Rubber Latex (“NRL”). Our global multi-patented technology reduces antigenicVystar manufactures and total proteinsells NRL used primarily in natural rubber latex products to virtually undetectable levels. Vytex NRL, our “ultra-low protein” natural rubber latexvarious bedding products. In addition, Vystar has been introduced throughouta majority ownership in Murida Furniture Co., Inc. dba Rotmans Furniture (“Rotmans”), the worldwide marketplace that uses NRL or latex substitutes as a raw material for end products. Natural rubber latex or latex substitutes are usedlargest furniture and flooring stores in an extensive rangeNew England and one of products including balloons, textiles, footwear and clothing (threads), adhesives, foams (mattresses, pillows, mattress toppers, etc.),the largest independent furniture (foam and adhesives), carpet, paints, coatings, protective equipment, sporting equipment, and, especially health care products such as condoms, surgical and exam gloves, among others. Our challenge has been that a manufacturer’s conversion from the use of standard latex or synthetic raw material to Vytex NRL involves a protracted sales cycle ranging from eighteen to thirty-six months. Additionally,retailers in the past, our primary method of distribution was via toll manufacturing. We now have several licensing agreements in place for global distribution that have allowed us to focus on and transition to sales and marketing with a technical oversight.U.S.
Vystar has expanded into the consumer arena with an introduction into the mattress, mattress topper and pillow arenas aligning with key foam manufacturers, mattress, mattress toppers and pillow producers, and furniture stores in specific areas of the Unites States. On January 22, 2015, Vystar announced the signing of an exclusive domestic distribution agreement with Worcester, MA based Nature’s Home Solutions (NHS) who sources eco-friendly materials and technologies for use in furnishings and other markets. In September 2016, the Vystar Board of Directors voted to end the January 2015 NHS agreement and replace it with a global exclusive for foam manufactured with Vytex and sold into the home furnishings industry. This change reflects the global nature of the mattress, topper and pillow businesses, the need for local warehousing, and access to container loads of foam cores and pillows for domestic, European and Asian manufacturers.
| 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 unauditednotes 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 accounting principles ofin the United States of America (“U.S. GAAP”) for interim financial information. Accordingly,and do not contain 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 reportAnnual Report on Form 10-K for the year ended December 31, 2016, filed2019. 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 (“SEC”). InCommission. Other than those events disclosed in Note 19, the opinionCompany is not aware of Vystar management, theseany 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 containinclude 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 adjustments (which comprise only normalnon-essential businesses to close their physical workplaces. As a result, the Rotmans showroom, offices and recurring accruals) necessarywarehouse temporarily closed. During that time, associates worked remotely where possible. The Company re-opened on June 10, 2020 and continues to present fairlymonitor developments, including government requirements and recommendations.
In addition, the financial positionCOVID-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 as of and for the three-monththree and nine-month periodsnine months ended September 30, 20172020 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 2016.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. 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 we monitor our cash balances on a regular basis and adjust the balances as appropriate, these balances could be impacted if the underlying financial institutions fail. To date, we have experienced no loss or lack of access to our cash; however, we can provide no assurances that access to our cash will not be impacted by adverse conditions in the financial markets.
Loss Per Share
Because the Company reported a net loss for the nine-month periods ended September 30, 2017 and 2016, common stock equivalents, including stock options and warrants, were anti-dilutive; therefore, the amounts reported for basic and diluted loss per share were the same. Excluded from the computation of diluted loss per share were options outstanding to purchase 8,298,271 shares and 9,718,271 shares of common stock for the nine months ended September 30, 2017 and 2016, respectively, as their effect would be anti-dilutive. Warrants to purchase 16,469,582 and 18,084,609 shares of common stock for the nine months ended September 30, 2017 and 2016, respectively, were also excluded from the computation of diluted loss per share as their effect would be anti-dilutive.
Revenues
The Company derives revenue from license fees of Vytex NRL raw material to manufacturers and distributors of rubber and rubber-end products such as the foam used in the pillows and mattresses. Revenue is recognized when the licensee confirms payment and pays Vystar.
Fair Value of Financial Instruments
The Company’s financial instruments consist principally of cash, accounts receivable, investments - equity securities, accounts payable, accrued expenses lineand interest payable, lines of credit, and shareholder notes payable.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. 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 September 30, 2017 approximate market interest rates foror, in the respective borrowings.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.
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.
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.
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.
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 its inception. At September 30, 2017,2020, the Company had cash of $6,651$71,913 and a deficit in working capital of $2,543,129.approximately $10.2 million. Further, at September 30, 2017,2020 the accumulated deficit amounted to $27,687,363. As a resultapproximately $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 the Company’sthis history of losses and financial condition, there is substantial doubt about the Company’s 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 plans to finance future operations through the use ofusing cash on hand, increased revenue from RxAir air purification units and Vytex division license fees our credit facility,and stock warrant exercises fromissuances to new and existing shareholders, raising capital through private placements of capital stock and debt.
shareholders. The Company’s future expenditures will depend on numerous factors, including: the rate at which the Company can introduce and license Vytex NRL to manufacturers; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; market acceptance of the Company’s products and services; revenue from the licensing agreement with NHS Holdings, LLC; and competing technological developments. 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.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 that the Company will be able to achieve its projected levellevels of revenue in 20172020 and beyond. If the Company is unablenot able 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 2017,2020, which could have a material adverse effect on the Company’s ability to achieve itsthe business objectives, and as a result, may require the Company to file for bankruptcy or cease operations. The financialstatements 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.
As partThe 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 strategyproducts, services and competing technological developments; the Company’s ability to focus on realizingsuccessfully realize synergies through the potentialintegration of the Vytex foam businessmerged companies, acquire new customers and maintain a strong brand; the success of our efforts to reduce expenses in the pillowour retail furniture business; and mattress marketsbroader economic factors such as well as part of the Company’s cost reduction plan,interest rates and changes in customer spending patterns. As the Company madeexpands its activities and operations, cash requirements are expected to increase at a rate consistent with revenue growth after the decision in May 2016 to discontinue the operations of the Kiron division acquired in June 2013.Company has achieved sustained revenue generation.
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NOTE 4 -INVESTMENTS – EQUITY SECURITIES
The Kiron division revenue was $0Cost and $4,538 for the three-month period ended September 30, 2017 and 2016, respectively and $130 and $80,988 for the nine-month period ended September 30, 2017 and 2016, respectively. Gains (Losses) from discontinued operations were $47,229 and ($31,030) for the three-month period ended September 30, 2017 and 2016, respectively and $42,382 and $43,207 for the nine-month period ended September 30, 2017 and 2016, respectively. These gains for the period were the resultfair value of the write-off of accounts payable associated with the previously closed SleepHealth and Kiron divisions.
Patents represent legal and other fees associated with the registration of patents. The Company has four patents with the United States Patent and Trade Office (USPTO), as well as many international PCT (Patent Cooperation Treaty) patents.
Intangible assetsinvestments - equity securities are as follows:
| September 30, 2017 | December 31, 2016 | |||||||
| Patents | $ | 238,551 | $ | 238,551 | ||||
| Trademarks & trade name | 9,072 | 9,072 | ||||||
| Subtotal | 247,623 | 247,623 | ||||||
| Accumulated amortization | (119,821 | ) | (108,061 | ) | ||||
| Intangible assets, net | $ | 127,802 | $ | 139,562 | ||||
| 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 | ||||||||
AmortizationNet 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 threenine months ended September 30, 20172020 and 20162019 was $3,920. $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, 20172020 and 20162019 was $11,760.$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 | ||
There is no income tax benefit recorded forNOTE 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 losseslease costs for the three and nine months ended September 30, 20172020 and 2016 since management has determined that2019:
| 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 realizationnine 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 net deferred tax asset isinterest 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 assuredhave additional operating and has createdfinance 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 valuation allowance$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 entireadvance 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 deferred tax asset.in the accompanying statements of operations is a gain of approximately $44,000 realized on the Libertas settlement.
Related Party LineOther 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 Credit (CMA Note Payable)$1,488 through maturity in November 2020.
On April 29, 2011,16, 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 executed with CMA Investments, LLC, a Georgia limited liability company (“CMA”dated April 16, 2020 (the “Note”), a line of credit with a in the principal amount of up to $800,000$1,402,900 with United Community Bank (the “CMA Note”“Bank”). CMA is a limited liability company of which three of, the directors of the Company (“CMA directors”) were initially the members. Pursuant tolender. Under the terms of the CMA Note and the Company may draw up to a maximum principal amount of $800,000. Interest, is computed at LIBOR plus 5.25% (6.50% at September 30, 2017), on amounts drawn and fees. The weighted averagePPP Loan, interest rate in effectaccrues on the borrowings foroutstanding principal at the sixrate 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 ended September 30, 2017 was 5.25%.from the date of the Note, until the maturity date.
Other terms of the CMA Note include:
On September 14, 2011, the Company’s Board of Directors approved increasing theCertain investors guaranteed $100,000 each with Ameris Bank (formerly Fidelity Bank) to establish a $500,000 revolving line of credit, with CMA by $200,000the proceeds of which were loaned to the Company. Since the inception of the loan, the Company has paid interest at a maximum principal amountrate of $1,000,000 and4.5% 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 Chairmancommon 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.
| 20 |
Shareholder, Convertible and Chief Executive Officer became a memberContingently 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 CMA. Aswhich were for contract work performed by other entities in lieu of compensation toand 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 CMA Directors for increasingCompany’s option post April 19, 2018. The Notes mature one year from issuance but may be extended one (1) additional year by the amount available underCompany. If converted, 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 priceNotes plus accrued interest are convertible into shares of the Company’s common stock on that dateat 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 also issued warrantscertain contingently convertible promissory notes in varying amounts to purchase an additional 1,600,000existing 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 $0.27 per share, which was the closing priceoption of the Company’s common stockCompany, based 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. There was no amortization of the financing costs associated with the CMA Note for the three and nine months ended September 30, 2017 and September 30, 2016.
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 exerciseaverage closing price for the 6,300,000 compensatorytrailing 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 purchase warrants previously issued tosplit and such conversion is in the Directors to $0.10 per share and the CMA Directors forfeited 630,000control of the warrants. AmortizationCompany. All of the financing costs associated with extending the CMA Note was amortized through interest expense.these notes are outstanding as of September 30, 2020.
On AprilBased 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, 2014, the maturity date of the CMA Note was extended to April 30, 2015. No consideration was awarded the CMA members based on this extension.
On April 29, 2015, the maturity date of the CMA Note was extended to April 29, 2016. No consideration was awarded the CMA members based on this extension. The note is currently due on demand.2020 and December 31, 2019, respectively.
Shareholder Notes PayableRelated Party Debt
The following table summarizes the shareholder notes payable:related party debt:
| September 30, 2017 | December 31, 2016 | |||||||
| Shareholder notes | $ | 789,990 | $ | 835,068 | ||||
| Accrued Interest | 276,146 | 231,080 | ||||||
| Total Shareholder Notes & Accrued Interest | 1,066,136 | 1,066,148 | ||||||
| Less: Accrued Interest | (276,146 | ) | (231,080 | ) | ||||
| Less: Current Portion | (591,529 | ) | (595,837 | ) | ||||
| Total long-term debt | $ | 198,461 | $ | 239,231 | ||||
| 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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SuchRotman 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 ranging from fiveof eight percent (5%) to ten percent (10%(8%) per annum from date of issuance, (iii) are convertible at the Company’s option after December 31, 2019, and (iii)(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 conversion rate ranging between $0.05 and $0.1050% discount. The balance of principal and interest for each such share.
The current average conversion price for the above referenced Shareholder and Promissory Notes with an outstanding balance as of September 30, 2017 of $1,066,136notes payable including accrued interest to Steven and Greg Rotman is approximately $0.055$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 shareannum from date of issuance. These notes can be converted only after an acceleration event which involves a symbol change or 19,305,727reverse 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.stock at a 20-day average closing price at a 50% discount. The face valuebalance of the Shareholder Notesnotes payable including accrued interest to Steven and Bernard Rotman were approximately $1,169,000 and $445,000, respectively, at September 30, 20172020 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 $789,990.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.
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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 |
Common Stock
As of September 30, 2020 and WarrantsDecember 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.
As partThe 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 November 2016 Private Placement Memorandum,consolidated statement of operations and the associated fair value carrying amount on the consolidated balance sheet is adjusted by the change. The Company issued 7,690,000 shares of common stock to sixteen (16) accredited investors duringfair values the period from January 1, 2017 toembedded 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, 2017. Total gross proceeds of the issuances were $384,500. No commissions were paid. The shares of common stock were offered2020 and sold in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder.December 31, 2019:
On March 15, 2017, the Company issued 400,000 common shares as compensation under the Company’s Business Development Agreement with FMW Media Works Corporation and 750,000 common shares as compensation under the Company’s Business Development Agreement with Joseph Savanyo.
On April 9, 2017, the Company issued 118,919 common shares as a resultFair Value of a cashless exercise of outstanding warrants.
On April 25, 2017, the Company issued 1,109,406 common shares as a result of a partial conversion of a Shareholder Note and accrued interest.
On September 29, 2017, the Company issued 500,000 shares of common stock as part of the existing PPM to William Doyle, its CEO in lieu of salary earned in August and September 2017.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 | ||||
On September 27, 2017, the Company issued an additional 200,000 common shares as compensation under the Company’s Business Development Agreement with FMW Media Works Corporation and on July 30, 2017 200,000 common shares as compensation under the Company’s Business Development Agreement with Joseph Zampetti. On July 25, 2017 the Company issued 1,087,023 shares (dated June 29, 2017) to Blue Oar Consulting, Inc. as part of a prior contract.
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| NOTE 10 - | STOCKHOLDERS’ DEFICIT |
On May 22, 2017, the Company signed a sales and marketing agreement with Anazca, LLC issuing restricted common shares quarterly and also as goals are achieved and issued 363,985 shares on September 28, 2017.
On July 1, 2017, the Company issued 3,125,000 shares to Accentuate Public Relations LLC under the Company’s Public Relations Services Agreement through December 2018.
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 $10.00$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.
AtAs of September 30, 2017,2020, the 13,82813,698 shares of outstanding preferred stock had accumulated undeclared dividends of approximately $60,133,$101,000 and could be converted into 3,968,2694,753,550 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 | 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 $242,038$1,024,788 and $74,253$2,406,409 of stock-based compensation expense for the three-month periodnine months ended September 30, 20172020 and 2016,2019, respectively, and $427,998 and $379,301 of stock-based compensation expense for the nine-month period ended September 30, 2017, and 2016, respectivelyincluding shares to be issued related to employeeconsultants and board member stock options and common stock and warrants issued to nonemployees. Asnon-employees. Included in stock subscription payable is accrued stock-based compensation of $2,143,587 and $845,175 at September 30, 2017, $128,461 of unrecognized compensation expense related to non-vested share-based awards remains to be recognized over a period of approximately four years.2020 and December 31, 2019, respectively.
Options and Warrants
The Company used the Black-Scholes option pricing model to estimate the grant-date fair value of option and warrant awards granted. The following assumptions were used for warrant awards during the nine months ended September 30, 2017:awards:
| ● | Expected Dividend Yield |
| ● | Expected Volatility in Stock Price |
| ● | Risk-free Interest Rate |
| ● | Expected Life of Award |
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, 2017,2020, there were 618,427are 2,251,729 shares of common stock reservedavailable for issuance under the Plan. In 2014, the Board of Directors adopted an additional stock option plan which provides for an additional 5,000,000 shares which are all available as of December 31, 2016.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-month periodnine months ended September 30, 2017. 2020.
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The following table summarizes all stock option activity of the Company for the period.nine months ended September 30, 2020:
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | |||||||||||
| Outstanding, December 31, 2016 | 9,418,271 | $ | 0.16 | 4.43 | |||||||||
| Granted | — | ||||||||||||
| Exercised | — | ||||||||||||
| Expired | 1,120,000 | ||||||||||||
| Outstanding, September 30, 2017 | 8,298,271 | $ | 0.16 | 4.10 | |||||||||
| Exercisable, September 30, 2017 | 6,533,271 | $ | 0.20 | 5.29 | |||||||||
| 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 employees for expenses and for compensation in lieu of cash as well as 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, 2017:2020:
| Number of Shares | Weighted Average Grant Date Fair Value | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | Weighted | |||||||||||||||||||||||||||||
| Weighted | Average | ||||||||||||||||||||||||||||||||
| Outstanding, December 31, 2016 | 16,122,332 | $ | 0.10 | 6.10 | |||||||||||||||||||||||||||||
| Weighted | Average | Remaining | |||||||||||||||||||||||||||||||
| Number | Average | Exercise | Contractual | ||||||||||||||||||||||||||||||
| of Shares | Fair Value | Price | Life (Years) | ||||||||||||||||||||||||||||||
| Outstanding, December 31, 2019 | 14,237,646 | $ | 0.09 | 3.58 | |||||||||||||||||||||||||||||
| Granted | 1,240,250 | $ | 0.14 | $ | 0.14 | 6.39 | - | - | - | - | |||||||||||||||||||||||
| Exercised | (200,000 | ) | $ | 0.05 | - | - | - | - | |||||||||||||||||||||||||
| Forfeited | (693,000 | ) | $ | 0.14 | (31,734 | ) | - | 1.29 | - | ||||||||||||||||||||||||
| Expired | — | - | - | - | - | ||||||||||||||||||||||||||||
| Outstanding, September 30, 2017 | 16,469,582 | $ | 0.10 | 5.04 | |||||||||||||||||||||||||||||
| Outstanding, September 30, 2020 | 14,205,912 | $ | 0.08 | 2.78 | |||||||||||||||||||||||||||||
| Exercisable, September 30, 2017 | 16,173,221 | $ | 0.10 | 5.36 | |||||||||||||||||||||||||||||
| Exercisable, September 30, 2020 | 14,205,912 | $ | 0.08 | 2.78 | |||||||||||||||||||||||||||||
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| NOTE 13 - | RELATED PARTY TRANSACTIONS |
Officers and Directors
Per Steven Rotman’s Employment agreement dated July 22, 2019, he is to be paid $125,000 per year in cash, $10,417 per month in shares based on a 20-day average price at a 50% discount to market, $5,000 per month in cash for expenses as well as access to a Company provided vehicle and health and life insurance. During the nine months ended September 30, 2020, the Company expensed approximately $338,000 related to this employment agreement. As of September 30, 2020, the Company had a stock subscription payable balance of $641,000, or approximately 23,826,000 shares to be issued in the future and $45,000 of reimbursable expenses payable.
Designcenters.com
This entity is owned by Jamie Rotman, who is the daughter of the Company’s CEO, Steven Rotman. Designcenters.com (“Design”) provided bookkeeping and management services to the Company through July 2019. In exchange for such services, the Company had entered into a consulting agreement with the related party entity. As of September 30, 2020, the Company had a stock subscription payable balance of $42,000, for approximately 850,000 shares related to this party for services incurred and expensed in 2019.
Blue Oar Consulting, Inc.
This entity is owned by Gregory Rotman, who is the son of the Company’s CEO, Steven Rotman. Blue Oar Consulting, Inc. (“Blue Oar”) provides business consulting services to the Company. In exchange for such services, the Company has entered into a consulting agreement with the related party entity.
Per Blue Oar’s consulting agreement, it is to be paid $15,000 per month in cash for expenses, and $12,500 per month to be paid in shares based on a 20-day average at a 50% discount to market. During the nine months ended September 30, 2020, the Company expensed approximately $374,000 related to the consulting agreement. As of September 30, 2020, the Company had a stock subscription payable balance of $569,000, or approximately 28,125,000 shares and a balance of $135,000 in accounts payable related to this related party.
In connection with litigation matters involving both Blue Oar and the Company, legal invoices totaling approximately $25,000 have been paid on Blue Oar’s behalf during the three months ended September 30, 2020 and expensed as consulting services.
| NOTE 14 - | COMMITMENTS |
Employment and Consulting Agreements
The Company has entered into employment and consulting agreements with certain of our officers, employees, and affiliates. For employees, payment and benefits would become payable in the event of termination by us for any reason other than cause, or upon change in control of our Company, or by the employee for good reason.
There is currently one employment agreement in place with the CEO, Steven Rotman. See compensation terms in Note 13.
During the nine months ended September 30, 2020, the Company entered into various service agreements with consultants for financial reporting, advisory, and compliance services.
Litigation
From time to time, the Company is party to certain legal proceedings that arise in the ordinary course and are incidental to our business. Future events or circumstances, currently unknown to management, will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on our consolidated financial position, liquidity or results of operations in any future reporting periods.
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EMA Financial
On February 19, 2019, EMA Financial, Inc. filed a lawsuit in the Southern District of New York against the Company. The lawsuit alleged various breaches of an underlying convertible promissory note and stock purchase agreement and sought four claims for relief: (i) specific performance to enforce a stock conversion and contractual obligations; (ii) breach of contract; (iii) permanent injunction to enforce the stock conversion and contractual obligations; and (iv) legal fees and costs of the litigation. The complaint was filed with a motion seeking: (i) a preliminary injunction seeking an immediate resolution of the case through the stock conversion; (ii) a consolidation of the trial with the preliminary injunctive hearing; and (iii) summary judgment on the first and third claims for relief.
The Company filed an opposition to the motion and upon oral argument the motion for injunctive relief was denied. The Court issued 1,240,250 warrantsa decision permitting a motion for summary judgment to proceed and permitted the Company the opportunity to supplement its opposition papers together with the plaintiff who was also provided opportunity to submit reply papers. On April 5, 2019, the Company filed the opposition papers as well as a motion to dismiss the first and third causes of action in the complaint. On March 13, 2020, the Court granted the Company’s motion dismissing the first and third claims for relief and denied the motion for summary judgment as moot.
The Company subsequently filed an amended answer with counterclaims. The affirmative defenses if granted collectively preclude the relief sought. In addition, Vystar filed counterclaims asserting: (a) violation of 10(b)(5) of the Securities and Exchange Act; (b) violation of Section 15(a)(1) of the Exchange Act (failure to register as a broker-dealer); (c) pursuant to the Uniform Declaratory Judgment Act, 28 U.S.C. §§ 2201, the Company requests the Court to declare: (i) pursuant to Delaware law, the underlying agreements are unconscionable; (ii) the underlying agreements are unenforceable and/or portions are unenforceable, such as the liquidated damages sections; (iii) to the extent the agreement is enforceable, Vystar in good faith requests the Court to declare the legal fee provisions of the agreements be mutual (d) unjust enrichment; (e) breach of contract (in the alternative); and (f) attorneys’ fees.
On June 10, 2020, EMA filed a motion for summary judgment as to its remaining claims for relief and a motion to dismiss the Company’s affirmative defenses and counterclaims. The Company opposed the motion on July 10, 2020, and the same was fully submitted to the Court on July 28, 2020; the parties await the Court’s decision on the motions.
Robert LaChapelle Class Action
On March 13, 2020, Robert LaChapelle, a former employee of Rotmans Furniture, the Company’s majority owned subsidiary, on behalf of himself and all others similarly situated, filed a class action complaint against Rotmans and two of its prior owners (including Steve Rotman, President of the Company) in the Worcester Superior Court alleging non-payment of overtime pay and Sunday premium pay pursuant to the Massachusetts Blue Laws (Ch. 136), the Massachusetts Overtime Law (Chapter 151, § 1A), and the Massachusetts Payment of Wages Law (Chapter 149 §§148 and 150). Specifically, LaChapelle has alleged that Rotmans failed to pay him and other sales people who were paid on a commission-only basis overtime pay at a rate of least 1.5 times the basic minimum wage or premium pay (also at 1.5 times the basic minimum wage) for hours they worked on Sundays. The parties are now in the discovery process and the litigation is proceeding. Based on the current status of the matter, the Company is unable to determine an amount due, if any.
Eric Maas Lawsuit
The Company and members of its Board of Directors, and certain employees and consultants, were added as defendants in the case Maas v. Zymbe, LLC, et al. The complaint was removed from Superior Court of the State of California to Federal District Court in California. The amended complaint alleged various employment, contract, and tort claims, including defamation, arising out of a dispute over the quality and utility of consulting and other services provided by Mr. Eric Maas, including through his dealings with Mr. Jason Leaf and Mr. Gregory Rotman. The original litigation was filed in 2017. After mediation, this matter was settled during the third quarter of 2020, and the case has been dismissed with prejudice. All costs related to this matter have been expensed and included in the accompanying statements of operations.
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| NOTE 15 - | MAJOR CUSTOMERS AND VENDORS |
Major customers and vendors are defined as a customer or vendor from which the Company derives at least 10% of its revenue and cost of revenue, respectively.
There were no significant vendor concentrations during the nine months ended September 30, 20172020. During the nine months ended September 30, 2019, the Company made approximately 26% of its purchases from two major vendors. The Company owed its major vendors approximately $400,000 at exercise prices from $0.07 to $0.17 per share, exercisable overSeptember 30, 2019.
| NOTE 16 - | INCOME TAXES |
The provision (benefit) for income taxes for the nine months ended September 30, 2020 and 2019 assumes a period of five to ten years from the grant date. All21% effective tax rate for federal income taxes. A reconciliation of the warrants withfederal statutory income tax rate and the exceptioneffective income tax rate as a percentage of 362,219 vested immediately withincome before income taxes is as follows:
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2020 | 2019 | |||||||
| Federal statutory income tax rate | (21.0 | )% | (21.0 | )% | ||||
| Change in valuation allowance on net operating loss carryforwards | 21.0 | 21.0 | ||||||
| Effective income tax rate | 0.0 | % | 0.0 | % | ||||
Deferred tax assets as of September 30, 2020 and December 31, 2019 are as follows:
| 2020 | 2019 | |||||||
| NOL carryforwards | $ | 6,625,000 | $ | 5,490,000 | ||||
| Less valuation allowance | (6,625,000 | ) | (5,490,000 | ) | ||||
| Deferred tax assets | $ | - | $ | - | ||||
Deferred taxes are caused primarily by net operating loss carryforwards. For federal income tax purposes, the 362,219 warrants vesting one-eleventh per month overCompany has a net operating loss carryforward of approximately $31,500,000 as of September 30, 2020, of which approximately $18,400,000 expires beginning in 2024 and $13,100,000 which can be carried forward indefinitely. For state income tax purposes, the Company has a net operating loss carryforward of approximately $18,300,000 and $12,900,000 as of September 30, 2020 in Georgia and Massachusetts, respectively, which expires beginning in 2023.
In addition, as of September 30, 2020, Rotmans has a net operating loss carryforward of approximately $4,200,000 for federal income tax purposes of which $1,810,000 expires beginning in 2029 and $2,390,000 can be carried forward indefinitely. Rotmans has a state operating loss carryforward of approximately $3,300,000 which expires beginning in 2022.
Pursuant to Internal Revenue Code Section 382, the future realization of our net operating loss carryforwards to offset future taxable income may be subject to an eleven-month period. annual limitation as a result of ownership changes that may have occurred previously or that could occur in the future.
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| NOTE 17 - | PROFIT SHARING PLAN |
The total amountCompany sponsors a qualified 401(k) profit sharing plan covering all eligible employees. The plan permits participants to make tax-deferred contributions to the plan by salary reduction. Company contributions are discretionary and are determined annually by the Board of Directors.
There were no Company contributions in 2020. Participant and Company contributions are limited to amounts allowed under the Internal Revenue Code.
The Company offers no post-retirement benefits other than the plan discussed above and no significant post-employment benefits.
| NOTE 18 - | ACQUISITION OF ROTMANS |
On July 18, 2019, the Company acquired 58% of the fair valueoutstanding shares of common stock of Rotmans, the largest furniture and flooring store in New England for an aggregate purchase price of $2,030,000. The consideration is to be paid in 25% in term notes payable over 4 to 8 years and 75% in notes convertible to common stock (see Note 8). The Company and Rotmans are exploring a number of initiatives relating to environmentally friendly product development and distribution that will utilize the access to the capital markets afforded by this grant was $50,000 and is recorded as noncash share-based compensation expense as vesting occurs. combination.
The fair valuefollowing unaudited pro forma information presents a summary of the warrants was calculatedCompany’s combined operating results for the three and nine months ended September 30, 2019, as if the acquisition and the related financing transactions had occurred on January 1, 2019. The following pro forma financial information is not necessarily indicative of the Company’s operating results as they would have been had the acquisition been effected on the assumed date, nor is it necessarily an indication of trends in future results for a number of reasons, including, but not limited to, differences between the assumptions used to prepare the pro forma information, basic shares outstanding and dilutive equivalents, cost savings from operating efficiencies, potential synergies, and the impact of incremental costs incurred in integrating the businesses.
| Three Months Ended | Nine Months Ended | |||||||
| September 30, 2019 | September 30, 2019 | |||||||
| Total revenues | $ | 7,219,641 | $ | 21,199,801 | ||||
| Loss from operations | $ | 1,510,982 | $ | 5,416,058 | ||||
| Net loss | $ | 2,075,341 | $ | 7,054,141 | ||||
| Net loss attributable to Vystar | $ | 1,833,148 | $ | 6,490,576 | ||||
| Basic and dilated loss per share | $ | 0.00 | $ | 0.01 | ||||
| NOTE 19 - | SUBSEQUENT EVENTS |
The Company has evaluated subsequent events through the date of the grant utilizingfiling of its Form 10-Q with the Black-Scholes option pricing modelSecurities and assumptions as detailed above.Exchange Commission.
On October 9, 2017, theThe Company issued 481,884 common shares as a result of a cashless exercise of outstanding warrants.
On October 10, 2017, the Company issued Shareholder Notes for a total of $45,000.
On October 20, 2017, the Company issued Anazca 368,217 shares as a quarterly commitment. Anazca, LLC subsequently resigned from their contract effective November 3, 2017.
On November 6, 2017, the Company issued 250,0008,100,000 shares of common stock included in stock subscription payable in the accompanying balance sheet as partof September 30, 2020.
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
OVERVIEW
This analysis of our results of operations should be read in conjunction with the accompanying financial statements. This Report contains certain forward-looking statements within the meaning of Section 27A of the existing PPMSecurities Act, and Section 21E of the Exchange Act. Statements that are predictive in nature and that depend upon or refer to William Doyle, its CEOfuture events or conditions are forward-looking statements. Although we believe that these statements are based upon reasonable expectations, we can give no assurance that projections will be achieved. Please refer to the discussion of forward-looking statements included in lieuPart I of salary earned during October 2017.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSthis Report.
OVERVIEWAbout RxAir
RxAir promotes a healthy lifestyle through the use of its innovative, patented ViraTech air purification technology, thereby improving the quality of life of each and every customer. Independently tested by EPA- and FDA-certified laboratories, the RxAir has been proven to destroy greater than 99% of bacteria and viruses and reduce concentrations of odors and VOCs. The RxAir uses high-intensity germicidal UV lamps that destroy bacteria and viruses instead of just trapping them, setting it apart from ordinary air filtration units. RxAir® and ViraTech® are registered trademarks of Vystar Corp. For more information, visit http://www.RxAir.com.
The Company’s RxAir and UV Flu product line use 48 inches of high-intensity germicidal UV lamps that destroy bacteria, viruses and other germs instead of just trapping them, setting it apart from ordinary air filtration units. RxAir is one of the few UV air purifiers that have been proven in independent EPA- and FDA- certified testing laboratories to destroy on the first pass 99.6% of harmful airborne viruses and bacteria. In addition to inactivating airborne viruses that cause influenza (flu) and colds, RxAir’s device disarms the airborne pathogens that cause MRSA (staph), strep (whooping cough), tuberculosis (TB), measles, pneumonia and a myriad of other antibiotic-resistant and viral infections.
The RxAir and UV Flu product line includes:
| ● | RxAir™ Residential Filterless Air Purifier | |
| ● | UV400 ™ FDA cleared Class II Filterless Air Purifier | |
| ● | RX3000™ Commercial FDA cleared Class II Air Purifier |
Vystar Corporation (“Vystar”, the “Company”, “we”, “us”, or “our”) is the creator and exclusive ownerwill continue production of the innovative technologyRxAir and UV Flu product line with a new world-class manufacturer and an expert U.S. engineer with a full understanding of the RxAir technology. Vystar plans to sell RxAir residential and commercial units via distributors, online and through retail channels. Vystar is assembling the distribution network to relaunch sales of UV400 and Rx3000 units to the healthcare and medical markets, which UV Flu had ceased due to a lack of sales force, distribution and cash flow constraints. Once production and sales are firmly re-established, Vystar expects that the air purification products will produce Vytex® Natural Rubber Latex (“NRL”)margins of approximately 70%. Our global multi-patented technology reduces antigenic
About Rotmans
Rotmans, the largest furniture and total proteinflooring store in natural rubber latex products to virtually undetectable levels. Vytex NRL, our “ultra-low protein” natural rubber latexNew England and one of the largest independent furniture retailers in the U.S., encompassing over 200,000 square feet in Worcester, Mass., and employing 70 people, was founded and has been introduced throughoutunder the worldwide marketplace that uses NRL or latex substitutes as a raw materialleadership of the Rotman family for end products. Natural rubber latex or latex substitutes are used in an extensive range of products including balloons, textiles, footwear and clothing (threads), adhesives, foams (mattresses, pillows, mattress toppers, etc.), furniture (foam and adhesives), carpet, paints, coatings, protective equipment, sporting equipment, and, especially health care products such as condoms, surgical and exam gloves, among others. Our challenge has been that a manufacturer’s conversion from the use of standard latex or synthetic raw material to Vytex NRL involves a protracted sales cycle ranging from eighteen to thirty-six months. Additionally, in the past our primary method of distribution was via toll manufacturing. We now have several licensing agreements50 years. Rotmans is expected to add approximately $25 million annually to Vystar’s top line revenue and enable Vystar to capitalize on the infrastructure already in place for global distribution that have allowed usaccounting, retail sales facilities and staff, customer service, warehousing, and delivery. Significant marketing and advertising opportunities are available for all of Vystar’s brands to focus onRotmans’ thousands of existing customers. As CEO of both Rotmans and transition to salesVystar, Steven Rotman provides continuity of management and marketing with a technical oversight.customer-focused values for the Company.
Natural rubber latex is an agricultural product produced fromImpact of COVID-19 on Our Business
The COVID-19 pandemic has resulted in significant economic disruption and adversely impacted our business. We closed the sapRotmans showroom on March 24. At that time, most of our team members were furloughed. During this period, we paid the cost of enrolled health benefits of those furloughed. We successfully reopened the showroom on June 10. As we restart many aspects of our operation, we will work closely with local authorities and follow the guidance of the rubber tree, Hevea brasiliensis. According to the most recent data availableCenters for Disease Control and obtained on the International Rubber Study Group web site (www.rubberstudy.com) and dated January 6, 2015: the total world rubber demand increased at 1.8% and 4.1% in 2015 and 2016 respectively, growing below the long-term growth rate of 3.7% under the IMF Scenario to 29.1 million tonnes in 2015 and to 30.3 million tonnes in 2016.
World Natural Rubber (NR) demand increased by 3.1% in 2015 under the IMF Scenario and by 4.4% in 2016. The world total NR consumption was 12.3 million tonnes in 2015, 12.9 million tonnes in 2016 and is expected to increase to 16.5 million tonnes in 2023. World Synthetic Rubber (SR) demand was 16.8 million tonnes in 2015 and 17.5 million tonnes in 2016 under the IMF Scenario. In 2023, the demand for SR will be 21.5 million tonnes. The outlook for NR supply is positive, sufficient to meet the demand of the industry for all forecast years under all three scenarios. Almost 60% of global consumption is by the world’s tire manufacturing industry, with the remainder going into the ‘general rubber products’ sector; many thousands of different goods are manufactured by this sector, serving many industries, including transport, construction, health, mining, apparel, foam, etc.
Substantially all of the latex processors are located in Southeast Asia, India, Africa and Latin America and are owned by local groups or large multinational corporations. This future demand is awakening interest in other areas of the world where the climate is suitable, particularly in Guatemala, where focus now shifts to certifications from the Forestry Stewardship Council and Rainforest Alliance, as a specialty latex. In addition to the resurgence of Central and South America in natural rubber latex production, countries such as Vietnam and Cambodia have launched major efforts to meet the needs of the global liquid natural rubber latex market. Vietnam is now a major processor of our Vytex NRL and several trial runs of the specialty offerings discussed below that are in place for manufacturer trials and we now have two producers in Guatemala, one starting the trial phase.
Our initial product portfolio included Vytex NRL in high ammonia (HA) and low ammonia (LA) formulations. New specialized formulations are projected to come to market over the next year with trials in ultra-low ammonia, pre-vulcanized and low nitrosamine versions currently taking place. Vystar has used its technology to work with customers to solve production issues and provide them with a point of difference and guidance as research using Vytex has headed into directions previously thought to be off-limits to natural rubber latex. It appears to be the removal of the vast majority of the proteins, the carotenoidsPrevention (“CDC”), implementing enhanced cleaning measures, social distancing and the non-rubbers that affords Vytex NRL this opportunity.
Boardutilization of Directors Member and Research & Development Director Ranjit K. Matthan, Ph.D., revealed ongoing developments in the formulation of Vytex NRL with reduced or no ammonia and nitrosamines at the International Latex Conference (ILC) session titled “Advances in Environmentally Friendly Ultra Low Protein Natural Rubber Specialty Latices” on August 12, 2015. The significant advances in aluminum hydroxide-treated Vytex NRL properties and applications are potential game-changersface masks for the issuessafety of volatile organic contentteam members, customers and nitrosamines for some critical latex products, such as balloons, catheters, condoms, and other medical devices, as well as enabling cleaner and more sustainable work environments. The expanded Vystar product grades make it applicable in a wider range of latex products with the advantage of improved environmental impact through reduced leachables/extractables. The advances deliver a simplified, sustainable, totally safe raw material that Vystar can offer for several applications without reservations about nitrosamines. Production scale up of all three newer versions of Vytex NRL is currently being targeted as well as sample fulfillment.
Recently at the 2017 Nuremberg Toy Show (Speilwarenmesse) Vytex NRL was a targeted product for manufacturers of balloons, masks, etc. On the main page of the European Balloons and Party Council web site is a Yahoo video still plus a recent press release that discusses the benefits of Vytex NRL in items such as balloons. As there is a new proposal for limits on protein content of balloons by virtue of an EN listing, Vytex has now gone in to full pre-vulcanized testing to start the sampling process in this very large European manufacturing market (Italy, Austria, Spain, etc.) for balloons and has already spread to areas in Central and South America.
Over the course of several years, our technical groups have presented technical papers of varying topics that still hold relevance. Vytex NRL is produced at the latex processor level and can be integrated into the current processing environments without additional capital equipment investment. The protein removal and modification process that leads to Vytex NRL allows manufacturers to lower manufacturing costs with the benefit of reduced protein levels. Reduced leaching times and resulting reductions in energy, water and material handling consumption can lead to realized cost savings.
Also, “Eco-Friendly Manufacturing of High Performance Latex using Ultra Low Antigenic Protein Latex” reviewed some of the learnings Vystar had made since commercializing Vytex NRL. Among these discoveries were: improved air and helium retention in balloons; reduced leaching needs for some dipped products; truer colors for dyed dipped products (such as balloons); and low latex odor in foams, which has now led to unique research into areas previously considered off-limits to NRL. Vystar published and presented a paper, “Further Development of Vytex® Natural Rubber Latex Leads to Strong Niche Market Advances”, that added additional learnings related to slow release (memory) foam formulations and other technical improvements helping customers solve their new product development challenges.
Vystar has transitioned from toll manufacturing agreements to licensing agreements that eliminate the need to maintain a costly infrastructure along with the other investment and regulatory compliance costs to develop and operate a processing or manufacturing facility. All of these costs are or will be borne by our manufacturing and distribution contractors and/or customers. This means we must show the NRL producers and product manufacturers the economic value proposition of including Vytex NRL in their product lines, hence the technical paper presentations we have made and continue to make. In addition, as an all-natural raw material, Vytex NRL puts the main component in gloves and other products back in the environmentally friendly arena.
Increased interest in the exam glove arena has put Vystar in the enviable position of needing glove manufacturers to work with to handle the expected transition of healthcare companies, clinics and non-medical uses. Vystar is currently working with an American manufacturing facility to handle some of these needs as they prepare for production start-up. Other glove manufacturers are also being sought.
To implement our licensing model, in March 2010 we signed a licensing agreement with Pica de Hule Natural, a division of Grupo Agroindustrial de Occidente (“Occidente”), located in Guatemala. Occidente is the largest processor of natural rubber latex in Latin America and the largest exporter serving more than 15 countries. Under the agreement, Occidente will manufacture, sell and market Vytex NRL throughout Latin America as well as supply Vytex NRL to North America and Europe. This agreement was continued in 2016 for an additional 5 yearscommunities.
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In October 2010, we signed a second licensing agreement with KA Prevulcanized Latex (KAPVL) to manufacture and sell Vytex NRL in the SAARC region which includes India, Pakistan, Sri Lanka, Bangladesh, Bhutan and Nepal. India is the second largest consumer of concentrated latex behind China. In 2014, this agreement ended and we did not renew.
In addition, the COVID-19 pandemic has caused, among other things, interruptions in January 2009, we entered into a Distribution Agreementour supply chains and suppliers, including potential problems with Centrotrade Minerals & Metals, USinventory availability and Centrotrade Deutschland, GmbH, Germany, a leading global distributorthe potential result of latex raw materials, to create a worldwide distribution network that will further enhance our ability tothe volatility or higher cost effectively reachof product and service manufacturer customers in these key manufacturing areas. This provides an expansive distribution network that facilitates both the licensing and toll manufacturing models and can assist with various processors in taking their products to market. On December 19, 2012, we amended our agreement with Centrotrade to expand Vytex NRL distribution rightsinternational freight due to the world’s largest NRL consuming markets in Southeast Asia, specifically Malaysiahigh demand of products and Thailand. Under this new license agreement, Centrotrade controls production schedulinglow supply for an unpredictable period of Vytex NRL, inventory in Thailand, sales, pricing and customer financing, while Vystar will focus on marketing, customized product development, as noted above, and support activities. Vystar currently has no exclusive areas under contract as RCMA, a Dutch based distributor was added in 2016.time.
The paper entitled, “The Non-Enzymatic Deproteinization of Natural Rubber Latex (DPNRL) EnablingAs the Greater Versatility in End Product Applications” discussed improvements that extend beyondCOVID-19 pandemic is complex and rapidly evolving, we cannot reasonably estimate the ultra-low allergenicityduration and severity of the DPNRLpandemic and include improved color, absenceits impact on our business, results of rubber odor,operations, financial position and improved physicochemical attributes. Improved air and helium retentions results were reported. The potential to extend applications into other non-conventional areas other than latex end products was discussed and we are currently in the retail test market stages for the United States based manufacturing of mattresses, pillows and toppers to key furniture stores and buying groups, primarily in the Northeastern United States and signed a 5-year renewable agreement in January 2015 with Nature’s Home Solutions (NHS) to exclusively distribute these products in the United States. In September 2016, the Vystar Board of Directors voted to end the January 2015 NHS agreement and replace it with a global exclusive for foam manufactured with Vytex and sold into the home furnishings industry. This change reflects the global nature of the mattress, topper and pillow businesses, the need for local warehousing, and access to container loads of foam cores and pillows for domestic, European and Asian manufacturers.cash flows.
Samples have been presented to the manufacturers and feedback has been very positive with names such as Gold Bond, King Coil (Natura and Laura Ashley) and SpringAir (Nature’s Rest) adding Vytex to their current offerings. A similar trial occurred in October 2016 in Thailand focusing on specific densities and pillows, and a meeting with a Belgian foam maker using a unique drying concept occurred in May 2016 with discussions ongoing. In addition, working with NHS and a large Vietnamese foam manufacturer, Lien A, the group attended the International Sleep Products Association (ISPA) in Orlando in March 2016 a select group attended the ISPA technical show in March 2017 in Tampa. The significance of ISPA is the focus on components for use with major mattress and pillow manufacturers, which takes Vytex foam to an additional audience. NHS sees steady increased exponential growth throughout the remainder of 2017 and the companies, combined with Lien A, have structured the needed supply chain.RESULTS OF OPERATIONS
Pricing of materials in the rubber and latex industries continues to fluctuate. Prices of centrifuged latex, thus Vytex, have risen throughout 2016 and in to early 2017 due to various factors such as floods in southern Thailand, removal of older tress and replanting which is a seven-year process, newer plantations coming online, etc.
Working through distribution with global manufacturers, Vystar secured a commitment from a major manufacturer of dielectric gloves qualifying Vytex to run on a full production line with potential to move to other lines and more of their international locations. Licensing discussions began in November 2016 and has now expanded to full container shipments with additional manufacturing plants set to come on throughout 2017. We are also expanding our usage of Vytex with a worldwide manufacturer of cold seal adhesives to complement the current business in sports shoes and starting a re-trial with a large domestic adhesive company in second quarter 2017.
With the introduction of several new versions of Vytex at the ILC meeting mid-2015, we secured several trials with toy manufacturers arena who desire the lowest levels of nitrosamine and protein per European standards. This affects European balloon manufacturers as well as those selling balloons in the European markets. Also, as an alternative raw material has ceased production, a catheter manufacturer is now trialing Vytex for their internal balloons with results now being evaluated. Vystar has also progressed well in pilot line trials with a major women’s apparel retailer
A small trial is commencing with a start-up American manufacturer of exam gloves, using Vytex, as requested by a major outpatient provider of services. The dipping process for the exam gloves will progress in the next months to provide samples for early evaluation with center-wide trials to start upon approval. As the USFDA 510k allowance for an exam glove containing Vytex is for an un-powdered glove, we are well positioned to manage expectations for those requiring an exam glove without powder with a lower antigenic protein content with two trials currently in place.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended September 30, 20172020 with the Three Months Ended September 30, 20162019
| Three Months Ended September 30, | Continuing | Consolidated | ||||||||||||||||||||||||||||||||||||||
| 2017 | 2016 | $ change | % change | $ change | % change | |||||||||||||||||||||||||||||||||||
| Continuing | Discontinued | Consolidated | Continuing | Discontinued | Consolidated | |||||||||||||||||||||||||||||||||||
| Revenue, net | $ | 5,400 | $ | — | $ | 5,400 | $ | 29,642 | $ | 4,538 | $ | 34,180 | $ | (24,242 | ) | (81.8 | %) | $ | (28,780 | ) | (84.2 | %) | ||||||||||||||||||
| Cost of revenue | 4,775 | — | 4,775 | 3,000 | (18,716 | ) | (15,716 | ) | 1,775 | 59.2 | % | 20,491 | (130.3 | %) | ||||||||||||||||||||||||||
| Gross profit/(loss) | 625 | — | 625 | 26,642 | 23,254 | 49,896 | (26,017 | ) | (97.7 | %) | (49,271 | ) | (98.7 | %) | ||||||||||||||||||||||||||
| Operating Expenses | ||||||||||||||||||||||||||||||||||||||||
| General and administrative | 331,807 | 1,789 | 333,596 | 247,422 | 51,583 | 299,005 | 84,385 | 34.1 | % | 34,591 | 11.6 | % | ||||||||||||||||||||||||||||
| Total operating expenses | 331,807 | 1,789 | 333,596 | 247,422 | 51,583 | 299,005 | 84,385 | 34.1 | % | 34,591 | 11.6 | % | ||||||||||||||||||||||||||||
| Profit (Loss) from Operations | (331,182 | ) | (1,789 | ) | (332,971 | ) | (220,780 | ) | (28,329 | ) | (249,109 | ) | (110,402 | ) | (50.0 | %) | (83,862 | ) | (33.7 | %) | ||||||||||||||||||||
| Other income/(expense) | 78,513 | 49,018 | 127,532 | (14,456 | ) | (2,701 | ) | (17,157 | ) | 92,969 | (643.1 | %) | 144,689 | (843.3 | %) | |||||||||||||||||||||||||
| Interest expense | (43,710 | ) | — | (43,710 | ) | (40,125 | ) | — | (40,125 | ) | (3,585 | ) | 8.9 | % | (3,585 | ) | 8.9 | % | ||||||||||||||||||||||
| Total Other Income/Expense | 34,804 | 49,018 | 83,822 | (54,581 | ) | (2,701 | ) | (57,282 | ) | 89,385 | (163.8 | %) | 141,104 | (246.3 | %) | |||||||||||||||||||||||||
| Net loss | $ | (296,378 | ) | $ | 47,229 | $ | (249,149 | ) | $ | (275,361 | ) | $ | (31,030 | ) | $ | (306,391 | ) | $ | (21,017 | ) | (7.6 | %) | $ | 57,242 | 18.7 | % | ||||||||||||||
| Three Months Ended September 30, | ||||||||||||||||
| 2020 | 2019 | $ Change | % Change | |||||||||||||
| CONSOLIDATED | ||||||||||||||||
| Revenue | $ | 5,544,563 | $ | 6,040,201 | $ | (495,638 | ) | -8.2 | % | |||||||
| Cost of revenue | 2,527,403 | 3,378,220 | (850,817 | ) | -25.2 | % | ||||||||||
| Gross profit | 3,017,160 | 2,661,981 | 355,179 | 13.3 | % | |||||||||||
| Operating expenses: | ||||||||||||||||
| Salaries, wages and benefits | 1,535,449 | 1,223,879 | 311,570 | 25.5 | % | |||||||||||
| Share-based compensation | 716,161 | 305,673 | 410,488 | 134.3 | % | |||||||||||
| Agent fees | 579,750 | - | 579,750 | 0.0 | % | |||||||||||
| Professional fees | 311,514 | 153,965 | 157,549 | 102.3 | % | |||||||||||
| Advertising | 469,383 | 495,421 | (26,038 | ) | -5.3 | % | ||||||||||
| Rent | 300,965 | 259,930 | 41,035 | 15.8 | % | |||||||||||
| Service charges | 132,542 | 200,212 | (67,670 | ) | -33.8 | % | ||||||||||
| Depreciation and amortization | 249,834 | 158,409 | 91,425 | 57.7 | % | |||||||||||
| Other operating | 892,239 | 1,073,793 | (181,554 | ) | -16.9 | % | ||||||||||
| Total operating expenses | 5,187,837 | 3,871,282 | 1,316,555 | 34.0 | % | |||||||||||
| Loss from operations | (2,170,677 | ) | (1,209,301 | ) | (961,376 | ) | 79.5 | % | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | (430,711 | ) | (195,142 | ) | (235,569 | ) | 120.7 | % | ||||||||
| Change in fair value of derivative liabilities | 143,000 | - | 143,000 | 100.0 | % | |||||||||||
| Loss on settlement of debt, net | (1,419,461 | ) | (339,875 | ) | (1,079,586 | ) | 317.6 | % | ||||||||
| Loss on legal settlement | (101,000 | ) | - | (101,000 | ) | 0.0 | % | |||||||||
| Other income, net | 15,316 | 7,956 | 7,360 | 92.5 | % | |||||||||||
| Total other expense, net | (1,792,856 | ) | (527,061 | ) | (1,265,795 | ) | 240.2 | % | ||||||||
| Net loss | (3,963,533 | ) | (1,736,362 | ) | (2,227,171 | ) | 128.3 | % | ||||||||
| Net loss attributable to noncontrolling interest | 372,759 | 63,802 | 308,957 | 484.2 | % | |||||||||||
| Net loss attributable to Vystar | $ | (3,590,774 | ) | $ | (1,672,560 | ) | $ | (1,918,214 | ) | 114.7 | % | |||||
Revenues
Revenues for the three months ended September 30, 20172020 and 2016 from the Company2019 were $5,400$5,544,563 and $34,180,$6,040,201, respectively, for a decrease of $28,780$495,638 or 84.2%8.2%. The decrease in revenues from operations was due to the impact of COVID-19 during the quarter. The Company’s showroom, although open for the entire quarter had significantly lower sales volume then the third quarter of 2019. We cannot estimate the full impact of COVID-19 on revenues at this time.
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The Company reported a significant dropincrease in Vytex royaltygross profit to $3,017,160 for the three-month period ended September 30, 2020 compared to gross profit of $2,661,981 for the three-month period ended September 30, 2019, an increase of $355,179. The cost of revenue and the elimination of the Kiron division. Revenues for the three months ended September 30, 20172020 and 2016 from the Company’s continuing operations were $5,4002019 was $2,527,403 and $29,642,$3,378,220, respectively, for a decrease of $24,242 or 81.8%25.2%. The decreaseincrease in revenues from continuing operations wasgross profit is primarily due to a dropchange in Vytex sales and yet to be realized Vytex foam royalties.purchasing. Merchandise is being purchased in large quantities from fewer vendors.
For the Company, gross margin fell from $49,896 for the period ended September 30, 2016 to $625 for the period ended September 30, 2017, a decrease of $49,271 or 98.7%. Gross margin from continuing operations for the three months ended September 30, 2017 and 2016 was $625 and $26,642 respectively, for a decrease of $26,017 or 97.7%. Cost of revenue from continuing operations for the three months ended September 30, 2017 and 2016 was $4,775 and $3,000 respectively an increase of $1,775 or 59.2%. This was a result of additional shipping costs and Vytex testing expense.
Operating Expenses
The Company’s operating expenses consist of general and administrative expenses. General and administrative expenses consist primarily of compensation and support costs for management and administrative staff, and for other general and administrative costs, including professional fees related to accounting, finance, and legal services as well as advertising, rent and other operating expenses. The Company’s operating expenses were $333,596$5,187,837 and $299,005$3,871,282 for the three months ended September 30, 20172020 and 2016,2019, respectively, for an increase of $34,591$1,316,555 or 11.6%34.0%. ThisThe increase was primarilydue in part to fees incurred under an agreement with a third-party agent to assist the result of an increase in third-party contracted expenses offset by the closing of the Kiron division. The Company’s operating expenses from continuing operations were $331,807 and $247,422Company with a high-impact sale at Rotmans.
Other Income (Expense)
Other expense for the three months ended September 30, 20172020 was $1,792,856, which primarily consisted of interest expense of $430,711, loss on settlement of debt, net of $1,419,461, change in fair value of derivative liabilities of $143,000, loss on legal settlement of $101,000 and 2016, respectively, for an increaseother income of $84,385 or 34.1%.$15,316. This was the resultcompares to other expense of an increase in third-party contracted expenses.
Other Income (Expense)
Other income (expense)$527,061 for the three months ended September 30, 20172019, which primarily consisted of interest expense of $43,710$195,142, loss on settlement of convertible notes payable of $339,875 and other income of $127,532. This compares to net interest expense of $40,125$7,956.
Net Loss
Net loss was $3,963,533 and other expense of $17,157$1,736,362 for the three months ended September 30, 2016. The increase in interest expense for the quarter ended September 30, 2017 versus the same quarter in 2016 was primarily attributable to2020 and 2019, respectively, an increase in LIBOR. Other income for the period was the result of derecognition and write-off of accounts payable associated with the previously closed SleepHealth and Kiron divisions.
Net Loss
Net loss was $249,149 and $306,391 for the three months ended September 30, 2017 and 2016, respectively, a decrease of $57,242 or 18.7% in the net loss.$2,227,171. The smallerlarger net loss the Company experienced in the quarter ended September 30, 20172020 versus the same period in 20162019 was primarily attributabledue to increased expenses from the derecognitionoperations of Rotmans, an increase in share-based compensation and write-offlegal fees and a loss on settlement of accounts payable with the previously closed SleepHealth and Kiron divisions.debt.
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Comparison of the Nine Months Ended September 30, 20172020 with the Nine Months Ended September 30, 20162019
| Nine Months Ended September 30, | Continuing | Consolidated | ||||||||||||||||||||||||||||||||||||||
| 2017 | 2016 | $ change | % change | $ change | % change | |||||||||||||||||||||||||||||||||||
| Continuing | Discontinued | Consolidated | Continuing | Discontinued | Consolidated | |||||||||||||||||||||||||||||||||||
| Revenue, net | $ | 11,723 | $ | 130 | $ | 11,853 | $ | 37,264 | $ | 80,988 | $ | 118,252 | $ | (25,541 | ) | (68.5 | %) | $ | (106,399 | ) | (90.0 | %) | ||||||||||||||||||
| Cost of revenue | 15,800 | 20 | 15,820 | 15,973 | 15,144 | 31,117 | (173 | ) | (1.1 | %) | (15,297 | ) | 49.2 | % | ||||||||||||||||||||||||||
| Gross profit | (4,077 | ) | 110 | (3,967 | ) | 21,291 | 65,844 | 87,135 | (25,368 | ) | (119.1 | %) | (91,102 | ) | (104.6 | %) | ||||||||||||||||||||||||
| Operating Expenses | ||||||||||||||||||||||||||||||||||||||||
| General and administrative | 860,589 | 7,741 | 868,330 | 902,286 | 22,531 | 924,817 | (41,697 | ) | (4.6 | %) | (56,487 | ) | (6.1 | %) | ||||||||||||||||||||||||||
| Total operating expenses | 860,589 | 7,741 | 868,330 | 902,286 | 22,531 | 924,817 | (41,697 | ) | (4.6 | %) | (56,487 | ) | (6.1 | %) | ||||||||||||||||||||||||||
| Profit (Loss) from Operations | (864,666 | ) | (7,631 | ) | (872,297 | ) | (880,995 | ) | 43,313 | (837,682 | ) | 16,329 | 1.9 | % | (34,615 | ) | (4.1 | %) | ||||||||||||||||||||||
| Other income/(expense) | 78,513 | 50,051 | 128,564 | (14,455 | ) | (2,700 | ) | (17,155 | ) | 92,968 | (643.1 | %) | 145,719 | (849.3 | %) | |||||||||||||||||||||||||
| Interest expense | (128,943 | ) | (38 | ) | (128,981 | ) | (134,233 | ) | 2,594 | (131,639 | ) | 5,290 | (3.9 | %) | 2,658 | (2.0 | %) | |||||||||||||||||||||||
| Total Other Income/Expense | (50,430 | ) | 50,013 | (417 | ) | (148,688 | ) | (106 | ) | (148,794 | ) | 98,258 | 66.1 | % | 148,377 | 99.7 | % | |||||||||||||||||||||||
| Net Income/(Loss) | $ | (915,096 | ) | $ | 42,382 | $ | (872,714 | ) | $ | (1,029,683 | ) | $ | 43,207 | $ | (986,476 | ) | $ | 114,587 | 11.1 | % | $ | 113,762 | 11.5 | % | ||||||||||||||||
| Nine Months Ended September 30, | ||||||||||||||||
| 2020 | 2019 | $ Change | % Change | |||||||||||||
| CONSOLIDATED | ||||||||||||||||
| Revenue | $ | 13,865,707 | $ | 6,417,431 | $ | 7,448,276 | 116.1 | % | ||||||||
| Cost of revenue | 6,450,421 | 3,789,186 | 2,661,235 | 70.2 | % | |||||||||||
| Gross profit | 7,415,286 | 2,628,245 | 4,787,041 | 182.1 | % | |||||||||||
| Operating expenses: | ||||||||||||||||
| Salaries, wages and benefits | 3,655,162 | 1,223,879 | 2,431,283 | 198.7 | % | |||||||||||
| Share-based compensation | 1,024,788 | 2,406,409 | (1,381,621 | ) | -57.4 | % | ||||||||||
| Agent fees | 635,919 | - | 635,919 | 0.0 | % | |||||||||||
| Professional fees | 855,397 | 525,950 | 329,447 | 62.6 | % | |||||||||||
| Advertising | 1,150,540 | 539,000 | 611,540 | 113.5 | % | |||||||||||
| Rent | 894,275 | 259,930 | 634,345 | 244.0 | % | |||||||||||
| Service charges | 360,465 | 202,116 | 158,349 | 78.3 | % | |||||||||||
| Depreciation and amortization | 737,682 | 258,513 | 479,169 | 185.4 | % | |||||||||||
| Other operating | 2,161,852 | 1,407,598 | 754,254 | 53.6 | % | |||||||||||
| Total operating expenses | 11,476,080 | 6,823,395 | 4,652,685 | 68.2 | % | |||||||||||
| Loss from operations | (4,060,794 | ) | (4,195,150 | ) | 134,356 | -3.2 | % | |||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | (1,646,104 | ) | (335,208 | ) | (1,310,896 | ) | 391.1 | % | ||||||||
| Change in fair value of derivative liabilities | (336,900 | ) | (1,044,250 | ) | 707,350 | -67.7 | % | |||||||||
| Loss on settlement of debt, net | (1,419,461 | ) | (327,433 | ) | (1,092,028 | ) | 333.5 | % | ||||||||
| Loss on legal settlement | (101,000 | ) | - | (101,000 | ) | 0.0 | % | |||||||||
| Other income, net | 35,990 | 7,802 | 28,188 | 361.3 | % | |||||||||||
| Total other expense, net | (3,467,475 | ) | (1,699,089 | ) | (1,768,386 | ) | 104.1 | % | ||||||||
| Net loss | (7,528,269 | ) | (5,894,239 | ) | (1,634,030 | ) | 27.7 | % | ||||||||
| Net loss attributable to noncontrolling interest | 703,846 | 63,802 | 640,044 | 1003.2 | % | |||||||||||
| Net loss attributable to Vystar | $ | (6,824,423 | ) | $ | (5,830,437 | ) | $ | (993,986 | ) | 17.0 | % | |||||
Revenues
Revenues for the nine months ended September 30, 2017 and 2016 from the Company2019 were $11,853$13,865,707 and $118,252$6,417,431, respectively, for a decreasean increase of $106,399$7,448,276 or 90.0%116.1%. The decreasesignificant increase in revenues from operations was due to the closingacquisition of KironRotmans in July of 2019, which was partially offset by the impact of COVID-19 as the Rotmans showroom was closed from March 24 through June 10. During this period, the Company processed limited customer deliveries for prior orders and web sales and subsequent to this period, sales have not returned to pre-COVID-19 levels.
The Company reported a fallsignificant increase in Vytex royalty revenue. Revenuesgross profit to $7,415,286 for the nine-month period ended September 30, 2020 compared to gross profit of $2,628,245 for the nine-month period ended September 30, 2019, an increase of $4,787,041. The cost of revenue for the nine months ended September 30, 20172020 and 2016 from the Company’s continuing operations were $11,7232019 was $6,450,421 and $37,264$3,789,186, respectively, for a decreasean increase of $25,541 or 68.5%70.2%. The decrease in revenues from continuing operations wasincrease is due to a change in merchandise buying in the drop in raw latex prices and the resultant drop in Vytex licensing fee.third quarter of 2020. The Company has also not yet been able to realize royalties from Vytex foam sales.is now buying items in large quantity rather than special order items.
For the Company, gross margin fell from $87,135 for the period ended September 30, 2016 to a gross loss of $3,967 for the period ended September 30, 2017, a decrease of $91,102 or 104.6%. Gross margin from continuing operations for the nine months ended September 30, 2017 and 2016 was ($4,077) and $21,291 respectively, for a decrease of $25,368 or 119.1%. Cost of revenue from continuing operations for the nine months ended September 30, 2017 and 2016 was $15,800 and $15,973 respectively, a decrease of $173 or 1.1%.
Operating Expenses
The Company’s operating expenses consist of general and administrative expenses. General and administrative expenses consist primarily of compensation and support costs for management and administrative staff, and for other general and administrative costs, including professional fees related to accounting, finance, and legal services as well as advertising, rent and other operating expenses. The Company’s operating expenses were $865, 330$11,476,080 and $924, 817$6,823,395 for the nine months ended September 30, 20172020 and 2016,2019, respectively, for a decreasean increase of $56,487$4,652,685 or 6.1%68.2%. ThisThe increase was primarilydue to the resultacquisition of the closingRotmans in July of the Kiron division and a reduction in third-party contracted services. The Company’s operating expenses from continuing operations were $860,589 and $902,286 for the nine months ended September 30, 2017 and 2016, respectively, for a decrease of $41,697 or 4.6%.2019.
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Other Income (Expense)
Other income (expense)expense for the nine months ended September 30, 20172020 was $3,467,475, which primarily consisted of interest expense of $128,981$1,646,104, loss on settlement of debt of 1,419,461, change in fair value of derivative liabilities of $336,900, loss on legal settlement of $101,000 and other income of $128,564.$35,990. This compares to interestother expense of $131,639$1,699,089 for the nine months ended September 30, 20162019, which consisted of change in fair value of derivative liabilities of $1,044,250, interest expense of $335,208, loss on settlement of convertible notes payable of $327,433 and other expenseincome of $17,155. The decrease in interest expense for the period ended September 30, 2017 versus the same period in 2016 was attributable to a decrease in interest expense associated with outstanding Shareholder Notes. Other income for the period was the result of derecognition and write-off of accounts payable associated with the previously closed SleepHealth and Kiron divisions.$7,802.
Net Loss
Net loss was $872,714$7,528,269 and $986,476$5,894,239 for the nine months ended September 30, 20172020 and 2016,2019, respectively, a decreasean increase of $113,762 or 11.5% in the net loss.$1,634,030. The smallerlarger net loss the Company experienced in the periodnine months ended September 30, 20172020 versus the same period in 20162019 was primarily a reductiondue to increased revenues and gross profit from the operations of Rotmans which was partially offset by the impact of COVID-19 as the showroom was closed from March 24 through June 10, and an increase in third-party contract servicesinterest expense due to amortization of debt discount of $721,000. The Company cannot reasonably estimate the resulteffect of derecognition and the write-off of accounts payable associated with the previously closed SleepHealth and Kiron divisions.COVID-19 on its net loss at this time.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s financial statements are prepared using the accrual method of accounting in accordance with U.S. GAAP and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. However, the Company haswe have incurred significant losses and experienced negative cash flow since its inception. At September 30, 2017,2020, the Company had cash of $6,651$71,913 and a deficit in working capital of $2,543,129.approximately $10.2 million. Further, at September 30, 2017,2020, the accumulated deficit amounted to $27,687,363. As a resultapproximately $47.9 million. We use working capital to finance our ongoing operations, and since those operations do not currently cover all of theour 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 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 plans to finance future operations through the use ofusing cash on hand, as well as increased revenue from RxAir air purifier sales and Vytex division license fees, our credit facility,fees. The Company will also raise capital with common stock warrant exercises from existing shareholders, raising capitalsubscription issuances and has raised $714,500 through private placements of capital stock and debt.
The Company’s future expenditures will depend on numerous factors, including: the rate at whichSeptember 30, 2020. In May, the Company can introduceentered into a sale promotion consulting agreement with a national sales event company to assist its recovery with a high-impact sale and license Vytex NRLmonetary advance. The agreement has allowed Rotmans to manufacturers;meet its financial obligations through the costs of filing, prosecuting, defendingshutdown and enforcing any patent claims and other intellectual property rights; market acceptance of the Company’s products and services; and competing technological developments. Asis expected to give the Company expands its activitiesflexibility and operations, cash requirements are expectedtime needed to increase atdevelop a rate consistent with revenue growth after the Company has achieved sustained revenue generation.new retail furniture sale model.
There can be no assurances that the Companywe will be able to achieve its projected levellevels of revenue in 20172020 and beyond. If the Company is unablewe are not able to achieve its projected revenue and is not able to obtain alternate additional financing of equity or debt, the Companywe would need to significantly curtail or reorient its operations during 2017,2020, which could have a material adverse effect on the Company’sour ability to achieve itsour 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.
Our future expenditures will depend on numerous factors, including: the rate at which we can introduce RxAir products and license Vytex NRL raw material and the foam cores made from Vytex to manufacturers and subsequently retailers; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, along with market acceptance of our products, and services and competing technological developments. As we expand our activities and operations, our cash requirements are expected to increase at a rate consistent with revenue growth after we achieve sustained revenue generation.
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Sources and Uses of Cash
For the nine months ended September 30, 2017 and 2016, net
Net cash used in operationsoperating activities was $414,131 and $537,620 respectively. The negative cash flow$2,353,944 for the nine months ended September 30, 2017 resulted primarily from the2020 as compared to net losscash used in operating activities of $872,714, offset by non-cash charges related to non-cash share-based compensation expense of $427,998, and a decrease in accounts receivable of $11,930, and an increase in accrued expenses of $53,541. The negative cash flow$1,090,903 for the nine months ended September 30, 2016 resulted primarily from the net loss of $986,476 and a decrease in allowance for uncollectible accounts receivable of $60,266 offset by non-cash charges related to non-cash share-based compensation expense of $379,301, prepaid expenses of $52,445, accounts receivable of $31,766 and accrued expenses of $28,906.
For2019. During the nine months ended September 30, 20172020, cash used in operations was primarily due to the net loss for the period of $7,528,269 net of non-cash related add-back of share-based compensation expense, depreciation, amortization, amortization of debt discount, loss on settlement of debt and change in fair value of derivative liabilities.
The Company had nocash used in investing activity. Foractivities of $133,878 during the nine months ended September 30, 2016 the Company realized $2,701 from the disposal of equipment from the closing of the Kiron division.
Net cash provided by financing activities2020 as compared to $10,019 for the nine months ended September 30, 2017 was $384,500 from the sale of common stock. 2019.
Net cash provided by financing activities forwas $2,487,380 during the nine months ended September 30, 20162020, as compared to cash provided of $1,115,092 during the nine months ended September 30, 2019. During the nine months ended September 30, 2020, cash was $570,000used in the net repayment on line of credit of $210,200, term debt in the amount of $794,106, finance lease obligations of $128,464, offset by proceeds from the saleissuance of commonterm debt of $2,211,400, stock subscription receivable of $49,250, advances from stock subscription payable of $714,500 and $53,500 from the exerciserelated party loan of warrants.$645,000.
The Company plans to service its current debt from profitability on RxAir product sales and equity infusions.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that may be reasonably likely to have a current or future material effect on our financial condition, liquidity, or results of operations.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; product development, introduction and acceptance; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.
Although the forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
None
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| ITEM 4. | CONTROLS AND PROCEDURES |
(A) Evaluation of
The Company’s Chief Executive Officer and Chief Financial Officer (the “Certifying Officer”) is responsible for establishing and maintaining disclosure controls and procedures
Our management, including our principal executive for the Company. Although the Certifying Officer has designed such disclosure controls and principal financial officer,procedures to ensure that material information is made known to them, particularly during the period in which this report was prepared, certain material weaknesses occurred during the period ended September 30, 2020 and subsequent to period end. The Certifying Officer has evaluated the effectiveness of ourthe Company’s disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e) (the “Rules”) under the Securities Exchange Act of 1934 (or “Exchange Act”) as of September 30, 2017. Our disclosurethe end of the period covered by this Quarterly Report and is working on improving controls with an outside CPA firm and procedures are designed to provide reasonable assurance that the information required to be disclosed in this quarterly report on Form 10-Q has been appropriately recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and principal financial officer, to allow timely decisions regarding required disclosure. Based on that evaluation, our principal executive officer and principal financial officer has concluded that our disclosure controls and procedures are effective to the reasonable assurance level.dedicated internal resources.
(B) Changes in internal control over financial reportingManagement’s Report on Internal Control Over Financial Reporting
We regularly review our system ofOur management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and make changes15d - 15(f) under the Securities Exchange Act of 1934). Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our processesfinancial reporting and systems to improve controlsthe preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those policies and increase efficiency, while ensuringprocedures that: (i) in reasonable detail accurately and fairly reflect our transactions; (ii) provide reasonable assurance that we maintain an effectivetransactions are recorded as necessary for preparation of our financial statements; (iii) provide reasonable assurance that our receipts and expenditures are made in accordance with management authorization; and (iv) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control environment. Changes may include such activities as implementing new, more efficientover financial reporting, however well designed and operated, can provide only reasonable, and not absolute, assurance that the controls will prevent or detect misstatements. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, consolidating activities, and migrating processes.there is only the reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.
There were no changes inManagement, under the supervision and with the participation of our Chief Executive Officer and our acting Chief Financial Officer, conducted an evaluation of our internal control over financial reporting that occurred duringas of September 30, 2020, based on the first nine monthsframework in Internal Control-Integrated Framework issued by the Committee of 2017Sponsoring Organizations of the Treadway Commission (“COSO”) 2013. Based on our evaluation under the COSO framework, management concluded that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.reporting was not effective as of September 30, 2020. Such conclusion was reached based on the following material weaknesses noted by management:
| a) | We have a lack of segregation of duties due to the small size of the Company. | |
| b) | The Company did not maintain reasonable control over records underlying transactions necessary to permit preparation of the Company’s financial statements. | |
| c) | Lack of controls that provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposal of the Company’s assets that could have a material effect on the financial statements. | |
| d) | Lack of a formal CFO position who can devote significant attention to financial reporting resulted in multiple audit adjustments. | |
| e) | Lack of a functioning audit committee, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures. Management believes the lack of a functioning audit committee results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future period. |
Management expects to strengthen internal control during 2020 by developing stronger business and financial processes for accounting for transactions such as warrant/stock issuances, which will enhance internal control for the Company.
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| ITEM 1. |
The Company is subject to legal proceedings and claims that have not been fully resolved and have arisen in the ordinary course of business. See the discussion of pending legal proceedings in Note 14 of the Notes to Condensed Consolidated Financial Statements.
None
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Set forth below is information regarding shares of common stock, warrants and options to purchase common stock issued byDuring the Company for the ninethree months ended September 30, 2017,2020, the Company entered into stock subscription agreements to issue common stock that were not registered under the Securities Act of 1933, as amended (the “Securities Act”). Also included isTotal proceeds of $714,500 were received for 47,633,403 shares to be issued. The Company will issue the consideration, if any, received bycommon stock in the Companynext quarter. Proceeds were used for such shares, warrants and options and information relating to the section of the Securities Act, or rule of the Securities and Exchange Commission, under which exemption from registration was claimed.working capital.
(a) Common Stock Financings
From December 31, 2016 through September 30, 2017, the Company issued 7,690,000 shares of common stock at $0.05 per share for $384,500. The Company also issued 118,919 shares of common stock as a result of a non-cash warrant exercise and 1,109,406 shares of common stock as a result of a shareholder note and accrued interest conversion.
(b) Stock Option Grants
From December 31, 2016 through September 30, 2017, the Company did not grant any stock options.
(c) Application of Securities Laws and Other Matters
No underwriters were involved in the foregoing sales of securities. The securities described in section (a) of this Item 2 were issued to investors in reliance upon the exemption from the registration requirements of the Securities Act, as set forth in Section 4(2) under the Securities Act and Regulation D promulgated thereunder, as applicable, relative to sales by an issuer not involving any public offering, to the extent an exemption from such registration was required.
All of the foregoing securities are deemed restricted securities for purposes of the Securities Act. All certificates representing the issued shares of common stock, warrants and options described in this Item 2 included appropriate legends setting forth that the securities had not been registered and the applicable restrictions on transfer.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None
ITEM 4. MINE SAFETY DISCLOSURES
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable
| ITEM 5. | OTHER INFORMATION |
None
| ITEM 6. | EXHIBITS |
Exhibit Index
| Number | Description | |
| 31.1 * | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 * | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
* Filed herewith
18
| 38 |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| VYSTAR CORPORATION | ||
| Date: November | By: | /s/ |
President, Chief Executive Officer, Chief Financial Officer and Director | ||
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19