VYST 10-K
Vystar Corp (VYST)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the Fiscal Year Ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
Registrants
telephone number, including area code:
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| NONE | NONE | NONE |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.0001 per share
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐
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by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐
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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.
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by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company, “and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer ☐ | Accelerated Filer ☐ | Smaller
Reporting Company | ||||
| Emerging
growth Company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
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by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
As
of June 30, 2021, the aggregate market value of shares held by non-affiliates of the registrant (based upon the closing sale price of
such shares on the OTC Market on June 30, 2021) was $
As of May 16, 2022, there were shares of the registrant’s common stock outstanding and 8,698 shares of the registrants Series A preferred stock.
Vystar Corporation
Annual Report on Form 10-K
For the Year Ended December 31, 2021
Table of Contents
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CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain oral and written statements made by Vystar Corporation about future events and expectations, including statements in this Annual Report on Form 10-K (the “Report”) contain forward-looking statements, within the meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Securities Act of 1933, as amended (the “Securities Act”), that involve risks and uncertainties. For those statements, we claim the protection of the safe-harbor for forward-looking statements contained in the Private Securities Litigation Act of 1995. In some cases, forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may” and similar expressions. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Report or the statement. All of these forward-looking statements are based on information available to us at this time, and we assume no obligation to update any of these statements. Actual results could differ from those projected in these forward-looking statements as a result of many factors, including those identified in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere. We urge you to review and consider the various disclosures made by us in this Report, and those detailed from time to time in our filings with the Securities and Exchange Commission (the “SEC”), that attempt to advise you of the risks and factors that may affect our future results. We qualify any forward-looking statements entirely by these cautionary factors.
The above-mentioned risk factors are not all-inclusive. Given these uncertainties and that such statements, speak only as of the date made; you should not place undue reliance on forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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PART I
| ITEM 1. | BUSINESS |
Overview
Vystar Corporation (“Vystar”, the “Company”, “we,” “us,” or “our”) is based in Worcester, Massachusetts. The Company uses patented technology to produce a line of innovative air purifiers, which destroy viruses and bacteria through the use of ultraviolet light. In addition, Vystar manufactures and sells reduced allergen natural rubber latex used primarily in various bedding products.
Vystar has a majority ownership in Murida Furniture Co., Inc. dba Rotmans Furniture, one of the largest independent furniture stores in the U.S.
Company Background
In May of 2018, Vystar acquired substantially all of the assets of UV Flu Technologies, Inc. (formerly traded on the OTC under the ticker UVFT), whose patented ViraTech™ UV light air purification technology destroys greater than 99% of airborne bacteria, viruses and other microorganisms and virtually eliminates concentrations of odors and volatile organic compounds (“VOCs”) and created the RxAir division.
The RxAir product line includes:
| ● | RXair™ Residential Filterless Air Purifier | |
| ● | RX400 ™ U.S. Food and Drug Administration (“FDA”) cleared Class II Filterless Air Purifier | |
| ● | RX3000™ Commercial FDA cleared Class II Air Purifier |
RxAir promotes a healthy lifestyle improving the quality of life of each and every customer. Independently tested by the U.S. Environmental Protection Agency (“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 units are sold online at www.RxAir.com and are available through multiple third-party distributors. RxAir® and ViraTech ® are registered trademarks of Vystar Corporation.
Vystar is the exclusive creator of Vytex Natural Rubber Latex (“NRL”), a multi-patented, all-natural, raw material that contains significantly reduced levels of the proteins found in natural rubber latex and can be used in over 40,000 products. Vytex NRL is a 100% renewable resource, environmentally safe, “green” and fully biodegradable. Vystar is working with manufacturers across a broad range of consumer and medical products bringing Vytex NRL to market in adhesives, gloves, balloons, condoms, other medical devices and natural rubber latex foam mattresses, toppers, and pillows.
In April of 2018, Vystar acquired the assets of NHS Holdings, LLC (“NHS”) to move into direct product offerings made from Vytex® latex. NHS was the exclusive U.S. distributor of Vystar’s Vytex® natural rubber latex foam to manufacturers for use in over 200 home furnishings products, including mattresses, toppers, pillows and upholstery, sold through multiple channels.
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In May of 2019, Vystar acquired the assets of Fluid Energy Conversion Inc. (“FEC”), primarily consisting of its patent on the Hughes Reactor, which has the ability to control, enhance, and focus energy in flowing liquids and gases. Vystar intends to use this technology to enhance the effectiveness of Vystar’s RxAir purification system to destroy airborne pathogens while decreasing the cost and size of Vystar’s RxAir units.
In July of 2019, Vystar acquired 58% of the outstanding shares of common stock of Murida Furniture Co., Inc. dba Rotmans Furniture (“Rotmans”), one of the largest independent furniture retailers in the U.S. Rotmans sells a broad line of residential furniture and decorative accessories and serves customers throughout the New England region. The acquisition enabled Vystar to capitalize on the infrastructure already in place at Rotmans for accounting, retail sales facilities and staff, customer service, warehousing, and delivery. In addition, Rotmans offers significant marketing and advertising opportunities for all of Vystar’s brands to Rotmans’ thousands of existing customers.
In December of 2020, Vystar selected Corrie MacColl Limited, a subsidiary of global natural rubber supply chain manager Halcyon Agri, as its exclusive global partner for all aspects of product market development and distribution of patented Vytex deproteinized latex.
Competition
RxAir
The residential air purification market is a highly fragmented competitive business. Vystar competes with a large number of companies on many factors including price, quality, innovation, reputation, distribution and promotion.
Furniture Store
The retail sale of home furnishings is a highly competitive business. There has been growth in the e-commerce channel both from internet only retailers and those with a brick-and-mortar presence. We also compete with numerous individual retail stores as well as chains in our immediate geographic area. Mass merchants and certain department stores also have limited furniture product offerings.
Natural Rubber Latex
Synthetic raw materials such as ethylene, propylene, styrene and butadiene compete with NRL. Currently, it is estimated that NRL processors have lost one-half of the overall latex market to synthetic latex. Despite the switch to non-latex alternatives, it is estimated that almost 70% of exam gloves and nearly 80% of surgical gloves used in U.S. hospitals are still made with NRL.
Intellectual Property
The Company currently holds a portfolio of patents and trademarks in the U.S. and other various foreign countries. No assurance can be given that such patent and trademark protection will provide substantial protection from competition. We are committed to aggressively challenging any infringements of our patents and/or trademarks.
Government Regulation
We are not subject to direct governmental regulation other than the laws and regulations generally applicable to businesses in the domestic and foreign jurisdictions in which we operate.
Our RxAir400 product was cleared by the FDA as a Class II medical device in November 2008. FDA clearance to sell our product as a Class II medical device provides invaluable credibility in the marketplace. By granting a listing, the FDA indicates it has reviewed all aspects of a product, including efficacy of the technology, independent test results and product safety to ensure that the product complies with our claims. Few air purification products are listed by the FDA, and it is extremely important that we expend the resources necessary to maintain this listing as a Class II medical device with the FDA.
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Seasonality
Our business is affected by traditional retail seasonality, advertising and promotion programs and general economic trends.
Employees
As of December 31, 2021, Vystar had one employee, Steven Rotman, CEO. Rotmans had 43 full-time and 15 part-time employees. None of the employees are represented by a labor organization or a party to any collective bargaining arrangement.
Corporate Information
Vystar Corporation is a Georgia corporation that was incorporated in 2003. Our predecessor company, Vystar LLC, was formed by our founder, Travis Honeycutt, in February 2000 as a Georgia limited liability company. Our corporate office is located at 725 Southbridge Street, Worcester, Massachusetts 01610. Our website address is www.vystarcorp.com.
The information contained on, or that can be accessed through, our website is not a part of this Report. We have links on our website to reports, information statements, and other information that we file electronically with the Securities and Exchange Commission, or SEC, at the Internet website maintained by the SEC, www.sec.gov. In addition to visiting our website and the SEC’s website, you may read and copy public reports we file with or furnish to the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
| ITEM 1A. | RISK FACTORS |
Our business is subject to a number of risks and uncertainties — many of which are beyond our control — that may cause our actual operating results or financial performance to be materially different from our expectations. If one or more of the events discussed below were to occur, actual outcomes could differ materially from those expressed in or implied by any forward-looking statements we make in this report or our other filings with the SEC, and our business, financial condition, results of operations or liquidity could be materially adversely affected; furthermore, the trading price of our common stock could decline and our shareholders could lose all or part of their investment.
Vystar presently does not generate the cash needed to finance its current and anticipated operations.
The Company is still in the early stage of establishing our business including attracting new customers and increasing sales. Our financial success will be dependent upon the soundness of our business concept, our management’s ability to successfully and profitably execute our plan, and our ability to raise additional capital.
Our limited operating history makes it difficult to evaluate our business. We expect to make significant future operating expenditures to develop and expand our business into areas such as OEM product lines and offerings in the mattress and furniture arenas. We may incur significant losses in the future for a number of reasons, including due to the other risks described in this Report, and we may encounter unforeseen expenses, difficulties, complications and delays and other unknown events. Accordingly, we may not be able to achieve or maintain profitability, and we may incur significant losses for the foreseeable future. See additional discussion under Liquidity and Capital Resources.
At December 31, 2021 our cash position was $151,175 and we had an accumulated deficit of $51,410,516. We plan to finance our operations for the next twelve (12) months through the use of cash on hand, raising capital through private placement and increased sales from RxAir products by exploring sales partnerships with third-party wholesalers and retailers. The Company is also evaluating adopting a consignment-based sales model at Rotmans. You should consider, among other factors, our prospects for success in light of the risks and uncertainties encountered by companies that, like us, have not generated net earnings on an annual basis. Various factors, such as economic conditions, regulatory and legislative considerations, and competition, may also impede our ability to expand our market presence. We may not successfully address these risks and uncertainties or successfully implement our operating strategies. If we fail to do so, it could materially harm our business and impair the value of our common stock. Even if we accomplish these objectives, we may not generate positive cash flows or profits we anticipate in the future.
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The following risk factors apply to our RxAir business:
We face significant competition from multinational and regional manufacturers.
The growing air purification market is highly competitive with companies offering wide range of air purifiers sold through e-commerce websites, company-owned websites, retailer and their websites and distributors. Market participants compete on product performance, quality, price and reputation.
We are dependent upon the ability of our third-party producers to meet our requirements.
We source our products from non-exclusive, third-party producers, many of which are located in foreign countries. We depend upon the ability of third-party producers to secure a sufficient supply of raw materials, a skilled workforce, adequately finance the production of goods ordered and maintain sufficient manufacturing and shipping capacity. We cannot be certain that we will not experience operational difficulties with our manufacturers, such as insufficient quality control, failures to meet production deadlines or increases in manufacturing costs.
The following risk factors apply to our furniture business:
We face a volatile retail environment and changing economic conditions that may further adversely affect consumer demand and spending.
Historically, the home furnishings industry has been subject to cyclical variations in the general economy and to uncertainty regarding future economic prospects. Should the current economic recovery falter or the current recovery in housing starts stall, consumer confidence and demand for home furnishings could deteriorate which could adversely affect our business.
Our retail store faces significant competition from national, regional and local retailers of home furnishings, including increasing on-line competition via the internet.
The retail market for home furnishings is highly fragmented and intensely competitive. We currently compete against a diverse group of retailers, including mass merchants, national department stores, regional or independent specialty stores, and dedicated franchises of furniture manufacturers. We also compete with retailers that market products through store catalogs and the internet. In addition, there are few barriers to entry into our current and contemplated markets, and new competitors may enter our current or future markets at any time. We have also seen increasing competition from retailers offering consumers the ability to purchase home furnishings via the internet for home delivery, and this trend is expected to continue. Our existing competitors or new entrants into our industry may use a number of different strategies to compete against us, including aggressive advertising, pricing and marketing, extension of credit to customers on terms more favorable than we offer, and expansion into markets where we currently operate.
Competition from any of these sources could cause us to lose market share, revenues and customers, increase expenditures or reduce prices, any of which could have a material adverse effect on our results of operations.
Failure to successfully anticipate or respond to changes in consumer tastes and trends in a timely manner could adversely impact our business, operating results and financial condition.
Sales of our furniture are dependent upon consumer acceptance of specific designs, styles, quality and price. As with all retailers, our business is susceptible to changes in consumer tastes and trends. We attempt to monitor changes in consumer tastes and home design trends through communication with our design consultants who provide valuable input on consumer tendencies. However, such tastes and trends can change rapidly and any delay or failure to anticipate or respond to changing consumer tastes and trends in a timely manner could adversely impact our business, operating results and financial condition. In addition, certain suppliers may require extensive advance notice of our requirements in order to produce products in the quantities we desire. This long lead time may require us to place orders far in advance of the time when certain products will be offered for sale, thereby exposing us to risks relating to shifts in consumer demand and trends, and any downturn in the U.S. economy.
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The following risk factors apply to our Vytex business:
Our Vytex operating results could fluctuate and differ considerably from our financial forecasts.
Our business model is based on experience derived from the marketplace. There are no assurances that this experience will prove to be valid for our future operations or plans.
Our operating results may fluctuate significantly as a result of a variety of factors, including:
| ● | Acceptance by manufacturers of the Vytex Natural Rubber Latex technology; | |
| ● | Our ability to achieve and sustain profitability; | |
| ● | Consumer confidence in products manufactured using our Vytex Natural Rubber Latex technology; | |
| ● | Our ability to raise additional capital. |
Our Vytex NRL business is totally dependent on market demand for, and acceptance of, the Vytex Natural Rubber Latex process.
We expect to derive most of our Vytex NRL business revenue from the sales of our Vytex Natural Rubber Latex raw material to various manufacturers of rubber and rubber end products using NRL through our distribution agreement with CMC Global. We pay natural rubber latex processors a fee for the service of manufacturing and creating Vytex NRL for us under our manufacturing and distribution agreements. Conversely, Vystar collects a fee under the CMC Global licensing model. Our Vytex NRL product operates within broad, diverse and rapidly changing markets. As a result, widespread acceptance and use of product is critical to our future growth and success. If the market for our product fails to grow or grows more slowly than we currently anticipate, demand for our product could be negatively affected.
Our ability to generate significant revenue in the Vytex business is substantially dependent upon the willingness of consumers to make discretionary purchases and the willingness of manufacturers to utilize capital for research and development and the retooling of their manufacturing process, both of which are impacted by the state of the economy.
The current state of the world economy has and likely will in the future impact upon our ability to increase revenue. Certain products that we anticipate will be manufactured with our Vystar NRL process, such as mattresses and sponge products, are considered discretionary consumer purchases which decline during economic downturns. Additionally, certain manufacturers who might otherwise utilize the Vytex NRL process in the manufacturing of products with NRL have determined not to expend capital to complete the research of the Vytex NRL process or to retool their manufacturing process because of the general downturn in the economy. As part of a strategy to increase awareness of the Vytex NRL brand, the Company has been aggressively seeking to have end products produced and labeled “made with Vytex NRL” such as mattresses, toppers and pillows. As these products enter the market, the Company plans to create consumer awareness of these end products and in so doing begin to develop consumer demand pull through as part of the Company’s efforts to complete the push-pull cycle using an ingredient branding strategy.
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Assertions by a third party that our Vytex process infringes its intellectual property, whether or not correct, could subject us to costly and time-consuming litigation or expensive licenses.
There is frequent litigation based on allegations of infringement or other violations of intellectual property rights. As we face increasing competition and become increasingly visible as an operating company, the possibility of intellectual property rights claims against us may grow.
Any intellectual property rights claim against us or our customers, with or without merit, could be time-consuming, expensive to litigate or settle and could divert management attention and financial resources. An adverse determination also could prevent us from offering our process, require us to pay damages, require us to obtain a license or require that we stop using technology found to be in violation of a third party’s rights or procure or develop substitute services that do not infringe, which could require significant resources and expenses.
The latex market in which we will participate is competitive and if we do not compete effectively, our operating results may be harmed.
The markets for our product are competitive and rapidly changing. With the introduction of new technologies, increasing scrutiny of alternative lattices such as Russian dandelion, and new market entrants, we expect competition to intensify in the future. In addition, pricing pressures and increased competition generally could result in reduced sales, reduced license fees or the failure of our products to achieve or maintain widespread market acceptance.
While continued interest is strong in a new innovative product in the natural rubber latex industry, pricing and regulatory approvals remain a key selling factor.
Our Vytex revenue will vary based on fluctuations in commodity prices for NRL.
NRL is a commodity and, as such, its price fluctuates daily. Our raw material revenue including licensing fees and cost of goods will also fluctuate upward or downward based upon changing market prices for the raw material used to produce Vytex NRL. Prolonged periods of lowered market prices can also cause manufacturers to review synthetic price drops as they look for even lower cost alternatives to NRL.
While Vytex NRL has received 510(k) clearance from the FDA for condoms and exam gloves, there is no assurance that future applications will be cleared.
In order for Vytex to be used in medical device applications, the manufacturer of the end product must submit an application to the FDA. If the device is classified by the FDA as Class II (e.g., condoms, surgical gloves, and most non-cardiac and non-renal/dialysis catheters) and in some cases Class I (e.g., exam gloves), a 510(k) application must be filed with the FDA seeking clearance to market the device based on the fact that there is at least one other predicate or similar device already marketed. If the product is classified as a Class III product (e.g., most cardiac and renal/dialysis catheters, certain adhesives and other in vivo devices), or is otherwise a new device with no predicate on the market already, then the manufacturer of the end product must submit a Pre-Market Approval (“PMA”) application seeking approval by the FDA to market the device. The PMA approval process is much more in depth and lengthy and requires a greater degree of clinical data and FDA review than does a 510(k) clearance process.
Since Vytex is a raw material and not an end-product, Vystar is not the entity that files with the FDA for any clearance or approval to market a device. Instead, the end-product manufacturers who will be selling and marketing the device(s) must submit applications and seek FDA clearance or approval depending upon the device classification. Vystar’s role in this process is only as background support to the manufacturers to supply information and any technical or test data regarding the Vytex raw material.
An American manufacturer of condoms and exam gloves had been engaged in production work and had completed required testing and received FDA clearance for using Vytex NRL in their condom and exam glove lines. However, this manufacturer is not currently producing products made with Vytex NRL or any other type of raw material. Notwithstanding such approvals, we have no assurance that future products will provide acceptable test results and even if they do, there is no certainty that the FDA will approve the applications.
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Each of the above mentioned 510(k)s have been sold to other manufacturers hence the need to pursue 510(k)s for the newer manufacturing facilities.
Vytex may seek to have lower protein claims than what is currently on the market today for exam gloves and may ultimately seek to have latex warnings removed from or modified on all FDA-regulated products, but it cannot guarantee that either of such actions will be approved by the FDA.
The FDA heavily scrutinizes any and all claims categorizing the protein levels and other claims of an NRL product. Currently, the FDA has allowed claims only stating the level of less than 50 micrograms/gram of total extractable proteins pursuant to only one of two FDA-recognized standards on exam or surgical gloves. Vystar intends to claim protein levels pursuant to both of the two FDA-recognized standards, which will result in claiming the lowest level of antigenic proteins for a Hevea NRL product currently on the market. Although the FDA has cleared such claims on the condom using Vytex NRL, the FDA rejected those claims for the exam glove. There is no guarantee that the FDA will ultimately or ever allow these claims on an exam glove.
Additionally, for many years, the FDA has required warnings on products containing latex due to the latex allergy issue that exists. Vystar plans on petitioning the FDA to have that label removed from or modified on products manufactured with Vytex NRL, by filing a Citizen’s Petition. The Petition will be filed when we see that the benefits of filing will far outweigh the costs since such Petition is likely to require clinical test results indicating acceptable allergic reactions associated with Vytex NRL. There are no assurances that the FDA will grant that request.
Manufacturers are implementing trials of Vytex NRL in their facilities but final data is not yet available from all these manufacturers on its viability for their particular environments.
Over the past several years, samples of Vytex NRL have been made available to over 50 natural rubber latex and latex substitute end product manufacturers, 30 of which have been in place since early 2009. Since the completion of the Vytex NRL Standard Operation Procedures (SOPs), Vytex has been produced at Revertex (Malaysia), Occidente (Guatemala), KAPVL (India) and most recently Mardec-Yala (Thailand) and MMG (Thailand). Under the 2020 agreement with CMC Global, that entity is responsible for manufacturing, marketing and selling Vytex exclusively including sampling. Manufacturers that have signed a ‘sampling’ agreement with us have been provided with samples of Vytex NRL for validating its use in their manufacturing processes.
Another risk is the validity of the customer as testing completes. Recently Vystar has completed more than three years of a specialized version of Vytex NRL only to have the end product manufacturer fail to upgrade their production line and fulfill their own contract. As part of the Company’s learnings, we have found that in listening closely to customer challenges and needs, our technical team has been able to develop solutions. The Company has come to realize that what we offer is not just a raw material but often a technology solution to a production or product development challenge.
While many of these new formulations look promising, there is no guarantee that these technological innovations will be successfully scaled up or successfully implemented by the customer.
The following risk factors apply to our company as a whole:
The COVID-19 pandemic has had, and will likely continue to have, a material effect on our business and results of operations.
The impacts of COVID-19 and measures to prevent its spread across the globe have affected businesses in a number of ways. When we closed our showroom at the end of March 2020, there was significant uncertainty as to when we could resume business. When we re-opened in June 2020, consumer demand was strong but our supply chain was strained and resulted in late arrivals of products. Our inability to deliver products in a timely manner negatively affected our sales. The pandemic has effected our ability to hire and train qualified employees to address temporary labor disruptions or labor shortages. COVID-19 has effected consumer demand for products, workforce availability and our results of operations, financial condition, liquidity and cash flows.
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Our use of foreign sources of production for a portion of our products exposes us to certain additional risks associated with international operations.
Our use of foreign sources for the supply of certain of our products exposes us to risks associated with overseas sourcing. These risks are related to government regulation, volatile ocean freight costs, delays in shipments, and extended lead time in ordering. Governments in the foreign countries where we source our products may change their laws, regulations and policies, including those related to tariffs and trade barriers, investments, taxation and exchange controls which could make it more difficult to service our customers resulting in an adverse effect on our earnings. We could also experience increases in the cost of ocean freight shipping which could have an adverse effect on our earnings. Shipping delays and extended order lead times may adversely affect our ability to respond to sudden changes in demand, resulting in the purchase of excess inventory in the face of declining demand, or lost sales due to insufficient inventory in the face of increasing demand, either of which would also have an adverse effect on our earnings or liquidity.
Significant fluctuations in the cost of raw materials could adversely affect our profits.
On a global and regional basis, the raw materials used in our products are susceptible to significant price fluctuations due to supply/demand trends, transportation costs, government regulations and tariffs, changes in currency rates, the economic and political climate and other circumstances. Significant increases in the future could materially affect our costs and profits.
Because our stock price may be volatile due to factors beyond our control, you could lose all or part of your investment.
Price and volume of stock, including additional stock issuances may cause price decline and dilution.
If we do not attract and retain highly qualified employees, we may not be able to grow effectively.
Our ability to compete and grow depends in large part on the efforts and talents of our executive officers or employees. We require the key employee(s) to enter into employment agreements, but in the U.S., employees are free to leave an employer at any time without penalties. The loss of key employees or the inability to hire additional skilled employees as necessary could result in significant disruptions of our business, and the integration of replacement personnel could be time-consuming and expensive and cause us additional disruptions.
We do not expect to declare any dividends in the foreseeable future.
We do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future. Consequently, shareholders must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our common stock.
There is no assurance that any significant public market for our shares of common stock will develop.
While our shares of common stock trade on the OTC Bulletin Board under the symbol “VYST”, there is currently no significant public market for our common stock and there is no assurance that there will be any such significant public market for our common stock in the future.
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The utilization of our tax losses could be substantially limited if we experience an ownership change as defined in the Internal Revenue Code.
Because of net operating losses we have experienced for federal income tax purposes at December 31, 2021, we had federal net operating loss (“NOL”) carry-forwards of approximately $36 million ($32 million for 2020) available to offset future taxable income. Our ability to utilize NOL carry-forwards to reduce future taxable income may be limited under Section 382 of the Internal Revenue Code if certain ownership changes in our Company occur during a rolling three-year period. These ownership changes include purchases of common stock under share repurchase programs, the offering of stock by us, the purchase or sale of our stock by 5% shareholders, as defined in the Treasury regulations, or the issuance or exercise of rights to acquire our stock. If such ownership changes by 5% shareholders result in aggregate increases that exceed 50 percentage points during the three-year period, then Section 382 imposes an annual limitation on the amount of our taxable income that may be offset by our NOL carry-forwards or tax credit carry-forwards at the time of ownership change. The limitation may affect the amount of our deferred income tax asset and, depending on the limitation, a significant portion of our NOL carry-forwards or tax credit carry-forwards could expire before we are able to use them. In such an event, our business, financial condition, results of operations or cash flows could be adversely affected. We believe we have not experienced an ownership change under Section 382 of the Internal Revenue Code as of December 31, 2021; however, the amount by which our ownership may change in the future could be affected by purchases and sales of stock by 5% shareholders and new issuances of stock by us, should we choose to do so.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
| ITEM 2. | PROPERTIES |
Although we believe that our current space is adequate for the foreseeable future, if additional office space is required, we believe that suitable space will be available at market rates.
| ITEM 3. | LEGAL PROCEEDINGS |
EMA Financial
On February 19, 2019, EMA Financial, Inc. filed a lawsuit in the Southern District of New York against the Company. The lawsuit alleged various breaches of an underlying convertible promissory note and stock purchase agreement and sought four claims for relief: (i) specific performance to enforce a stock conversion and contractual obligations; (ii) breach of contract; (iii) permanent injunction to enforce the stock conversion and contractual obligations; and (iv) legal fees and costs of the litigation. The complaint was filed with a motion seeking: (i) a preliminary injunction seeking an immediate resolution of the case through the stock conversion; (ii) a consolidation of the trial with the preliminary injunctive hearing; and (iii) summary judgment on the first and third claims for relief.
The Company filed an opposition to the motion and upon oral argument the motion for injunctive relief was denied. The Court issued a decision permitting a motion for summary judgment to proceed and permitted the Company the opportunity to supplement its opposition papers together with the plaintiff who was also provided opportunity to submit reply papers. On April 5, 2019, the Company filed the opposition papers as well as a motion to dismiss the first and third causes of action in the complaint. On March 13, 2020, the Court granted the Company’s motion 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.
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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. On March 29, 2021, the Court issued a decision granting in part and denying in part the motion. Specifically, the Court granted that part of the motion seeking summary judgment and dismissal on the Company’s affirmative defense and counterclaim regarding Sections 15(a)/29(b) of the Exchange Act. Two weeks later the Company filed a motion for reconsideration as to the dismissal portion of the order, or, for the alternative, a motion for certification for the right to file a petition to the Second Circuit Court of Appeals on the issue. The Court denied the motion for reconsideration and certification. Subsequently, fact discovery has been completed and the parties are now moving forward with preparing summary judgment motions for their respective claims. Motions should be fully submitted to the Court by June 2022.
Payment of Wages 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 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 settled with the named Plaintiffs, Robert LaChapelle and certain other employees, each on an individual basis, for a de minimus amount which was paid in March 2021. Plaintiffs’ counsel then filed a Stipulation of Dismissal of the Plaintiffs’ Complaint with prejudice. The settlement is included in the accompanying financial statements for the year ended December 31, 2020. On May 21, 2021, one former and one current employee of Rotmans filed suit in the Worcester District Court on substantially the same allegations as LaChapelle. In January 2022, the parties settled for a similarly immaterial amount. The Stipulation of Dismissal is expected to be in June 2022 after the settlement payment is made. The settlement is included in the accompanying financial statements for the year ended December 31, 2021.
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable.
PART II.
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND PURCHASES OF EQUITY SECURITIES |
Market Price Information
Our common stock is traded in the United States on the Over the Counter Bulletin Board (OTCBB) under the symbol “VYST.” The following table shows the range of high and low closing prices for our common stock.
| High | Low | |||||||
| December 31, 2020 | ||||||||
| First Quarter | $ | 0.01 | $ | 0.004 | ||||
| Second Quarter | $ | 0.07 | $ | 0.005 | ||||
| Third Quarter | $ | 0.10 | $ | 0.01 | ||||
| Fourth Quarter | $ | 0.07 | $ | 0.02 | ||||
| December 31, 2021 | ||||||||
| First Quarter | $ | 0.06 | $ | 0.03 | ||||
| Second Quarter | $ | 0.03 | $ | 0.02 | ||||
| Third Quarter | $ | 0.03 | $ | 0.02 | ||||
| Fourth Quarter | $ | 0.02 | $ | 0.01 | ||||
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These quotations do not reflect retail markup, markdown or commission and may not necessarily represent the prices of actual transactions during these quarterly periods.
Holders of Record
As of December 31, 2021, there were 212 holders of record of our common stock. Because some of our shares are held by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of stockholders represented by these record holders.
Dividend Policy
We have never paid or declared any cash dividends on our common stock and we do not intend to pay or declare dividends on our common stock in the near future. We presently expect to retain any future earnings to fund continuing development and growth of our business. Our payment of dividends is subject to the discretion of our board of directors and will depend on earnings, financial condition, capital requirements and other relevant factors.
Issuer Purchases of Equity Securities
None.
Securities Authorized for Issuance Under Equity Compensation Plans
Information concerning our equity compensation plans is set forth in Item 12 of Part III of this Annual Report on Form 10-K.
Recent Sales of Unregistered Securities
Common Stock and Warrant Grants
From January 1, 2021 through December 31, 2021, we issued 78,577,773 shares of our common stock valued at $2,110,089 for services rendered to the Company, 2,533,334 shares were issued for cash for $38,000, 11,364,791 shares were issued for settlement of related party payable valued at $335,265 and 1,767,945 shares were issued upon conversion of 5,000 shares of preferred stock.
Stock Option Grants
There were no stock option grants issued from January 1, 2021 through December 31, 2021.
Proceeds from loans and shareholder, convertible and contingently convertible notes payable
There were no proceeds from October 1, 2021 through December 31, 2021.
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Application of Securities Laws and Other Matters
No underwriters were involved in the foregoing sales of securities. The securities described above were issued to investors in reliance upon the exemption from the registration requirements of the Securities Act, as set forth in Section 4 (2) under the Securities Act and Regulation D promulgated thereunder, as applicable, relative to sales by an issuer not involving any public offering, to the extent an exemption from such registration was required.
The issuance of stock options as described above were issued pursuant to written compensatory plans or arrangements with our employees, directors and consultants, in reliance on the exemption provided by Rule 701 promulgated under the Securities Act. All recipients either received adequate information about us or had access, through employment or other relationships, to such information.
All of the foregoing securities are deemed restricted securities for purposes of the Securities Act. All certificates representing the issued shares of common stock, warrants and options described above included appropriate legends setting forth that the securities had not been registered and the applicable restrictions on transfer.
| ITEM 6. | SELECTED FINANCIAL DATA |
As a smaller reporting company, we are not required to provide the information required by this Item pursuant to 301(c) of Regulation S-K.
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This analysis of our results of operations should be read in conjunction with the accompanying financial statements, including notes thereto, contained in Item 8 of this Report. This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. Statements that are predictive in nature and that depend upon or refer to future events or conditions are forward-looking statements. Although we believe that these statements are based upon reasonable expectations, we can give no assurance that projections will be achieved. Please refer to the discussion of forward-looking statements included in Part I of this Report.
Overview
About RxAir
RxAir promotes a healthy lifestyle through the use of its innovative, patented ViraTech air purification technology, thereby improving the quality of life of each and every customer. Independently tested by EPA- and FDA-certified laboratories, the RxAir has been proven to destroy greater than 99% of bacteria and viruses and reduce concentrations of odors and VOCs. The RxAir uses high-intensity germicidal UV lamps that destroy bacteria and viruses instead of just trapping them, setting it apart from ordinary air filtration units. RxAir® and ViraTech® are registered trademarks of Vystar Corp. For more information, visit http://www.RxAir.com.
The Company’s RxAir 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 product line includes:
| ● | RxAir™ Residential Filterless Air Purifier | |
| ● | RX400 ™ FDA cleared Class II Filterless Air Purifier | |
| ● | RX3000™ Commercial FDA cleared Class II Air Purifier |
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Vystar produces the RxAir product line with a world-class manufacturer and an expert U.S. engineer with a full understanding of the RxAir technology. Vystar sells RxAir residential and commercial units via distributors, online and through retail channels. Vystar is assembling the distribution network to relaunch sales of RX400 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 sales are firmly re-established, Vystar expects that the air purification products will produce margins of approximately 70%.
About Rotmans
Rotmans, the largest furniture and flooring store in New England and one of the largest independent furniture retailers in the U.S., encompassing over 170,000 square feet in Worcester, Mass., and employing approximately 50 people, was founded and has been under the leadership of the Rotman family for the past 50 years. Rotmans adds approximately $20 million annually to Vystar’s top line revenue and enable Vystar to capitalize on the infrastructure already in place for accounting, retail sales facilities and staff, customer service, warehousing, and delivery. Significant marketing and advertising opportunities are available for all of Vystar’s brands to Rotmans’ thousands of existing customers. Steven Rotman and a group of dedicated employees provide continuity of management and customer-focused values for the Company.
Impact of COVID-19 on Our Business
The COVID-19 pandemic has resulted in significant economic disruption and adversely impacted our business. We closed the Rotmans showroom on March 24, 2020. 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, 2020. We continue to work closely with local authorities and follow the guidance of the Centers for Disease Control and Prevention (“CDC”), implementing enhanced cleaning measures, social distancing and the utilization of face masks for the safety of team members, customers and communities.
In addition, the COVID-19 pandemic has caused, among other things, interruptions in our supply chains and suppliers, including problems with inventory availability, higher cost of products and international freight due to the high demand of products and low supply during this volatile period of time.
The COVID-19 pandemic is complex and continues to evolve with the emergence and spread of variants. At this point, we cannot reasonably estimate the duration and severity of the pandemic and its impact on our business, results of operations, financial position and cash flows.
Management Objectives
The COVID-19 pandemic has raised awareness of airborne disease transmission and consumers’ desire to reduce their risk of infection through the use of air purifiers. The Company has pivoted its resources to meeting the demand for air purifiers by adding additional distributors to the RxAir sales network and contracting the development of the next generation RxAir Ultraviolet-C light air purifiers.
Vystar and the Indian Rubber Manufacturers Research Association’s (“IRMRA”) are actively collaborating to develop viscoelastic deproteinized natural rubber (“DPNR”) variants having properties for expanding applications in specific new arenas such as green tires, biodegradable and other unique bioelastoplast product lines that desire a new approach.
Vystar entered into a Market Development and Distribution Agreement with Corrie MacColl to produce, develop and manage the Vytex product and supply lines. This agreement will allow Vystar to expand the market for its Natural Rubber Latex products.
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Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. As such, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. Our management reviews its estimates on an on-going basis. We base our estimates and assumptions on historical experience, knowledge of current conditions and our understanding of what we believe to be reasonable that might occur in the future considering available information. Actual results may differ from these estimates, and material effects on our operating results and financial position may result.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.
Fair Value Inputs Related to Share-based and Other Equity Compensation
Generally accepted accounting principles require all share-based payments, including grants of employee stock options, stock grants and warrants, to be recognized in the financial statements based on their fair values. We compute the value of option awards granted by utilizing the Black-Scholes valuation model based upon their expected lives, expected volatility, expected dividend yield, and the risk-free interest rate. The value of the awards is then straight-line expensed over the service period of the awards. Issuance in shares of common stock is valued using the closing market price on the measurement date.
Inventories
Inventories include those costs directly attributable to the product before sale. Inventories consist primarily of finished goods of furniture, mattresses, RxAir purifiers, 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 inventories on a regular basis. Approximate consideration is given to obsolescence, slow-moving and other factors in evaluating net realizable values. Inventories not expected to be sold within 12 months are classified as long-term.
Revenue
We recognize revenue when we satisfy a performance obligation in a contract by transferring control over a product to a customer when product is shipped based on fulfillment by the Company. The Company considers fulfillment when it passes all liability at the point of shipping through third party carriers. Consideration is typically paid prior to shipment via credit card or check when our products are sold direct to consumers, which is typically within a 1 to 2 days or approximately 30 days from the time control is transferred when sold to wholesalers, distributors and retailers. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of revenue. We assess our estimates of expected returns at each financial reporting date.
Valuation and Impairment of Intangible and Long-Lived Assets
We perform an impairment assessment of intangible assets including goodwill annually or more frequently as warranted by events or changes in circumstances. We review long-lived assets such as property and equipment for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. If the total of the estimated undiscounted future cash flows is less than the carrying value of the assets, an impairment loss is recognized for the excess of the carrying value over the fair value of the long-lived assets. The Company recorded a loss on impairment in 2021 and 2020 of $245,050 and $240,350, respectively, related to the discontinuation of NHS proprietary technology and customer relationships in 2021 and the NHS tradename in 2020.
Accounting for Derivative Financial Instruments
The Company evaluates stock options, stock warrants, notes payable or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under the relevant sections of ASC 815-40, Derivative Instruments and Hedging: Contracts in Entity’s Own Equity. The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative instrument and is marked-to-market at each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income or other expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially classified as equity that become subject to reclassification under ASC 815-40 are reclassified to a liability account at the fair value of the instrument on the reclassification date.
Leases
The Company has adopted and implemented ASC 842, Leases, where the Company recognized right-of use assets and lease liabilities. For leases in which the acquiree is a lessee, the Company measured the lease liability at the present value of the remaining lease payments, as if the acquired lease were a new lease at the acquisition date. The Company measured the right-of-use asset at the same amount as the lease liability as adjusted to reflect favorable and unfavorable terms of the lease when compared with market terms.
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RESULTS OF OPERATIONS
Year ended December 31, 2021 compared to year ended December 31, 2020
| Year Ended December 31, | ||||||||||||||||
| 2021 | 2020 | $ Change | % Change | |||||||||||||
| CONSOLIDATED | ||||||||||||||||
| Revenue | $ | 27,647,879 | $ | 20,979,243 | $ | 6,668,636 | 31.8 | % | ||||||||
| Cost of revenue | 13,505,600 | 10,005,075 | 3,500,525 | 35.0 | % | |||||||||||
| Gross profit | 14,142,279 | 10,974,168 | 3,168,111 | 28.9 | % | |||||||||||
| Operating expenses: | ||||||||||||||||
| Salaries, wages and benefits | 4,491,864 | 5,105,668 | (613,804 | ) | -12.0 | % | ||||||||||
| Share-based compensation | 822,070 | 1,031,850 | (209,780 | ) | -20.3 | % | ||||||||||
| Agent fees | 4,273,308 | 1,388,598 | 2,884,710 | 207.7 | % | |||||||||||
| Professional fees | 588,137 | 983,764 | (395,627 | ) | -40.2 | % | ||||||||||
| Advertising | 2,174,005 | 1,808,115 | 365,890 | 20.2 | % | |||||||||||
| Rent | 1,165,978 | 1,243,949 | (77,971 | ) | -6.3 | % | ||||||||||
| Service charges | 574,669 | 523,124 | 51,545 | 9.9 | % | |||||||||||
| Depreciation and amortization | 738,083 | 795,241 | (57,158 | ) | -7.2 | % | ||||||||||
| Loss on impairment | 245,050 | 240,350 | 4,700 | 2.0 | % | |||||||||||
| Other operating | 3,454,410 | 2,697,090 | 757,320 | 28.1 | % | |||||||||||
| Total operating expenses | 18,527,574 | 15,817,749 | 2,709,825 | 17.1 | % | |||||||||||
| Loss from operations | (4,385,295 | ) | (4,843,581 | ) | 458,286 | -9.5 | % | |||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | (721,869 | ) | (1,845,916 | ) | 1,124,047 | -60.9 | % | |||||||||
| Change in fair value of derivative liabilities | 53,600 | (238,900 | ) | 292,500 | -122.4 | % | ||||||||||
| Gain (loss) on settlement of debt, net | 2,688,100 | (1,497,061 | ) | 4,185,161 | -279.6 | % | ||||||||||
| Other income, net | 724,779 | 92,764 | 632,015 | 681.3 | % | |||||||||||
| Total other income (expense), net | 2,744,610 | (3,489,113 | ) | 6,233,723 | -178.7 | % | ||||||||||
| Net loss | (1,640,685 | ) | (8,332,694 | ) | 6,692,009 | -80.3 | % | |||||||||
| Net (income) loss attributable to noncontrolling interest | (1,056,647 | ) | 724,477 | (1,781,124 | ) | -245.8 | % | |||||||||
| Net loss attributable to Vystar | $ | (2,697,332 | ) | $ | (7,608,217 | ) | $ | 4,910,885 | -64.5 | % | ||||||
Revenues
Consolidated revenues for the year ended December 31, 2021 and 2020 were $27,647,879 and $20,979,243, respectively, for an increase of $6,668,636 or 31.8%. The increase in revenues from operations was principally due to the success of the high impact closing to remodel sale at Rotmans which took place in the first quarter of 2021.
Consolidated gross profit for the year ended December 31, 2021 and 2020 was $14,142,279 and $10,974,168, respectively, for an increase of $3,168,111 or 28.9%. Consolidated cost of revenue for year ended December 31, 2021 and 2020 was $13,505,600 and $10,005,075, respectively, an increase of $3,500,525 or 35%. The increase in gross profit and cost of revenue was primarily due to increased revenues, continued change in purchasing and the reduction of special offers. Merchandise is being purchased in large quantities from fewer vendors.
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Operating Expenses
The Company’s operating expenses consist primarily of compensation and support costs for management, sales and administrative staff, agent fees and for other general and administrative costs, including professional fees related to accounting, finance, and legal services as well as other operating expenses such as advertising and occupancy costs. The Company’s consolidated operating expenses was $18,527,574 and $15,817,749 for the year ended December 31, 2021 and 2020, respectively, for an increase of $2,709,825 or 17.1%. The increase in operating expenses was primarily due to fees incurred under an agreement with a third-party agent to assist the Company with a high-impact sale at Rotmans.
Other Income (Expense)
Other income (expense) for the year ended December 31, 2021 and 2020 was $2,744,610 and ($3,489,113), respectively, for a net increase of $6,233,723 or a reduction in expense of 178.7%. Increases in other income (expense) in 2021 included reduction of interest expense of $1,124,047, gain (loss) on settlement of debt of $4,185,161, an increase in change in value of derivative liabilities of $292,500 and an increase in other income of $632,015.
Net Loss
Net loss for the year ended December 31, 2021 and 2020 was $1,640,685 and $8,332,694, respectively, for a decrease in net loss of $6,692,009 or 80.3%. Net loss in 2021 and 2020 includes net (income) loss attributable to noncontrolling interest of ($1,056,647) and $724,477, respectively. The smaller net loss the Company experienced in the year ended December 31, 2021 versus the same period in 2020 was attributable to increased operating efficiencies and COVID-19 programs mainly the Paycheck Protection Program loans forgiven of $2,805,800 and Employee Retention Credits of $771,287.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. However, we have incurred significant losses and experienced negative cash flow since inception. At December 31, 2021, the Company had cash of $151,175 and a deficit in working capital of $8,306,611. For the year ended December 31, 2021, the Company had a net loss of $1,640,685 and an accumulated deficit of $51,410,516. For the year ended December 31, 2020, the Company had a net loss of $8,332,694 and the accumulated deficit amounted to $48,713,184. We use working capital to finance our ongoing operations, and since those operations do not currently cover all of our operating costs, managing working capital is essential to our Company’s future success. Because of this history of losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.
Net cash used in operating activities was $2,864,142 for the year ended December 31, 2021 as compared to $2,262,940 for the year ended December 31, 2020. During the year ended December 31, 2021, cash used in operations was primarily due to the net loss for the year of $1,640,685 net of non-cash related add-back of share-based compensation, depreciation and amortization.
The Company had $371,431 cash provided by investing activities during the year ended December 31, 2021 as compared to $133,878 cash used in investing activities for the year ended December 31, 2020. During the year ended December 31, 2021, cash provided by investing activities was related to the sales of property and equipment and investments.
Net cash provided by financing activities was $2,023,347 during the year ended December 31, 2021, as compared to cash provided of $2,945,002 during the year ended December 31, 2020. During 2021, cash was provided from the proceeds in notes payable in the amount of $2,225,939 net of repayments of finance leases in the amount of $202,592. During 2020, cash was provided from the proceeds in notes payable in the amount of $3,309,400, repayments on notes payable and finance leases in the amount of $967,938, net repayments on line of credit of $210,200, $456,490 in proceeds from common stock issuances, advances from stock subscription payable of $308,000 and proceeds from stock subscription receivable of $49,250.
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A successful transition to profitable operations is dependent upon obtaining sufficient financing to fund the Company’s planned expenses and achieving a level of revenue adequate to support the Company’s cost structure. Management plans to finance future operations using cash on hand, as well as increased revenue from RxAir air purifier sales and Vytex license fees, that now also include the Company’s association with foam cores made from Vytex used in mattresses, mattress toppers and pillows.
There can be no assurances that we will be able to achieve projected levels of revenue in 2022 and beyond. If we are not able to achieve projected revenue and obtain alternate additional financing of equity or debt, we would need to significantly curtail or reorient operations during 2022, which could have a material adverse effect on our ability to achieve our business objectives and as a result, may require the Company to file for bankruptcy or cease operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities that might be necessary should the Company be forced to take any such actions.
Our future expenditures will depend on numerous factors, including: the rate at which we can introduce RxAir products and license Vytex NRL raw material and the foam cores made from Vytex to manufacturers and subsequently retailers; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, along with market acceptance of our products, and services and competing technological developments. As we expand our activities and operations, our cash requirements are expected to increase at a rate consistent with revenue growth after we achieve sustained revenue generation.
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements.
Certain Relationships and Related Transactions
Per Steven Rotman’s Employment agreement dated July 22, 2019, as amended, 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 year ended December 31, 2021, the Company expensed approximately $422,000 related to this employment agreement and issued 29,205,927 shares of common stock for past services. As of December 31, 2021, the Company had a stock subscription payable balance of $286,625, or approximately 14,797,000 shares to be issued in the future, $123,155 of reimbursable expenses payable and $116,403 of unpaid salary.
Blue Oar Consulting, Inc. (“Blue Oar”) provides business consulting services to the Company. 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 the consulting agreement, Blue Oar is to be paid $15,000 per month in cash for expenses, and $12,500 per month to be paid in shares based on a 20-day average at a 50% discount to market. During the year ended December 31, 2021, the Company expensed approximately $461,000 related to the consulting agreement and issued 30,038,513 shares of common stock for past services. In addition, the Company issued 11,364,791 shares of common stock to settle its accounts payable balance of $180,000 in February 2021. In connection with the settlement, a loss of $155,265 was incurred. As of December 31, 2021, the Company had a stock subscription payable balance of approximately $281,000 or approximately 15,603,000 shares and a balance of $180,000 in accounts payable related to this related party.
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
As a smaller reporting company, we are not required to provide the information required by this Item pursuant to 301(c) of Regulation S-K.
| ITEM 8. | INDEX TO FINANCIAL STATEMENTS |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Vystar Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Vystar Corporation (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of Vystar Corporation as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying financial statements have been prepared assuming that the entity will continue as a going concern. As discussed in Note 3 to the financial statements, the entity has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to Vystar Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Vystar Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| F-1 |
Impairment Analysis of Goodwill and Intangible Assets
As of December 31, 2021, the Company’s goodwill and intangible assets were $1,669,171. Goodwill and intangible assets are tested for impairment at least annually at the reporting unit level and asset level, respectively. During the year ended December 31, 2021, the Company recorded a $245,050 impairment loss.
Auditing management’s annual goodwill and intangible assets impairment test is complex and highly judgmental due to the significant estimation required in determining the fair value of the reporting units and intangible assets. In particular, the fair value estimates are sensitive to significant assumptions such as the weighted average cost of capital, revenue growth rate, operating margin, working capital requirements, terminal value and market multiples, which are affected by expectations about future market or economic conditions.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included obtaining an understanding of the Company’s review process related to assessing the Company’s goodwill and intangible assets for impairment, such as management’s review of the valuation models, the underlying assumptions used in the model and the related accounting conclusions. To test the estimated fair value of the Company’s reporting units and intangible assets, we performed audit procedures that include, among others, assessing methodologies and testing the significant assumptions discussed above and the underlying data used by the Company in its analysis. We compared the significant assumptions used by management to current industry and economic trends and performed procedures to identify information that might contradict the Company’s selected methodologies and associated significant assumptions. We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting units and intangible assets that would result from changes in the assumptions. In addition, we tested the reconciliation of the fair value of the reporting units to the market capitalization of the Company. Lastly, we also evaluated the Company’s financial statement disclosures related to these matters.
Fair Value of Derivative Liability
As of December 31, 2021, the Company had significant derivative liabilities totaling $1,778,100 and recorded a $53,600 gain from change in fair value of derivative liabilities during the year ended December 31, 2021. The derivative liability activity relates to embedded conversion features within convertible notes payable. The Company analyzed the conversion features of the various note agreements for derivative accounting consideration under Accounting Standards Codification (“ASC”) 815-15 “Derivatives and Hedging” and determined that the embedded conversion features should be classified as derivatives because the conversion prices of these convertible notes payable 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.
Auditing the Company’s valuation of this derivative is challenging as the Company uses complex valuation methodologies that incorporate significant assumptions which include the discount rate and forecasted volatility of the Company’s common stock price. The valuation includes assumptions about economic and market conditions with uncertain future outcomes.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included obtaining an understanding of the Company’s valuation of the derivative liabilities, such as management’s review of the valuation models, the underlying assumptions used in the model and the related accounting conclusions. To test the valuation of the derivative liability, our audit procedures included, among others, evaluating the methodologies used in the valuation model and testing the significant assumptions. For example, we compared the discount rate that was adjusted for the Company’s credit risk to the interest rates on comparable debt instruments, and we compared the forecasted volatility of the Company’s common stock price to its historical volatility. We also assessed the completeness and accuracy of the underlying data. We involved professionals with specialized skill and knowledge to assist in our evaluation of the significant assumptions and methodologies used by the Company. Lastly, we also evaluated the Company’s financial statement disclosures related to these matters.
/s/
We have served as Vystar Corporation auditor since 2020.
May 16, 2022
| F-2 |
VYSTAR CORPORATION
CONSOLIDATED BALANCE SHEETS
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Other receivables | ||||||||
| Inventories | ||||||||
| Investments - equity securities, at fair value | ||||||||
| Prepaid expenses and other | ||||||||
| Deferred commission costs | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Finance lease right-of-use assets, net | ||||||||
| Other assets: | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Inventories, long-term | ||||||||
| Deferred commission costs, net of current portion | ||||||||
| Other | ||||||||
| Total other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Stock subscription payable | ||||||||
| Operating lease liabilities - current maturities | ||||||||
| Finance lease liabilities - current maturities | ||||||||
| Shareholder, convertible and contingently convertible notes payable and accrued interest - current maturities | ||||||||
| Related party debt - current maturities | ||||||||
| Unearned revenue | ||||||||
| Derivative liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Term notes, net of current maturities | ||||||||
| Operating lease liabilities, net of current maturities | ||||||||
| Finance lease liabilities, net of current maturities | ||||||||
| Unearned revenue, net of current maturities | ||||||||
| Related party debt, net of current maturities and debt discount | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Stockholders’ deficit: | ||||||||
| Convertible preferred stock, $ par value shares authorized; and shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively (liquidation preference of $ | ||||||||
| Common stock, $ par value, shares authorized; and shares issued at December 31, 2021 and December 31, 2020, respectively, and and shares outstanding at December 31, 2021 and December 31, 2020, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Common stock in treasury, at cost; shares | ( | ) | ( | ) | ||||
| Total Vystar stockholders’ deficit | ( | ) | ( | ) | ||||
| Noncontrolling interest | ||||||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-3 |
VYSTAR CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Revenue | $ | $ | ||||||
| Cost of revenue | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| Salaries, wages and benefits | ||||||||
| Share-based compensation | ||||||||
| Agent fees | ||||||||
| Professional fees | ||||||||
| Advertising | ||||||||
| Rent | ||||||||
| Service charges | ||||||||
| Depreciation and amortization | ||||||||
| Loss on impairment | ||||||||
| Other operating | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income (expense): | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Change in fair value of derivative liabilities | ( | ) | ||||||
| Gain (loss) on settlement of debt, net | ( | ) | ||||||
| Other income, net | ||||||||
| Total other income (expense), net | ( | ) | ||||||
| Net loss | ( | ) | ( | ) | ||||
| Net (income) loss attributable to noncontrolling interest | ( | ) | ||||||
| Net loss attributable to Vystar | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted loss per share: | ||||||||
| Net loss per share | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted weighted average number of common shares outstanding | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-4 |
VYSTAR CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020
| 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 | $ | $ | $ | $ | ( | ) | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||
| Common stock issued for services | ||||||||||||||||||||||||||||||||||||||||||||
| Share based compensation - options | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for settlement of warrants | - | |||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for cash received, net | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of loan | ||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock conversion | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Ending balance December 31, 2020 | $ | $ | $ | $ | ( | ) | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||
| Common stock issued for services | ||||||||||||||||||||||||||||||||||||||||||||
| Share based compensation - options | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for settlement of related party payable | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for cash received in prior period | ||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock conversion | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||
| Ending balance December 31, 2021 | $ | $ | $ | $ | ( | ) | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-5 |
VYSTAR CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Share-based compensation | ||||||||
| Depreciation | ||||||||
| Bad debts | ||||||||
| Amortization of intangible assets | ||||||||
| Noncash lease expense | ||||||||
| Amortization of debt discount | ||||||||
| Impairment loss | ||||||||
| Change in fair value of derivative liabilities | ( | ) | ||||||
| Interest paid by issuance of common stock | ||||||||
| Unamortized term debt issuance costs | ||||||||
| Loss on sale of property and equipment | ||||||||
| Loss on sale of investments | ||||||||
| Net unrealized (gain) loss on available-for-sale investments | ( | ) | ||||||
| (Gain) loss on settlement of debt, net | ( | ) | ||||||
| (Increase) decrease in assets: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Other receivables | ( | ) | ||||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other | ||||||||
| Deferred commission costs | ||||||||
| Increase (decrease) in liabilities: | ||||||||
| Accounts payable | ||||||||
| Accrued expenses and interest payable | ( | ) | ||||||
| Unearned revenue | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Acquisition of property and equipment | ( | ) | ( | ) | ||||
| Proceeds from the sale of property and equipment | ||||||||
| Proceeds from the sale of investments | ||||||||
| Patents and trademark fees | ( | ) | ( | ) | ||||
| Net cash provided by (used in) investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Net borrowings (repayments) on line of credit | ( | ) | ||||||
| Proceeds from issuance of term debt | ||||||||
| Repayment of term debt | ( | ) | ||||||
| Repayment of finance lease obligations | ( | ) | ( | ) | ||||
| Proceeds from the issuance of notes - related parties | ||||||||
| Advances from stock subscription payable | ||||||||
| Proceeds from stock subscription receivable | ||||||||
| Proceeds from issuance of common stock, net of costs | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash - beginning of year | ||||||||
| Cash - end of year | $ | $ | ||||||
| Cash paid during the year for: | ||||||||
| Interest | $ | $ | ||||||
| Non-cash transactions: | ||||||||
| Common stock issued for accrued compensation | $ | $ | ||||||
| Derivatives issued as a debt discount | ||||||||
| Common stock issued for settlement of related party payable | ||||||||
| Common stock issued for cash received in prior year | ||||||||
| Common stock issued for preferred stock | ||||||||
| Reduction of third-party vendor payable with transfer of inventories | ||||||||
| Acquisition of inventories with third-party vendor payable at commencement of second sale agreement | ||||||||
| Lease liabilities arising from obtaining right-of-use assets | ||||||||
| Third-party settlement of the Company’s line of credit | ||||||||
| Common stock issued for settlement of term debt and accrued interest | ||||||||
| Term debt issuance costs | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-6 |
VYSTAR CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2021 and 2020
NOTE 1 - DESCRIPTION OF BUSINESS
Nature of Business
Vystar Corporation (“Vystar”, the “Company”, “we,” “us,” or “our”) is based in Worcester, Massachusetts and produces a line of innovative air purifiers, which destroy viruses and bacteria through the use of ultraviolet light. Vystar is also the creator and exclusive owner of the innovative technology to produce Vytex® Natural Rubber Latex (“NRL”). Vystar manufactures and sells NRL used primarily in various bedding products. In addition, Vystar has a majority ownership in Murida Furniture Co., Inc. dba Rotmans Furniture (“Rotmans”), one of the largest independent furniture retailers in the U.S.
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification.
The Company has evaluated subsequent events through the date of the filing of its Form 10-K with the Securities and Exchange Commission. Other than those events disclosed in Note 18, the Company is not aware of any other significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on the Company’s financial statements.
Basis of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned or controlled operating subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Reclassifications
Loss on impairment balance from the 2020 consolidated financial statements has been reclassified to conform to the 2021 financial statement presentation. Previously included in other income (expense), loss on impairment is included in operating expenses for 2021 and 2020. Such reclassification had no effect on the previously reported net loss for the year ended December 31, 2020.
COVID-19
In December 2019, a novel coronavirus (“COVID-19”) emerged and has subsequently spread worldwide. The World Health Organization declared COVID-19 a pandemic resulting in federal, state, and local governments mandating various restrictions, including travel restrictions, restrictions on public gatherings, stay at home orders and advisories and quarantining of people who may have been exposed to the virus. On March 24, 2020, Massachusetts required all non-essential businesses to close their physical workplaces. As a result, the Rotmans showroom, offices and warehouse temporarily closed. During that time, associates worked remotely where possible. The Company reopened on June 10, 2020 and continues to monitor developments, including government requirements and recommendations.
The COVID-19 pandemic has caused, among other things, interruptions to our supply chains and suppliers, including problems with inventory availability with price volatility and higher cost of products and international freight due to the high demand of products and low supply for an unpredictable period of time.
The pandemic continues to cause economic disruption. Although our showroom has reopened, some business segments remain closed or are operating on a reduced scale. The COVID-19 pandemic is complex and continues to evolve with the emergence and spread of variants. We cannot reasonably estimate the duration of COVID-19 and its impact on Vystar. Accordingly, the estimates and assumptions made as of December 31, 2021 could change in subsequent interim reports, and it is reasonably possible that such changes could be significant (although the potential effects cannot be measured at this time).
| F-7 |
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 recoverability of long-lived assets, valuation and impairment of intangible assets, fair values of right of use assets and lease liabilities, valuation of derivative liabilities, share-based compensation and other equity issuances. Although these estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future, actual results could differ from these estimates.
Fair Value of Financial Instruments
The Company’s financial instruments consist principally of cash, accounts receivable, investments - equity securities, accounts payable, accrued expenses and interest payable, shareholder notes payable, long-term debt and unearned revenue. The carrying values of all the Company’s financial instruments approximate or equal fair value because of their short maturities and market interest rates or, in the case of equity securities, being stated at fair value.
In specific circumstances, certain assets and liabilities are reported or disclosed at fair value. Fair value is the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the Company’s principal market for such transactions. If there is not an established principal market, fair value is derived from the most advantageous market.
Valuation inputs are classified in the following hierarchy:
| ● | Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities. | |
| ● | Level 2 inputs are directly or indirectly observable valuation inputs for the asset or liability, excluding Level 1 inputs. | |
| ● | Level 3 inputs are unobservable inputs for the asset or liability. |
Highest priority is given to Level 1 inputs and the lowest priority to Level 3 inputs. Acceptable valuation techniques include the market approach, income approach, and cost approach. In some cases, more than one valuation technique is used. The derivative liabilities were recognized at fair value on a recurring basis through the date of the settlement and December 31, 2021 and are level 3 measurements. There have been no transfers between levels during the year ended December 31, 2021.
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.
| F-8 |
Cash, Cash Equivalents and Restricted Cash
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. Restricted cash represents cash balances restricted as to withdrawal or use and are included in prepaid expenses and other on the consolidated balance sheets.
Accounts Receivable, Net
Accounts
receivable, net 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 two financial institutions at an average service charge
of
Other Receivables
Under
the provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) signed into law on March 27, 2020
and the subsequent extension of the CARES Act, the Company was eligible for a refundable employee retention credit subject to certain
criteria. The Company recognized employee retention credits of $
Rotmans
terminated its agreement with a supplier in 2021 and will receive $
Inventories
Inventories include those costs directly attributable to the product before sale. Inventories consist primarily of finished goods of furniture, mattresses, RxAir purifier units, 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 restricted cash, 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.
| F-9 |
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
Expenditures
for major renewals and betterments are capitalized, while routine repairs and maintenance are expensed as incurred. When property items
are retired or otherwise disposed of, the asset and related reserve accounts are relieved of the cost and accumulated depreciation, respectively,
and the resultant gain or loss is reflected in earnings. As of December 31, 2021, the net balance of property and equipment is $
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
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.
Our
intangible assets are reviewed for impairment annually or more frequently as warranted by events of changes in circumstances. During
the year ended December 31, 2021, we recognized an impairment charge of $
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.
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.
| F-10 |
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. We did not recognize any impairment of our goodwill during the years ended December 31, 2021 and 2020.
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 December 31, 2021, 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.
| F-11 |
Changes to unearned revenue during the years ended December 31, 2021 and 2020 are summarized as follows:
| 2021 | 2020 | |||||||
| Balance, beginning of the year | $ | $ | ||||||
| Customer deposits received | ||||||||
| Warranty coverage purchased | - | |||||||
| Gift cards purchased | ||||||||
| Revenue earned | ( | ) | ( | ) | ||||
| Balance, end of the year | $ | $ | ||||||
The Company presents basic and diluted loss per share. Because the Company reported a net loss for 2021 and 2020, 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 and shares of common stock for 2021 and 2020, respectively, as their effect would be anti-dilutive. Warrants to purchase and shares of common stock for 2021 and 2020, 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 and shares of common stock for 2021 and 2020, respectively, were excluded from the computation of diluted loss per share as their effect would be anti-dilutive. Both shareholder and Rotman Family contingently convertible notes payable convertible to and shares of common stock for 2021 and 2020, respectively, were also excluded from the computation of diluted loss per share as their effect would be anti-dilutive.
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 and on the websites for e-commerce 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.
| F-12 |
The
transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer
receives the benefit of the performance obligation. The transaction price is determined based on the consideration to which we will be
entitled to receive in exchange for transferring goods to the customer. We issue refunds to retail, e-commerce and print media customers,
upon request, within 30 days of delivery. We estimate the amount of potential refunds at each reporting period using a portfolio approach
of historical data, adjusted for changes in expected customer experience, including seasonality and changes in economic factors. For
retailers, distributors and wholesalers, we do not offer a right of return or refund and revenue is recognized at the time products are
shipped to customers. In all cases, judgment is required in estimating these reserves. Actual claims for returns could be materially
different from the estimates. As of December 31, 2021, and 2020, reserves for estimated sales returns totaled $
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 through January 20, 2020. All subsequent delivery costs are included in revenues as a third-party delivery service was engaged beginning January 21, 2020. 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. The Company ended this warranty program during 2020 but continues
to amortize the previously contracted warranties over their original terms. The Company switched to a separately-priced stain protection
warranty serviced by a third-party when the store reopened in June 2020. At December 31, 2021, and 2020, deferred warranty revenue was
approximately $
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 years ended December 31, 2021 and 2020, Vystar’s research and development costs were not significant.
Advertising Costs
Advertising
costs, which include television, radio, newspaper, digital 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 $
| F-13 |
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
The Company remains subject to income tax examinations from Federal and state taxing jurisdictions for 2018 through 2021.
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.
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 May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40), which addresses issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options. This amendment is effective for all entities, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the effects, if any, of the adoption of ASU 2021-04 guidance on the Company’s financial position, results of operations and cash flows.
| F-14 |
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 FASB 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. The Company adopted ASC 740 in 2021 with no material impact on its financial statements.
NOTE 3 - LIQUIDITY AND GOING CONCERN
The
Company’s financial statements are prepared using the accrual method of accounting in accordance with U.S. GAAP and have been prepared
on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business.
However, the Company has incurred significant losses and experienced negative cash flow since inception. At December 31, 2021, the Company
had cash of $
A successful transition to attaining profitable operations is dependent upon obtaining sufficient financing to fund the Company’s planned expenses and achieving a level of revenue adequate to support the Company’s cost structure. Management plans to finance future operations using cash on hand, increased revenue from RxAir air purification units,Vytex license fees, proceeds received from the second round of financing under the Paycheck Protection Program and stock issuances to new and existing shareholders. The Company has also focused the efforts of key internal employees on the goal of creating efficiencies in each department in our retail furniture business, including purchasing, marketing, inventory control, advertising, accounting, warehousing and customer service.
There can be no assurances the Company will be able to achieve projected levels of revenue in 2022 and beyond. If the Company is not able to achieve projected revenue and obtain alternate additional financing of equity or debt, the Company would need to significantly curtail or reorient operations during 2022, which could have a material adverse effect on the ability to achieve the business objectives, and as a result, may require the Company to file bankruptcy or cease operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities that might be necessary should the Company be forced to take any such actions.
The Company’s future expenditures will depend on numerous factors, including: the rate at which the Company can introduce RxAir air purification units and license Vytex NRL raw materials to manufacturers, and subsequently retailers; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; market acceptance of the Company’s products, services and competing technological developments; the Company’s ability to successfully realize synergies through the integration of the merged companies, acquire new customers and maintain a strong brand; the success of our efforts to reduce expenses in our retail furniture business; and broader economic factors such as interest rates and changes in customer spending patterns. As the Company expands its activities and operations, cash requirements are expected to increase at a rate consistent with revenue growth after the Company has achieved sustained revenue generation.
| F-15 |
NOTE 4 - INVESTMENTS – EQUITY SECURITIES
Cost and fair value of investments - equity securities are as follows:
| Gross | Gross | Fair | |||||||||||||||
| Cost | Unrealized Losses | Unrealized Gains | Value | ||||||||||||||
| December 31, 2020 | $ | $ | ( | ) | $ | - | $ | ||||||||||
Investments,
which represented equity securities in a publicly traded company, were sold during 2021 at a gain of approximately $
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment, net consists of the following:
| 2021 | 2020 | |||||||
| Furniture, fixtures and equipment | $ | $ | ||||||
| Tooling and testing equipment | ||||||||
| Parking lots | ||||||||
| Leasehold improvements | ||||||||
| Motor vehicles | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation
expense for the years ended December 31, 2021 and 2020 was $
| F-16 |
NOTE 6 - INTANGIBLE ASSETS
Intangible assets consist of the following:
| Amortization | ||||||||||||
| Period | ||||||||||||
| 2021 | 2020 | (in Years) | ||||||||||
| Amortized intangible assets: | ||||||||||||
| Customer relationships | $ | $ | ||||||||||
| Proprietary technology | ||||||||||||
| Tradename and brand | ||||||||||||
| Marketing related | ||||||||||||
| Patents | ||||||||||||
| Noncompete | ||||||||||||
| Total | ||||||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||||||
| Intangible assets, net | ||||||||||||
| Indefinite-lived intangible assets: | ||||||||||||
| Trademarks | ||||||||||||
| Total intangible assets | $ | $ | ||||||||||
Amortization
expense for the years ended December 31, 2021 and 2020 was $
Estimated future amortization expense for finite-lived intangible assets is as follows:
| Amount | ||||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total | $ | |||
NOTE 7 - LEASES
The
Company leases equipment, a showroom, offices and warehouse facilities.
| F-17 |
The table below presents the lease costs for years ended December 31, 2021 and 2020:
| Year Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Operating lease cost | $ | $ | ||||||
| Finance lease cost: | ||||||||
| Amortization of right-of-use assets | ||||||||
| Interest on lease liabilities | ||||||||
| Total lease cost | $ | $ | ||||||
During
the year ended December 31, 2021, the Company recognized sublease income of approximately $
Our leases generally do not provide an implicit rate, and therefore we use our incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease. We used incremental borrowing rates as of the implementation date for operating leases that commenced prior to that date.
The following table presents other information related to leases:
| Year Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows used for operating leases | $ | $ | ||||||
| Financing cash flows used for financing leases | ||||||||
| Assets obtained in exchange for operating lease liabilities | ||||||||
| Assets obtained in exchange for finance lease liabilities | ||||||||
| Weighted average remaining lease term: | ||||||||
| Operating leases | ||||||||
| Finance leases | ||||||||
| Weighted average discount rate: | ||||||||
| Operating leases | % | % | ||||||
| Finance leases | % | % | ||||||
| F-18 |
The future minimum lease payments required under operating and financing lease obligations as of December 31, 2021 having initial or remaining non-cancelable lease terms in excess of one year are summarized as follows:
| Operating Leases | Finance Leases | Total | ||||||||||
| 2022 | $ | $ | $ | |||||||||
| 2023 | ||||||||||||
| 2024 | ||||||||||||
| 2025 | ||||||||||||
| 2026 | ||||||||||||
| Thereafter | ||||||||||||
| Total undiscounted lease liabilities | ||||||||||||
| Less: imputed interest | ( | ) | ( | ) | ( | ) | ||||||
| Net lease liabilities | $ | $ | $ | |||||||||
As of December 31, 2021, the Company does not have additional operating and finance leases that have not yet commenced.
NOTE 8 - NOTES PAYABLE AND LOAN FACILITY
Letter of Credit
The
Company entered into a $
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 $
Term Notes
On
February 24, 2020, the Company entered into an agreement with Libertas Funding LLC (“Libertas”) to sell future sale receipts
totaling $
On
April 16, 2020, Rotmans received $
| F-19 |
On
February 2, 2021, Rotmans received a second PPP loan of $
Certain
investors guaranteed $
Shareholder, Convertible and Contingently Convertible Notes Payable
The following table summarizes shareholder, convertible and contingently convertible notes payable:
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Shareholder, convertible and contingently convertible notes | $ | $ | ||||||
| Accrued interest | ||||||||
| Less: current maturities | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Shareholder Convertible Notes Payable
During
the year ended December 31, 2018, the Company issued shareholder contingently convertible notes payable, some of which were for contract
work performed by other entities in lieu of compensation and expense reimbursement, totaling approximately $
During
the year ended December 31, 2019, the Company issued certain contingently convertible promissory notes in varying amounts to existing
shareholders which totaled $
| F-20 |
During
the year ended December 31, 2021, the Company issued certain contingently convertible promissory notes in varying amounts to existing
shareholders which totaled $
Based on the variable conversion price of the notes issued prior to 2021, the Company recorded the embedded conversion features as derivative liabilities, which amounted to $ and $ at December 31, 2021 and 2020, respectively.
Related Party Debt
The following table summarizes related party debt:
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Rotman Family convertible notes | $ | $ | ||||||
| Rotman Family nonconvertible notes | ||||||||
| Accrued interest | ||||||||
| Debt discount | ( | ) | ( | ) | ||||
| Less: current maturities | ( | ) | ( | ) | ||||
| $ | $ | |||||||
Rotman Family Convertible Notes
On
September 30, 2019, the Company issued contingently convertible promissory notes totaling $
On
July 18, 2019, the Company issued contingently convertible notes totaling $
| F-21 |
On
December 19, 2019, the Company issued a contingently convertible promissory note totaling $
On
February 20, 2020, the Company issued a contingently convertible promissory note totaling $
On
June 3, 2021, the Company issued a contingently convertible promissory note totaling $
On
August 17, 2021, the Company issued a contingently convertible promissory note totaling $
The following table summarizes the Rotman Family Convertible Notes:
| Carrying Amount | ||||||||||||||
| Principal | December 31, | December 31, | ||||||||||||
| Issue Date | Amount | 2021 | 2020 | |||||||||||
| Steven Rotman | $ | $ | $ | |||||||||||
| Gregory Rotman | ||||||||||||||
| Steven Rotman | ||||||||||||||
| Bernard Rotman | ||||||||||||||
| Steven Rotman | ||||||||||||||
| Steven Rotman | ||||||||||||||
| Gregory Rotman | ||||||||||||||
| Jamie Rotman | ||||||||||||||
| $ | ||||||||||||||
| Debt Discount | ( | ) | ( | ) | ||||||||||
| $ | $ |
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 $
| F-22 |
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
$
During
the six months ended December 31, 2020, Steven Rotman advanced the Company funds totaling $
During
2021, Steven Rotman advanced the Company funds totaling $
The following table summarizes the Rotman Family Nonconvertible Notes:
| Carrying Amount | ||||||||||||||
| Principal | December 31, | December 31, | ||||||||||||
| Issue Date | Amount | 2021 | 2020 | |||||||||||
| Steven Rotman | $ | $ | $ | |||||||||||
| Bernard Rotman | ||||||||||||||
| Steven Rotman | ||||||||||||||
| Steven Rotman | ||||||||||||||
| Steven Rotman | ||||||||||||||
| $ | $ | $ | ||||||||||||
| F-23 |
Approximate maturities for the succeeding years are as follows:
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| $ |
NOTE 9 - DERIVATIVE LIABILITIES
As
of December 31, 2021 and 2020 the Company had a $
The embedded derivatives for the notes are carried on the Company’s consolidated balance sheet at fair value. The derivative liability is marked-to-market each measurement period and any unrealized change in fair value is recorded as a component of the consolidated statement of operations and the associated fair value carrying amount on the consolidated balance sheet is adjusted by the change. The Company fair values the embedded derivative using a lattice-based valuation model or Monte Carlo simulation.
The following table summarizes the derivative liabilities included in the consolidated balance sheet at December 31, 2021 and 2020:
Fair Value of Embedded Derivative Liabilities:
| 2021 | 2020 | |||||||
| Balance, beginning of the year | $ | $ | ||||||
| Initial measurement of liabilities | ||||||||
| Change in fair value | ( | ) | ||||||
| Balance, end of the year | $ | $ | ||||||
NOTE 10 - STOCKHOLDERS’ DEFICIT
Cumulative Convertible Preferred Stock
On
May 2, 2013, the Company began a private placement offering to sell up to 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 shares of preferred stock at
$ per share for a value of $
| F-24 |
As
of December 31, 2021, the shares of outstanding preferred stock had undeclared dividends of approximately $
As
of December 31, 2020, the shares of outstanding preferred stock had undeclared dividends of approximately $
Common Stock and Warrants
During
the year ended December 31, 2021, the Company issued shares under equity purchase agreements for cash
proceeds received in 2020 totaling $
During the year ended December 31, 2021, shares of common stock were issued for the conversion of shares of preferred stock.
NOTE 11 - REVENUES
The following table presents our revenues disaggregated by each major product category and service for the last two years:
| Year Ended December 31, | ||||||||||||||||
| 2021 | 2020 | |||||||||||||||
| % of | % of | |||||||||||||||
| Net Sales | Net Sales | Net Sales | Net Sales | |||||||||||||
| Merchandise: | ||||||||||||||||
| Case Goods | ||||||||||||||||
| Bedroom Furniture | $ | $ | ||||||||||||||
| Dining Room Furniture | ||||||||||||||||
| Occasional | ||||||||||||||||
| Upholstery | ||||||||||||||||
| Mattresses and Toppers | ||||||||||||||||
| Broadloom, Flooring and Rugs | ||||||||||||||||
| Warranty | ||||||||||||||||
| Air Purification Units | ||||||||||||||||
| Accessories and Other | ||||||||||||||||
| $ | $ | |||||||||||||||
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 $ and $ of stock-based compensation for the years ended December 31, 2021 and 2020, respectively, including shares to be issued related to consultants and board member stock options and common stock and warrants issued to non-employees. Included in stock subscription payable is accrued stock-based compensation of $ and $ at December 31, 2021 and 2020, respectively.
| F-25 |
The Company used the Black-Scholes option pricing model to estimate the grant-date fair value of option and warrant awards:
| ● | Expected Dividend Yield - because the Company does not currently pay dividends, the expected dividend yield is ; | |
| ● | Expected Volatility in Stock Price - volatility based on the Company’s trading activity was used to determine expected volatility; | |
| ● | Risk-free Interest Rate - reflects the average rate on a United States Treasury Bond with a maturity equal to the expected term of the option; and | |
| ● | Expected Life of Award - because we have minimal experience with the exercise of options or warrants for use in determining the expected life of each award, we used the option or warrant’s contractual term as the expected life. |
In total for the years ending December 31, 2021 and 2020, the Company recorded $ and $, respectively, of share-based compensation expense related to employee and board members’ stock options. The unrecognized compensation expense as of December 31, 2021 was $ for non-vested share-based awards to be recognized over a period of approximately .
Options
During 2004, the Board of Directors of the Company adopted a stock option plan (the “Plan”) and authorized up to 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 shares and to include the independent Board Members in the Plan in lieu of continuing the previous practice of granting warrants each quarter to independent Board Members for services. At December 31, 2021, there are shares of common stock available for issuance under the Plan. In 2014, the Board of Directors adopted an additional stock option plan which provides for an additional shares, which are all available as of December 31, 2021. In 2019, the Board of Directors adopted an additional stock option plan which provides for an additional shares, which are all available as of December 31, 2021. 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 years and are typically exercisable up to years.
There were options granted during the years ended December 31, 2021 and 2020, respectively.
| F-26 |
| Weighted | ||||||||||||
| Weighted | Average | |||||||||||
| Average | Remaining | |||||||||||
| Number | Exercise | Contractual | ||||||||||
| of Shares | Price | Life (Years) | ||||||||||
| Outstanding, December 31, 2019 | $ | |||||||||||
| Granted | - | - | ||||||||||
| Exercised | - | - | ||||||||||
| Forfeited | ( | ) | $ | - | ||||||||
| Outstanding, December 31, 2020 | $ | |||||||||||
| Granted | - | - | ||||||||||
| Exercised | - | - | ||||||||||
| Forfeited | ( | ) | $ | - | ||||||||
| Outstanding, December 31, 2021 | $ | |||||||||||
| Exercisable, December 31, 2021 | $ | |||||||||||
| Exercisable, December 31, 2020 | $ | |||||||||||
As of December 31, 2021 and 2020, there was no aggregate intrinsic value on the Company’s outstanding options. The aggregate intrinsic value will change based on the fair market value of the Company’s common stock.
Warrants
Warrants are issued to third parties as payment for services, debt financing compensation and conversion, and in conjunction with the issuance of common stock. The fair value of each common stock warrant issued for services is estimated on the date of grant using the Black-Scholes option pricing model.
| F-27 |
The following table represents the Company’s warrant activity for the years ended December 31, 2021 and 2020:
| Weighted | ||||||||||||||||
| Average | ||||||||||||||||
| Weighted | Weighted | Remaining | ||||||||||||||
| Number | Average | Average | Contractual | |||||||||||||
| of Shares | Fair Value | Exercise Price | Life (Years) | |||||||||||||
| Outstanding, December 31, 2019 | $ | |||||||||||||||
| Granted | - | - | ||||||||||||||
| Exercised | - | - | ||||||||||||||
| Forfeited | ( |
) | $ | - | ||||||||||||
| Expired | - | - | ||||||||||||||
| Outstanding, December 31, 2020 | $ | |||||||||||||||
| Granted | - | - | ||||||||||||||
| Exercised | - | - | ||||||||||||||
| Forfeited | ( |
) | $ | - | ||||||||||||
| Expired | - | - | ||||||||||||||
| Outstanding, December 31, 2021 | $ | |||||||||||||||
| Exercisable, December 31, 2021 | $ | |||||||||||||||
| Exercisable, December 31, 2020 | $ | |||||||||||||||
NOTE 13 - RELATED PARTY TRANSACTIONS
Officers and Directors
Per
Steven Rotman’s Employment agreement dated July 22, 2019, as amended, he is to be paid $
The Board of Directors authorized their board fees for 2021 be paid in common stock of the Company. Included in stock subscription payable is million shares valued at $, of which million shares valued at $ is included in Steven Rotman’s balance above.
| F-28 |
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 December 31, 2021, the Company had a stock subscription payable balance
of approximately $
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
the consulting agreement, Blue Oar is to be paid $
As
of December 31, 2021, the Company had a stock subscription payable balance of approximately $
Fluid Energy Conversion Inc.
In
May of 2019, the Company acquired the assets of Fluid Energy Conversion, Inc. (“FEC”) for shares of common stock.
FEC is owned by Dr. Bryan Stone, one of the Company’s directors. The assets consist of a patent on the Hughes Reactor, which has
the ability to control, enhance and focus energy in flowing liquids and gases. Included in subscription stock payable at December 31,
2021 is $
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 year ended December 31, 2021 and 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.
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.
| F-29 |
The Company filed an opposition to the motion and upon oral argument the motion for injunctive relief was denied. The Court issued a decision permitting a motion for summary judgment to proceed and permitted the Company the opportunity to supplement its opposition papers together with the plaintiff who was also provided opportunity to submit reply papers. On April 5, 2019, the Company filed the opposition papers as well as a motion to dismiss the first and third causes of action in the complaint. On March 13, 2020, the Court granted the Company’s motion 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. On March 29, 2021, the Court issued a decision granting in part and denying in part the motion. Specifically, the Court granted that part of the motion seeking summary judgment and dismissal on the Company’s affirmative defense and counterclaim regarding Sections 15(a)/29(b) of the Exchange Act. Two weeks later the Company filed a motion for reconsideration as to the dismissal portion of the order, or, for the alternative, a motion for certification for the right to file a petition to the Second Circuit Court of Appeals on the issue. The Court denied the motion for reconsideration and certification. Subsequently, fact discovery has been completed and the parties are now moving forward with preparing summary judgment motions for their respective claims. Motions should be fully submitted to the Court by June 2022.
Payment of Wages 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 settled with the named Plaintiffs, Robert LaChapelle and certain other employees, each on an individual basis, for a de minimus amount which was paid in March 2021. Plaintiffs’ counsel then filed a Stipulation of Dismissal of the Plaintiffs’ Complaint with prejudice. The settlement is included in operating expenses in the accompanying financial statements for the year ended December 31, 2020. On May 21, 2021, one former and one current employee of Rotmans filed suit in the Worcester District Court on substantially the same allegations as LaChapelle. In January 2022, the parties settled for a similarly immaterial amount. The Stipulation of Dismissal is expected to be in June 2022 after the settlement payment is made. The settlement is included in the accompanying financial statements for the year ended December 31, 2021.
| F-30 |
Stock Subscription Payable
At
December 31, 2021 and December 31, 2020, the Company recorded $
| Amount | Shares | |||||||
| Balance, January 1, 2020 | $ | |||||||
| Additions, net | ||||||||
| Issuances, net | ( | ) | ( | ) | ||||
| Balance, December 31, 2020 | ||||||||
| Additions, net | ||||||||
| Issuances, net | ( | ) | ( | ) | ||||
| Balance, December 31, 2021 | $ | |||||||
NOTE 15 - MAJOR CUSTOMERS AND VENDORS
Major customers and vendors are defined as a customer or vendor from which the Company derives at least 10% of its revenue and cost of revenue, respectively.
During
the year ended December 31, 2021 and 2020 the Company made approximately
NOTE 16 - INCOME TAXES
The
provision (benefit) for income taxes for the years ended December 31, 2021 and 2020 assumes a
| Year Ended | ||||||||
| December 31, | ||||||||
| 2021 | 2020 | |||||||
| Federal statutory income tax rate | ( | )% | ( | )% | ||||
| Change in valuation allowance on net operating loss carryforwards | ||||||||
| Effective income tax rate | % | % | ||||||
| F-31 |
Deferred tax assets as of December 31, 2021 and 2020 are as follows:
| 2021 | 2020 | |||||||
| NOL carryforwards | $ | $ | ||||||
| Less valuation allowance | ( | ) | ( | ) | ||||
| Deferred tax assets | $ | $ | ||||||
Deferred taxes are caused primarily by net operating loss carryforwards. U.S. Tax Legislation enacted in 2017 (the “TCJA”) has significantly changed certain aspects of U.S. federal income taxation. Net Operating Losses (“NOLs”) generated in 2017 and prior years can be carried forward for 20 years. NOLs generated in 2018 – 2020, as enacted by the CARES Act, can be carried forward indefinitely. However, NOLs generated in 2021 is also carried forward indefinitely but limited to 80% of taxable income.
For federal income tax purposes, the Company has a net operating loss
carryforward of approximately $
In
addition, as of December 31, 2021, Rotmans has a net operating loss carryforward of approximately $
Pursuant to Internal Revenue Code Section 382, the future realization of our net operating loss carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that may have occurred previously or that could occur in the future.
NOTE 17 - PROFIT SHARING PLAN
The Company sponsors a qualified 401(k) profit sharing plan covering all eligible employees. The plan permits participants to make tax-deferred contributions to the plan by salary reduction. Company contributions are discretionary and are determined annually by the Board of Directors.
There were no Company contributions in 2021 and 2020. Participant and Company contributions are limited to amounts allowed under the Internal Revenue Code.
The
Company offers
NOTE 18 - SUBSEQUENT EVENTS
The Board voted to create a new class of preferred stock named Class A. The stock will convert to into common shares, have a liquidation preference and earn 10% annual dividends. Class A stock will be available to all debt holders including Board members.
On January 5, 2022, the Board approved the repurchase of shares of common stock at par value.
Blue
Oar has advanced Rotmans $
Steven
Rotman has advanced the Company funds totaling $
Pursuant
to a settlement agreement with a vendor in May 2022, Steven Rotman personally guaranteed an obligation of the Company totaling $
| F-32 |
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| ITEM 9A. | CONTROLS AND PROCEDURES |
The Company’s Chief Executive Officer and Chief Financial Officer (the Certifying Officer) is responsible for establishing and maintaining disclosure controls and procedures for the Company. Although the Certifying Officer has designed such disclosure controls and procedures to ensure that material information is made known to them, particularly during the period in which this report was prepared, certain material weaknesses occurred during the year ended December 31, 2021 and subsequent to year end. The Certifying Officer has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e) (the Rules) under the Securities Exchange Act of 1934 (or Exchange Act) as of the end of the period covered by this Annual Report and is working on improving controls with an outside CPA firm and a more dedicated internal resources.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d - 15(f) under the Securities Exchange Act of 1934). Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those policies and procedures that: (i) in reasonable detail accurately and fairly reflect our transactions; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; (iii) provide reasonable assurance that our receipts and expenditures are made in accordance with management authorization; and (iv) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting, however well designed and operated, can provide only reasonable, and not absolute, assurance that the controls will prevent or detect misstatements. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only the reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.
Management, under the supervision and with the participation of our Chief Executive Officer and our acting Chief Financial Officer, conducted an evaluation of our internal control over financial reporting as of December 31, 2021 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) 2013. Based on our evaluation under the COSO framework, management concluded that our internal control over financial reporting was not effective as of December 31, 2021. 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.
| 21 |
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 2022 by developing stronger business and financial processes for accounting for transactions such as warrant/stock issuances, which will enhance internal control for the Company.
| ITEM 9B. | OTHER INFORMATION |
None.
PART III
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Board of Directors
The following tables set forth the name and information of each director of Vystar as of December 31, 2021. Each director is elected to serve until the next Annual Meeting of Stockholders.
| Name | Principal Occupation During Last Five Years | Age | Director Since | |||
| Joseph C. Allegra, Jr., PhD | Joseph Allegra, PhD was elected Chairman of the Board on February 14, 2018 and has followed Vystar’s progress for numerous years and has assisted as an investment advisor and investor, providing insight into positioning the company to attract investors, particularly in the healthcare sector. He currently is an Instructor of Epidemiology and Biostatistics at the University of Georgia and an Investment Advisor at Lincoln Lee Investments in Atlanta. Previously he was a Senior Drug Safety Associate at Genentech. Dr. Allegra received his BA in Psychology from Boston University, and his Master of Public Health and Doctor of Philosophy degrees from the University of Georgia. | 42 | 2017 | |||
| Steven Rotman | Steven Rotman was elected Chief Executive Officer and a Director of Vystar Corporation. Mr. Rotman has been President and CEO of Rotmans, one of the oldest and largest, furniture and carpet retailers in New England, for more than 40 years. In addition, he is the founder and managing partner of NHS Holdings, a company that in 2015 became the exclusive distributor of Vytex™ natural rubber latex foam in the U.S. and laid the groundwork for Vytex’s entrance to the home furnishings industry. Mr. Rotman received a BBA degree from Clark University and an MS from New York University. | 83 | 2017 |
| 22 |
| Ranjit K. Matthan, PhD | Ranjit K. Matthan, Ph.D., an internationally renowned latex and rubber expert, joined the Company’s Board of Directors in 2015. Dr. Matthan has been a consultant to Vystar Corporation since 2008 and has played a significant role in the manufacturing scale up of reduced-protein Vytex® natural rubber latex (NRL) in Malaysia and refining the research and development of manufacturing processes for applications using Vytex NRL, such as latex foam, condoms, adhesives, medical devices, etc. Dr. Matthan has been associated with the development of natural rubber and rubber-based industries manufacturing in South Asia since the 1970s and introduced technically specified natural rubber into India. He has advised national and international companies and research bodies including the Government of India, the Malaysian Rubber Research and Development Board, Asian Development Bank, Industrial Development Bank of India, Revertex (Malaysia) as well as many private companies engaged in latex production and manufacturing. A founding Director of the Bangkok-based Asia Pacific Elastomer Science and Technology (APEST), he has played a key role in sustainability initiatives for natural rubber. He has also been associated with the development and commercial introduction of several eco-friendly natural rubber grades, including Vytex NRL. | 77 | 2015 | |||
Dr. Matthan has received numerous industry awards, including: the prestigious 2014 Institute of Materials, Minerals and Mining, U.K.’s Hancock Medal for his contributions to the development of the environmentally friendly sustainable growth of the global natural rubber industry, and the 2006 KMPhilip Award from the All India Rubber Industries Association for significant contributions toward the development of the Indian Rubber Industry. Dr. Matthan has published over 50 scientific and technical papers on natural rubber and lattices and is an invited speaker at several international conferences including the International Latex Conference.
Dr. Matthan holds an undergraduate degree from St. Stephens College, Delhi University, India and he earned his Ph.D. in Polymer Chemistry from the National College of Rubber Technology, London, England, where he was the first Ph.D. student of Dr. D.C. Blackley whose books and high polymer lattices and emulsion polymerization are the industry standard references. |
||||||
| Bryan Stone, MD | Bryan Stone, M.D, has advised Vystar over the past years relating to product development for the healthcare industry and brings to the Board an understanding of the challenges of new product development for start-up companies. He is the Chairman of Medicine at Desert Regional Medical Center in Palm Springs, California, and is the Medical Director at multiple DaVita Dialysis Centers. He is also an entrepreneur, serving as the Interim CEO of Fluid Energy Conversion, Inc., a firm specializing in molecular fluid mechanics, specifically high efficiency mass producible energy conversion technologies. | 54 | 2017 | |||
| Byron L. Novosad, DDS | Byron L. Novosad, DDS was appointed to the Board on January 25, 2021. Dr. Novosad received a BA in Chemistry from Baylor University and graduated from the University of Texas Dental School in Houston and later received his Certificate in Periodontics in 1982. Dr. Novosad brings experience to the Board in the medical and health care field, and served previously as a consultant to UV Flu Technologies from 2011 to 2015 and a consultant to Vystar Corporation from 2013 to 2015. He has operated a private periodontal practice in the Houston, Texas area for 30 years and has been a Clinical Assistant Professor of Periodontics at the Periodontic Graduate Clinic for the University of Texas Dental branch in Houston since 2007. He was on the Advisory Board of Wharton County Jr. College School of Dental Hygiene for 37 years. |
66 | 2021 |
| 23 |
Director Independence
Under Rule 5605(b)(1) of the Nasdaq Marketplace Rules, independent directors must comprise a majority of a listed company’s board of directors within one year of listing. In addition, Nasdaq Marketplace Rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and governance committees be independent. While Vystar does not currently qualify for listing on Nasdaq and will likely not qualify for some time after the date of this proxy statement, it does intend to seek such listing as soon as possible and complies with its Marketplace Rules. Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended. Under Nasdaq Marketplace Rule 5605(a)(2), a director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In order to be considered to be independent for purposes of Rule 10A-3, a member of an audit committee of a public company may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee: (1) accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the public company or any of its subsidiaries; or (2) be an affiliated person of the listed company or any of its subsidiaries.
In March of 2013, our Board undertook a review of its composition, the composition of its committees and the independence of each director. Based upon information requested from and provided by each director concerning his or her background, employment and affiliations, including family relationships, our Board has determined none of the directors has a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is “independent” as that term is defined under Nasdaq Marketplace Rule 5605(a)(2).
Audit Committee
The Board member serving on our Audit Committee was Dr. Stone. Our Board has determined that Dr. Stone satisfies the requirements for financial literacy under the current requirements of the Nasdaq Marketplace Rules. He is an “audit committee financial expert,” as defined by SEC rules and satisfy the financial sophistication requirements of The NASDAQ Global Market. Our Audit Committee assists our Board in its oversight of our accounting and financial reporting process and the audits of our financial statements. The Audit Committee’s responsibilities include:
| ● | appointing, approving the compensation of, and assessing the independence of our independent registered public accounting firm; | |
| ● | overseeing the work of our independent registered public accounting firm, including through the receipt and consideration of reports from such firm; | |
| ● | reviewing and discussing with management and the independent registered public accounting firm our annual and quarterly financial statements and related disclosures; | |
| ● | monitoring our internal control over financial reporting, disclosure controls and procedures and code of business conduct and ethics; | |
| ● | discussing our risk management policies; | |
| ● | establishing policies regarding hiring employees from the independent registered public accounting firm and procedures for the receipt and resolution of accounting related complaints and concerns; | |
| ● | meeting independently with our independent registered public accounting firm and management; | |
| ● | reviewing and approving or ratifying any related person transactions; and | |
| ● | preparing the audit committee report required by SEC rules. |
All audit and non-audit services, other than de minimus non-audit services, to be provided to us by our independent registered public accounting firm must be approved in advance by our Audit Committee.
| 24 |
Audit Committee Charter
We have adopted an Audit Committee Charter which sets out the duties and responsibilities of our Audit Committee. The Audit Committee Charter is available on our website at www.vystarcorp.com. Any amendments to the Charter, or any waivers of its requirements, will be disclosed on our website.
Meetings of the Board and Committees
During fiscal year 2021, our Board held one meeting, and its Audit Committee held one meeting. Each director attended the meeting in fiscal year 2021. Members of our Board are encouraged to attend our annual meetings of shareholders.
CORPORATE GOVERNANCE
Corporate Governance Guidelines
We believe in sound corporate governance practices and have adopted formal Corporate Governance Guidelines to enhance our effectiveness. Our Board adopted these Corporate Governance Guidelines in order to ensure that it has the necessary practices in place to review and evaluate our business operations as needed and to make decisions that are independent of our management. The Corporate Governance Guidelines are also intended to align the interests of directors and management with those of our shareholders. The Corporate Governance Guidelines set forth the practices our Board follows with respect to Board and committee composition and selection, Board meetings, chief executive officer performance evaluation and management development and succession planning for senior management, including the chief executive officer position. A copy of our Corporate Governance Guidelines is available on our website at www.vystarcorp.com.
Code of Business Conduct and Ethics
We adopted a Code of Business Conduct and Ethics applicable to all officers, directors and employees of Vystar that comply with NASDAQ listing standards. The Code of Business Conduct and Ethics includes an enforcement mechanism, and any waivers for directors or executive officers must be approved by our Board and disclosed in a current report on Form 8-K with the SEC. This Code of Business Conduct is publicly available on our website at www.vystarcorp.com. There were no waivers of the Code of Business Conduct and Ethics for any of our directors or executive officers during fiscal year 2021.
| ITEM 11. | EXECUTIVE COMPENSATION |
Overview
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information regarding compensation earned by our, Chief Executive Officer and President for 2021 and 2020.
| Name and Principal Position | Salary | Option Awards(1) | Total | |||||||||
| Steven Rotman - 2021 | $ | 185,000 | $ | 292,329 | $ | 477,329 | ||||||
| Chief Executive Officer, Chief Financial Officer and President | ||||||||||||
| Steven Rotman - 2020 | $ | 185,000 | $ | 263,269 | $ | 448,269 | ||||||
| Chief Executive Officer, Chief Financial Officer and President | ||||||||||||
| (1) | These amounts do not reflect the actual economic value realized by the executive officers. In accordance with SEC rules, the amounts in this column for 2021 and 2020 represent the dollar amount recognized as compensation expense by Vystar for financial statement reporting purposes for fiscal years 2021 and 2020 for stock and options granted to each of the executive officers in each such fiscal year in accordance with applicable accounting guidance related to stock-based compensation. Pursuant to SEC rules, the amounts shown disregard the impact of estimated forfeitures related to service-based vesting conditions. |
| 25 |
DIRECTOR COMPENSATION
The following table sets forth certain information with respect to compensation awarded to, paid to or earned by each of Vystar’s non-employee directors during fiscal year 2021.
| Fees | ||||||||||||||||
| Earned or | Stock | Option | ||||||||||||||
| Paid in | Awards | Awards | Total | |||||||||||||
| Name | Cash ($) | ($)(3) | ($) (1) | ($)(2) | ||||||||||||
| Joseph C. Allegra, Jr., PhD | 58,200 | - | 4,921 | 63,121 | ||||||||||||
| Bryan Stone, M.D. | 58,200 | - | 4,921 | 63,121 | ||||||||||||
| Ranjit K. Matthan, PhD | 58,200 | - | - | 58,200 | ||||||||||||
| Byron L. Novosad, DDS | 58,200 | - | - | 58,200 | ||||||||||||
| (1) | On December 15, 2017, Dr. Stone and Dr. Allegra as non-employee directors were granted 500,000 options at $0.05 per share which vest 25,000 options at the end of each fiscal quarter for five (5) years beginning December 31, 2017. |
| The amounts included represent the portion of the original total grant date fair value of options that vested in 2021 together with the dollar amount recognized as compensation expense by Vystar for financial statement reporting purposes for fiscal year 2021 in accordance with applicable accounting guidance related to stock-based compensation. | |
| (2) | These amounts do not reflect the actual economic value realized by the directors. In accordance with SEC rules, this column represents the dollar amount recognized as compensation expense by Vystar for financial statement reporting purposes for fiscal year 2021 for stock options granted to each of the non-employee directors during fiscal years 2016 through 2021 in accordance with applicable accounting guidance related to stock-based compensation. Pursuant to SEC rules, the amounts shown disregard the impact of estimated forfeitures related to service-based vesting conditions. |
| 26 |
Compensation Philosophy
The current policy of our Board is that compensation for non-employee directors should be equity-based compensation to reward directors for quarterly periods of service in fulfilling their oversight responsibilities.
Expenses
We reimburse our directors for their travel and related expenses in connection with attending Board and committee meetings, as well as costs and expenses incurred in attending director education programs and other Vystar-related seminars and conferences.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The following table sets forth the beneficial ownership of our common stock as of December 31, 2021 by each entity or person who is known to beneficially own 5% or more of our common stock, each of our directors, each Executive Officer identified in “Executive Compensation—Summary Compensation Table” contained in this proxy statement and all of our directors and current executive officers as a group. This table is based upon information supplied by executive officers, directors and principal shareholders. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, each of the shareholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned. None of the shares beneficially owned by our executive officers and directors are pledged as security. Applicable percentages are based on shares outstanding on December 31, 2021, adjusted as required by rules promulgated by the SEC.
| Officers and Directors | ||||||||
| Steven Rotman | ||||||||
| Worcester, MA | 20,530,464 | 1.586 | % | |||||
| Bryan Stone, M.D. | ||||||||
| Palm Springs, CA | 9,895,579 | 0.765 | % | |||||
| Joseph Carmen Allegra, Jr., PhD | ||||||||
| Atlanta, GA | 1,500,000 | 0.116 | % | |||||
| Ranjit K. Matthan, PhD | ||||||||
| India | 1,165,000 | 0.090 | % | |||||
| Byron L. Novosad, DDS | ||||||||
| Houston, TX | 766,667 | 0.059 | % | |||||
| All Directors and Executive Officers as a Group | 33,857,710 | 2.616 | % | |||||
| Total Shares Outstanding | 1,294,145,560 |
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our executive officers and directors, and any person or entity who owns more than ten percent of a registered class of our common stock or other equity securities, to file with the SEC certain reports of ownership and changes in ownership of our securities. Executive officers, directors and shareholders who hold more than ten percent of our outstanding common stock are required by the SEC to furnish us with copies of all required forms filed under Section 16(a). We prepare Section 16(a) forms on behalf of our executive officers and directors based on the information provided by them.
| 27 |
Based solely on review of this information and written representations by our executive officers and directors that no other reports were required, we believe that, during fiscal year 2021 each director filed the forms required by Section 16(a) of the Exchange Act on a timely basis with respect to the repricing of option and warrants.
EQUITY COMPENSATION PLAN INFORMATION
The following table shows information related to our common stock which may be issued under our compensation plans, as amended, as of December 31, 2021:
| Plan Category | Number of securities to be issued exercise of outstanding options | Weighted Average Exercise price of outstanding options | Number of securities remaining available for future issuance under equity (excluding securities reflected in first column) | |||||||||
| 2004 Long-Term Incentive Compensation Plan, as amended, approved by shareholders | 7,748,271 | $ | 5.80 | 2,251,729 | ||||||||
| 2014 Long-Term Incentive Compensation Plan | 0 | 0 | 5,000,000 | |||||||||
| 2019 Equity Incentive Plan | 0 | 0 | 50,000,000 | |||||||||
| Total | 7,748,271 | $ | 5.80 | 57,251,729 | ||||||||
Our 2004 Long-Term Incentive Compensation Plan, as amended, which we refer to as the 2004 Plan, was adopted by our Board in 2004, and amended and approved by our shareholders in 2009. A maximum of 10,000,000 shares of common stock were authorized for issuance under the 2004 Plan.
The 2004 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock and other stock-based awards. Our officers, employees, consultants and directors are eligible to receive awards under the 2004 Plan; however, incentive stock options may only be granted to our employees. In accordance with the terms of the 2004 Plan, our Board administers the 2004 Plan and, subject to any limitations in the 2004 Plan, selects the recipients of awards and determines:
| ● | the number of shares of common stock covered by options and the dates upon which those options become exercisable; | |
| ● | the exercise prices of options; | |
| ● | the duration of options; | |
| ● | the methods of payment of the exercise price; and | |
| ● | the number of shares of common stock subject to any restricted stock or other stock-based awards and the terms and conditions of those awards, including the conditions for repurchase, issue price and repurchase price. |
Pursuant to the terms of the 2004 Plan, in the event of a change in control of our company, each outstanding option under the 2004 Plan will vest, but the holders shall have the right, assuming the holder still maintains a continuous service relationship with us, immediately prior to such dissolution or liquidation, to exercise the option to the extent exercisable on the date of such dissolution or liquidation.
In the event of a merger or other reorganization event, our Board shall have the discretion to provide for any or all of the following: (a) the acceleration of vesting or the termination of our repurchase rights of any or all of the outstanding awards, (b) the assumption or substitution of all options by the acquitting or succeeding entity or (c) the termination of all options that remain outstanding at the time of the merger or other reorganization event.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Review, Approval or Ratification of Transactions with Related Persons
Vystar’s Code of Business Conduct requires that all employees and directors avoid conflicts of interests that interfere with the performance of their duties or are not in the best interests of Vystar.
In addition, pursuant to its written charter, the Audit Committee considers and approves or disapproves any related person transaction as defined under Item 404 of Regulation S-K promulgated by the SEC, after examining each such transaction for potential conflicts of interest and other improprieties. The Audit Committee has not adopted any specific written procedures for conducting such reviews and considers each transaction in light of the specific facts and circumstances presented.
Transactions with Related Persons
Per Steven Rotman’s Employment agreement dated July 22, 2019, as amended, 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 year ended December 31, 2021, the Company expensed approximately $422,000 related to this employment agreement. As of December 31, 2021, the Company had a stock subscription payable balance of $286,625, or approximately 14,797,000 shares to be issued in the future, $123,155 of reimbursable expenses payable and $116,403 of unpaid salary payable related to this party. In addition, 6,666,667 shares are owed to this party under a stock subscription agreement dated in July 2020 for $100,000. On August 9, 2021, the Company issued 29,205,927 shares to Steven Rotman for past services.
Steven Rotman advanced the Company $398,009 in 2021 for working capital purposes. The Company issued him promissory notes. The notes are unsecured and bear interest at 5% and are due no later than two years from the issuance date.
Blue Oar Consulting, Inc. (“Blue Oar”) is owned by Gregory Rotman, who is the son of the Company’s CEO, Steven Rotman. Blue Oar provides business consulting services to the Company. In exchange for such services, the Company has entered into a consulting agreement with the related party entity. Per Blue Oar’s consulting agreement, it is to be paid approximately $15,000 per month in cash for expenses and $12,500 per month to be paid in shares based on a 20-day average at a 50% discount to market. During the year ended December 31, 2021, the Company expensed approximately $461,000 related to the consulting agreement and issued 30,038,513 shares of common stock for past services. In addition, the Company issued 11,364,791 shares of common stock to settle its accounts payable balance of $180,000 in February 2021. In connection with the settlement, a loss of $155,265 was incurred. As of December 31, 2021, the Company had a stock subscription payable balance of approximately $281,000, or approximately 15,603,000 shares and a balance of $180,000 in accounts payable related to this related party. In addition, 4,666,667 shares are owed to this party under a stock subscription agreement dated in July 2020 for $70,000.
Gregory Rotman advanced the Company $130,030 in 2021 for working capital purposes. The Company issued him a contingently convertible promissory note. The note is unsecured and bears interest at 5% and matures two years from the issuance date.
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Director Independence
Under Rule 5605(b)(1) of the Nasdaq Marketplace Rules, independent directors must comprise a majority of a listed company’s board of directors within one year of listing. In addition, Nasdaq Marketplace Rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and governance committees be independent. While Vystar does not currently qualify for listing on Nasdaq and will likely not qualify for some time after the date of this proxy statement, it does intend to seek such listing as soon as possible and complies with its Marketplace Rules. Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended. Under Nasdaq Marketplace Rule 5605(a)(2), a director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In order to be considered to be independent for purposes of Rule 10A-3, a member of an audit committee of a public company may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee: (1) accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the public company or any of its subsidiaries; or (2) be an affiliated person of the listed company or any of its subsidiaries.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
During fiscal year 2021, we retained the firm of Macias Gini & O’Connell (“MGO”) to provide audit services. Prior to 2021, we retained the firm of Hall and Company (“Hall”) to provide such services. On January 1, 2021, the audit practice of Hall was combined with MGO in a transaction pursuant to which Hall combined its operations with MGO, and certain members of Hall joined MGO either as employees or partners of MGO. Below is a table of fees incurred in the following categories and amounts:
| Fee Category | 2021($) | 2020($) | ||||||
| Audit Fees | 190,000 | 160,000 | ||||||
| Audit-Related Fees | — | — | ||||||
| Tax Fees | — | — | ||||||
| All Other Fees | — | — | ||||||
| Total | 190,000 | 160,000 | ||||||
Audit fees include the audit of Vystar’s annual financial statements, review of financial statements included in each of our Quarterly Reports on Form 10-Q, and services that are normally provided in connection with statutory and regulatory filings or engagements for those fiscal years.
Audit-related fees consist of fees for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements.
Tax fees consist of fees for professional services for tax compliance, tax advice and tax planning. This category includes fees primarily related to the preparation and review of federal, state and assistance with tax audits. No tax fees were incurred for the current or previous period.
All other fees include assurance services not related to the audit or review of our financial statements. No other fees were incurred for the current or previous period.
There were no non-audit services provided by either MGO or Hall for the current or previous period.
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AUDIT COMMITTEE PRE-APPROVAL OF SERVICES PERFORMED BY OUR
INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
It is the policy of our Audit Committee to pre-approve all audit and permissible non-audit services to be performed by MGO and Hall. Our Audit Committee pre-approves services by authorizing specific projects within the categories outlined above, subject to a budget for each category. Our Audit Committee’s charter delegates to one or more members of the Audit Committee the authority to address any requests for pre-approval of services between Audit Committee meetings, and the subcommittee or such member or members must report any pre-approval decisions to our Audit Committee at its next scheduled meeting.
All services related to audit fees provided by MGO and Hall during fiscal year 2021 and 2020 were pre-approved by the Audit Committee in accordance with the pre-approval policy described above.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee’s role includes the oversight of our financial, accounting and reporting processes; our system of internal accounting and financial controls; our enterprise risk management program; and our compliance with related legal, regulatory and ethical requirements. The Audit Committee oversees the appointment, compensation, engagement, retention, termination and services of our independent registered public accounting firm, including conducting a review of its independence; reviewing and approving the planned scope of our annual audit; overseeing our independent registered public accounting firm’s audit work; reviewing and pre-approving any audit and non-audit services that may be performed by it; reviewing with management and our independent registered public accounting firm the adequacy of our internal financial and disclosure controls; reviewing our critical accounting policies and the application of accounting principles; and monitoring the rotation of partners of our independent registered public accounting firm on our audit engagement team as required by regulation. The Audit Committee establishes procedures, as required under applicable regulation, for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or auditing matters and the submission by employees of concerns regarding questionable accounting or auditing matters. The Audit Committee’s role also includes meeting to review our annual audited financial statements and quarterly financial statements with management and our independent registered public accounting firm. The Audit Committee held one meeting during fiscal year 2021.
The member of the Audit Committee met the independence criteria prescribed by applicable regulation and the rules of the SEC for audit committee membership and are “independent director” within the meaning of NASDAQ listing standards. The Audit Committee member meets NASDAQ’s financial literacy requirements, and the Board further determined that the member is an “audit committee financial expert” “as such term is defined in Item 407(d) of Regulation S-K promulgated by the SEC also meets NASDAQ’s financial sophistication requirements. The Audit Committee acts pursuant to a written charter, which complies with the applicable provisions of the Sarbanes-Oxley Act of 2002 and related rules of the SEC and NASDAQ, a copy of which can be found on our website at www.vystarcorp.com.
I have reviewed and discussed with management and MGO Vystar’s audited financial statements. I discussed with MGO and Vystar’s Chief Financial Officer the overall scope and plans of MGO’s audit. I met with MGO, with and without management present, to discuss results of its examinations, its evaluation of Vystar’s internal controls, and the overall quality of Vystar’s financial reporting.
I have reviewed and discussed with MGO matters required to be discussed pursuant to Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1. AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T. I have received from MGO the written disclosures and letter required by the applicable requirements of the Public Company Accounting Oversight Board regarding MGO’s communications with the Audit Committee concerning independence. I have discussed with MGO matters relating to its independence.
Based on the reviews and discussions referred to above and my review of Vystar’s audited financial statements for fiscal year 2021, I recommended to the Board that Vystar’s audited financial statements be included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021, for filing with the SEC.
Respectfully submitted,
AUDIT COMMITTEE
Bryan Stone, M.D., Chair
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PART IV
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
1. FINANCIAL STATEMENTS
The following financial statements and notes thereto of Vystar Corporation, and the related Report of Independent Registered Public Accounting Firm are set forth in Item 8.
2. FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable accounting regulations of the SEC have been omitted because they are not applicable, or the required information is included in the financial statements or notes thereto.
3. EXHIBITS
Exhibit Index *
* Some Exhibits have certain confidential information redacted pursuant to a request for confidential treatment
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| 101.INS*** | Inline XBRL Instance Document | |
| 101.SCH*** | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL*** | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF*** | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB*** | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE*** | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit) |
| * | Some Exhibits have certain confidential information redacted pursuant to a request for confidential treatment. |
| ** | Exhibits and schedules to this exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company will furnish copies of the omitted exhibits and schedules to the Securities and Exchange Commission upon its request. Confidential treatment has been requested as to a portion of this exhibit, which portion has been omitted and filed separately with the Securities and Exchange Commission. | |
| *** | Filed herewith. |
| ITEM 16. | FORM 10-K SUMMARY |
Not applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| VYSTAR CORPORATION | ||
| Date: May 16, 2022 | By: | /s/ Steven Rotman |
| Steven Rotman | ||
| Chairman, President, Chief Executive Officer (Principal Executive Officer), Chief Financial Officer (Principal Financial and Accounting Officer) and Director | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on May 16, 2022.
| Signature | Title | |
| /s/ Steven Rotman | President, Chief Executive Officer, and Chief Financial Officer | |
| Steven Rotman | ||
| /s/ Joseph Allegra | Chairman of the Board of Directors | |
| Joseph Allegra, PhD | ||
| /s/ Ranjit Matthan | Director | |
| Ranjit Matthan, PhD | ||
| /s/ Bryan Stone | Director | |
| Bryan Stone, MD | ||
| /s/ Byron Novosad | Director | |
| Byron Novosad, DDS |
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