VYST 10-Q
Vystar Corp (VYST)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________ to ________________
Commission
File Number
(Exact Name of Registrant as Specified in its Charter)
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
(Address of Principal Executive Offices, Zip Code)
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| NONE | NONE | NONE |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Smaller
reporting company | ||
| Emerging
growth company |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) YES ☐
| Class | Outstanding as of December 6, 2022 | |
Common Stock, $0.0001 par value per share |
shares |
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
In addition to historical information, this Form 10-Q contains statements relating to our future results (including certain projections and business trends) that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are subject to the “safe harbor” created by those sections. The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the financial statements and the related notes thereto included in this Quarterly Report on Form 10-Q (this “Report”). This Report contains certain forward-looking statements and the Company’s future operating results could differ materially from those discussed herein. Our disclosure and analysis included in this Report concerning our operations, cash flows and financial position, including, in particular, the likelihood of our success in expanding our business and raising debt and capital securities include forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expect”, “anticipate”, “intend”, “plan”, “believe”, “estimate”, “may”, “project”, “will likely result”, and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to certain risks, uncertainties, and assumptions, including prevailing market conditions and are more fully described under “Part I, Item 1A - Risk Factors” of our Form 10-K for the year ended December 31, 2021. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. In any event, these and other crucial factors, including those set forth in Item 1A - “Risk Factors” of our Form 10-K for the year ended December 31, 2021 may cause actual results to differ materially from those indicated by our forward-looking statements.
Although we believe that these statements are based upon reasonable assumptions, we cannot guarantee future results and readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date of this filing. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct or (iv) our strategy, which is based in part on this analysis, will be successful. The Company undertakes no obligation to update or revise forward-looking statements.
All references to “we”, “us”, “our” or “Vystar” in this Quarterly Report on Form 10-Q mean Vystar Corporation, and affiliates.
| 2 |
VYSTAR CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2022
INDEX
| 3 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VYSTAR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Other receivables | ||||||||
| Inventories | ||||||||
| 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 | ||||||||
| Related party advances | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| 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 series A, $ par value shares authorized; shares issued and outstanding at September
30, 2022 and December 31, 2021, respectively (liquidation preference of $ | ||||||||
| Convertible
preferred stock series B, $ par value shares authorized; and shares issued and outstanding at September
30, 2022 and December 31, 2021, respectively (liquidation preference of $ | ||||||||
| Convertible
preferred stock series C, $ par value shares authorized; and shares issued and outstanding at September
30, 2022 and December 31, 2021, respectively (liquidation preference of $ | ||||||||
| Common stock, $ par value, shares authorized; shares issued at September 30, 2022 and December 31, 2021, and and shares outstanding at September 30, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Common stock in treasury, at cost; shares at September 30, 2022 and December 31, 2021, respectively | ( | ) | ( | ) | ||||
| Total Vystar stockholders’ deficit | ( | ) | ( | ) | ||||
| Noncontrolling interest | ||||||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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VYSTAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| 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 | ||||||||||||||||
| 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 income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Net (income) loss attributable to noncontrolling interest | ( | ) | ||||||||||||||
| Net loss attributable to Vystar | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per share: | ||||||||||||||||
| Basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of common shares outstanding: | ||||||||||||||||
| Basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
VYSTAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022
(Unaudited)
| Attributable to Vystar | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number | Number | Number | Number | Number | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| of | of | of | of | Additional | of | Vystar | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred | Preferred | Preferred | Preferred | Preferred | Preferred | Common | Common | Paid-in | Accumulated | Treasury | Treasury | Stockholders’ | Noncontrolling | Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares A | Stock A | Shares B | Stock B | Shares C | Stock C | Shares | Stock | Capital | Deficit | Shares | Stock | Deficit | Interest | Deficit | ||||||||||||||||||||||||||||||||||||||||||||||
| Ending balance December 31, 2021 | | $ | $ | $ | $ | $ | $ | ( | ) | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation - options | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Retirement of common stock | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | ( | ) | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| Ending balance March 31, 2022 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation - options | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ending balance June 30, 2022 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation - options | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock issued for services | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock issued for cash | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock issued for settlement of accounts payable | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock issued for settlement of shareholder notes payable | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock issued for settlement of related party notes payable | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock issued for settlement of stock payable | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | ( | ) | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| Ending balance September 30, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 6 |
VYSTAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021
(Unaudited)
| Attributable to Vystar | ||||||||||||||||||||||||||||||||||||||||||||
| Number | Number | Number | Total | |||||||||||||||||||||||||||||||||||||||||
| of | of | Additional | of | Vystar | Total | |||||||||||||||||||||||||||||||||||||||
| Preferred | Preferred | Common | Common | Paid-in | Accumulated | Treasury | Treasury | Stockholders’ | Noncontrolling | Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Stock | Shares | Stock | Capital | Deficit | Shares | Stock | Deficit | Interest | Deficit | ||||||||||||||||||||||||||||||||||
| Ending balance December 31, 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 income | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Ending balance March 31, 2021 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Share-based compensation - options | ||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | - | - | ( | ) | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Ending balance June 30, 2021 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Common stock issued for services | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation - options | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for settlement of related party payable | ||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Ending balance September 30, 2021 | $ | $ | $ | ( | ) | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 7 |
VYSTAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | ( | ) | $ | ||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| (Gain) loss on settlement of debt, net | ( | ) | ||||||
| Share-based compensation | ||||||||
| Depreciation | ||||||||
| Bad debts (recovery) | ( | ) | ||||||
| Amortization of intangible assets | ||||||||
| Noncash lease expense | ||||||||
| Amortization of debt discount | ||||||||
| Change in fair value of derivative liabilities | ( | ) | ||||||
| Loss on sale of property and equipment | ||||||||
| Gain on sale of investments | ( | ) | ||||||
| (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 sales of investments | ||||||||
| Patents and trademark fees | ( | ) | ||||||
| Net cash provided by investing activities | ||||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of term debt | ||||||||
| Proceeds from the issuance of notes - related parties | ||||||||
| Proceeds from the issuance of convertible notes payable | ||||||||
| Proceeds from related party advances | ||||||||
| Repayment of related party debt | ( | ) | ||||||
| Repayment of finance lease obligations | ( | ) | ( | ) | ||||
| Proceeds from issuance of preferred stock | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash - beginning of period | ||||||||
| Cash - end of period | $ | $ | ||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Non-cash transactions: | ||||||||
| Common stock issued for accrued compensation | $ | $ | ||||||
| Common stock issued for settlement of related party payable | ||||||||
| Common stock issued for cash received in prior period | ||||||||
| Common stock issued for preferred stock | ||||||||
| Prepaid expenses with common stock | ||||||||
| Prepaid expenses with preferred stock | ||||||||
| Notes payable paid with preferred stock | ||||||||
| Related party notes payable paid with preferred stock | ||||||||
| Warrants and consulting paid by preferred stock | ||||||||
| Preferred stock issued for stock subscription payable | ||||||||
| Vendor payables paid with preferred stock | ||||||||
| Vendor payables paid directly by related party | ||||||||
| Reduction of third-party vendor payable with transfer of inventories | ||||||||
| Acquisition of inventories with third-party vendor payable at commencement of second sale agreement | ||||||||
| Derivatives issued as a debt discount | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 8 |
VYSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
Nature of Business
Vystar Corporation (“Vystar”, the “Company”, “we,” “us,” or “our”) is based in Worcester, Massachusetts. The Company uses patented technology to 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 to produce Vytex® Natural Rubber Latex (“NRL”) currently being 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.
On
September 1, 2022, our amendment effecting a
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed consolidated financial statements of the Company and the accompanying notes included in this Quarterly Report on Form 10-Q are unaudited. In the opinion of management, all adjustments necessary for the fair presentation of the condensed consolidated financial statements have been included. Such adjustments are of a normal, recurring nature. The condensed consolidated financial statements, and the accompanying notes, are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and do not contain certain information included in the Company’s Annual Report and Form 10-K for the year ended December 31, 2021. Therefore, the interim condensed consolidated financial statements should be read in conjunction with that Annual Report on Form 10-K.
The Company has evaluated subsequent events through the date of the filing of its Form 10-Q with the Securities and Exchange Commission. Other than those events disclosed in Note 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 condensed consolidated financial statements include the accounts of the Company and its wholly-owned or controlled operating subsidiaries. All significant intercompany accounts and transactions have been eliminated.
COVID-19 and Economic Conditions
The novel coronavirus (“COVID-19”) pandemic, its contributory efforts on the economy and general economic conditions, continues to impact our business and results of operations. During the nine months ended September 30, 2022, we experienced rising product prices, volatile transportation costs and supply chain disruptions. In addition, discretionary consumer spending has been adversely impacted by rising inflation, including fuel costs and interest rates. We cannot reasonably estimate the extent and duration of any future impact from the COVID-19 pandemic or general economic conditions on our business. Accordingly, the estimates and assumptions made as of September 30, 2022 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).
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.
| 9 |
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, 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 September 30, 2022 and are level 3 measurements. There have been no transfers between levels during the nine months ended September 30, 2022.
Acquisitions
Amounts paid for acquisitions are allocated to the assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition. The fair value of identifiable intangible assets is based on valuations that use information and assumptions provided by management. Identifiable intangible assets with finite lives are amortized over their useful lives. Acquisition-related costs, including, legal, accounting, and other costs, are capitalized in asset acquisitions and for business combinations are expensed in the periods in which the costs are incurred. The results of operations of acquired assets are included in the financial statements from the acquisition date.
Cash, 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 condensed consolidated balance sheets.
| 10 |
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.
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 September 30, 2022, the net balance of property and equipment is $
| 11 |
Intangible Assets
Patents
represent legal and other fees associated with the registration of patents. The Company has five issued patents with the United States
Patent and Trade Office (“USPTO”) as well as five issued international Patent Cooperation Treaty (“PCT”) patents.
Patents are carried at cost and are being amortized on a straight-line basis over their estimated useful lives, typically ranging from
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
Our intangible assets are reviewed for impairment annually or more frequently as warranted by events of changes in circumstances. As disclosed in Note 18, Rotmans will be closing its showroom at the end of 2022. At that time, the carrying amounts of our intangible assets may not be fully recoverable and an impairment charge will be recorded.
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 condensed 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 condensed consolidated balance sheet, if material. During the nine months ended September 30, 2022 and 2021, we did not recognize any impairment of our long-lived assets. As disclosed in Note 18, Rotmans will be closing its showroom at the end of 2022. At that time, the carrying amounts of the assets may not be fully recoverable and an impairment charge will be recorded.
Goodwill
Goodwill reflects the cost of an acquisition in excess of the fair values assigned to identifiable net assets acquired. Goodwill is not amortized, rather, it is subject to a periodic assessment for impairment by applying a fair value-based test. We perform our annual impairment test at the end of each calendar year, or more frequently if events or changes in circumstances indicate the asset might be impaired.
Accounting for acquisitions requires us to recognize, separately from goodwill, the assets acquired and the liabilities assumed at their acquisition-date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition-date fair values of the assets acquired and the liabilities assumed. While we use best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, the estimates are inherently uncertain and subject to refinement.
The impairment model permits, and we utilize, a simplified approach for determining goodwill impairment. In the first step, we evaluate the recoverability of goodwill by estimating the fair value of our reporting unit using multiple techniques, including an income approach using a discounted cash flow model and a market approach. Based on an equal weighting of the results of these two approaches, a conclusion of fair value is estimated. The fair value is then compared to the carrying value of our reporting unit. If the fair value of a reporting unit is less than its carrying value, the Company recognizes this amount as an impairment loss. Impairment losses, limited to the carrying value of goodwill, represent the excess of the carrying amount of goodwill over its implied fair value.
As disclosed in Note 18, Rotmans will be closing its showroom at the end of 2022. At that time, goodwill will be reviewed and, if impaired, a loss will be recorded.
Convertible Notes Payable
Borrowings are recognized initially at the principal amount received. Borrowings are subsequently carried at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized as interest expense in the statements of operations over the period of the borrowings using the effective interest method.
| 12 |
Derivatives
The Company evaluates its debt instruments or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under the relevant sections of Accounting Standards Codification (“ASC”) Topic 815-40, Derivative Instruments and Hedging: Contracts in Entity’s Own Equity. The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative instrument and is marked-to-market at each balance sheet date and recorded as a liability. In the event the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations as other income or other expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815-40 are reclassified to a liability account at the fair value of the instrument on the reclassification date.
The Company applies the accounting standard that provides guidance for determining whether an equity-linked financial instrument, or embedded feature, is indexed to an entity’s own stock. The standard applies to any freestanding financial instrument or embedded features that have the characteristics of a derivative, and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. From time to time, the Company has issued notes with embedded conversion features. Certain of the embedded conversion features contain price protection or anti-dilution features that result in these instruments being treated as derivatives for accounting purposes. Accordingly, as of September 30, 2022, the Company has classified all conversion features as derivative liabilities and has estimated the fair value of these embedded conversion features using a Monte Carlo simulation model.
Unearned Revenue
Unearned revenue consists of customer advance payments, deposits on sales of undelivered merchandise and deferred warranty revenue on self-insured stain protection warranty coverage.
Changes to unearned revenue during the nine months ended September 30, 2022 and 2021 are summarized as follows:
| 2022 | 2021 | |||||||
| Balance, beginning of the period | $ | $ | ||||||
| Customer deposits received | ||||||||
| Gift cards purchased | ||||||||
| Revenue earned | ( | ) | ( | ) | ||||
| Balance, end of the period | $ | $ | ||||||
The Company presents basic and diluted loss per share. As the Company reported a net loss in the nine months ended September 30, 2022 and 2021, 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 the nine months ended September 30, 2022 and 2021, respectively, as their effect would be anti-dilutive. Warrants to purchase and shares of common stock for the nine months ended September 30, 2022 and 2021, respectively, were also excluded from the computation of diluted loss per share as their effect would be anti-dilutive. In addition, preferred stock series A convertible to and shares of common stock for the nine months ended September 30, 2022 and 2021, respectively, were excluded from the computation of diluted loss per share as their effect would be anti-dilutive. Preferred stock series B and C convertible to and shares of common stock for the nine months ended September 30, 2022 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 of and shares of common stock for the nine months ended September 30, 2022 and 2021, respectively, were also excluded from the computation of diluted loss per share as their effect would be anti-dilutive.
| 13 |
Revenue
Our principal activities from which we generate our revenue are product sales. Revenue is measured based on considerations specified in a contract with a customer. A contract exists when it becomes a legally enforceable agreement with a customer. The contract is based on either the acceptance of standard terms and conditions at the retail store 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.
The
transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer
receives the benefit of the performance obligation. The transaction price is determined based on the consideration to which we will be
entitled to receive in exchange for transferring goods to the customer. We issue refunds to retail, e-commerce and print media customers,
upon request, within 30 days of delivery. We estimate the amount of potential refunds at each reporting period using a portfolio approach
of historical data, adjusted for changes in expected customer experience, including seasonality and changes in economic factors. For
retailers, distributors and wholesalers, we do not offer a right of return or refund and revenue is recognized at the time products are
shipped to customers. In all cases, judgment is required in estimating these reserves. Actual claims for returns could be materially
different from the estimates. As of September 30, 2022 and December 31, 2021, 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 condensed consolidated statements of operations and the costs associated with these deliveries are included in revenues as a third-party delivery service is engaged. 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 condensed 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 currently offers
a separately-priced stain protection warranty serviced by a third-party. At September 30, 2022 and December 31, 2021, deferred
warranty revenue was approximately $
| 14 |
Cost of Revenue
Cost of revenue consists primarily of product and freight costs and fees paid to online retailers.
Research and Development
Research and development costs are expensed when incurred. Research and development costs include all costs incurred related to the research, development and testing. For the nine months ended September 30, 2022 and 2021, 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 were approximately $
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 2019 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.
| 15 |
Other Risks and Uncertainties
The Company is exposed to risks pertinent to the operations of a retailer, including, but not limited to, the ability to acquire new customers and maintain a strong brand as well as broader economic factors such as interest rates and changes in customer spending patterns.
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). The new ASU eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. The amendments in the ASU are effective for public business entities that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Board also specified that an entity should adopt the guidance as of the beginning of its annual fiscal year and is not permitted to adopt the guidance in an interim period. The Company is still evaluating the effect the adoption will have on its financial statements.
NOTE 3 - LIQUIDITY AND GOING CONCERN
The
Company’s financial statements are prepared using the accrual method of accounting in accordance with U.S. GAAP and have been prepared
on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business.
However, the Company has incurred significant losses and experienced negative cash flow since inception. At September 30, 2022, 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 and stock issuances to new and existing shareholders.
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.
| 16 |
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 acquire new customers and maintain a strong brand; and broader economic factors such as interest rates and changes in customer spending patterns. As the Company expands its activities and operations, cash requirements are expected to increase at a rate consistent with revenue growth after the Company has achieved sustained revenue generation.
NOTE 4 - INVESTMENTS – EQUITY SECURITIES
Investments,
which represented equity securities in a publicly traded company, were sold during the nine months ended September 30, 2021 at a gain
of approximately $
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment, net consists of the following:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Furniture, fixtures and equipment | $ | $ | ||||||
| Tooling and testing equipment | ||||||||
| Parking lots | ||||||||
| Leasehold improvements | ||||||||
| Motor vehicles | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation
expense for the nine months ended September 30, 2022 and 2021 was $
| 17 |
NOTE 6 - INTANGIBLE ASSETS
Intangible assets consist of the following:
| September 30, | December 31, | Amortization Period | ||||||||
| 2022 | 2021 | (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 nine months ended September 30, 2022 and 2021 was $
Estimated future amortization expense for finite-lived intangible assets is as follows:
| Amount | ||||
| Remaining in 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total | $ | |||
| 18 |
NOTE 7 - LEASES
The
Company leases equipment, a showroom, offices and warehouse facilities.
The table below presents the lease costs for the three and nine months ended September 30, 2022 and 2021:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30. | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Operating lease cost | $ | $ | $ | $ | ||||||||||||
| Finance lease cost: | ||||||||||||||||
| Amortization of right-of-use assets | ||||||||||||||||
| Interest on lease liabilities | ||||||||||||||||
| Total lease cost | $ | $ | $ | $ | ||||||||||||
During
the nine months ended September 30, 2022 and 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:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| 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 | years | |||||||||||||||
| Weighted average discount rate: | ||||||||||||||||
| Operating leases | % | % | % | % | ||||||||||||
| Finance leases | % | % | % | % | ||||||||||||
| 19 |
The future minimum lease payments required under operating and financing lease obligations as of September 30, 2022 having initial or remaining non-cancelable lease terms in excess of one year are summarized as follows:
| Operating Leases | Finance Leases | Total | ||||||||||
| Remainder of 2022 | $ | $ | $ | |||||||||
| 2023 | ||||||||||||
| 2024 | ||||||||||||
| 2025 | ||||||||||||
| 2026 | ||||||||||||
| Thereafter | ||||||||||||
| Total undiscounted lease liabilities | ||||||||||||
| Less: imputed interest | ( | ) | ( | ) | ( | ) | ||||||
| Net lease liabilities | $ | $ | $ | |||||||||
As of September 30, 2022, 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
April 16, 2020, Rotmans received $
On
February 2, 2021, Rotmans received an additional $
| 20 |
Shareholder, Convertible and Contingently Convertible Notes Payable
The following table summarizes shareholder, convertible and contingently convertible notes payable:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| 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 $
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 these notes issued prior to 2021, the Company recorded the embedded conversion features as derivative liabilities, which amounted to $ at December 31, 2021. With the debt settlements beginning in April 2022, the value of the embedded conversion features on the one remaining note was $ at September 30, 2022.
| 21 |
Related Party Debt
The following table summarizes related party debt:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| 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 $
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 $
| 22 |
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 | September 30, | December 31, | ||||||||||||
| Issue Date | Amount | 2022 | 2021 | |||||||||||
| 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 these convertible notes excluding the one issued in August 2021, the Company recorded the embedded
conversion features as derivative liabilities, which amounted to $
Rotman Family Nonconvertible Notes
In
connection with the acquisition of
| 23 |
During
the six months ended December 31, 2020, Steven Rotman advanced the Company funds totaling $
During
2021, Steven Rotman advanced the Company funds totaling $
In
April 2022, Blue Oar Consulting, Inc. (“Blue Oar”), an entity wholly owned by Gregory Rotman, advanced the Company $
The following table summarizes the Rotman Family Nonconvertible Notes:
| Carrying Amount | ||||||||||||||
| Principal | September 30, | December 31, | ||||||||||||
| Issue Date | Amount | 2022 | 2021 | |||||||||||
| Steven
Rotman | $ | $ | $ | |||||||||||
| Bernard
Rotman | ||||||||||||||
| Steven
Rotman | ||||||||||||||
| Steven
Rotman | ||||||||||||||
| Steven
Rotman | ||||||||||||||
| Blue
Oar | ||||||||||||||
| $ | $ | $ | ||||||||||||
Approximate maturities for the succeeding years are as follows:
| Remainder of 2022 | $ | |||
| 2023 | ||||
| $ |
| 24 |
NOTE 9 - DERIVATIVE LIABILITIES
As
of September 30, 2022 and December 31, 2021, the Company had a $
The embedded derivatives for the notes are carried on the Company’s condensed 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 condensed 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. With the settlement of all except one of the convertible notes payable, the balance has been significantly reduced as of September 30, 2022.
The following table summarizes the derivative liabilities included in the condensed consolidated balance sheet at September 30, 2022 and December 31, 2021:
Fair Value of Embedded Derivative Liabilities:
| 2022 | 2021 | |||||||
| Balance, beginning of the period | $ | $ | ||||||
| Initial measurement of liabilities | ||||||||
| Change in fair value | ( | ) | ( | ) | ||||
| Balance, end of the period | $ | $ | ||||||
NOTE 10 - STOCKHOLDERS’ DEFICIT
Cumulative Convertible Preferred Stock
Series A Preferred Stock
On
May 2, 2013, the Company began a private placement offering to sell up to shares of the Company’s
As
of September 30, 2022, the shares of outstanding preferred stock had undeclared dividends of approximately $
As
of December 31, 2021, the shares of outstanding preferred stock had undeclared dividends of approximately $
| 25 |
Series B Preferred Stock
On
April 11, 2022, the Company amended its Articles of Incorporation to add the terms of a
As
of September 30, 2022, the shares of outstanding preferred stock had undeclared
dividends of approximately $
Series C Preferred Stock
On
July 8, 2022, the Company amended its Articles of Incorporation to add the terms of a
As
of September 30, 2022, the shares of outstanding preferred stock had undeclared
dividends of approximately $
Common Stock and Warrants
During the nine months ended September 30, 2022, the Company retired shares of previously issued common stock. Included in stock subscription payable at September 30, 2022, is $ received under common stock subscription agreements for shares during the year ended December 31, 2020.
Stock Subscription Payable
At
September 30, 2022 and December 31, 2021, the Company recorded $
| Amount | Shares | |||||||
| Balance, January 1, 2021 | $ | |||||||
| Additions, net | ||||||||
| Issuances, net | ( | ) | ( | ) | ||||
| Balance, December 31, 2021 | ||||||||
| Additions, net | ||||||||
| Issuances, net | ( | ) | ( | ) | ||||
| Balance, September 30, 2022 | $ | |||||||
| 26 |
NOTE 11 - REVENUES
The following table presents our revenues disaggregated by each major product category and service for the three and nine months ended September 30, 2022 and 2021:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||
| % of | % of | % of | % of | |||||||||||||||||||||||||||||
| Net Sales | Net Sales | Net Sales | Net Sales | Net Sales | Net Sales | Net Sales | Net Sales | |||||||||||||||||||||||||
| Merchandise: | ||||||||||||||||||||||||||||||||
| Case Goods | ||||||||||||||||||||||||||||||||
| Bedroom Furniture | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| 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 nine months ended September 30, 2022 and 2021, 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 September 30, 2022 and December 31, 2021, respectively.
The Company used the Black-Scholes option pricing model to estimate the grant-date fair value of option and warrant awards:
| ● | Expected Dividend Yield - because the Company does not currently pay dividends, the expected dividend yield is ; | |
| ● | Expected Volatility in Stock Price - volatility based on the Company’s trading activity was used to determine expected volatility; | |
| ● | Risk-free Interest Rate - reflects the average rate on a United States Treasury Bond with a maturity equal to the expected term of the option; and | |
| ● | Expected Life of Award - because we have minimal experience with the exercise of options or warrants for use in determining the expected life of each award, we used the option or warrant’s contractual term as the expected life. |
In total for the nine months ended September 30, 2022 and 2021, the Company recorded $ and $, respectively, of share-based compensation expense related to employee and Board Members’ stock options. There is unrecognized compensation expense as of September 30, 2022 for non-vested share-based awards to be recognized over a period of less than .
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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 September 30, 2022, 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 September 30, 2022. In 2019, the Board of Directors adopted an additional stock option plan with provides for shares which are all available as of September 30, 2022. 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 and are typically exercisable up to .
There were options granted during the nine months ended September 30, 2022 and 2021, respectively.
| Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | ||||||||||
| Outstanding, December 31, 2021 | $ | |||||||||||
| Granted | - | - | ||||||||||
| Exercised | ( | ) | - | - | ||||||||
| Forfeited | - | - | ||||||||||
| Outstanding, September 30, 2022 | $ | |||||||||||
| Exercisable, September 30, 2022 | $ | |||||||||||
As of September 30, 2022 and 2021, the aggregate intrinsic value of the Company’s outstanding options was minimal. 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.
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The following table represents the Company’s warrant activity for the nine months ended September 30, 2022:
| Number of Shares | Weighted Average Fair Value | Weighted Average Exercise Price | Weighted Average Remaining Contractual Life (Years) | |||||||||||||
| Outstanding, December 31, 2021 | $ | |||||||||||||||
| Granted | - | - | ||||||||||||||
| Exercised | ( | ) | - | - | ||||||||||||
| Forfeited | - | - | ||||||||||||||
| Expired | ( | ) | $ | - | ||||||||||||
| Outstanding, September 30, 2022 | $ | |||||||||||||||
| Exercisable, September 30, 2022 | $ | |||||||||||||||
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 $
During
the three months ended September 30, 2022, the Company issued shares of preferred stock series C for the settlement of debt
totaling $
The Board of Directors authorized their board fees for 2021 be paid in common stock of the Company. Included in stock subscription payable at September 30, 2022 and December 31, 2021 is , of which is included in Steven Rotman’s balance above.
Blue Oar Consulting, Inc.
This entity 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
the consulting agreement, Blue Oar is to be paid $
During
the three months ended September 30, 2022, the Company issued shares of preferred stock series C for the settlement of debt and
payables totaling $
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Related Party Advances
During
the nine months ended September 30, 2022, Gregory Rotman and Steven Rotman advanced the Company funds totaling $
Bernard Rotman
On
July 18, 2019, the Company issued a contingently convertible note totaling $
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 $
Designcenters.com
This
entity is owned by Jamie Rotman, who is the daughter of the Company’s CEO, Steven Rotman. Designcenters.com (“Design”)
provided bookkeeping and management services to the Company through July 2019. In exchange for such services, the Company had entered
into a consulting agreement with the related party entity. As of September 30, 2022, the Company had a stock subscription payable balance
of $
NOTE 14 - COMMITMENTS
Employment and Consulting Agreements
The Company has entered into employment and consulting agreements with certain of our officers, employees, and affiliates. For employees, payment and benefits would become payable in the event of termination by us for any reason other than cause, or upon change in control of our Company, or by the employee for good reason.
There is currently one employment agreement in place with the CEO, Steven Rotman. See compensation terms in Note 13.
During the nine months ended September 30, 2022, the Company entered into various service agreements with consultants for financial reporting, advisory, and compliance services.
Litigation
From time to time, the Company is party to certain legal proceedings that arise in the ordinary course and are incidental to our business. Future events or circumstances, currently unknown to management, will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on our consolidated financial position, liquidity or results of operations in any future reporting periods.
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EMA Financial
On February 19, 2019, EMA Financial, Inc. filed a lawsuit in the Southern District of New York against the Company. The lawsuit alleged various breaches of an underlying convertible promissory note and stock purchase agreement and sought four claims for relief: (i) specific performance to enforce a stock conversion and contractual obligations; (ii) breach of contract; (iii) permanent injunction to enforce the stock conversion and contractual obligations; and (iv) legal fees and costs of the litigation. The complaint was filed with a motion seeking: (i) a preliminary injunction seeking an immediate resolution of the case through the stock conversion; (ii) a consolidation of the trial with the preliminary injunctive hearing; and (iii) summary judgment on the first and third claims for relief.
The Company filed an opposition to the motion and upon oral argument the motion for injunctive relief was denied. The Court issued 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 on June 24, 2022, the parties submitted competing motions for summary judgment.
EMA
seeks summary judgment on its breach of contract and attorneys’ fees claims, specifically seeking damages in the amount of $
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 nine months ended September 30, 2022, the Company made approximately
During
the nine months ended September 30, 2021, the Company made approximately
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NOTE 16 - INCOME TAXES
The
provision (benefit) for income taxes for the nine months ended September 30, 2022 and 2021 assumes a
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Federal statutory income tax rate | ( | )% | ( | )% | ||||
| Change in valuation allowance on net operating loss carryforwards | ||||||||
| Effective income tax rate | % | % | ||||||
Deferred tax assets as of September 30, 2022 and December 31, 2021 are as follows:
| 2022 | 2021 | |||||||
| 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
For
federal income tax purposes, the Company has a net operating loss carryforward of approximately $
In
addition, as of September 30, 2022, 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 2022 and 2021. Participant and Company contributions are limited to amounts allowed under the Internal Revenue Code.
The
Company offers
NOTE 18 - SUBSEQUENT EVENTS
In October 2022, the Company announced it is closing the Rotmans retail showroom by the end of the year and has started a going out of business sale. The Company is exploring alternative uses for the showroom in 2023 and reviewing the disposition of the remaining business assets. In addition, the Company’s 401(k) profit sharing plan will be terminated by December 31, 2022.
As of September 30, 2022, the Company was in negotiations
with its third-party agent to extend the repayment terms of advances totaling $
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
OVERVIEW
This analysis of our results of operations should be read in conjunction with the accompanying financial statements. This Report contains certain forward-looking statements within the meaning of Section 27A of the 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.
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 the U.S. Environmental Protection Agency (“EPA”) and U.S. Food and Drug Administration (“FDA”) certified laboratories, the RxAir has been proven to destroy greater than 99% of bacteria and viruses and reduce concentrations of odors and volatile organic compounds (“VOCs”). The RxAir uses high-intensity germicidal UV lamps that destroy bacteria and viruses instead of just trapping them, setting it apart from ordinary air filtration units. RxAir® and ViraTech® are registered trademarks of 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 |
Vystar produces the RxAir product line with a new world-class manufacturer and an expert U.S. engineer with a full understanding of the RxAir technology. Vystar sells RxAir residential and commercial units through multiple distributors and the Company’s website. Once distribution channels are firmly established, Vystar expects the air purification products will produce margins of approximately 70%.
Vystar’s Board of Directors have approved preliminary plans to spin off the RxAir, Vytex and FEC product lines into a separate legal entity which Vystar intends to take public. Vystar anticipates retaining approximately 10% of the shares in the new entity and will distribute the remaining ownership percentage to Vystar shareholders. This plan is expected to be executed in early 2023.
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About Rotmans
Rotmans, 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. Steven Rotman and a group of dedicated employees provide continuity of management and customer-focused values for the Company. As disclosed in subsequent events, Rotmans will be closing its retail showroom by the end of the year.
About Vytex
Vytex is a multi-patented latex raw material in which the allergy causing proteins are reduced to a level that falls at or below detection based on ASTM approved test methods. Vytex has been available as a raw material commercially for fourteen years and through that time has a group of manufacturers who use it in end products such as electrical gloves, condoms, adhesives, etc. Ironically, most use Vytex as it’s better for their manufacturing process as an easier to use raw material and not for protein properties. As of mid-2020 Vystar and the Indian Rubber Manufacturers Research Association’s (“IRMRA”) had been 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. Additionally, this research, while slowed by the COVID-19 pandemic, showed attributes with extra low ammonia offerings that are desired.
Towards the end of 2020, Vystar entered into a Market Development and Distribution Agreement with Corrie MacColl, Ltd. (“CMC Global”) to produce, develop and manage the Vytex product and supply lines. This agreement allows Vystar to expand the market for its Natural Rubber Latex products and has garnered much attention across a broad range of industries including liquid Vytex as well as the newly developed dry rubber Vytex. As of the date of this report, CMC Global has provided numerous opportunities that are in a trial basis or moving towards manufacturing trials in industries that use a significant amount of natural rubber latex, hence Vytex that now includes production size trial runs in a large dipped product consumer line starting late 2022. Additionally Vystar now has a testing supply of Vytex dry rubber for larger trials. The success of early trials and the shipping crisis has led to broader spectrum of manufacturers combining the potential of Cameroon production with strategically placed contract manufacturers based on geographical needs including the North American maket. Also Vystar research has shown great strides in specializing liquid Vytex (ultra low protein latex, ULPL) to meet the immediate needs of customers such as low or no nitrosamine and others (discussed in the presentation below available in the pdf) and additional patents have been proposed to cover these findings. Research into dry rubber continues at a moderate pace as tire companies seek out alternatives to synthetics.
Vytex researcher Dr. Ranjit Matthan and CMC Global Director John Heath presented at The International Latex Conference which was held virtually July 20 to 22, 2021 and offered a plenary session entitled “Innovations and Sustainability in Natural Rubber Latex - The New Paradigm.” The presentation discussed the dramatic effect the COVID-19 pandemic has had on the natural rubber supply chain, and how the industry is reacting the new economic circumstances; including strategy and policy shifts in supply chain management and restoring greater geographic diversification of latex processing and product manufacturing. The R&D association with IRMRA promises quicker laboratory and field-based testing and evaluations downstream. At Vystar, the recalibrated sustainability programme (FSC, nitrosamines & ammonia free, ultralow proteins, no SVHC and green carbon neutrality) emphasize certifications with Corrie MacColl market reach facilitating faster rollouts. Nontraditional/non Hevea brasiliensis based production efforts are likely to continue to face new penetration and high cost-benefit acceptance challenges in this decade. A PDF of the full presentation is available on vytex.com.
Additionally, in August 2021, Dr. Matthan presented new data to the Automotive Tyre Manufacturers’ Association including Vytex dry rubber. A follow up paper has been completed by Dr Matthan, John Heath and William Doyle and will run in Rubber World in early 2023.
In Halcyon Agri (owner of CMC Global), 2020 Corporate Report: “Our group-wide innovation capabilities have enabled us to engage in innovative commercial partnerships. Corrie MacColl is collaborating with Vystar Corporation to transform our Cameroon plantation output into ultra-pure latex with stronger molecular bond that offers enhanced strength, durability, and flexibility in the end products. This is achieved by removing non-rubber components and 99.85% of the proteins.” CMC Global continues to work with the facility at Cameroon to produce Vytex at their owned processing plant.
About FEC
Vystar is looking to Fluid Energy as it moves forward in its quest for a cleaner and safer environment. The Company is planning to improve its air purifying by using the ultrasonic technology of Fluid Energy and combining it with its leading UV-C technology. The designs and prototypes are in development. This ultrasonic technology is applied into water products with the same goal. We have working prototypes for our water product targets that have tested beyond expectation for bacterial killing and flow metering. We will begin soon evaluating our ability to eradicate hard water pollution that fouls pools, fountains, and pumps. These products will move us toward living more safely and cleanly in our environment.
Impact of COVID-19 and Economic Conditions on Our Business
The COVID-19 pandemic, its contributory effect on the economy and general economic conditions, has resulted in significant economic disruption and adversely impacted our business. It has caused, among other things, interruptions in our supply chains and suppliers, including potential problems with inventory availability and the potential result of the volatility or higher cost of product and international freight due to the high demand of products and low supply for an unpredictable period of time. In addition, discretionary consumer spending has been negatively affected by rising inflation, including fuel costs and interest rates. At this time, we cannot reasonably estimate the duration of the pandemic or general economic conditions and its influence on consumers and our business.
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RESULTS OF OPERATIONS
Comparison of the Three Months Ended September 30, 2022 with the Three Months Ended September 30, 2021
| Three Months Ended September 30, | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
| CONSOLIDATED | ||||||||||||||||
| Revenue | $ | 3,572,071 | $ | 4,066,597 | $ | (494,526 | ) | -12.2 | % | |||||||
| Cost of revenue | 1,681,713 | 1,932,290 | (250,577 | ) | -13.0 | % | ||||||||||
| Gross profit | 1,890,358 | 2,134,307 | (243,949 | ) | -11.4 | % | ||||||||||
| Operating expenses: | ||||||||||||||||
| Salaries, wages and benefits | 866,427 | 1,188,835 | (322,408 | ) | -27.1 | % | ||||||||||
| Share-based compensation | 181,199 | 207,382 | (26,183 | ) | -12.6 | % | ||||||||||
| Agent fees | 312,909 | 312,214 | 695 | 0.2 | % | |||||||||||
| Professional fees | 91,624 | 124,285 | (32,661 | ) | -26.3 | % | ||||||||||
| Advertising | 242,902 | 365,369 | (122,467 | ) | -33.5 | % | ||||||||||
| Rent | 195,950 | 331,056 | (135,106 | ) | -40.8 | % | ||||||||||
| Service charges | 90,132 | 147,466 | (57,334 | ) | -38.9 | % | ||||||||||
| Depreciation and amortization | 119,237 | 193,158 | (73,921 | ) | -38.3 | % | ||||||||||
| Other operating | 585,082 | 812,817 | (227,735 | ) | -28.0 | % | ||||||||||
| Total operating expenses | 2,685,462 | 3,682,582 | (997,120 | ) | -27.1 | % | ||||||||||
| Loss from operations | (795,104 | ) | (1,548,275 | ) | 753,171 | -48.6 | % | |||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | (107,869 | ) | (186,732 | ) | 78,863 | -42.2 | % | |||||||||
| Change in fair value of derivative liabilities | 240,300 | (88,200 | ) | 328,500 | -372.4 | % | ||||||||||
| Loss on settlement of debt, net | (2,481,231 | ) | - | (2,481,231 | ) | 100.0 | % | |||||||||
| Other income (expense), net | 34,443 | (135,612 | ) | 170,055 | -125.4 | % | ||||||||||
| Total other expense, net | (2,314,357 | ) | (410,544 | ) | (1,903,813 | ) | 463.7 | % | ||||||||
| Net loss | (3,109,461 | ) | (1,958,819 | ) | (1,150,642 | ) | 58.7 | % | ||||||||
| Net loss attributable to noncontrolling interest | 134,849 | 439,512 | (304,663 | ) | -69.3 | % | ||||||||||
| Net loss attributable to Vystar | $ | (2,974,612 | ) | $ | (1,519,307 | ) | $ | (1,455,305 | ) | 95.8 | % | |||||
Revenues
Revenues for the three months ended September 30, 2022 and 2021 were $3,572,071 and $4,066,597, respectively, for an decrease of $494,526 or 12.2%. The decrease in revenues was due to the reduction in discretionary consumer spending due to rising inflation in 2022.
The Company reported a decrease in gross profit to $1,890,358 for the three-month period ended September 30, 2022 compared to gross profit of $2,134,307 for the three-month period ended September 30, 2021, a decrease of $243,949 or 11.4%. The decrease in gross profit is consistent with the decrease in revenues.
The cost of revenue for the three months ended September 30, 2022 and 2021 was $1,681,713 and $1,932,290, respectively, a decrease of $250,577 or 13.0%.
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Operating Expenses
The Company’s operating expenses consist primarily of compensation and support costs for management and administrative staff, and for other general and administrative costs, including professional fees related to accounting, finance, and legal services as well as advertising, rent and other operating expenses. The Company’s operating expenses were $2,685,462 and $3,682,582 for the nine months ended September 30, 2022 and 2021, respectively, a decrease of $997,120 or 27.1%. The decrease was due in part to reduced revenues and the closing of a second warehouse occupied by Rotmans until October 2021.
Other Expense
Other expense for the three months ended September 30, 2022 was $2,314,357 which consisted of interest expense of $107,869, change in fair value of derivative liabilities of ($240,300), loss on settlement of debt, net of $2,481,231 and other income of $34,443. This compares to other expense of $410,544 for the three months ended September 30, 2021, which consisted of interest expense of $186,732, change in fair value of derivative liabilities of $88,200 and other expense of $135,612. Loss on settlement of debt, net resulted from the settlement of notes and vendor payables with preferred stock series B and C in July and September 2022.
Net Loss
Net loss was $3,109,461 and $1,958,819 for the three months ended September 30, 2022 and 2021, respectively, an increase of $1,150,642 or 58.7%. Net loss in the quarter ended September 30, 2022 versus net loss in the same period in 2021 was due to a reduced operating loss which was offset by loss on settlement of debt, net.
RESULTS OF OPERATIONS
Comparison of the Nine Months Ended September 30, 2022 with the Nine Months Ended September 30, 2021
| Nine Months Ended September 30, | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
| CONSOLIDATED | ||||||||||||||||
| Revenue | $ | 10,607,362 | $ | 23,150,720 | $ | (12,543,358 | ) | -54.2 | % | |||||||
| Cost of revenue | 4,809,951 | 10,576,205 | (5,766,254 | ) | -54.5 | % | ||||||||||
| Gross profit | 5,797,411 | 12,574,515 | (6,777,104 | ) | -53.9 | % | ||||||||||
| Operating expenses: | ||||||||||||||||
| Salaries, wages and benefits | 2,560,840 | 4,713,623 | (2,152,783 | ) | -45.7 | % | ||||||||||
| Share-based compensation | 658,004 | 623,501 | 34,503 | 5.5 | % | |||||||||||
| Agent fees | 1,058,095 | 2,641,654 | (1,583,559 | ) | -59.9 | % | ||||||||||
| Professional fees | 414,498 | 343,246 | 71,252 | 20.8 | % | |||||||||||
| Advertising | 850,474 | 1,774,022 | (923,548 | ) | -52.1 | % | ||||||||||
| Rent | 556,861 | 967,287 | (410,426 | ) | -42.4 | % | ||||||||||
| Service charges | 282,376 | 456,481 | (174,105 | ) | -38.1 | % | ||||||||||
| Depreciation and amortization | 420,397 | 577,539 | (157,142 | ) | -27.2 | % | ||||||||||
| Other operating | 1,748,378 | 2,490,302 | (741,924 | ) | -29.8 | % | ||||||||||
| Total operating expenses | 8,549,923 | 14,587,655 | (6,037,732 | ) | -41.4 | % | ||||||||||
| Loss from operations | (2,752,512 | ) | (2,013,140 | ) | (739,372 | ) | 36.7 | % | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | (494,355 | ) | (540,062 | ) | 45,707 | -8.5 | % | |||||||||
| Change in fair value of derivative liabilities | 1,760,300 | (1,400 | ) | 1,761,700 | -125835.7 | % | ||||||||||
| Gain (loss) on settlement of debt, net | (2,250,411 | ) | 2,675,926 | (4,926,337 | ) | -184.1 | % | |||||||||
| Other income (expense), net | 102,147 | (35,688 | ) | 137,835 | -386.2 | % | ||||||||||
| Total other income (expense), net | (882,319 | ) | 2,098,776 | (2,981,095 | ) | -142.0 | % | |||||||||
| Net income (loss) | (3,634,831 | ) | 85,636 | (3,720,467 | ) | -4344.5 | % | |||||||||
| Net (income) loss attributable to noncontrolling interest | 552,545 | (823,363 | ) | 1,375,908 | -167.1 | % | ||||||||||
| Net income (loss) attributable to Vystar | $ | (3,082,286 | ) | $ | (737,727 | ) | $ | (2,344,559 | ) | 317.8 | % | |||||
Revenues
Revenues for the nine months ended September 30, 2022 and 2021 were $10,607,362 and $23,150,720, respectively, for a decrease of $12,543,358 or 54.2%. The decrease in revenues was due to the success of the high impact closing to remodel sale at Rotmans in 2021 and the reduction in discretionary consumer spending due to rising inflation in 2022.
The Company reported a significant decrease in gross profit to $5,797,411 for the nine month period ended September 30, 2022 compared to gross profit of $12,574,515 for the nine month period ended September 30, 2021, a decrease of $6,777,104 or 53.9%. The decrease in gross profit is consistent with the decrease in revenues.
The cost of revenue for the nine months ended September 30, 2022 and 2021 was $4,809,951 and $10,576,205, respectively, a decrease of $5,766,254 or 54.5%.
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Operating Expenses
The Company’s operating expenses consist primarily of compensation and support costs for management and administrative staff, and for other general and administrative costs, including professional fees related to accounting, finance, and legal services as well as advertising, rent and other operating expenses. The Company’s operating expenses were $8,549,923 and $14,587,655 for the nine months ended September 30, 2022 and 2021, respectively, a decrease of $6,037,732 or 41.4%. The decrease was due in part to reduced revenues and the closing of a second warehouse occupied by Rotmans until October 2021.
Other Income (Expense)
Other income (expense) for the nine months ended September 30, 2022 was ($882,319) which consisted of interest expense of ($494,355), change in fair value of derivative liabilities of $1,760,300, loss on settlement of debt, net of ($2,250,411) and other income of $102,147. Loss on settlement of debt, net resulted from the settlement of notes and vendor payables with preferred stock series B and C in 2022. This compares to other income (expense) of $2,098,776 for the nine months ended September 30, 2021, which consisted of interest expense of ($540,062), change in fair value of derivative liabilities of ($1,400), gain on settlement of debt, net of $2,675,926 and other expense of ($35,688). Included in gain on settlement of debt, net is PPP loan forgiveness of $2,805,800.
Net Income (Loss)
Net income (loss) was ($3,634,831) and $85,636 for the nine months ended September 30, 2022 and 2021, respectively, a decrease of $3,720,467 or 4,344.5%. Net loss in the nine months ended September 30, 2022 versus net income in the same period in 2021 was due to PPP loan forgiveness of $2,805,800 and increased sales and margins from the operations of a high impact closing to remodel sale at Rotmans in 2021. The net loss in 2022 was increased by the loss on settlement of debt, net partially offset by the change in fair value of derivative liabilities of $1,760,300.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s financial statements are prepared using the accrual method of accounting in accordance with U.S. GAAP and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. However, we have incurred significant losses and experienced negative cash flow since inception. At September 30, 2022, the Company had cash of $160,686 and a deficit in working capital of approximately $4.6 million. Further, at September 30, 2022, the accumulated deficit amounted to approximately $54.5 million. 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, as well as the Rotmans going out of business sale as discussed in Note 18, there is substantial doubt about the Company’s ability to continue as a going concern.
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. The Company will also raise capital with common stock subscription issuances.
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 bankruptcy or cease operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities that might be necessary should the Company be forced to take any such actions.
Our future expenditures will depend on numerous factors, including: the rate at which we can introduce RxAir products and license Vytex NRL raw material and the foam cores made from Vytex to manufacturers and subsequently retailers; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, along with market acceptance of our products, and services and competing technological developments. As we expand our activities and operations, our cash requirements are expected to increase at a rate consistent with revenue growth after we achieve sustained revenue generation.
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Sources and Uses of Cash
Net cash used in operating activities was $395,427 for the nine months ended September 30, 2022 as compared to net cash used in operating activities of $2,768,529 for the nine months ended September 30, 2021. During the nine months ended September 30, 2022, cash used in operations was primarily due to the net loss offset by the decrease of inventories and other receivables, and non-cash related add-back of share-based compensation expense, depreciation, amortization, loss on settlement of debt, net and change in fair value of derivative liabilities.
The Company had no cash provided by investing activities during the nine months ended September 30, 2022 as compared to $399,170 for the nine months ended September 30, 2021.
Net cash provided by financing activities was $404,938 during the nine months ended September 30, 2022, as compared to cash provided of $2,095,451 during the nine months ended September 30, 2021. During the nine months ended September 30, 2022, cash was provided by related party term debt and advances of $592,731 and preferred stock issuances of $85,000 which was offset by the repayment of finance lease obligations of $110,293 and repayment of related party debt of $162,500. During the nine months ended September 30, 2021, cash was provided by PPP loan proceeds of $1,402,900, related party term debt in the amount of $533,039 and convertible notes payable of $290,000 offset by the repayment of finance lease obligations of $130,488.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that may be reasonably likely to have a current or future material effect on our financial condition, liquidity, or results of operations.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth; product development, introduction and acceptance; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.
Although the forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
None
| ITEM 4. | 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 period ended September 30, 2022 and subsequent to period 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 Quarterly Report and is working on improving controls with an outside CPA firm and dedicated internal resources.
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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 September 30, 2022, 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 September 30, 2022. Such conclusion was reached based on the following material weaknesses noted by management:
| a) | We have a lack of segregation of duties due to the small size of the Company. | |
| b) | The Company did not maintain reasonable control over records underlying transactions necessary to permit preparation of the Company’s financial statements. | |
| c) | Lack of controls that provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposal of the Company’s assets that could have a material effect on the financial statements. | |
| d) | Lack of a formal CFO position who can devote significant attention to financial reporting resulted in multiple audit adjustments. | |
| e) | Lack of a functioning audit committee, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures. Management believes the lack of a functioning audit committee results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future period. |
Management expects to strengthen internal control during 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.
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PART II. OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS |
The Company is subject to legal proceedings and claims that have not been fully resolved and have arisen in the ordinary course of business. See the discussion of pending legal proceedings in Note 14 of the Notes to Condensed Consolidated Financial Statements.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
During the three months ended September 30, 2022, the Company issued 32,566 shares of preferred stock series C under stock subscription agreements dated in September 2022 for $85,000. Other issuance in the quarter were in connection with settlements of convertible and related party notes, share based compensation and vendor payables.
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None
| ITEM 4. | MINE SAFETY DISCLOSURES |
Not applicable
| ITEM 5. | OTHER INFORMATION |
None
| ITEM 6. | EXHIBITS |
Exhibit Index
| Number | Description | |
| 31.1 * | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 * | Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS | 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) |
* Filed herewith
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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: December 7, 2022 | By: | /s/ Steven Rotman |
| Steven Rotman | ||
President, Chief Executive Officer, Chief Financial Officer and Director | ||
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