UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2020March 31, 2021

 

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

 

For the transition period from _______________ to ________________

 

Commission File Number 000-53754

 

VYSTAR CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

Georgia 20-2027731

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

725 Southbridge St

Worcester, MA 01610

(Address of Principal Executive Offices, Zip Code)

 

(508) 791-9114

(Registrant’s telephone number including area code)

 

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

 

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

 

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

YES [X] NO [  ] NO [X]

 

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

 

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

 

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

 

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

 

Class Outstanding as of August 19, 2020May 17, 2021
Preferred Stock, $0.0001 par value per share 13,6988,698 shares
Common Stock, $0.0001 par value per share 1,118,718,3151,264,072,966 shares

 

 

 

 

 

INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS

 

In addition to historical information, this Form 10-Q contains statements relating to our future results (including certain projections and business trends) that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are subject to the “safe harbor” created by those sections. The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the financial statements and the related notes thereto included in this Quarterly Report on Form 10-Q (this “Report”). This Report contains certain forward-looking statements and the Company’s future operating results could differ materially from those discussed herein. Our disclosure and analysis included in this Report concerning our operations, cash flows and financial position, including, in particular, the likelihood of our success in expanding our business and raising debt and capital securities include forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expect”, “anticipate”, “intend”, “plan”, “believe”, “estimate”, “may”, “project”, “will likely result”, and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to certain risks, uncertainties, and assumptions, including prevailing market conditions and are more fully described under “Part I, Item 1A - Risk Factors” of our Form 10-K for the year ended December 31, 2019.2020. 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, 20192020 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 JUNE 30, 2020MARCH 31, 2021

 

INDEX

 

Part I. Financial Information 
   
Item 1.Financial Statements: 
   
 Condensed Consolidated Balance Sheets at June 30, 2020March 31, 2021 (unaudited) and December 31, 201920204
   
 Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30,March 31, 2021 (unaudited) and 2020 (unaudited) and 2019 (unaudited)5
   
 Condensed Consolidated Statements of Stockholders’ Deficit for the Three and Six Months Ended June 30,March 31, 2021 (unaudited) and 2020 (unaudited) and 2019 (unaudited)6-7
   
 Condensed Consolidated Statements of Cash Flows for the SixThree Months Ended June 30,March 31, 2021 (unaudited) and 2020 (unaudited) and 2019 (unaudited)8
   
 Notes to Condensed Consolidated Financial Statements (unaudited)9
   
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations3031
   
Item 3.Quantitative and Qualitative Disclosures About Market Risk3534
   
Item 4.Controls and Procedures3534
   
Part II. Other Information 
  
Item 1.Legal Proceedings36
   
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds36
   
Item 3.Defaults Upon Senior Securities36
   
Item 4.Mine Safety Disclosures36
   
Item 5.Other Information36
   
Item 6.Exhibits36
   
SIGNATURES37

 

3

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 June 30, December 31,  March 31, December 31, 
 2020 2019  2021  2020 
 (Unaudited)    (Unaudited)    
ASSETS             
Current assets:             
Cash $832,632  $72,355  $1,195,859  $620,539 
Accounts receivable 95,458 38,526   432,110   236,106 
Stock subscription receivable - 49,250 
Inventories 3,534,511 4,114,977   5,795,668   6,546,481 
Investments - equity securities, at fair value 110,855 149,517   141,629   127,910 
Prepaid expenses and other 221,924 602,980   685,204   565,550 
Deferred commission costs  122,614  129,123   98,723   106,954 
             
Total current assets  4,917,994  5,156,728   8,349,193   8,203,540 
             
Property and equipment, net 1,695,493 1,879,739   1,550,878   1,631,651 
             
Operating lease right-of-use assets 9,799,748 10,379,685   8,894,378   9,199,730 
             
Finance lease right-of-use assets, net 823,685 849,209   684,849   730,761 
             
Other assets:             
Intangible assets, net 2,284,816 2,489,612   1,742,180   1,835,987 
Goodwill 460,301 460,301   460,301   460,301 
Inventories, long-term 802,383 935,121   369,936   438,161 
Deferred commission costs, net of current portion 182,711 217,024   112,614   134,213 
Other  34,377  34,377   26,253   26,253 
             
Total other assets  3,764,588  4,136,435   2,711,284   2,894,915 
             
Total assets $21,001,508 $22,401,796  $22,190,582  $22,660,597 
             
LIABILITIES AND STOCKHOLDERS’ DEFICIT             
             
Current liabilities:             
Line of credit $- $2,413,539 
Term notes - current maturities 596,768 16,374 
Accounts payable 4,139,102 2,846,306  $3,250,910  $4,830,143 
Accrued expenses 587,850 681,758   2,222,337   3,422,796 
Stock subscription payable 1,447,628 1,150,125   1,578,494   2,589,556 
Operating lease liabilities - current maturities 1,127,500 1,055,000   1,125,000   1,095,500 
Finance lease liabilities - current maturities 171,800 167,000   159,000   172,900 
Shareholder, convertible and contingently convertible notes payable and accrued interest - current maturities 806,911 366,326   1,057,957   1,046,059 
Related party debt - current maturities 46,000 46,000   323,000   1,258,000 
Unearned revenue 2,199,907 1,677,171   1,295,995   1,904,256 
Derivative liabilities  1,979,700  1,499,800   1,895,700   1,766,700 
             
Total current liabilities  13,103,166  11,919,399   12,908,393   18,085,910 
             
Long-term liabilities:             
Term notes, net of current maturities 1,902,900 500,000 
Term notes  1,402,900   1,402,900 
Operating lease liabilities, net of current maturities 6,912,497 7,490,431   6,212,490   6,515,103 
Finance lease liabilities, net of current maturities 663,713 694,487   548,154   577,192 
Unearned revenue, net of current maturities 704,021 823,401   442,141   523,515 
Shareholder, convertible and contingently convertible notes payable and accrued interest, net of current maturities and debt discount 145,592 494,363 
Related party debt, net of current maturities and debt discount  2,355,775  1,712,259   3,694,996   2,314,934 
             
Total long-term liabilities  12,684,498  11,714,941   12,300,681   11,333,644 
             
Total liabilities  25,787,664  23,634,340   25,209,074   29,419,554 
             
Stockholders’ deficit:             
Convertible preferred stock, $0.0001 par value 15,000,000 shares authorized; 13,828 issued and outstanding at June 30, 2020 and December 31, 2019 (liquidation preference of $98,283 and $91,275 at June 30, 2020 and December 31, 2019 , respectively) 1 1 
Common stock, $0.0001 par value, 1,500,000,000 shares authorized; 1,105,762,080 shares issued and 1,105,732,080 outstanding 110,573 110,573 
Convertible preferred stock, $0.0001 par value 15,000,000 shares authorized; 8,698 and 13,698 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively (liquidation preference of $68,008 and $100,698 at March 31, 2021 and December 31, 2020 , respectively)  1   1 
Common stock, $0.0001 par value, 1,500,000,000 shares authorized; 1,264,102,966 and 1,199,931,717 shares issued at March 31, 2021 and December 31, 2020, respectively, and 1,264,072,966 and 1,199,901,717 shares outstanding at March 31, 2021 and December 31, 2020, respectively  126,408   119,990 
Additional paid-in capital 38,447,731 38,436,607   42,996,326   41,233,471 
Accumulated deficit (44,338,616) (41,104,967)  (47,795,057)  (48,713,184)
Common stock in treasury, at cost; 30,000 shares  (30)  (30)  (30)  (30)
             
Total Vystar stockholders’ deficit (5,780,341) (2,557,816)  (4,672,352)  (7,359,752)
             
Noncontrolling interest  994,185  1,325,272   1,653,860   600,795 
             
Total stockholders’ deficit  (4,786,156)  (1,232,544)  (3,018,492)  (6,758,957)
             
Total liabilities and stockholders’ deficit $21,001,508 $22,401,796  $22,190,582  $22,660,597 

 

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

 

4

 

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 Three Months Ended Six Months Ended  Three Months Ended 
 June 30, June 30,  March 31, 
 2020 2019 2020 2019  2021  2020 
              
Revenue $2,388,906  $185,563  $8,321,144  $377,230  $12,868,119  $5,932,238 
                 
Cost of revenue  990,404  211,124  3,923,018  410,966   6,076,840   2,932,614 
                 
Gross profit (loss)  1,398,502  (25,561)  4,398,126  (33,736)
Gross profit  6,791,279   2,999,624 
                 
Operating expenses:                 
Salaries, wages and benefits 721,808 - 2,175,882 -   1,949,139   1,454,074 
Share-based compensation 154,259 488,450 308,627 2,100,736   204,696   154,368 
Agent fees  1,251,873   - 
Professional fees 251,187 179,956 543,883 371,985   20,183   292,696 
Advertising 234,462 23,096 681,157 43,579   865,178   446,695 
Rent 300,139 - 593,310 -   316,615   293,171 
Service charges 44,346 778 227,923 1,904   224,516   183,577 
Depreciation and amortization 243,925 50,451 487,848 100,104   192,009   243,923 
Other operating  487,940  213,502  1,269,613  333,805   796,413   781,673 
                 
Total operating expenses  2,438,066  956,233  6,288,243  2,952,113   5,820,622   3,850,177 
                 
Loss from operations  (1,039,564)  (981,794)  (1,890,117)  (2,985,849)
Operating income (loss)  970,657   (850,553)
                 
Other income (expense):                 
Interest expense (610,679) (40,403) (1,215,393) (140,066)
Gain on settlement of debt, net  1,247,635   - 
Interest expense, net  (175,847)  (604,714)
Change in fair value of derivative liabilities (479,900) - (479,900) (1,044,250)  (129,000)  - 
Gain (loss) on settlement of debt, net - (2,503) - 12,442 
Other income (expense)  43,730  (2)  20,674  (154)
Other income, net  57,747   (23,056)
                 
Total other expense, net  (1,046,849)  (42,908)  (1,674,619)  (1,172,028)  1,000,535   (627,770)
                 
Net loss (2,086,413) (1,024,702) (3,564,736) (4,157,877)
Net income (loss)  1,971,192   (1,478,323)
                 
Net loss attributable to noncontrolling interest  220,141  -  331,087  - 
Net loss (income) attributable to noncontrolling interest  (1,053,065)  110,946 
                 
Net loss attributable to Vystar $(1,866,272) $(1,024,702) $(3,233,649) $(4,157,877)
Net income (loss) attributable to Vystar $918,127  $(1,367,377)
                 
Basic and diluted loss per share:         
Net loss per share $(0.00) $(0.00) $(0.00) $(0.00)
Income (loss) per share:        
Basic 0.00  $(0.00)
Diluted  $0.00  $(0.00)
                 
Basic and diluted weighted average number of common shares outstanding  1,105,732,080  1,076,466,101  1,105,732,080  919,249,702 
Weighted average number of common shares outstanding:        
Basic  1,241,705,734   1,105,732,080 
Diluted  1,241,905,734   1,105,732,080 

 

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

 

5

 

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE SIXTHREE MONTHS ENDED JUNE 30, 2020MARCH 31, 2021

(Unaudited)

 

  Attributable to Vystar       
  Number
of
Preferred
 Shares
   Preferred
Stock
  Number
of
Common
 Shares
  Common Stock  Additional
Paid-in
Capital
  Accumulated
Deficit
  Number
of
Treasury Shares
   Treasury Stock  Total
Vystar
Stockholders’
Deficit
  Non
controlling Interest
  Total
Stockholders’
Deficit
 
                                  
Ending balance December 31, 2019  13,828  $1   1,105,762,080  $110,573  $38,436,607  $(41,104,967)  (30,000) $(30) $(2,557,816) $1,325,272  $(1,232,544)
                                             
Share based compensation - options                  5,562               5,562       5,562 
                                             
Net loss  -   -   -   -   -   (1,367,377)  -   -   (1,367,377)  (110,946)  (1,478,323)
                                             
Ending balance March 31, 2020  13,828  $1   1,105,762,080  $110,573  $38,442,169  $(42,472,344)  (30,000) $(30) $(3,919,631) $1,214,326  $(2,705,305)
                                             
Share based compensation - options                  5,562               5,562       5,562 
                                             

Adjustment for treasury shares purchased in prior year

          

(30,000

)                                
                                             
Net loss  -   -   -   -   -   (1,866,272)   -   -   (1,866,272)  (220,141)  (2,086,413)
                                             
Ending balance June 30, 2020  13,828  $1   1,105,732,080  $110,573  $38,447,731  $(44,338,616)  (30,000) $(30) $(5,780,341) $994,185  $(4,786,156)
  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  13,698  $     1   1,199,931,717  $119,990  $41,233,471  $(48,713,184)  (30,000) $(30) $(7,359,752) $600,795  $(6,758,957)
                                             
Common stock issued for services          49,371,733   4,938   1,399,154               1,404,092       1,404,092 
                                             
 Common stock issued for settlement of related party payable          11,364,904   1,136   334,129               335,265       335,265 
                                             
Share based compensation - options                  4,916               4,916       4,916 
                                             
Common stock issued for cash received in prior period          1,666,667   167   24,833               25,000       25,000 
                                             
Preferred stock conversion  (5,000)      1,767,945   177   (177)              -       - 
                                             
Net income  -   -   -   -   -   918,127   -   -   918,127   1,053,065   1,971,192 
                                             
Ending balance March 31, 2021  8,698  $1   1,264,102,966  $126,408  $42,996,326  $(47,795,057)  (30,000) $(30) $(4,672,352) $1,653,860  $(3,018,492)

 

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

 

6

 

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE SIXTHREE MONTHS ENDED JUNE 30, 2019MARCH 31, 2020

(Unaudited)

 

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

            (30,000)  (30)  (30)      (30)
                                             
Net loss  -   -   -   -   -   (3,133,174)  -   -   (3,133,174)  -   (3,133,174)
                                             
Ending balance March 31, 2019  13,828  $1   1,057,482,127  $105,746  $35,730,012  $(36,533,520)  (30,000) $(30) $(697,791)  -  $(697,791)
                                             
Common stock issued for services          4,246,576   425   350,778               351,203       351,203 
                                             
Share based compensation - options                  17,047               17,047       17,047 
                                             
Common stock issued for cash received, net          11,781,392   1,179   147,321               148,500       148,500 
                                             
Common stock issued for conversion of related party line of credit          12,487,100   1,250   885,156               886,406       886,406 
                                             
Common stock issued for asset purchase          2,500,000   250   99,750               100,000       100,000 
                                             
Net loss  -   -   -   -   -   (1,024,702)  -   -   (1,024,702)  -   (1,024,702)
                                             
Ending balance June 30, 2019  13,828  $1   1,088,497,195  $108,850  $37,230,064  $(37,558,222)  (30,000) $(30) $(219,337)  -  $(219,337)
  Attributable to Vystar       
  Number     Number           Number     Total       
  of     of     Additional     of     Vystar     Total 
  Preferred  Preferred  Common  Common  Paid-in  Accumulated  Treasury  Treasury  Stockholders’  Noncontrolling  Stockholders’ 
  Shares  Stock  Shares  Stock  Capital  Deficit  Shares  Stock  Deficit  Interest  Deficit 
                                  
Ending balance December 31, 2019  13,828  $      1   1,105,762,080  $110,573  $38,436,607  $(41,104,967)  (30,000) $(30) $(2,557,816) $1,325,272  $(1,232,544)
                                             
Share based compensation - options                  5,562               5,562       5,562 
                                             
Net loss  -   -   -   -   -   (1,367,377)  -   -   (1,367,377)  (110,946)  (1,478,323)
                                             
Ending balance March 31, 2020  13,828  $1   1,105,762,080  $110,573  $38,442,169  $(42,472,344)  (30,000) $(30) $(3,919,631) $1,214,326  $(2,705,305)

 

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

 

7

 

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

  Six Months Ended 
  June 30, 
  2020  2019 
Cash flows from operating activities:        
Net loss $(3,564,736) $(4,157,877)
Adjustments to reconcile net loss to cash used in operating activities:        
Share-based compensation  308,627   2,100,736 
Depreciation  279,369   20,422 
Bad debts  12,645   - 
Amortization of intangible assets  208,479   79,682 
Noncash lease expense  64,402   - 
Amortization of debt discount  601,041   73,519 
Consulting  -   125,822 
Change in fair value of derivative liabilities  479,900   1,044,250 
Amortization of debt issuance costs  8,250   - 
Net unrealized loss on available-for-sale investments  38,662   - 
(Gain) loss on settlement of debt, net  -   (12,442)
(Increase) decrease in assets:        
Accounts receivable  (69,577)  9,011 
Inventories  713,204   66,415 
Prepaid expenses and other  381,056   (8,896)
Deferred commission costs  40,822   - 
Increase (decrease) in liabilities:        
Accounts payable  (910,543)  68,234 
Accrued expenses and interest payable  (9,619)  (48,225)
Unearned revenue  403,356   - 
         
Net cash used in operating activities  (1,014,662)  (639,349)
         
Cash flows from investing activities:        
Patents and trademark fees  (3,683)  (9,519)
Website development costs  -   (500)
         
Net cash used in investing activities  (3,683)  (10,019)
         
Cash flows from financing activities:        
Net repayments on line of credit  (210,200)  - 
Proceeds from issuance of term debt  2,211,400   - 
Repayment of term debt  (236,356)  - 
Repayment of finance lease obligations  (85,472)  - 
Proceeds from the issuance of notes - related parties  50,000   367,700 
Proceeds from stock subscription receivable  49,250   - 

Repayment of notes payable - related parties

    -   (146,206)
Issuance of common stock, net of costs  -   883,300 
Treasury stock repurchases  -   (30)
         
Net cash provided by financing activities  1,778,622   1,104,764 
         
Net increase in cash  760,277   455,396 
         
Cash - beginning of period  72,355   50,053 
         
Cash - end of period $832,632  $505,449 
         
Cash paid during the period for:        
Interest $499,275  $53,796 
         
Non-cash transactions:        
Third-party settlement of the Company’s line of credit $

2,203,339

  $- 

Purchase of intangible assets with common stock

  -   100,000 
Convertible notes and accrued interest payable converted to common stock  -   64,576 
Common stock issued for accrued compensation  -   771,203 
Common stock issued for settlement of related party line of credit  -   1,029,935 
Shareholder advances to related party on behalf of the Company  -   180,000 
Settlement of derivative liabilities  -   1,279,335 

  Three Months Ended 
  March 31, 
  2021  2020 
Cash flows from operating activities:        
Net income (loss) $1,971,192  $(1,478,323)
Adjustments to reconcile net income (loss) to net cash used in operating activities:        
Gain on settlement of debt, net  (1,247,635)  - 
Share-based compensation  204,696   154,368 
Depreciation  96,019   139,684 
Bad debts  3,245   5,317 
Amortization of intangible assets  95,990   104,239 
Noncash lease expense  78,151   32,166 
Unamortized term debt issuance costs  -   (14,208)
Amortization of debt discount  4,667   315,875 
Change in fair value of derivative liabilities  129,000   - 
Gain on sale of property and equipment  (112)  - 
Net unrealized (gain) loss on available-for-sale investments  (13,719)  50,422 
(Increase) decrease in assets:        
Accounts receivable  (199,249)  (6,946)
Inventories  819,038   242,971 
Prepaid expenses and other  98,596   291,504 
Deferred commission costs  29,830   10,087 
Increase (decrease) in liabilities:        
Accounts payable  (1,399,233)  278,065 
Accrued expenses and interest payable  (1,143,166)  (289,705)
Unearned revenue  (689,635)  (26,306)
         
Net cash used in operating activities  (1,162,325)  (190,790)
         
Cash flows from investing activities:        
Acquisition of property and equipment  (16,434)  - 
Proceeds from the sale of property and equipment  1,300   - 
Patents and trademark fees  (2,183)  (3,683)
         
Net cash used in investing activities  (17,317)  (3,683)
         
Cash flows from financing activities:        
Net repayments on line of credit  -   (249,977)
Proceeds from issuance of term debt  1,402,900   808,500 
Repayment of term debt  -   (40,852)
Repayment of finance lease obligations  (42,938)  (42,462)
Proceeds from the issuance of notes - related parties  395,000   50,000 
         
Net cash provided by financing activities  1,754,962   525,209 
         
Net increase in cash  575,320   330,736 
         
Cash - beginning of period  620,539   72,355 
         
Cash - end of period $1,195,859  $403,091 
         
Cash paid during the period for:        
Interest $113,912  $224,433 
         
Non-cash transactions:        
Common stock issued for accrued compensation $1,404,092  $- 
Common stock issued for settlement of related party payable  335,265   - 
Prepaid expenses with common stock  291,000   - 
Common stock issued for cash received in prior period  25,000   - 

Common stock issued for preferred stock

  177   - 

 

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

NOTE 1 - DESCRIPTION OF BUSINESS

 

Nature of Business

 

Vystar Corporation (“Vystar”, the “Company”, “we,” “us,” or “our”) is based in Worcester, Massachusetts andMassachusetts. 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 of the innovative technology to produce Vytex® Natural Rubber Latex (“NRL”). Vystar manufactures and sells 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”), the largest furniture and flooring stores in New England and one of the largest independent furniture retailers in the U.S.

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

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'sCompany’s Annual Report on Form 10-K for the year ended December 31, 2019.2020. Therefore, the interim condensed consolidated financial statements should be read in conjunction with that Annual Report on Form 10-K.

 

The Company has evaluated subsequent events through the date of the filing of its Form 10-Q with the Securities and Exchange Commission. Other than those events disclosed in Note 19,18, 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

 

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

 

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

 

The results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of results for the entire year. The pandemic has resulted in significantcontinues to cause economic disruption. Although our showroom has reopened, wesome business segments remain closed or are operating on a reduced scale. The COVID-19 pandemic is complex and continues to evolve with sporadic resurgences, new virus variants and the vaccine rollout. We cannot reasonably estimate the duration of COVID-19 and its impact on Vystar should the pandemic persist or worsen.Vystar. Accordingly, the estimates and assumptions made as of June 30, 2020March 31, 2021 could change in subsequent interim reports, and upon final determination at year-end, and it is reasonably possible that such changes could be significant (although the potential effects cannot be measured at this time).

 

9

 

 

Segment Reporting

 

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

 

Estimates

 

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

 

Fair Value of Financial Instruments

 

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

 

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

 

Valuation inputs are classified in the following hierarchy:

 

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

 

Highest priority is given to Level 1 inputs and the lowest priority to Level 3 inputs. Acceptable valuation techniques include the market approach, income approach, and cost approach. In some cases, more than one valuation technique is used. The derivative liabilities were recognized at fair value on a recurring basis through the date of the settlement and June 30, 2020March 31, 2021 and are level 3 measurements. There have been no transfers between levels during the sixthree months ended June 30, 2020.March 31, 2021.

 

Acquisitions

 

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

 

10

Cash, and 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

 

Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company routinely sells, without recourse, trade receivables resulting from retail furniture sales to varioustwo financial institutions at an average service charge of 5.1%1% in 2020.2021. Amounts sold during the six months ending June 30, 2020first quarter of 2021 were approximately $2,150,000. There were no sales of trade receivables during the six months ending June 30, 2019.$2,717,000. Retail furniture receivables retained by the Company are generally collateralized by the merchandise sold, represent valid claims against debtors for sales arising on or before the balance sheet date and are reduced to their estimated net realizable value. In addition, the Company grants credit to VytexVystar customers without requiring collateral. The amount of accounting loss for which Vystar is at risk in these unsecured accounts receivable is limited to their carrying value. Management provides for uncollectible amounts through a charge to earnings and a credit to an allowance for doubtful accounts based upon its assessment of the current status of individual accounts. Balances that are still outstanding after management has performed reasonable collection efforts are written off through a charge to the allowance and a credit to accounts receivable. As of June 30, 2020March 31, 2021 and December 31, 2019,2020, the Company considers accounts receivable to be fully collectible and no allowance for doubtful accounts was recorded.

 

Inventories

 

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

 

Prepaid Expenses and Other

 

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

 

Investments - Equity Securities

 

Marketable equity securities have been categorized as available-for-sale and, as a result, are stated at fair value. Unrealized gains and losses are reflected in the statement of operations. The Company periodically reviews the available-for-sale securities for other than temporary declines in fair value below cost and more frequently when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As of June 30, 2020,March 31, 2021, the Company believes the cost of the available-for-sale securities was recoverable in all material respects.

 

Property and Equipment

 

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

 

Expenditures for major renewals and betterments are capitalized, while routine repairs and maintenance are expensed as incurred. When property items are retired or otherwise disposed of, the asset and related reserve accounts are relieved of the cost and accumulated depreciation, respectively, and the resultant gain or loss is reflected in earnings. As of June 30,March 31, 2021, the net balance of property and equipment is $1,550,878 with accumulated depreciation of $682,038. As of December 31, 2020, the net balance of property and equipment is $1,695,493$1,631,651 with accumulated depreciation of $393,045. As of December 31, 2019, the net balance of property and equipment is $1,879,739 with accumulated depreciation of $208,799.$587,081.

11

 

Intangible Assets

 

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

11

 

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

 

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

Our intangible assets are reviewed for impairment annually or more frequently as warranted by events of changes in circumstances.

 

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 sixthree months ended June 30,March 31, 2021 and 2020, and 2019, we did not recognize any impairment of our long-lived assets.

 

Goodwill

 

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

 

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

 

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

 

Convertible Notes Payable

 

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

 

12

 

 

Derivatives

 

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

 

The Company applies the accounting standard that provides guidance for determining whether an equity-linked financial instrument, or embedded feature, is indexed to an entity’s own stock. The standard applies to any freestanding financial instrument or embedded features that have the characteristics of a derivative, and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. From time to time, the Company has issued notes with embedded conversion features. Certain of the embedded conversion features contain price protection or anti-dilution features that result in these instruments being treated as derivatives for accounting purposes. Accordingly, as of June 30, 2020,March 31, 2021, the Company has classified all conversion features as derivative liabilities and has estimated the fair value of these embedded conversion features using a Monte Carlo simulation model.

 

Unearned Revenue

 

Unearned revenue consists of customer advance payments, deposits on sales of undelivered merchandise and deferred warranty revenue on self-insured stain protection warranty coverage. There was no unearned revenue during the six months ended June 30, 2019.

 

Changes to unearned revenue during the sixthree months ended June 30,March 31, 2021 and 2020 are summarized as follows:

 

Balance, December 31, 2019 $2,500,572 
 2021 2020 
     
Balance, beginning of the period $2,427,771  $2,500,572 
            
Customer deposits received  7,426,477   10,953,412   4,930,536 
            
Warranty coverage purchased  112,121   -   98,309 
            
Gift cards purchased  4,000   -   2,500 
            
Revenue earned  (7,139,242)  (11,643,047)  (5,057,651)
            
Balance, June 30, 2020 $2,903,928 
Balance, end of the period $1,738,136  $2,474,266 

 

LossIncome (Loss) Per Share

 

The Company presents basic and diluted lossincome (loss) per share. Because the Company reported a net loss for the six months ended June 30,first quarter of 2020, and 2019, common stock equivalents, including stock options and warrants, were anti-dilutive; therefore, the amounts reported for basic and dilutive loss per share were the same. Excluded from the computation of diluted lossincome (loss) per share were options to purchase 27,883,27127,224,938 and 27,898,27127,983,271 shares of common stock for the sixthree months ended June 30,March 31, 2021 and 2020, and 2019, respectively, as their effect would be anti-dilutive. Warrants to purchase 14,218,05113,549,571 and 14,373,49314,237,315 shares of common stock for the sixthree months ended June 30,March 31, 2021 and 2020, and 2019, respectively, were also excluded from the computation of diluted lossincome (loss) per share as their effect would be anti-dilutive. Warrants to purchase 200,000 shares of common stock for the three months ended March 31, 2021 were included in the computation of diluted income per share. In addition, preferred stock convertible to 4,731,2603,099,750 and 4,451,8804,661,180 shares of common stock for the sixthree months ended June 30,March 31, 2021 and 2020, and 2019, respectively, were excluded from the computation of diluted lossincome (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 and via telephone with our third-party call center for our print media and direct mail customers, or the execution of terms and conditions contracts with retailers and wholesalers. These contracts define each party’s rights, payment terms and other contractual terms and conditions of the sale.

 

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

 

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

 

The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation. The transaction price is determined based on the consideration to which we will be entitled to receive in exchange for transferring goods to the customer. We issue refunds to retail, e-commerce and print media customers, upon request, within 30 days of delivery. We estimate the amount of potential refunds at each reporting period using a portfolio approach of historical data, adjusted for changes in expected customer experience, including seasonality and changes in economic factors. For retailers, distributors and wholesalers, we do not offer a right of return or refund and revenue is recognized at the time products are shipped to customers. In all cases, judgment is required in estimating these reserves. Actual claims for returns could be materially different from the estimates. As of June 30, 2020March 31, 2021 and December 31, 2019,2020, reserves for estimated sales returns totaled $3,000,$115,000 and $55,000, respectively, and are included in the accompanying condensed consolidated balance sheets as accrued expenses.

 

We recognize revenue when we satisfy a performance obligation in a contract by transferring control over a product to a customer when product is shipped based on fulfillment by the Company. The Company considers fulfillment when it passes all liability at the point of shipping through third party carriers or in-house delivery services. Delivery fees are charged to customers and are included in revenue in the accompanying condensed consolidated statements of operations and the costs associated with these deliveries are included in operating expenses in the accompanying condensed consolidated statements of operations.operations through January 20, 2020. All subsequent delivery costs are included in revenues as a third-party delivery service was engaged beginning January 21, 2020. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of revenue in the accompanying 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 switched to a separately-priced stain protection warranty serviced by a third-party when the store reopened in June 2020. At June 30, 2020March 31, 2021 and December 31, 2019,2020, deferred warranty revenue was approximately $1,157,000$810,000 and $1,309,000,$920,000, respectively, and is included in unearned revenue in the accompanying consolidated balance sheets. During the sixthree months ended June 30,March 31, 2021, the Company recognized total revenues of approximately $110,000 related to deferred warranty revenue arrangements. During the three months ended March 31, 2020, the Company recorded total proceeds of approximately $112,000$98,000 and recognized total revenues of approximately $264,000$134,000 related to deferred warranty revenue arrangements. There were no proceeds or deferred warranty revenues during the six months ended June 30, 2019. Commission costs in obtaining extended warranty contracts are capitalized and recognized as expense on a straight-line basis over the period of the warranty contract. At June 30, 2020March 31, 2021 and December 31, 2019,2020, deferred commission costs were approximately $305,000$211,000 and $346,000,$241,000, respectively, and are included in the accompanying condensed consolidated balance sheets. All other costs, such as costs of services performed under the contract, general and administrative expenses, and advertising costs are expensed as incurred.

 

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 sixthree months ended June 30,March 31, 2021 and 2020, and 2019, Vystar’s research and development costs were not significant.

 

Advertising Costs

 

Advertising costs, which include television, radio, newspaper, digital and other media advertising, are expensed upon first showing. Advertising costs included in general and administrative expenses in the accompanying consolidated statements of operations were approximately $681,000$865,000 and $43,000$447,000 for the sixthree months ended June 30,March 31, 2021 and 2020, and 2019, respectively.

 

Share-Based Compensation

 

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

 

Income Taxes

 

Vystar recognizes income taxes on an accrual basis based on a tax position taken or expected to be taken in its tax returns. A tax position is defined as a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets or liabilities. Tax positions are recognized only when it is more likely than not (i.e., likelihood of greater than 50%), based on technical merits, that the position would be sustained upon examination by taxing authorities. Tax positions that meet the more likely than not threshold will be measured using a probability-weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. A valuation allowance is established to reduce deferred tax assets if all, or some portion, of such assets will more likely than not be realized. Should they occur, interest and penalties related to tax positions are recorded as interest expense. No such interest or penalties have been incurred for the sixthree months ended June 30, 2020March 31, 2021 and 2019.2020.

 

The Company remains subject to income tax examinations from Federal and state taxing jurisdictions for 20162017 through 2019.2020.

 

Concentration of Credit Risk

 

Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of cash and accounts receivable. Cash held in operating accounts may exceed the Federal Deposit Insurance Corporation, or FDIC, insurance limits. While the Company monitors cash balances in our operating accounts on a regular basis and adjust the balances as appropriate, these balances could be impacted if the underlying financial institutions fail. To date, the Company has experienced no loss or lack of access to our cash; however, the Company can provide no assurances that access to our cash will not be impacted by adverse conditions in the financial markets. Credit concentration risk related to accounts receivable is mitigated as customer credit is checked prior to the sales and accounts receivable consists of a high number of relatively small balances.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 May 2021, 1he FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40), which addresses issuer’s accounting for certain modifications or exchanges of freestanding  equity-classified written call options. This amendment is effective for all entities, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the effects, if any, of the adoption of ASU 2021-04 guidance on the Company’s financial position, results of operations and cash flows.

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

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

NOTE 3 -LIQUIDITY AND GOING CONCERN

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 June 30, 2020,March 31, 2021, the Company had cash of $832,632$1,195,859 and a deficit in working capital of approximately $8.2$4.6 million. Further, at June 30, 2020March 31, 2021 the accumulated deficit amounted to approximately $44.3$47.8 million. We use working capital to finance our ongoing operations, and since those operations do not currently cover all our operating costs, managing working capital is essential to our Company’s future success. Because of this history of losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.

 

A successful transition to attaining profitable operations is dependent upon obtaining sufficient financing to fund the Company’s planned expenses and achieving a level of revenue adequate to support the Company’s cost structure. Management plans to finance future operations using cash on hand, increased revenue from RxAir air purification units, and Vytex license fees, that now also includeproceeds received from the Company’s association with foam cores made from Vytex used in mattresses, mattress toppers and pillows,second round of financing under the Paycheck Protection Program and stock warrant exercises fromissuances to new and existing shareholders. The Company has also focused the efforts of key internal employees on the goal of creating efficiencies in each department in our retail furniture business, including purchasing, marketing, inventory control, advertising, accounting, warehousing and customer service.

 

16

There can be no assurances that the Company will be able to achieve projected levels of revenue in 20202021 and beyond. If the Company is not able to achieve projected revenue and obtain alternate additional financing of equity or debt, the Company would need to significantly curtail or reorient operations during 2020,2021, which could have a material adverse effect on the ability to achieve the business objectives, and as a result, may require the Company to file bankruptcy or cease operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities that might be necessary should the Company be forced to take any such actions.

 

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

 

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NOTE 4 - INVESTMENTS – EQUITY SECURITIES

NOTE 4 -INVESTMENTS – EQUITY SECURITIES

 

Cost and fair value of investments - equity securities are as follows as of June 30, 2020:follows:

 

   Gross  Fair 
Cost  Unrealized Losses  Value 
           
$141,225  $(30,370) $110,855 
     Gross  Gross  Fair 
  Cost  Unrealized Losses  Unrealized Gains  Value 
             
March 31, 2021 $141,225  $-  $404  $141,629 
                 
December 31, 2020 $141,225  $(13,315) $-  $127,910 

 

Net unrealizedUnrealized holding lossesgains (losses) on available-for-sale securities were approximately $39,000$14,000 and $(50,000) in the first six monthsquarter of 2021 and 2020, respectively, and have been included in other income (expenses) in the accompanying condensed statements of operations. There were no investments – equity securities prior to the Rotmans acquisition in July 2019. Investments represent equity securities in a publicly traded company.

 

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NOTE 5 -PROPERTY AND EQUIPMENT

NOTE 5 - PROPERTY AND EQUIPMENT

 

Property and equipment, net consists of the following:

 

 June 30, December 31,  March 31, December 31,
 2020  2019  2021 2020
         
Furniture, fixtures and equipment $1,354,665  $1,354,665  $1,383,180  $1,385,430 
Tooling and testing equipment  319,000   319,000   338,572   338,572 
Parking lots  365,707   365,707   365,707   365,707 
Leasehold improvements  96,291   79,857 
Motor vehicles  49,166   49,166   49,166   49,166 
                
  2,088,538   2,088,538   2,232,916   2,218,732 
Accumulated depreciation  (393,045)  (208,799)  (682,038)  (587,081)
                
Property and equipment, net $1,695,493  $1,879,739  $1,550,878  $1,631,651 

 

Depreciation expense for the sixthree months ended June 30,March 31, 2021 and 2020 was $96,019 and 2019 was $279,369 and $20,422,$139,684, respectively.

NOTE 6 -INTANGIBLE ASSETS

NOTE 6 - INTANGIBLE ASSETS

 

Intangible assets consist of the following:

 

      Amortization      Amortization
 June 30, December 31, Period  March 31, December 31, Period
 2020  2019  (in Years)  2021 2020 (in Years)
Amortized intangible assets:                      
Customer relationships $210,000  $210,000   6 - 10  $210,000  $210,000   6 - 10 
Proprietary technology  610,000   610,000   10   610,000   610,000   10 
Tradename and brand  1,380,000   1,380,000   5 - 10   1,050,000   1,050,000   5 - 10 
Marketing related  380,000   380,000   5   380,000   380,000   5 
Patents  359,101   355,418   6 - 20   361,284   359,101   6 - 20 
Noncompete  50,000   50,000   5   50,000   50,000   5 
                      
Total  2,989,101   2,985,418       2,661,284   2,659,101   
Accumulated amortization  (713,357)  (504,878)      (928,176)  (832,186)  
                      
Intangible assets, net  2,275,744   2,480,540       1,733,108   1,826,915   
Indefinite-lived intangible assets:                      
Trademarks  9,072   9,072       9,072   9,072   
                      
Total intangible assets $2,284,816  $2,489,612      $1,742,180  $1,835,987   

 

Amortization expense for the three months ended March 31, 2021 and 2020 was $95,990 and $104,239, respectively.

1718

 

 

Amortization expense for the six months ended June 30, 2020 and 2019 was $208,479 and $79,682, respectively. Estimated future amortization expense for finite-lived intangible assets is as follows:

 

 Amount  Amount 
      
Remaining in 2020 $208,477 
2021  416,956 
Remaining in 2021 $287,971 
2022  417,140   383,961 
2023  410,529   377,350 
2024  311,306   278,125 
2025  129,261 
Thereafter  511,336   276,440 
        
Total $2,275,744  $1,733,108 

 

NOTE 7 -LEASES

NOTE 7 - LEASES

 

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

 

The table below presents the lease costs for the three and six months ended June 30,March 31, 2021 and 2020:

 

  Three Months Ended  Six Months Ended 
  June 30, 2020  June 30, 2020 
       
Operating lease cost $394,766  $789,114 
         
Finance lease cost:        
         
Amortization of right-of-use assets  47,561   95,122 
Interest on lease liabilities  11,141   22,831 
         
Total lease cost $453,468  $907,067 

  Three Months Ended 
  March 31, 
  2021  2020 
       
Operating lease cost $396,052  $394,348 
         
Finance lease cost:        
         
Amortization of right-of-use assets  45,912   47,561 
Interest on lease liabilities  9,488   11,690 
         
Total lease cost $451,452  $453,599 

 

During the sixthree months ended June 30,March 31, 2021 and 2020, the Company recognized sublease income of approximately $58,000,$42,000 and $27,000, respectively, which in included in other income (expense), net in the accompanying condensed consolidated statements of operations.

There were no lease costs or sublease income for the three and six months ended June 30, 2019.

 

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

 

1819

 

 

The following table presents other information related to leases:

 

  Three Months Ended  Six Months Ended 
  June 30, 2020  June 30, 2020 
       
Cash paid for amounts included in the measurement of lease liabilities:        
         
Operating cash flows used for operating leases $375,911  $748,795 
Financing cash flows used for financing leases  54,152   108,304 
         
Assets obtained in exchange for finance lease liabilities  -   75,739 
         
Weighted average remaining lease term:        
Operating leases  9 years   9 years 
Finance leases  5 years   5 years 
         
Weighted average discount rate:        
Operating leases  5.53%  5.53%
Finance leases  5.16%  5.16%

  Three Months Ended 
  March 31, 
  2021  2020 
       
Cash paid for amounts included in the measurement of lease liabilities:        
         
Operating cash flows used for operating leases $375,911  $372,884 
Financing cash flows used for financing leases  52,427   54,152 
         
Assets obtained in exchange for operating lease liabilities  -   - 
         
Assets obtained in exchange for finance lease liabilities  -   75,739 
         
Weighted average remaining lease term:        
Operating leases  8.7 years   9.5 years 
Finance leases  4.8 years   5.7 years 
         
Weighted average discount rate:        
Operating leases  5.55%  5.53%
Finance leases  5.16%  5.16%

 

The future minimum lease payments required under operating and financing lease obligations as of June 30, 2020March 31, 2021 having initial or remaining non-cancelable lease terms in excess of one year are summarized as follows:

 

 Operating Leases  Finance Leases  Total  Operating Leases  Finance Leases  Total 
              
Remainder of 2020 $751,822  $106,004  $857,826 
2021  1,503,643   205,545   1,709,188 
Remainder of 2021 $1,233,870  $153,118  $1,386,988 
2022  1,117,377   150,943   1,268,320   1,117,377   150,943   1,268,320 
2023  878,807   150,142   1,028,949   878,807   150,142   1,028,949 
2024  870,000   140,002   1,010,002   870,000   140,002   1,010,002 
2025  870,000   139,080   1,009,080 
Thereafter  5,220,000   207,475   5,427,475   4,350,000   68,395   4,418,395 
                        
Total undiscounted lease liabilities  10,341,649   960,111   11,301,760   9,320,054   801,680   10,121,734 
Less: imputed interest  (2,301,652)  (124,598)  (2,426,250)  (1,982,564)  (94,526)  (2,077,090)
                        
Net lease liabilities $8,039,997  $835,513  $8,875,510  $7,337,490  $707,154  $8,044,644 

 

As of June 30, 2020,March 31, 2021, the Company does not have additional operating and finance leases that have not yet commenced.

NOTE 8 -NOTES PAYABLE AND LOAN FACILITY

NOTE 8 - NOTES PAYABLE AND LOAN FACILITY

 

LineLetter of Credit

 

The Company formerly hadentered into a $2,500,000 revolving line$125,000 letter of credit agreement with Fidelity Co-operative Bank. Advances were limitedBank in November 2020. The pledged collateral of a $125,000 cash deposit account is included in prepaid expenses and other. The letter of credit was required pursuant to 50% of eligible inventory and bore interest at the prime rate plus 0.50%an agreement with a floor of 3.75%. The Company was not in compliance with certain covenants and was in default at March 31, 2020. The line was paid in full with proceeds from advances noted below and closed in May 2020.third-party financial institution for customer financing.

 

Advances

 

On May 29, 2020, Rotmans entered into a sale promotion consulting agreement with a national furniture sales event company. Under the agreement, Rotmans appointed the third-party as its exclusive agent to assist with a high-impact sale. Before the sale, the agent advanced the Company funds of approximately $2,300,000 to pay off the Fidelitya bank line of credit and certain other vendors. The agent will be reimbursed for the advance from the proceeds of the sale. In addition, the agent has a senior first priority security interest and lien in Rotmans inventories and other assets until all obligations and liabilities are satisfied. Profits of the sale will be distributed according to the specific terms of the agreement. The agreement will expire 240 days from the commencement date ofwhich has been tentatively extended through May 29, 2020.2021. The outstanding balance of the advance is approximately $1,229,000$678,000 as of June 30, 2020March 31, 2021 and is included in accounts payable in the accompanying consolidated balance sheet. The Company may owe additional amounts to the agent at the end of the sale. These amounts have not been recorded as they are dependent upon the results of the sale and not known at this time.

 

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Term Notes

 

On February 24, 2020, the Company entered into an agreement with Libertas Funding LLC (“Libertas”) to sell future sale receipts totaling $1,089,000 for a purchase price of $825,000. The sold amount of future sales receipts are delivered weekly to Libertas at predetermined amounts over a period of nine months. The agreement contains an early delivery discount fee for delivering the future revenues before the end of the contract term and an origination fee of $16,500, which has been capitalized and is being amortized over the term of the agreement. The implicit borrowing rate of the agreement is approximately 75%. The agreement is personally guaranteed by Steven Rotman. As of June 30, 2020, the outstanding balance on this obligation of $597,575 is included in current maturities of term notes. In June 2020, the Company and Libertas agreed to defer repayment on the loan until August 2020.

Other term debt totaling $7,443 and $16,374 at June 30, 2020 and December 31, 2019, respectively, represents three 0% loans on motor vehicles, requiring cumulative monthly payments of $1,488 through maturity in November 2020.

On April 16, 2020, Rotmans received $1,402,900 in loan funding from the Paycheck Protection Program (the “PPP”), established pursuant to the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and administered by the U.S. Small Business Administration (“SBA”). The unsecured loan (the “PPP Loan”) iswas evidenced by a promissory note of the Company dated April 16, 2020 (the “Note”) in the principal amount of $1,402,900 with United Community Bank (the “Bank”), the lender. Under the terms of the Note and the PPP Loan, interest accrues on the outstanding principal at the rate of 1.0% per annum. The term of the Note iswas two years, though it may be payable sooner in connection with an event of default under the Note. To the extent the loan amount is not forgiven underOn January 24, 2021, the PPP loan was fully forgiven by the SBA.

On February 2, 2021, Rotmans is obligated to make equal monthly payments of principal and interest, beginning seven monthsreceived an additional $1,402,900 in PPP loan funding from the dateSBA. The terms of the Note untilare the maturity date.

Certain investors guaranteed $100,000 each with Ameris Bank (formerly Fidelity Bank) to establish a $500,000 revolving line of credit. Atsame as the present time, the Company is paying interest only at a rate of 4.5% per annum, with a balloon payment of $500,000 due in 2033. The balance is $500,000 as of June 30, 2020 and December 31, 2019.original PPP Loan.

 

Shareholder, Convertible and Contingently Convertible Notes Payable

 

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

 

  March 31,  December 31, 
  2021  2020 
       
Shareholder, convertible and contingently convertible notes $951,895  $951,895 
Accrued interest  106,062   94,164 
         
   1,057,957   1,046,059 
         
Less: current maturities  (1,057,957)  (1,046,059)
         
  $-  $- 

  June 30,  December 31, 
  2020  2019 
       
Shareholder, convertible and contingently convertible notes $951,895  $951,895 
Accrued interest  70,366   46,569 
Debt discount  (69,758)  (137,775)
         
   952,503   860,689 
         
Less: current maturities  (806,911)  (366,326)
         
  $145,592  $494,363 

Shareholder Convertible Notes Payable

 

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

 

20

During the year ended December 31, 2019, the Company issued certain contingently convertible promissory notes in varying amounts to existing shareholders which totaled $613,700. The face amount of the note represents the amount due at maturity along with the accrued interest. The amount can be converted into shares of the Company’s stock, at the option of the Company, based on the average closing price for the trailing 20 days prior to conversion and carrying a 35% to 50% discount. These notes can be converted only after an acceleration event which involves a symbol change, uplisting, or reverse stock split and such conversion is in the control of the Company. All of these notes are outstanding as of June 30, 2020.March 31, 2021.

 

Based on the variable conversion price of these notes, the Company recorded the embedded conversion features as derivative liabilities, which amounted to $535,700$456,700 and $442,934$491,700 at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.

21

 

Related Party Debt

 

The following table summarizes related party debt:

 

 June 30, December 31,  March 31, December 31, 
 2020  2019  2021  2020 
          
Rotman Family convertible notes $1,832,707  $1,782,707  $1,832,707  $1,832,707 
Rotman Family nonconvertible notes  507,500   507,500   1,950,500   1,555,500 
Accrued interest  113,644   53,152   234,789   189,394 
Debt discount  (52,076)  (585,100)  -   (4,667)
                
  2,401,775   1,758,259   4,017,996   3,572,934 
Less: current maturities  (46,000)  (46,000)  (255,000)  (1,258,000)
                
 $2,355,775  $1,712,259  $3,762,996  $2,314,934 

 

Rotman Family Convertible Notes

 

On June 30, 2019, theThe Company issued contingently convertible promissory notes totaling $180,000, to Stevenseveral members of the Rotman ($105,000)Family during 2019 and Greg Rotman ($75,000).2020. These notes are (i) unsecured, (ii)and bear interest at an annual rate of eightat five percent (8%(5%) per annum from date of issuance, (iii) are convertible at the Company’s option after December 31, 2019, and (iv) mature five years from issuance. If converted, the notes plus accrued interest are convertible into shares of the Company’s common stock at the average of the five lowest closing prices in the 90-day period prior to conversion with a 50% discount. The balance of the notes payable including accrued interest to Steven and Greg Rotman is approximately $113,000 and $60,000, respectively, at June 30, 2020 and approximately $109,000 and $57,000, respectively, at December 31, 2019.

On July 18, 2019, the Company issued contingently convertible notes totaling $1,522,500, to Steven Rotman ($1,102,500) and Bernard Rotman ($420,000) as partial consideration for the acquisition of 58% of Rotmans (see Note 18). These notes are (i) unsecured, and (ii) bear interest at an annual rate ofor eight percent (8%) per annum from date of issuance. These notes can be converted only after an acceleration event which involves a symbol change, or reverse stock split and such conversion is in the control of the Company. Steven Rotman’s note matures eight years from issuance and Bernard Rotman’s note matures four years from issuance. If converted, the notes plus accrued interest are convertible into shares of the Company’s common stock at a 20-day average closing price at a 50% discount. The balance of theSteven and Gregory Rotman July 2019 notes payable includingplus accrued interest to Steven and Bernard Rotman were approximately $1,155,000 and $440,000, respectively, at June 30, 2020 and approximately $1,128,000 and $430,000, respectively, at December 31, 2019.

21

On December 19, 2019, the Company issued a contingentlyare convertible promissory note totaling $100,000, to Steven Rotman. The face amount of the note represents the amount due at maturity along with the accrued interest. The amount can be converted into shares of the Company’s common stock at the optionaverage of the Company, based onfive lowest closing prices in the average closing price for the trailing 20 days90-day period prior to conversion and carryingwith a 50% discount. The note can be converted only after an acceleration event which involves a symbol change, uplisting, or reverse stock split and such conversion is in the control of the Company. The note matures two years from issuance. The balance of the note payable including accrued interest to Steven Rotman is approximately $103,000 and $100,000 at June 30, 2020 and December 31, 2019, respectively.

 

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

       Carrying Amount 
    Principal  March 31,  December 31, 
  Issue Date Amount  2021  2020 
Steven Rotman 8.00% note due July 2024 07/18/19 $105,000  $119,700  $117,600 
Gregory Rotman 8.00% note due July 2024 07/18/19  55,207   62,951   61,847 
Steven Rotman 5.00% note due July 2027 07/18/19  1,102,500   1,196,672   1,182,890 
Bernard Rotman 5.00% note due July 2023 07/18/19  420,000   455,875   450,625 
Steven Rotman 5.00% note due December 2021 12/19/19  100,000   106,458   105,207 
Steven Rotman 5.00% note due February 2022 02/02/20  50,000   52,708   52,083 
               
    $1,832,707   1,994,364   1,970,252 
               
Debt Discount        -   (4,667)
               
        $1,994,364  $1,965,585 

 

Based on the variable conversion price for all of these convertible notes, the Company recorded the embedded conversion features as derivative liabilities, which amounted to $1,444,000$1,439,000 and $1,056,866$1,275,000 at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.

22

 

Rotman Family Nonconvertible Notes

 

In connection withDuring the acquisition of 58% of Rotmans,three months ended March 31, 2021, Steven Rotman advanced the Company funds totaling $395,000. The Company formalized the advances and Bernard Rotman were issued related party notes payable in the amounts of $367,500 and $140,000, respectively.a promissory note to Steven Rotman. The notes bearnote bears interest at an annual rate of five percent (5%). Steven Rotman’s note matures eight years from issuance and Bernard Rotman’s note matures four years from issuance. Paymentsis due no later than March 31, 2023. The face amount of $3,828 and $2,917the notes represents the amount due at maturity along with accrued interest.

In addition, the maturity date of advances made in 2020 has been extended to Steven and BernardDecember 2022.

The following table summarizes the Rotman respectively, per month begin six months from issuance until maturity in December 2027 and 2023, respectively. The balance of these notes payable including accrued interest to Steven and Bernard Rotman is approximately $385,000 and $147,000, respectively, at June 30, 2020 and approximately $376,000 and $143,000, respectively, at December 31, 2019. No payments have been made by the Company as of June 30, 2020.Family Nonconvertible Notes:

       Carrying Amount 
       March 31,  December 31, 
  Issue Date Principal Amount  2021  2020 
Steven Rotman 5.00% note due July 2027 07/18/19 $367,500  $398,890  $394,297 
Bernard Rotman 5.00% note due July 2023 07/18/19  140,000   151,958   150,208 
Steven Rotman 5.00% note due December 2022 08/24/20  75,000   77,260   76,323 
Steven Rotman 5.00% note due December 2022 09/01/20  100,000   102,902   101,653 
Steven Rotman 5.00% note due December 2022 09/08/20  145,000   149,068   147,256 
Steven Rotman 5.00% note due December 2022 09/15/20  200,000   205,416   202,917 
Steven Rotman 5.00% note due December 2022 09/21/20  75,000   76,969   76,031 
Steven Rotman 5.00% note due December 2022 10/02/20  50,000   51,250   50,625 
Steven Rotman 5.00% note due December 2022 10/08/20  40,000   41,000   40,500 
Steven Rotman 5.00% note due December 2022 10/15/20  48,000   49,200   48,600 
Steven Rotman 5.00% note due December 2022 10/20/20  50,000   51,250   50,625 
Steven Rotman 5.00% note due December 2022 11/02/20  70,000   71,750   70,875 
Steven Rotman 5.00% note due December 2022 11/13/20  35,000   35,876   35,438 
Steven Rotman 5.00% note due December 2022 11/18/20  35,000   35,876   35,438 
Steven Rotman 5.00% note due December 2022 11/20/20  65,000   66,626   65,813 
Steven Rotman 5.00% note due December 2022 12/22/20  60,000   61,500   60,750 
Steven Rotman 5.00% note due March 2023 01/21/21  35,000   35,340   - 
Steven Rotman 5.00% note due March 2023 01/27/21  40,000   40,356   - 
Steven Rotman 5.00% note due March 2023 02/03/21  50,000   50,396   - 
Steven Rotman 5.00% note due March 2023 02/26/21  100,000   100,500   - 
Steven Rotman 5.00% note due March 2023 03/19/21  100,000   100,181   - 
Steven Rotman 5.00% note due March 2023 03/25/21  70,000   70,068   - 
               
    $1,950,500  $2,023,632  $1,607,349 

 

Approximate maturities for the succeeding years are as follows:

 

Remainder of 2020 $46,000 
2021�� 59,000 
Remainder of 2021 $255,000 
2022  62,000   1,191,000 
2023  85,000   938,000 
2024  34,000   217,000 
2025  36,000 
Thereafter  221,500   1,380,996 
        
 $507,500  $4,017,996 

 

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NOTE 9 -DERIVATIVE LIABILITIES

NOTE 9 - DERIVATIVE LIABILITIES

 

As of June 30, 2020March 31, 2021 and December 31, 2019,2020, the Company had a $1,979,700$1,895,700 and $1,499,800,$1,766,700, respectively, derivative liability balance on the condensed consolidated balance sheet and recorded a loss from change in fair value of derivative liabilities of $479,900$129,000 for the three and six months ended June 30, 2020.March 31, 2021, respectively. The derivative liability activity comes from the convertible notes payable. The Company analyzed the conversion features and warrants of the various note agreements for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the embedded conversion features should be classified as a derivative because the exercise price of these Convertible notes are subject to a variable conversion rate. The Company has determined that the conversion feature is not considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment. In accordance with ASC 815, the Company has bifurcated the conversion feature of the notes and recorded a derivative liability.

 

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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.

 

The following table summarizes the derivative liabilities included in the condensed consolidated balance sheet at June 30, 2020March 31, 2021 and December 31, 2019:2020:

 

Fair Value of Embedded Derivative and Warrant Liabilities:

 

  2020  2019 
       
Balance, beginning of the period $1,499,800  $235,085 
         
Initial measurement of liabilities  -   1,464,600 
         
Change in fair value  

479,900

   1,079,450 
         
Settlement due to conversion  -   (1,279,335)
         
Balance, end of the period $1,979,700  $1,499,800 

  2021  2020 
       
Balance, beginning of the period $1,766,700  $1,499,800 
         
Initial measurement of liabilities  -   28,000 
         
Change in fair value  129,000   238,900 
         
Balance, end of the period $1,895,700  $1,766,700 
NOTE 10 -STOCKHOLDERS’ DEFICIT

NOTE 10 - STOCKHOLDERS’ DEFICIT

 

Cumulative Convertible Preferred Stock

 

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

 

As of June 30, 2020,March 31, 2021, the 13,8288,698 shares of outstanding preferred stock had undeclared dividends of approximately $98,000$68,000 and could be converted into 4,731,2603,099,750 shares of common stock, at the option of the holder.

 

As of December 31, 2019,2020, the 13,82813,698 shares of outstanding preferred stock had undeclared dividends of approximately $91,000$101,000 and could be converted into 4,591,1004,801,840 shares of common stock, at the option of the holder.

 

Common Stock and Warrants

 

During the sixthree months ended June 30, 2020, noMarch 31, 2021, the Company issued 1,666,667 shares were issued under equity purchase agreements.agreements for cash proceeds totaling $25,000. Included in stock subscription payable at March 31, 2021, is $283,000 received under common stock subscription agreements for 18,866,668 shares during the year ended December 31, 2020.

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During the sixthree months ended June 30, 2020, noMarch 31, 2021, 1,767,945 shares of common stock were issued for the conversion of 5,000 shares of preferred stock for principal and interest.interest totaling $88,397.

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NOTE 11 - REVENUES


 

The following table presents our revenues disaggregated by each major product category and service for the three and six months ended June 30, 2020March 31, 2021 and 2019:2020:

 

  Three Months Ended  Six Months Ended 
  June 30,  June 30, 
  2020  2019  2020  2019 
     % of     % of     % of     % of 
  Net Sales  Net Sales  Net Sales  Net Sales  Net Sales  Net Sales  Net Sales  Net Sales 
Merchandise:                                
Case Goods                                
Bedroom Furniture $295,179   12.4  $-   -  $1,156,302   13.9  $-   - 
Dining Room Furniture  218,948   9.2   -   -   741,062   8.9   -   - 
Occasional  445,511   18.6   -   -   1,405,890   16.9   -   - 
   959,638   40.2   -   -   3,303,254   39.7   -   - 
Upholstery  650,331   27.2   -   -   2,267,878   27.3   -   - 
Mattresses and Toppers  320,136   13.4   139,326   75.1   1,391,463   16.7   318,343   84.4 
Broadloom, Flooring and Rugs  99,306   4.2   -   -   506,185   6.1   -   - 
Warranty  183,151   7.7   -   -   281,460   3.4   -   - 
Accessories and Other *  176,344   7.4   46,237   24.9   570,904   6.9   58,887   15.6 
  $2,388,906   100.0  $185,563   100.0  $8,321,144   100.0  $377,230   100.0 

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

  Three Months Ended March 31, 
  2021  2020 
     % of     % of 
  Net Sales  Net Sales  Net Sales  Net Sales 
Merchandise:                
Case Goods                
Bedroom Furniture $780,233   6.0  $861,123   14.5 
Dining Room Furniture  768,548   6.0   522,114   8.8 
Occasional  1,952,829   15.2   960,379   16.2 
   3,501,610   27.2   2,343,616   39.5 
Upholstery  4,400,170   34.2   1,617,547   27.3 
Mattresses and Toppers  1,789,456   13.9   1,071,327   18.0 
Broadloom, Flooring and Rugs  1,320,223   10.3   406,879   6.9 
Warranty  265,772   2.1   98,309   1.7 
Air Purification Units  1,159,286   9.0   66,334   1.1 
Accessories and Other  431,602   3.3   328,226   5.5 
  $12,868,119   100.0  $5,932,238   100.0 
NOTE 12 -SHARE-BASED COMPENSATION

NOTE 12 - SHARE-BASED COMPENSATION

 

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

 

In total, the companyCompany recorded $308,627$204,696 and $2,100,736$154,368 of stock-based compensation for the sixthree months ended June 30,March 31, 2021 and 2020, and 2019, respectively, including shares to be issued related to consultants and board member stock options and common stock and warrants issued to non-employees. Included in stock subscription payable is accrued stock-based compensation of $1,142,678$1,191,744 and $845,175$2,177,806 at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively.

 

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

 

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

 

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In total for the sixthree months ended June 30,March 31, 2021 and 2020, and 2019, the Company recorded $11,124$4,916 and $2,100,736,$5,562, respectively, of share-based compensation expense related to employee and Board Members’ stock options. The unrecognized compensation expense as of June 30, 2020March 31, 2021 was $37,628$22,143 for non-vested share-based awards to be recognized over a period of approximately fourthree years.

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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 4,000,000 shares to be issued under the Plan. In April 2009, the Company’s Board of Directors authorized an increase in the number of shares to be issued under the Plan to 10,000,000 shares and to include the independent Board Members in the Plan in lieu of continuing the previous practice of granting warrants each quarter to independent Board Members for services. At June 30, 2020,March 31, 2021, there are 2,251,729 shares of common stock available for issuance under the Plan. In 2014, the Board of Directors adopted an additional stock option plan which provides for an additional 5,000,000 shares which are all available as of June 30, 2020.March 31, 2021. In 2019, the Board of Directors adopted an additional stock option plan with provides for 50,000,000 shares which are all available as of June 30, 2020.March 31, 2021. The Plan is intended to permit stock options granted to employees to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (“Incentive Stock Options”). All options granted under the Plan that are not intended to qualify as Incentive Stock Options are deemed to be non-qualified options. Stock options are granted at an exercise price equal to the fair market value of the Company’s common stock on the date of grant, typically vest over periods up to 4 years and are typically exercisable up to 10 years.

 

There were no options granted during the sixthree months ended June 30, 2020.March 31, 2021 and 2020, respectively.

 

The following table summarizes all stock option activity of the Company for the sixthree months ended June 30, 2020:March 31, 2021:

 

        Weighted 
     Weighted  Average 
     Average  Remaining 
  Number  Exercise  Contractual 
  of Shares  Price  Life (Years) 
          
Outstanding, December 31, 2019  27,983,271  $0.20   3.45 
             
Granted  -   -   - 
             
Excercised  -   -   - 
             
Forfeited  (100,000)  0.68   - 
             
Outstanding, June 30, 2020  27,883,271  $0.20   2.97 
             
Excercisable, June 30, 2020  27,033,271  $0.21   3.13 
        Weighted 
     Weighted  Average 
     Average  Remaining 
  Number  Exercise  Contractual 
  of Shares  Price  Life (Years) 
          
Outstanding, December 31, 2020  27,874,938  $0.19   2.47 
             
Exercisable, December 31, 2020  27,124,938  $0.19   2.59 
             
Granted  -   -   - 
             
Exercised  -   -   - 
             
Forfeited  (650,000)  0.05   - 
             
Outstanding, March 31, 2021  27,224,938  $0.19   2.27 
             
Exercisable, March 31, 2021  26,474,938  $0.20   2.38 

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As of June 30,March 31, 2021 and 2020, there was no aggregate intrinsic value on the Company’s outstanding options. As of June 30, 2019, the aggregate intrinsic value of the Company’s outstanding options was approximately $2,000.$1,000. The aggregate intrinsic value will change based on the fair market value of the Company’s common stock.

 

Warrants

 

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

 

The following table represents the Company’s warrant activity for the sixthree months ended June 30, 2020:March 31, 2021:

 

           Weighted 
           Average 
     Weighted  Weighted  Remaining 
  Number  Average  Average  Contractual 
  of Shares  Fair Value  Exercise Price  Life (Years) 
             
Outstanding, December 31, 2019  14,237,646        $0.09   3.58 
                 
Granted  -   -   -   - 
                 
Exercised  -   -   -   - 
                 
Forfeited  (19,595)  -   1.58   - 
                 
Expired  -   -   -   - 
                 
Outstanding, June 30, 2020  14,218,051       0.09   3.03 
                 
Exercisable, June 30, 2020  14,218,051      $0.09   3.03 

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           Weighted 
        Weighted  Average 
     Weighted  Average  Remaining 
  Number  Average  Exercise  Contractual 
  of Shares  Fair Value  Price  Life (Years) 
             
Outstanding, December 31, 2020  14,205,912      $0.08   2.53 
                 
Granted  -   -   -   - 
                 
Exercised  -   -   -   - 
                 
Forfeited  (559,805)  -   0.14   - 
                 
Expired  -   -   -   - 
                 
Outstanding, March 31, 2021  13,646,107      $0.08   2.37 
                 
Exercisable, March 31, 2021  13,646,107      $0.08   2.37 
NOTE 13 -RELATED PARTY TRANSACTIONS

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 $125,000 per year in cash, $10,417 per month in shares based on a 20-day average price at a 50% discount to market, $5,000 per month in cash for expenses as well as access to a Company provided vehicle and health and life insurance. During the sixthree months ended June 30, 2020,March 31, 2021, the Company expensed approximately $228,000$104,000 related to this employment agreement. As of June 30, 2020,March 31, 2021, the Company had a stock subscription payable balance of $577,000,$758,000, or approximately 22,294,00027,152,000 shares to be issued in the future and $30,000$75,000 of reimbursable expenses payable.payable related to this party. In addition, 6,666,667 shares are owed to this party under a stock subscription agreement dated in July 2020 for $100,000.

 

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 June 30, 2020,March 31, 2021, the Company had a stock subscription payable balance of $42,000, for approximately 850,000 shares related to this party for services incurred and expensed in 2019.

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Blue Oar Consulting, Inc.

 

This entity is owned by Gregory Rotman, who is the son of the Company’s CEO, Steven Rotman. Blue Oar Consulting, Inc. (“Blue Oar”) provides business consulting services to the Company. In exchange for such services, the Company has entered into a consulting agreement with the related party entity.

 

Per Blue Oar’sthe consulting agreement, itBlue Oar is to be paid $15,000 per month in cash for expenses, and $12,500 per month to be paid in shares based on a 20-day average at a 50% discount to market. During the sixthree months ended June 30, 2020,March 31, 2021, the Company expensed approximately $252,000$114,000 related to the consulting agreement.agreement and issued 30,038,400 shares of common stock for 2020 services. In addition, the Company issued 11,364,904 shares of common stock to settle its accounts payable balance of $180,000 in February 2021. In connection with the settlement, a loss of $155,265 was incurred. As of June 30, 2020,March 31, 2021, the Company had a stock subscription payable balance of $492,000,$69,000, or approximately 26,287,0002,078,000 shares and a balance of $90,000$45,000 in accounts payable related to this related party. In addition, 4,666,667 shares are owed to this party under a stock subscription agreement dated in July 2020 for $70,000.

 

NOTE 14 -COMMITMENTS

Fluid Energy Conversion Inc.

In May of 2019, the Company acquired the assets of Fluid Energy Conversion Inc. (“FEC”) for 2,500,000 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 March 31, 2021 is $103,750 representing the value of the 2,500,000 shares on the purchase date.

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 sixthree months ended June 30, 2020,March 31, 2021, 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.

 

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The Company filed an opposition to the motion and anupon 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'sCompany’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. TheIn addition, Vystar filed counterclaims asserted are:asserting: (a) violation of 10(b)(5) of the Securities and Exchange Act; (b) violation of Section 15(a)(1) of the Exchange Act (failure to register as a broker-dealer); (c) pursuant to the Uniform Declaratory Judgment Act, 28 U.S.C. §§ 2201, the Company requests the Court to declare: (i) pursuant to Delaware law, the underlying agreements are unconscionable; (ii) the underlying agreements are unenforceable and/or portions are unenforceable, such as the liquidated damages sections; (iii) to the extent the agreement is enforceable, Vystar in good faith requests the Court to declare the legal fee provisions of the agreements be mutual (d) unjust enrichment; (e) breach of contract (in the alternative); and (f) attorneys’ fees.

 

On June 10, 2020, EMA filed a motion for summary judgment as to its remaining claims for relief and a motion to dismiss the Company’s affirmative defenses and counterclaims. The Company opposed the motion on July 10, 2020, and the same was fully submitted to the Court on July 28, 2020; the parties await the Court’s decision on the motions.

Robert LaChapelle Class ActionPayment of Wages Actions

 

On March 13, 2020, Robert LaChapelle, a former employee of Rotmans Furniture, the Company’s majority owned subsidiary, on behalf of himself and all others similarly situated, filed a class action complaint against Rotmans and two of its prior owners (including Steve Rotman, President of the Company) in the Worcester Superior Court alleging non-payment of overtime pay and Sunday premium pay pursuant to the Massachusetts Blue Laws (Ch. 136), the Massachusetts Overtime Law (Chapter 151, § 1A), and the Massachusetts Payment of Wages Law (Chapter 149 §§148 and 150). Specifically, LaChapelle has alleged that Rotmans failed to pay him and other sales people who were paid on a commission-only basis overtime pay at a rate of least 1.5 times the basic minimum wage or premium pay (also at 1.5 times the basic minimum wage) for hours they worked on Sundays. Rotmans isThe parties settled with the named Plaintiffs, Robert LaChapelle and certain other employees, each on an individual basis, for a de minimus amount which was paid in the processMarch 2021. Plaintiffs’ counsel then filed a Stipulation of investigating these claims to determine whether it may be liable to the membersDismissal of the putative classPlaintiffs’ Complaint with prejudice. The settlement was included in operating expenses for unpaid overtimethe year ended December 31, 2020. However, after settlement, three additional former employees made similar claims and Sunday pay and, if so, the approximate amount of such amounts.Company is reviewing the matter.

 

Eric Maas LawsuitStock Subscription Payable

 

At March 31, 2021 and December 31, 2020, the Company recorded $1,578,494 and $2,589,556, respectively, of stock subscription payable related to common stock to be issued. The Companyfollowing summarizes the activity of stock subscription payable during the period ended March 31, 2021 and members of its Board of Directors, and certain employees and consultants, have been added as defendants in the case Maas v. Zymbe, LLC, et. al. The complaint was recently moved from Superior Court of the State of California to Federal District Court in California. The amended complaint alleges various employment, contract, and tort claims, including defamation, arising out of a dispute over the quality and utility of consulting and other services provided by Mr. Eric Maas, including through his dealings with Mr. Jason Leaf and Mr. Gregory Rotman. The original litigation was filed in 2017.December 31, 2020:

 

  Amount  Shares 
       
Balance, January 1, 2020 $1,150,125   31,439,401 
Additions, net  1,640,631   71,991,955 
Issuances, net  (201,200)  (4,000,000)
         
Balance, December 31, 2020  2,589,556   99,431,356 
Additions, net  418,030   13,810,214 
Issuances, net  (1,429,092)  (51,038,400)
         
Balance, March 31, 2021 $1,578,494   62,203,170 

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NOTE 15 -MAJOR CUSTOMERS AND VENDORS

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 sixthree months ended June 30, 2020,March 31, 2021, the Company made approximately 13%22% of its purchases from one major vendor. The Company owed its major vendor approximately $80,000$415,000 at June 30, 2020. There were no significant vendor concentrations duringMarch 31, 2021.

During the sixthree months ended June 30, 2019.March 31, 2020, the Company made approximately 15% of its purchases from one major vendor. The Company owed its major vendor approximately $185,000 at March 31, 2020.

 

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NOTE 16 - INCOME TAXES

NOTE 16 -INCOME TAXES

 

The provision (benefit) for income taxes for the sixthree months ended June 30,March 31, 2021 and 2020 and 2019 assumes a 21% effective tax rate for federal income taxes. A reconciliation of the federal statutory income tax rate and the effective income tax rate as a percentage of income before income taxes is as follows:

 

  Six Months Ended 
  June 30, 
  2020  2019 
       
Federal statutory income tax rate  (21.0)%  (21.0)%
         
Change in valuation allowance on net operating loss carryforwards  21.0  21.0
         
Effective income tax rate  0.0%  0.0%

  Three Months Ended 
  March 31, 
  2021  2020 
       
Federal statutory income tax rate  (21.0)%  (21.0)%
         
Change in valuation allowance on net operating loss carryforwards  21.0   21.0 
         
Effective income tax rate  0.0%  0.0%

 

Deferred tax assets as of June 30, 2020March 31, 2021 and December 31, 20192020 are as follows:

 

 2020 2019  2021  2020 
          
NOL carryforwards $5,729,000  $5,490,000  $6,890,000  $6,715,000 
                
Less valuation allowance  (5,729,000)  (5,490,000)  (6,890,000)  (6,715,000)
                
Deferred tax assets $-  $-  $-  $- 

 

Deferred taxes are caused primarily by net operating loss carryforwards. For federal income tax purposes, the Company has a net operating loss carryforward of approximately $27,200,000$32,800,000 as of June 30, 2020,March 31, 2021, of which approximately $18,400,000 expires beginning in 2024 and $8,800,000$14,400,000 which can be carried forward indefinitely. For state income tax purposes, the Company has a net operating loss carryforward of approximately $18,300,000 and $8,800,000$14,200,000 as of June 30, 2020March 31, 2021 in Georgia and Massachusetts, respectively, which expires beginning in 2023.

 

In addition, as of June 30, 2020March 31, 2021, Rotmans has a net operating loss carryforward of approximately $2,800,000$3,100,000 for federal income tax purposes of which $1,810,000$710,000 expires beginning in 2029 and $990,000$2,390,000 can be carried forward indefinitely. Rotmans has a state operating loss carryforward of approximately $1,900,000$2,200,000 which expires beginning in 2022.

 

Pursuant to Internal Revenue Code Section 382, the future realization of our net operating loss carryforwards to offset future taxable income may be subject to an 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

NOTE 17 - PROFIT SHARING PLAN

 

The Company sponsors a qualified 401(k) profit sharing plan covering all eligible employees. The plan permits participants to make tax-deferred contributions to the plan by salary reduction. Company contributions are discretionary and are determined annually by the Board of Directors.

 

There were no Company contributions in 2021 and 2020. Participant and Company contributions are limited to amounts allowed under the Internal Revenue Code.

 

The Company offers no post-retirement benefits other than the plan discussed above and no significant post-employment benefits.

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NOTE 18 -ACQUISITION OF ROTMANS

On July 18, 2019, the Company acquired 58% of the outstanding shares of common stock of Rotmans, the largest furniture and flooring store in New England for an aggregate purchase price of $2,030,000. The consideration is to be paid in 25% in term notes payable over 4 to 8 years and 75% in notes convertible to common stock (see Note 8). The Company and Rotmans are exploring a number of initiatives relating to environmentally friendly product development and distribution that will utilize the access to the capital markets afforded by this combination.

The following unaudited pro forma information presents a summary of the Company’s combined operating results for the three and six months ended June 30, 2019, as if the acquisition and the related financing transactions had occurred on January 1, 2019. The following pro forma financial information is not necessarily indicative of the Company’s operating results as they would have been had the acquisition been effected on the assumed date, nor is it necessarily an indication of trends in future results for a number of reasons, including, but not limited to, differences between the assumptions used to prepare the pro forma information, basic shares outstanding and dilutive equivalents, cost savings from operating efficiencies, potential synergies, and the impact of incremental costs incurred in integrating the businesses.

  Three Months Ended  Six Months Ended 
  June 30, 2019  June 30, 2019 
Total revenues $7,245,231  $13,980,160 
Loss from operations $1,399,709  $3,905,076 
Net loss $1,290,976  $4,978,800 
Net loss attributable to Vystar $1,290,976  $4,657,428 
Basic and dilated loss per share $0.00  $0.01 

NOTE 19 -

NOTE 18 - SUBSEQUENT EVENTS

The Company has evaluated subsequent events through the date of the filing of its Form 10-Q with the Securities and Exchange Commission.

 

On July 1, 2020, 130 preferred shares were converted into 44,357 sharesApril 2, 2021, Greg Rotman advanced the Company $100,000 for working capital. The advance bears interest at an annual rate of common stock.five percent (5%). Repayment terms have not been finalized as of this date.

 

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On July 7, 2020, the Company entered into a stock subscription agreement to issue 10,000,000 shares of common stock for $0.015 per share to a consultant for legal services.

 

On July 27, 2020, the Company issued 4,000,000 shares of common stock to a Director for 2019 board fees accrued and included in stock subscription payable in the accompanying balance sheet as of June 30, 2020 and December 31, 2019.

On August 5, 2020, the Company issued 8,941,878 shares of common stock to a third-party consultant for marketing and public relations services. The consultant will provide 30 hours of services per month for a six month period ending in September 2020.

In addition, the Company has received $415,000 for 27,666,735 shares of common stock to be issued.

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 EPA- and FDA-certified laboratories, the RxAir has been proven to destroy greater than 99% of bacteria and viruses and reduce concentrations of odors and VOCs. The RxAir uses high-intensity germicidal UV lamps that destroy bacteria and viruses instead of just trapping them, setting it apart from ordinary air filtration units. RxAir® and ViraTech® are registered trademarks of Vystar Corp. For more information, visit http://www.RxAir.com.

 

The Company’s RxAir and UV Flu product line use 48 inches of high-intensity germicidal UV lamps that destroy bacteria, viruses and other germs instead of just trapping them, setting it apart from ordinary air filtration units. RxAir is one of the few UV air purifiers that have been proven in independent EPA- and FDA- certified testing laboratories to destroy on the first pass 99.6% of harmful airborne viruses and bacteria. In addition to inactivating airborne viruses that cause influenza (flu) and colds, RxAir’s device disarms the airborne pathogens that cause MRSA (staph), strep (whooping cough), tuberculosis (TB), measles, pneumonia and a myriad of other antibiotic-resistant and viral infections.

 

The RxAir and UV Flu product line includes:

 

 RxAir™ RxAir® Residential Filterless Air Purifier
 UV400RX400 ™ FDA cleared Class II Filterless Air Purifier
 RX3000™ Commercial FDA cleared Class II Air Purifier

 

Vystar will continue production ofproduces the RxAir and UV Flu product line with a new world-class manufacturer and an expert U.S. engineer with a full understanding of the RxAir technology. Vystar plans to sellsells RxAir residential and commercial units viathrough multiple distributors online and through retail channels. Vystar is assembling the Company’s website. Once distribution network to relaunch sales of UV400 and Rx3000 units to the healthcare and medical markets, which UV Flu had ceased due to a lack of sales force, distribution and cash flow constraints. Once production and saleschannels are firmly re-established,established, Vystar expects that the air purification products will produce margins of approximately 70%.

 

About FECSince the onset of the COVID-19 global pandemic the population of the United States has searched for answers to the aspect of the virus being transmissible both airborne and upon infected skin contacting body membranes. RxAir has proven to be a viable option for both individual purchasers as well as groups whose members and/or employees could be a safe return to “prior normalcy” whatever that definition is. Additionally, Vystar has contracted with numerous school districts and state education departments to supply units on a broad scale. Accompanying those opportunities are also various modes of distribution through established national distributors.

 

Currently, FEC technology R&D is underwayWith the ongoing variants associated with COVID-19 and the potential for a future outbreak of a different version of COVID, Vystar remains poised to produce additional units to combat airborne illnesses as deemed appropriate based on the following initiatives:need and efficacy.

Vystar plans to apply FEC technology to increase pathogen killing efficiency, reduce size and cost of Vystar’s RxAir air purifiers.
FEC technology expected to be used to negate viruses and bacteria using sound energy in a highly proprietary manner.
Vystar plans to apply FEC technology to vape pens to improve substance delivery and control dosage.
FEC technology offers numerous eco-friendly product initiatives already in development in metering, energy, water purification, and medical uses.
A water filtration enhancement device in prototype stage to improve dialysis efficiency for those affected by renal failure.

 

About Rotmans

 

Rotmans, the largest furniture and flooring store in New England and one of the largest independent furniture retailers in the U.S., encompassing over 200,000170,000 square feet in Worcester, Mass., and employing 70approximately 80 people, was founded and has been under the leadership of the Rotman family for the past 50 years. Rotmans is expected to add approximately $25$20 million annually to Vystar’s top line revenue and enable Vystar to capitalize on the infrastructure already in place for accounting, retail sales facilities and staff, customer service, warehousing, and delivery. Significant marketing and advertising opportunities are available for all of Vystar’s brands to Rotmans’ thousands of existing customers. As CEO of both Rotmans and Vystar, Steven Rotman provides continuity of management and customer-focused values for the Company.

 

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With the end of the high impact closing to remodel sale in the foreseeable future, management is focusing its efforts on creating a more efficient, streamlined store with an enhanced web presence.

 

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 ten years and through that time has a dedicated 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) have 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, has also shown 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 will allow 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. The International Latex Conference that will be held virtually July 20 to 22, 2021 offered the joint companies a plenary session entitled.”Innovations and Sustainability in Natural Rubber Latex - The New Paradigm” which will air on July 20th at 10am eastern.

As CMC Global’s Cameroon plantations and processing facilities come out of wintering, Vytex will be produced there on a semi-exclusive basis.

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.

Additional Notes

In anticipation of the success of the RxAir spin-off, we may entertain this concept in our other divisions.

 

Impact of COVID-19 on Our Business

 

The COVID-19 pandemic has resulted in significant economic disruption and adversely impacted our business. We closed the Rotmans showroom on March 24.24, 2020. At that time, most of our team members were furloughed. During this period, we paid the cost of enrolled health benefits of those furloughed. We successfully reopened the showroom on June 10. As we restart many aspects of our operation, we will10, 2020. We continue to work closely with local authorities and follow the guidance of the Centers for Disease Control and Prevention (“CDC”), implementing enhanced cleaning measures, social distancing and the utilization of face masks for the safety of team members, customers and communities.

 

In addition, the COVID-19 pandemicIt 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.

 

As theThe COVID-19 pandemic is complex and rapidly evolving,continues to evolve with sporadic resurgences, new virus variants and the vaccine rollout. At this time, we cannot reasonably estimate the duration and severity of the pandemic and its impactinfluence on consumers and our business, results of operations, financial position and cash flows.business.

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RESULTS OF OPERATIONS

 

Comparison of the Three Months Ended June 30, 2020March 31, 2021 with the Three Months Ended June 30, 2019March 31, 2020

  Three Months Ended March 31, 
  2021  2020  $ Change  % Change 
             
  CONSOLIDATED 
             
Revenue $12,868,119  $5,932,238  $6,935,881   116.9%
                 
Cost of revenue  6,076,840   2,932,614   3,144,226   107.2%
                 
Gross profit  6,791,279   2,999,624   3,791,655   126.4%
                 
Operating expenses:                
Salaries, wages and benefits  1,949,139   1,454,074   495,065   34.0%
Share-based compensation  204,696   154,368   50,328   32.6%
Agent fees  1,251,873   -   1,251,873   100.0%
Professional fees  20,183   292,696   (272,513)  -93.1%
Advertising  865,178   446,695   418,483   93.7%
Rent  316,615   293,171   23,444   8.0%
Service charges  224,516   183,577   40,939   22.3%
Depreciation and amortization  192,009   243,923   (51,914)  -21.3%
Other operating  796,413   781,673   14,740   1.9%
                 
Total operating expenses  5,820,622   3,850,177   1,970,445   51.2%
                 
Income (loss) from operations  970,657   (850,553)  1,821,210   -214.1%
                 
Other income (expense):                
Interest expense  (175,847)  (604,714)  428,867   -70.9%
Change in fair value of derivative liabilities  (129,000)  -   (129,000)  100.0%
Gain on settlement of debt, net  1,247,635   -   1,247,635   100.0%
Other income (expense), net  57,747   (23,056)  80,803   -350.5%
                 
Total other income (expense), net  1,000,535   (627,770)  1,628,305   -259.4%
                 
Net income (loss)  1,971,192   (1,478,323)  3,449,515   -233.3%
                 
Net (income) loss attributable to noncontrolling interest  (1,053,065)  110,946   (1,164,011)  -1049.2%
                 
Net income (loss) attributable to Vystar $918,127  $(1,367,377) $2,285,504   -167.1%

 

  Three Months Ended June 30, 
  2020  2019  $ Change  % Change 
             
  CONSOLIDATED 
             
Revenue $2,388,906  $185,563  $2,203,343   1187.4%
                 
Cost of revenue  990,404   211,124   779,280   369.1%
                 
Gross profit (loss)  1,398,502   (25,561)  1,424,063   -5571.2%
                 
Operating expenses:                
Salaries, wages and benefits  721,808   -   721,808   100.0%
Share-based compensation  154,259   488,450   (334,191)  -68.4%
Professional fees  251,187   179,956   71,231   39.6%
Advertising  234,462   23,096   211,366   915.2%
Rent  300,139   -   300,139   100.0%
Service charges  44,346   778   43,568   5600.0%
Depreciation and amortization  243,925   50,451   193,474   383.5%
Other operating  487,940   213,502   274,438   128.5%
                 
Total operating expenses  2,438,066   956,233   1,481,833   155.0%
                 
Loss from operations  (1,039,564)  (981,794)  (57,770)  5.9%
                 
Other income (expense):                
Interest expense  (610,679)  (40,403)  (570,276)  1411.5%
Change in fair value of derivative liabilities  (479,900  -   (479,900)  -100.0%
Loss on settlement of debt, net  -   (2,503)  2,503   100.0%
Other income (expense)  43,730   (2)  43,732   100.0%
                 
Total other expense, net  (1,046,849)  (42,908)  (1,003,941)  2339.8%
                 
Net loss  (2,086,413)  (1,024,702)  (1,061,711)  103.6%
                 
Net loss attributable to noncontrolling interest  220,141   -   220,141   100.0%
                 
Net loss attributable to Vystar $(1,866,272) $(1,024,702) $(841,570)  82.1%

Revenues

 

Revenues for the three months ended June 30,March 31, 2021 and 2020 were $12,868,119 and 2019 were $2,388,906 and $185,563,$5,932,238, respectively, for an increase of $2,203,343$6,935,881 or 1,187.4%117%. The significant increase in revenues was due to the acquisitionhigh impact closing to remodel sale at Rotmans and an increase in sales of Rotmansthe RxAir units. Our revenues in Julythe first quarter of 2019, which was partially offset by2020 were impacted in March as information and news coverage concerning the impact of COVID-19 during the quarter. The Company'spandemic increased. Our showroom was closed through June 9 and processed limited customer deliveries for prior orders and web sales during this period. We cannot estimate the full impact on revenues at this time.March 24, 2020.

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The Company reported a significant increase in gross incomeprofit to $1,398,502$6,791,279 for the three-month period ended June 30, 2020March 31, 2021 compared to a lossgross profit of $25,561$2,999,624 for the three-month period ended June 30, 2019,March 31, 2020, an increase of $1,424,063. $3,791,655 or 126%. The increase in gross profit was primarily due to a change in purchasing which started when the store reopened in May 2020 and the reduction of special offers. Merchandise is being purchased in large quantities from fewer vendors. This quarter results also include the margins of RxAir units.

The cost of revenue for the three months ended June 30,March 31, 2021 and 2020 was $6,076,840 and 2019 was $990,404 and $211,124,$2,932,614, respectively, an increase of 369.1%107%. The increase is due to the greater inventory needs primarily from the acquisitions of Rotmans.

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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 $2,438,066$5,820,622 and $956,233$3,850,177 for the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively, an increase of $1,481,833$1,970,445 or 155.0%51%. The increase was due in part to fees incurred under an agreement with a third-party agent to assist the acquisition of Rotmans in July of 2019.Company with the high-impact sale at Rotmans.

 

Other Income (Expense)

 

Other expenseincome for the three months ended June 30, 2020March 31, 2021 was $1,046,849,$1,000,535, which primarily consisted of interest expense of $610,679,$175,847, gain on settlement of debt, net of $1,247,635, change in fair value of derivative liabilities of $479,900($129,000) and other income of $43,730.$57,747. Included in gain on settlement of debt, net is PPP loan forgiveness of $1,402,900. This compares to other expense of $42,908$627,770 for the three months ended June 30, 2019,March 31, 2020, which primarily consisted of interest expense of $40,403$604,714, and loss on settlementother expense of convertible notes payable of $2,503.$23,056.

 

Net LossIncome (Loss)

 

Net lossincome (loss) was $2,086,413$918,127 and $1,024,702($1,367,377) for the three months ended June 30,March 31, 2021 and 2020, and 2019, respectively, an increase of $1,061,711. The larger net loss the Company experienced$2,285,504 or 167%. Net income in the quarter ended June 30, 2020March 31, 2021 versus net loss in the same period in 20192020 was due to increased expenses from the operations of Rotmanssales and an increase in the change in fair value of derivative liabilities. The net loss was also impacted by the closing of the Rotmans showroom due to COVID-19.

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Comparison of the Six Months Ended June 30, 2020 with the Six Months Ended June 30, 2019

  Six Months Ended June 30, 
  2020  2019  $ Change  % Change 
             
  CONSOLIDATED 
             
Revenue $8,321,144  $377,230  $7,943,914   2105.9%
                 
Cost of revenue  3,923,018   410,966   3,512,052   854.6%
                 
Gross profit (loss)  4,398,126   (33,736)  4,431,862   -13136.9%
                 
Operating expenses:                
Salaries, wages and benefits  2,175,882   -   2,175,882   100.0%
Share-based compensation  308,627   2,100,736   (1,792,109)  -85.3%
Professional fees  543,883   371,985   171,898   46.2%
Advertising  681,157   43,579   637,578   1463.0%
Rent  593,310   -   593,310   100.0%
Service charges  227,923   1,904   226,019   11870.7%
Depreciation and amortization  487,848   100,104   387,744   387.3%
Other operating  1,269,613   333,805   935,808   280.3%
                 
Total operating expenses  6,288,243   2,952,113   3,336,130   113.0%
                 
Loss from operations  (1,890,117)  (2,985,849)  1,095,732   -36.7%
                 
Other income (expense):                
Interest expense  (1,215,393)  (140,066)  (1,075,327)  767.7%
Change in fair value of derivative liabilities  (479,900)  (1,044,250)  564,350   -54.0%
Gain on settlement of debt, net  -   12,442   (12,442)  100.0%
Other income (expense)  20,674   (154)  20,828   100.0%
                 
Total other expense, net  (1,674,619)  (1,172,028)  (502,591)  42.9%
                 
Net loss  (3,564,736)  (4,157,877)  593,141   -14.3%
                 
Net loss attributable to noncontrolling interest  331,087   -   331,087   100.0%
                 
Net loss attributable to Vystar $(3,233,649) $(4,157,877) $924,228   -22.2%

Revenues

Revenues for the six months ended June 30, and 2019 were $8,321,144 and $377,230, respectively, for an increase of $7,943,914 or 2,105.9%. The significant increase in revenues was due to the acquisition of Rotmans in July of 2019, which was partially offset by the impact of COVID-19 during the six months as the Rotmans showroom was closed from March 24 through June 10. During this period, the Company processed limited customer deliveries for prior orders and web sales.

The Company reported a significant increase in gross income to $4,398,126 for the six-month period ended June 30, 2020 compared to a loss of $33,736 for the six month period ended June 30, 2019, an increase of $4,431,862. The cost of revenue for the six months ended June 30, 2020 and 2019 was $3,923,018 and $410,966, respectively, an increase of 854.6%. The increase is due to the greater inventory needs primarily from the acquisitions of Rotmans.

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 $6,288,243 and $2,952,113 for the six months ended June 30, 2020 and 2019, respectively, an increase of $3,336,130 or 113.0%. The increase was due to the acquisition of Rotmans in July of 2019.

Other Income (Expense)

Other expense for the six months ended June 30, 2020 was $1,674,619, which primarily consisted of interest expense of $1,215,393, change in fair value of derivative liabilities of $479,900 and other income of $20,674. This compares to other expense of $1,172,028 for the six months ended June 30, 2019, which consisted of change in fair value of derivative liabilities of $1,044,250, interest expense of $140,066, gain on settlement of convertible notes payable of $12,442 and other expense of $154.

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Net Loss

Net loss was $3,564,736 and $4,157,877 for the six months ended June 30, 2020 and 2019, respectively, a decrease of $593,141. The smaller net loss the Company experienced in the six months ended June 30, 2020 versus the same period in 2019 was due to increased revenues and gross profitmargins from the operations of Rotmans and a decreasesignificant increase in sales of air purification products. The Company’s high impact closing to remodel sale was a tremendous success. The PPP loan forgiveness also contributed to the change in the fair value of derivative liabilities. The Company cannot reasonably estimate the effect of COVID-19 on its net loss at this time.income.

 

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 June 30, 2020,March 31, 2021, the Company had cash of $832,632$1,195,859 and a deficit in working capital of approximately $8.2$4.6 million. Further, at June 30, 2020,March 31, 2021, the accumulated deficit amounted to approximately $44.3$47.8 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, 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. In May, the Company entered into a sale promotion consultingThe current agreement with a national sales event company to assist its recovery with a high-impact sale and monetary advance. The agreement has allowed Rotmans to meet its financial obligations through the shutdown and is expected to giveprovided the Company flexibility and time needed to develop a new retail furniture sale model.

 

There can be no assurances that we will be able to achieve projected levels of revenue in 20202021 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 2020,2021, 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 $1,014,662$1,162,325 for the sixthree months ended June 30, 2020March 31, 2021 as compared to net cash used in operating activities of $639,349$190,790 for the sixthree months ended June 30, 2019.March 31, 2020. During the sixthree months ended June 30, 2020,March 31, 2021, cash used in operations was primarily due to net income and the net loss for the periodreduction of $3,279,570 net ofaccounts payable, accrued expenses and customer deposits and non-cash related add-back of share-based compensation expense, depreciation, amortization, gain on settlement of debt, net and change in fair value of derivative liabilities.

 

The Company had cash used in investing activities of $3,683$17,317 during the sixthree months ended June 30, 2020March 31, 2021 as compared to $10,019$3,683 for the sixthree months ended June 30, 2019.March 31, 2020.

 

Net cash provided by financing activities was $1,778,622$1,754,962 during the sixthree months ended June 30, 2020,March 31, 2021, as compared to cash provided of $1,104,764$525,209 during the sixthree months ended June 30, 2019.March 31, 2020. During the sixthree months ended June 30, 2020,March 31, 2021, cash was used in the net repayment on lineprovided by PPP loan proceeds of credit of $210,200,$1,402,900, related party term debt in the amount of $236,356,$395,000 offset by finance lease obligations repayment of $85,472, offset by proceeds from issuance of term debt of $2,211,400, stock subscription receivable of $49,250 and related party loan of $50,000.$42,938.

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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 June 30, 2020March 31, 2021 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.

 

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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 June 30, 2020,March 31, 2021, based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) 2013. Based on our evaluation under the COSO framework, management concluded that our internal control over financial reporting was not effective as of June 30, 2020.March 31, 2021. Such conclusion was reached based on the following material weaknesses noted by management:

 

 a)We have a lack of segregation of duties due to the small size of the Company.
   
 b)The Company did not maintain reasonable control over records underlying transactions necessary to permit preparation of the Company’s financial statements.
   
 c)Lack of controls that provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposal of the Company’s assets that could have a material effect on the financial statements.
   
 d)Lack of a formal CFO position who can devote significant attention to financial reporting resulted in multiple audit adjustments.
   
 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 20202021 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

 

NoneDuring the three months ended March 31, 2021, the Company issued 1,666,667 shares of common stock subscribed under a stock subscription agreement dated in July 2020 for $25,000. Other issuances in the quarter were in connection with share based compensation, a settlement of a related party payable and preferred stock conversion. There were no current sales of unregistered securities.

 

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 XBRL Instance Document
   
101.SCH XBRL Taxonomy Extension Schema Document
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith

 

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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: August 19, 2020May 17, 2021By:/s/ Steven Rotman
  Steven Rotman
  President, Chief Executive Officer, Chief Financial Officer and Director

 

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