Vystar 10Q 2016 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2016

☐	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.)

2480 Briarcliff Rd, #6

Suite 159

Atlanta, GA 30329

(Address of Principal Executive Offices, Zip Code)

(866) 674-5238

(Registrant’s telephone number including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ☐ NO ☒

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

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

Large accelerated filer ☐

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company ☒

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

As of May 12, 2016, there were 105,625,242 shares of the Registrant’s common stock, par value $0.0001 per share, outstanding.

INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS

In addition to historical information, this Form 10-Q contains statements relating to our future results (including certain projections and business trends) that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are subject to the “safe harbor” created by those sections. The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the financial statements and the related notes thereto included in this Quarterly Report on Form 10-Q (this “Report”). This Report contains certain forward-looking statements and the Company’s future operating results could differ materially from those discussed herein. Our disclosure and analysis included in this Report concerning our operations, cash flows and financial position, including, in particular, the likelihood of our success in expanding our business and raising debt and capital securities include forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expect”, “anticipate”, “intend”, “plan”, “believe”, “estimate”, “may”, “project”, “will likely result”, and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to certain risks, uncertainties, and assumptions, including prevailing market conditions and are more fully described under “Part I, Item 1A – Risk Factors” of our Form 10-K for the year ended December 31, 2015. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. In any event, these and other important factors, including those set forth in Item 1A – “Risk Factors” of our Form 10-K for the year ended December 31, 2015 may cause actual results to differ materially from those indicated by our forward-looking statements.

Although we believe that these statements are based upon reasonable assumptions, we cannot guarantee future results and readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date of this filing. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct or (iv) our strategy, which is based in part on this analysis, will be successful. The Company undertakes no obligation to update or revise forward-looking statements.

All references to “we”, “us”, “our”, “Vystar”, or “Kiron” in this Quarterly Report on Form 10-Q mean Vystar Corporation, its subsidiaries and affiliates.

Vystar Corporation

Form 10-Q for the Quarter Ended March 31, 2016

Index

Part I. Financial Information

Item 1.	Consolidated Financial Statements	4
	Consolidated Balance Sheets at March 31, 2016 (unaudited) and December 31, 2015	4
	Consolidated Statements of Operations for the Three Months Ended March 31, 2016 and 2015 (unaudited)	5
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015 (unaudited)	6
	Notes to Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	15

Item 4.	Controls and Procedures	15

Part II. Other Information

Item 1.	Legal Proceedings	15

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16

Item 3.	Defaults Upon Senior Securities	16

Item 4.	Mine Safety Disclosures	16

Item 5.	Other Information	16

Item 6.	Exhibits	16

SIGNATURES		17

Part I.

FINANCIAL INFORMATION

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

VYSTAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	March 31, 2016			December 31, 2015
ASSETS
CURRENT ASSETS
Cash	$	5,854		$	29,059
Accounts receivable, net of allowance for uncollectible amount of $17,398 and $60,266 at March 31, 2016 and December 31, 2015, respectively		47,678			—
Prepaid expenses		139,162			233,816
TOTAL CURRENT ASSETS		192,694			262,875
PROPERTY AND EQUIPMENT, NET		2,701			2,979
OTHER ASSETS
Intangible assets, net		151,503			155,423
TOTAL ASSETS	$	346,898		$	421,277
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Related party line of credit	$	1,499,875		$	1,499,875
Accounts payable		602,854			592,739
Accrued compensation		29,801			40,137
Accrued expenses		255,144			209,486
TOTAL CURRENT LIABILITIES		2,387,674			2,342,237
Shareholder notes payable		700,068			700,068
TOTAL LIABILITIES	$	3,087,742		$	3,042,305
STOCKHOLDERS’ DEFICIT
Preferred stock, $0.0001 par value, 15,000,000 shares authorized; 13,828 issued and outstanding at March 31, 2016 and December 31, 2015 respectively		1			1
Common stock, $0.0001 par value, 150,000,000 shares authorized; 99,627,242 and 96,443,907 shares issued and outstanding at March 31, 2016 and December 31, 2015, respectively		9,963			9,644
Additional paid-in capital		23,165,472			22,962,678
Accumulated deficit		(25,916,280	)		(25,593,351	)
TOTAL STOCKHOLDERS’ DEFICIT		(2,740,844	)		(2,621,028	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT	$	346,898		$	421,277

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

VYSTAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three Months Ended March 31,
	2016			2015
REVENUE	$	54,324		$	99,892
COST OF REVENUE		29,259			64,442
Gross Margin		25,065			35,450
OPERATING EXPENSES
General and administrative, including non-cash share-based compensation of $79,613 and $200,655 in 2016 and 2015, respectively		306,625			421,945
Total Operating Expenses		306,625			421,945
LOSS FROM OPERATIONS		(281,560	)		(386,495	)
OTHER INCOME (EXPENSE)
Interest income		1			36
Interest expense		(41,370	)		(30,798	)
Total Other Income (Expense)		(41,369	)		(30,762	)
NET LOSS	$	(322,929	)	$	(417,257	)
BASIC AND DILUTED LOSS PER SHARE:
Net loss per share	$	(0.00	)	$	(0.01	)
Basic and Diluted Weighted Average Number of Common Shares Outstanding		98,035,575			75,040,668

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

VYSTAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Three months ended March 31,
	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(322,929	)	$	(417,257	)
Adjustments to reconcile net loss to cash used in operating activities
Share-based compensation		79,613			200,655
Allowance for uncollectible accounts receivable		(42,868	)		30,439
Depreciation		278			583
Amortization of intangible assets		3,920			3,920
(Increase) decrease in assets
Accounts receivable		(4,810	)		17,110
Prepaid expenses		94,654			(54,845	)
Increase (decrease) in liabilities
Accounts payable		10,115			(7,401	)
Accrued compensation and expenses		35,322			22,450
Net cash used in operating activities		(146,705	)		(204,346	)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock, net of costs		70,000			285,000
Exercise of warrants/options		53,500			—
Net cash provided by financing activities		123,500			285,000
NET INCREASE (DECREASE) IN CASH		(23,205	)		80,654
CASH - BEGINNING OF YEAR		29,059			73,770
CASH - END OF YEAR	$	5,854		$	154,424
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR
Interest	$	22,195		$	14,461
Non-cash conversion of preferred stock		—			192,100

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

VYSTAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1

DESCRIPTION OF BUSINESS

Vystar Corporation (“Vystar”, the “Company”, “we”, “us”, or “our”) is the creator and exclusive owner of the innovative technology to produce Vytex® Natural Rubber Latex (“NRL”). On June 28, 2013, Vystar Corporation completed the acquisition of Kiron Clinical Sleep Lab, LLC (“Kiron”) a vertically integrated sleep diagnostic practice located in Durham, NC. Vystar Corporation is comprised of two segments, a Vytex Division, focused on expanding the licensing and utilization of its proprietary source natural rubber latex technology and a Kiron Division focused on the sleep diagnostic business. Kiron sold the CPAP therapy resupply business and any remaining materials related to CPAP therapy resupply to the Sleepworks, LLC division of Medbridge Home Medical LLC on September 1, 2015 and has subsequently asked that the agreement be modified to include compensation for those patients that have placed a second order through the end of May 2016 .On April 16, 2016, the Vystar Board of Directors voted to authorize the closing of Kiron Clinical Sleep Lab, LLC and stopped performing sleep studies effective April 29, 2016. Closure is targeted for the end of May 2016.

Vystar has expanded into the consumer arena with an introduction into the mattress, mattress topper and pillow arenas aligning with key foam manufacturers, mattress, mattress toppers and pillow producers, and furniture stores in specific areas of the Unites States. On January 22, 2015, Vystar announced the signing of an exclusive domestic distribution agreement with Worcester, MA based Nature’s Home Solutions (NHS) who sources eco-friendly materials and technologies for use in furnishings and other markets. Vystar has also completed several trials with Vietnamese, European and Indian makers of foam products to use its Vytex NRL raw material in their current offerings in their own areas as well as to supply added needs for foam cores in both the mattress and topper arenas. The current requests from major mattress manufactures trialing Vytex foam products involves different densities especially those used on the upper levels of mattresses. The samples have been presented to the manufacturers and awaiting feedback, A similar trial is planned for June 2016 in Thailand focusing on specific densities and pillows, and a meeting with a Belgian foam maker using a unique drying concept is scheduled for May 2016. In addition, working with NHS and a large Vietnamese foam manufacturer, Lien A, the group attended the International Sleep Products Association (ISPA) in Orlando in March 2016. The significance of ISPA is the focus on components for use with major mattress and pillow manufacturers, which takes Vytex foam to an additional audience.

NOTE 2

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles of the United States of America (“GAAP”) for interim financial information. Accordingly, certain information and footnotes required by GAAP for complete financial statements may be condensed or omitted. These interim consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission (“SEC”). In the opinion of Vystar management, these consolidated financial statements contain all adjustments (which comprise only normal and recurring accruals) necessary to present fairly the financial position and results of operations as of and for the three month periods ended March 31, 2016 and 2015.

Estimates

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

Concentration of Credit Risk

Certain financial instruments potentially subject the Company to concentrations of credit risk. These consolidated financial instruments consist primarily of cash and accounts receivable. Cash held in banks in many cases exceeds the Federal Deposit Insurance Corporation, or FDIC, insurance limits. While we monitor our cash balances on a regular basis and adjust the balances as appropriate, these balances could be impacted if the underlying financial institutions fail. To date, we have experienced no loss or lack of access to our cash; however, we can provide no assurances that access to our cash will not be impacted by adverse conditions in the financial markets.

Loss Per Share

Because the Company reported a net loss for the three month periods ended March 31, 2016 and 2015, common stock equivalents, including stock options and warrants, were anti-dilutive; therefore, the amounts reported for basic and dilutive loss per share were the same. Excluded from the computation of diluted loss per share were options outstanding to purchase 18,178,158 shares and 8,864,906 shares of common stock for the three months ended March 31, 2016 and 2015, respectively, as their effect would be anti-dilutive. Warrants to purchase 18,300,015 shares and 23,321,655 shares of common stock for the three months ended March 31, 2016 and 2015, respectively, were also excluded from the computation of diluted loss per share as their effect would be anti-dilutive.

Revenues

The Vytex segment derives revenue from license fees of Vytex NRL raw material to manufacturers and distributors of rubber and rubber-end products such as the foam used in the pillows and mattresses. Revenue is recognized when the licensee confirms payment and pays Vystar.

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

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash, accounts receivable, accounts payable, accrued expenses, line of credit and shareholder notes payable. The carrying values of all the Company’s financial instruments approximate fair value because of their short maturities. In addition to the short maturities, the carrying amounts of our line of credit and shareholder notes payable approximate fair value because the interest rates at March 31, 2016 approximate market interest rates for the respective borrowings.

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

Valuation inputs are classified in the following hierarchy:

	●	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.

NOTE 3

LIQUIDITY AND GOING CONCERN

The Company’s consolidated financial statements are prepared using the accrual method of accounting in accordance with GAAP and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. However, the Company has incurred significant losses and experienced negative cash flow since its inception. At March 31, 2016, the Company had cash of $5,854 and a deficit in working capital of $2,194,980. Further, at March 31, 2016, the accumulated deficit amounted to $25,916,280. As a result of the Company’s history of losses and financial condition, there is substantial doubt about the ability of the Company to continue as a going concern.

A successful transition to attaining profitable operations is dependent upon obtaining sufficient financing to fund the Company’s planned expenses and achieving a level of revenue adequate to support the Company’s cost structure. Management plans to finance future operations through the use of cash on hand, increased revenue from Vytex division license fees, our credit facility, stock warrant exercises from existing shareholders, raising capital through private placements of capital stock and debt.

The Company’s future expenditures will depend on numerous factors, including: the rate at which the Company can introduce and license Vytex NRL to manufacturers; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; market acceptance of the Company’s products and services; and competing technological developments. As the Company expands its activities and operations, cash requirements are expected to increase at a rate consistent with revenue growth after the Company has achieved sustained revenue generation.

There can be no assurances that the Company will be able to achieve its projected level of revenue in 2016 and beyond. If the Company is unable to achieve its projected revenue and is not able to obtain alternate additional financing of equity or debt, the Company would need to significantly reorient its operations during 2016, which could have a material adverse effect on the Company’s ability to achieve its business objectives and as a result may require the Company to file for bankruptcy or cease operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities that might be necessary should the Company be forced to take any such actions.

NOTE 4

PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

	March 31, 2016			December 31, 2015
Furniture, fixtures and equipment	$	150,119		$	150,119
Accumulated depreciation		(147,418	)		(147,140	)
	$	2,701		$	2,979

Depreciation expense for the three months ended March 31, 2016 and 2015 was $278 and $583, respectively.

NOTE 5

INTANGIBLE ASSETS

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

Intangible assets are as follows:

	March 31, 2016			December 31, 2015
Patents	$	238,551		$	238,551
Trademarks & trade name		9,072			9,072
Subtotal		247,623			247,623
Accumulated amortization		(96,120	)		(92,200	)
Intangible assets, net	$	151,503		$	155,423

Amortization expense for the three months ended March 31, 2016 and 2015 was $3,920 for both periods.

NOTE 6

INCOME TAXES

There is no income tax benefit recorded for the losses for the three months ended March 31, 2016 and 2015 since management has determined that the realization of the net deferred tax asset is not assured and has created a valuation allowance for the entire amount of the net deferred tax asset.

NOTE 7

NOTES PAYABLE AND LOAN FACILITY

Related Party Line of Credit (CMA Note Payable)

On April 29, 2011, the Company executed with CMA Investments, LLC, a Georgia limited liability company (“CMA”), a line of credit with a principal amount of up to $800,000 (the “CMA Note”). CMA is a limited liability company of which three of the directors of the Company (“CMA directors”) were initially the members. Pursuant to the terms of the CMA Note, the Company may draw up to a maximum principal amount of $800,000. Interest, is computed at LIBOR plus 5.25% (5.73% at March 31, 2016), on amounts drawn and fees. The weighted average interest rate in effect on the borrowings for the three months ended March 31, 2016 was 5.73%.

Other terms of the CMA Note include:

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

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

On November 2, 2012, the Board of Directors approved an increase in the CMA line of credit from $1,000,000 to $1,500,000. As compensation to the CMA Directors for increasing the amount available under the CMA Note, warrants to purchase an additional 2,100,000 shares of the Company’s stock at $0.35 per share were issued and recorded as deferred financing cost to be amortized through interest expense over the remaining term of the CMA Note. There was no amortization of the financing costs associated with the CMA Note for the three and nine months ended March 31, 2016 and March 31, 2015.

On April 29, 2013, the maturity date of the CMA Note was extended to April 29, 2014. As compensation to the CMA Directors for extending the maturity date of the CMA Note, the Board of Directors approved modifying the exercise price for the 6,300,000 compensatory stock purchase warrants previously issued to the Directors to $0.10 per share and the CMA Directors forfeited 630,000 of the warrants. Amortization of the financing costs associated with extending the CMA Note was amortized through interest expense.

On April 30, 2014 the maturity date of the CMA Note was extended to April 30, 2015. No consideration was awarded the CMA members based on this extension.

On April 29, 2015 the maturity date of the CMA Note was extended to April 29, 2016. No consideration was awarded the CMA members based on this extension.

On April 29, 2016, the maturity date for the CMA Note was verbally extended to April 29, 2017 as the paperwork was being assembled. No consideration was awarded to the CMA members based on this extension.

Shareholder Notes Payable

The following table summarizes the shareholder notes payable:

	March 31, 2016		December 31, 2015
Shareholder notes payable	$	700,068	$	700,068
Accrued interest		231,121		213,667
Total Shareholder Notes Payable	$	931,189	$	913,735

Such notes are (i) unsecured, (ii) bear interest at an annual rate of ten percent (10%) per annum, and (iii) are convertible into shares of common stock at a conversion rate ranging between $0.05 and $0.10 of principal and interest for each such share.

The current average conversion price for the above referenced Shareholder and Promissory Notes with an outstanding balance as of March 31, 2016 of $931,189 including accrued interest, is approximately $0.055 per share or 16,806,654 shares of the Company’s common stock. The face value of the Shareholder Notes at March 31, 2016 is $700,068.

NOTE 8

STOCKHOLDERS’ EQUITY

Common Stock and Warrants

As part of a September 2014 Private Placement Memorandum, updated in February 2015 and September 2015, the Company issued 1,400,000 shares of common stock to three (3) accredited investors during the quarter ended March 31, 2016. Total gross proceeds of the issuances were $70,000. No commissions were paid. The shares of common stock were offered and sold in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder.

During the quarter ended March 31, 2016, the Company had 1,783,335 common stock warrants exercised at $0.03 per share for $53,500.

Cumulative Convertible Preferred Stock

On May 2, 2013, the Company began a private placement offering to sell up to 200,000 shares of the Company’s 10% Series A Cumulative Convertible Preferred Stock. Under the terms of the offering, the Company offered to sell up to 200,000 shares of preferred stock at $10.00 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 six-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 holder may convert up to 5% of the shares to common shares per month. The preferred shares have full voting rights as if converted and have a fully participating liquidation preference.

At March 31, 2016, the 13,828 shares of outstanding preferred stock had accumulated undeclared dividends of approximately $39,373, and could be converted into 3,553,050 shares of common stock, at the option of the holder.

NOTE 9

SHARE-BASED COMPENSATION

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

In total, the Company recorded $79,613 and $200,655 of stock-based compensation expense for the three month period ended March 31, 2016 and 2015, respectively, related to employee and board member stock options and common stock and warrants issued to nonemployees. As of March 31, 2106, $311,424 of unrecognized compensation expense related to non-vested share-based awards remains to be recognized over a period of approximately four years.

Options and Warrants

The Company used the Black-Scholes option pricing model to estimate the grant-date fair value of option and warrant awards granted. The following assumptions were used for warrant awards during the three months ended March 31, 2016:

	●	Expected Dividend Yield – because we do not currently pay dividends, the expected dividend yield is zero;
	●	Expected Volatility in Stock Price – volatility based on our own 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.

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 March 31, 2016, there were 618,427 shares of common stock reserved for issuance under the Plan. In 2014, the Board adopted an additional stock option plan which provides for an additional 5,000,000 shares which are all available as of December 31, 2015. 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 three month period ended March 31, 2016. The following table summarizes all stock option activity of the Company for the period.

	Number of Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)
Outstanding, December 31, 2015		9,381,573	$	0.16		5.10
Granted		—
Exercised		—
Forfeited		—
Outstanding, March 31, 2016		9,381,573	$	0.16		4.85
Exercisable, March 31, 2016		6,858,271	$	0.21		6.37

Warrants

Warrants are issued to employees for expenses and for compensation in lieu of cash as well as to third parties as payment for services 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 weighted-average assumptions used in the option pricing model for stock warrant grants were as follows:

	2016
Expected Dividend Yield		0.00	%
Expected Volatility in Stock Price		118.49	%
Risk-Free Interest Rate		2.22	%
Expected Life of Stock Awards – Years		10.0

The following table represents the Company’s warrant activity for the three months ended March 31, 2016:

	Number of Shares			Weighted Average Grant Date Fair Value		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)
Outstanding, December 31, 2015		18,178,158				$	0.13		5.54
Granted		1,563,284		$	0.06	$	0.07		9.77
Exercised		(1,783,335	)			$	0.03
Forfeited		—
Expired		—
Outstanding, March 31, 2016		17,958,107				$	0.13		6.21
Exercisable, March 31, 2016		17,097,829				$	0.13		6.41

The Company issued 1,563,284 warrants for services during the three months ended March 31, 2016 at exercise prices from $0.06 to $0.08 per share, exercisable over a period of ten years from the grant date. All of the warrants with the exception of 745,664 vested immediately with the 745,664 warrants vesting one-twelfth per month over a one-year period. The fair value of the warrants was calculated as of the date of the grant utilizing the Black-Scholes option pricing model and assumptions as detailed above. The total amount of the fair value was $104,981 and is recorded as noncash share-based compensation expense as vesting occurs.

NOTE 10

SUBSEQUENT EVENTS

On April 7, 2016, the Company entered an agreement to sell a total of 10,000,000 common stock shares for $500,000 as part of the September 2014 Private Placement Memorandum, updated in June 2015. The Company has received $400,000 under the agreement and upon receipt of the investment balance; the Company will issue 10,000,000 common stock shares.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Vystar Corporation (“Vystar”, the “Company”, “we”, “us”, or “our”) is the creator and exclusive owner of the innovative technology to produce Vytex® Natural Rubber Latex (“NRL”). This technology reduces antigenic protein and non-rubbers in natural rubber latex to virtually undetectable levels. With non-latex products growing at a rapid rate, the costs for these alternative materials incurred by the manufacturers of these many different products have greatly decreased with nearly all substitute materials being more expensive than NRL. This fact has changed in the past year as NRL prices have decreased and continue to fluctuate in the low price zone with recent prices falling to a level below the original prices used to write the business plan for Vystar Corporation in 2004. Supply for nitrile and neoprene has grown dramatically in the past year as additional facilities have come on line mostly in Southeast Asia. We have introduced Vytex NRL, our “ultra-low protein” natural rubber latex, throughout the worldwide marketplace that uses NRL or latex substitutes as a component of manufactured products and we have recently approved an ultra-low ammonia version for limited exposure on the workers in the manufacturing world. Recent industry estimates have the total rubber market at 11 million dry metric tons of which just over 1.2 million tons are in liquid latex form. There are more than 40,000 products made from the liquid latex while the other eight million plus tons are used to produce tires and other hard rubber products. Natural rubber latex is used in an extensive range of products including balloons, textiles, footwear and clothing (threads), adhesives, foams, furniture, carpet, paints, coatings, protective equipment, sporting equipment, and specialty health care products such as condoms, surgical and exam gloves, catheters and other items.

We expanded our operations, particularly increasing market acceptance and sales of Vytex NRL through our operating agreement with CT Group (“CT”). The decision to convert to Vytex NRL is impacted by many functional areas including research and development, manufacturing, sales, marketing, purchasing and finance. Each of these areas has a significantly different decision-making role per company thus the large difference in the sales cycle. If the product is regulated and requires regulatory clearances or approvals prior to commercialization, the sales cycle could be extended by another nine to twelve months for testing, filing and agency review. Our focus on the consumer foam arena will greatly increase the global production and use of Vytex NRL and includes other licensees as well as the CT Group. The CT Group was recently purchased by Halcyon Agri, based out of Singapore and is now under due diligence with the Sinochem Group of Beijing, China.

As noted in a press release issued March 19, 2014 and two subsequent releases, Vystar announced a strategic directional shift that has taken it into the multi-billion dollar foam market using its patented Vytex NRL raw material. The raw material is then transformed by its Guatemalan partner, Islatex, and potentially other companies into foam that is whiter, lighter weight and free of the off-gassing common among competitors’ memory foam products. Because Vytex NRL results in a more translucent and cleaner latex following the removal of proteins and non-rubbers, manufacturers’ production costs are decreased by utilizing less chemicals, water, and processing to remove proteins, and less dyes and perfumes to cover up the yellow color and odor of non-Vytex natural rubber latex. In July 2015, we were notified by management at Islatex in Guatemala that they were ceasing operations during the quarter. Since that time, Vystar has focused its efforts on the foam core manufacturers in Asia and Europe with great success and added capacity for raw material and foam cores and pillows.

As noted in the opening paragraphs, Vystar’s alliances have been formed to include mattress and pillow producers in the United States, business development strategists, and selected retailers that have received containers of foam pillow and mattress cores for showroom analysis, market research and select early sales efforts. Through these broad alliances, Vystar is offering a broad array of mattress and pillow cores to meet consumer needs across the board.

Vystar has moved into a targeted role in the North American foam industry with specific large retail outlets identified for Vytex foam but key markets and online retailers are ready to start offering mattresses and pillows for their customers. This is the first time that Vystar is participating directly in end product sales.

Recent Developments

As previously noted, Vystar remains in discussions with parties in the alternate rubber arena to license its technologies for removal of proteins from alternate latex sources that have been shown to contain similar proteins. These discussions have intensified as this alternate industry has added companies that show strong potential to fill a possible void in future demand.

Recently, after two presentations to technical audiences and much publicity surrounding the foam line launch, Vystar has been approached by companies with novel ideas that include the use of its Vytex NRL raw material. Also, Vystar has also completed trials with European and Indian makers of foam products to use its Vytex NRL raw material in their current offerings in their own areas as well as to supply added needs for foam cores in both the mattress and topper arenas. Vystar has also completed a trial to procure pillows made with Vytex NRL for global and domestic use with another trial planned for SE Asia. The sample runs performed in both the European and SE Asian trials have led to manufacturing for mattress cores and pillows for domestic mattress manufacturers and possibly finished goods. Vystar entered into discussions in July 2015 with a large international maker of natural rubber latex foam cores, who has an American subsidiary and distribution center to supply foam of varying thicknesses and firmness to handle global and domestic business for retail outlets and its online offerings. Vytex NRL passed the first trial phase at the American facility and is currently in the process of doing a full manufacturing run which will determine the starting level of domestic production

Board of Directors Member and Research & Development Director Ranjit K. Matthan, Ph.D., revealed ongoing developments in the formulation of Vytex NRL with reduced or no ammonia and nitrosamines at the International Latex Conference (ILC) session titled “Advances in Environmentally Friendly Ultra Low Protein Natural Rubber Specialty Latices” on August 12, 2015. The significant advances in aluminum hydroxide-treated Vytex NRL properties and applications are potential game-changers for the issues of volatile organic content and nitrosamines for some critical latex products, such as balloons,catheters, condoms, and other medical devices, as well as enabling cleaner and more sustainable work environments. The expanded Vystar product grades make it applicable in a wider range of latex products with the advantage of improved environmental impact through reduced leachables/extractables. The advances deliver a simplified, sustainable, totally safe raw material that Vystar can offer for several applications without reservations about nitrosamines. Production scale up of all three newer versions of Vytex NRL is currently being targeted as well as sample fulfillment.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended March 31, 2016 with the Three Months Ended March 31, 2015

	Three Months Ended March 31,				Consolidated
	2016		2015		$ change			% change
	Consolidated		Consolidated
Revenue, net	$	54,324	$	99,892	$	(45,568	)		(45.6	%)
Cost of revenue		29,259		64,442		(35,183	)		(54.6	%)
Gross margin	$	25,065	$	35,450	$	(10,385	)		(29.3	%)

Revenues

Revenues for the three months ended March 31, 2016 and 2015 from the consolidated Company were $54,324 and $99,892, respectively, for a decrease of $45,568 or 45.6%. The decrease in revenues from operations was due to a decrease in fees from Kiron. The decrease in fee revenue and cost of revenue from Kiron was due to a number of factors, principal of which was the elimination of the unprofitable DME business. For the consolidated Company, gross margin decreased from $35,450 for the period ended March 31, 2015 to $25,065 for the period ended March 31, 2016 for a decrease of $10,385 or 29.3%.

Operating Expenses

	Three Months Ended March 31,				Consolidated
	2016		2015		$ change			% change
Operating Expenses
General and administrative		306,625		421,945		(115,320	)		(27.3	%)
Total operating expenses	$	306,625	$	421,945	$	(115,320	)		(27.3	%)

The Company’s consolidated operating expenses consist of general and administrative expenses. General and administrative expenses consist primarily of compensation and support costs for management and administrative staff, and for other general and administrative costs, including professional fees related to accounting, finance, and legal services as well as other operating expenses. Operating expenses were $306,625 and $421,945 for the three months ended March 31, 2016 and 2015, respectively, for a decrease of $115,320 or 27.3%. The decrease was due primarily to the elimination of the Company’s former acting Chief Financial Officer as well as a reduction in third-party contract services.

Other Income (Expense)

Other income (expense) for the three months ended March 31, 2016 consisted of interest expense of $41,370 and interest income of $1. This compares to interest expense of $30,798 and interest income of $36 for the three months ended March 31, 2015. The increase in interest expense for the quarter ended March 31, 2016 versus the same quarter in 2015 was attributable to an increase in the LIBOR index rate on the CMA Loan as well as additional Shareholder Notes.

Net Loss

Net loss was $322,929 and $417,257 for the three months ended March 31, 2016 and 2015, respectively, a decrease of $94,328 or 22.6% in the net loss. The smaller net loss the Company experienced in the quarter ended March 31, 2016 versus the same period in 2015 was primarily attributable to the elimination of the Company’s former acting Chief Financial Officer as well as a reduction in third-party contract services.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s expenditures will depend on numerous factors, including: the rate at which the Company can introduce and license Vytex NRL to manufacturers; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; market acceptance of the Company’s products and services; and competing technological developments. As the Company expands its activities and operations, cash requirements are expected to increase at a rate consistent with revenue growth after the Company have achieved sustained revenue generation.

Sources and Uses of Cash

For the three months ended March 31, 2016 and 2015, net cash used in operations was $146,705 and $204,346 respectively. The negative cash flow for the three months ended March 31, 2016 resulted primarily from the net loss of $322,929 and a decrease in allowance for uncollectible accounts receivable of $42,868 offset by non-cash charges related to non-cash share-based compensation expense of $79,613, prepaid expenses of $94,654, and accounts payable of $10,115. The negative cash flow for the three months ended March 31, 2015 resulted primarily from the net loss of $417,257, and an increase in prepaid expenses of $54,845 offset by non-cash charges related to non-cash share-based compensation expense of $200,655, allowance for uncollectible accounts receivable of $30,439, and accrued compensation and expenses of $22,450.

For the three months ended March 31, 2016 and 2015, the company had no investing activity.

Net cash provided by financing activities for the three months ended March 31, 2016 was $70,000 in proceeds from the sale of common stock and $53,500 from the exercise of warrants. Net cash provided by financing activities for the three months ended March 31, 2015 was $285,000 from the sale of common stock.

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

(A)	Evaluation of disclosure controls and procedures

Our management, including our principal executive and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2016. Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in this quarterly report on Form 10-Q has been appropriately recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and principal financial officer, to allow timely decisions regarding required disclosure. Based on that evaluation, our principal executive officer and principal financial officer has concluded that our disclosure controls and procedures are effective to the reasonable assurance level.

(B)	Changes in internal control over financial reporting

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.

There were no changes in our internal control over financial reporting that occurred during the first three months of 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

On April 15, 2016, Kiron Clinical Sleep Lab, LLC was notified by a Certified Letter from The North Carolina Secretary of State that Henry Clifford Baggett, Dr H. C. Baggett, P.A. of Raleigh, NC had filed a Complaint for Money Owed in the General Court of Justice District Court Division - Small Claims for $9,810.00 for services rendered under his contract for the months ended November 2015 and December 2015. The Company has made full payment for these services.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Set forth below is information regarding shares of common stock, warrants and options to purchase common stock issued by the Company in the Quarter Ended March 31, 2016, that were not registered under the Securities Act of 1933, as amended (the “Securities Act”). Also included is the consideration, if any, received by the Company for such shares, warrants and options and information relating to the section of the Securities Act, or rule of the Securities and Exchange Commission, under which exemption from registration was claimed.

(a)

Common Stock Financings

From December 31, 2015 through March 31, 2016, the Company issued 1,400,000 shares of common stock at $0.05 per share for $70,000.

(b)

Stock Option Grants

From December 31, 2015 through March 31, 2016, the Company did not grant any stock options.

(c)

Application of Securities Laws and Other Matters

No underwriters were involved in the foregoing sales of securities. The securities described in section (a) of this Item 2 were issued to investors in reliance upon the exemption from the registration requirements of the Securities Act, as set forth in Section 4(2) under the Securities Act and Regulation D promulgated thereunder, as applicable, relative to sales by an issuer not involving any public offering, to the extent an exemption from such registration was required.

All of the foregoing securities are deemed restricted securities for purposes of the Securities Act. All certificates representing the issued shares of common stock, warrants and options described in this Item 2 included appropriate legends setting forth that the securities had not been registered and the applicable restrictions on transfer.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

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

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	VYSTAR CORPORATION

Date: May 12, 2016	By:	/s/ William R. Doyle
		William R. Doyle
		President, Chief Executive Officer, Chief Financial Officer and Director

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Vystar (VYST) 10-Q2016 Q1 Quarterly report

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