NOTES
TO FINANCIAL STATEMENTS
December
31, 2017 and 2016
NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
History
and Nature 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”). In addition,
on June 28, 2013, Vystar Corporation (the “Company”) completed the acquisition of Kiron Clinical Sleep Lab, LLC (“Kiron”)
a vertically integrated sleep diagnostic practice located in Durham, NC. We effectively closed Kiron in April 2016 due to changes
in the healthcare insurance marketplace. Because of the closure of Kiron, Vystar Corporation has returned its focus to expanding
the licensing and utilization of its proprietary source natural rubber latex technology. Vytex NRL uses a global multi-patented
technology and proprietary formulation to reduce non-rubber particles including the antigenic proteins associated with latex allergies,
resulting in a cleaner form of latex. In fact, the antigenic protein levels are reduced to virtually undetectable levels. 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. On March 4,
2015, the Company announced that Hartford, CT based Gold Bond formed a strategic alliance with NHS to produce and market the world’s
first Vytex NRL based mattress. In June 2015, the first mattresses made with Vytex (hybrid and pure Vytex) were placed on the
sales floor at Rotman’s Furniture and Carpet Store in Worcester, MA using the “Evaya” brand and Gold Bond had
shipped four versions of their “Brilliance” inner coil and pure foam mattresses (Emerald, Ruby, Sapphire Plush and
Sapphire Firm) to over 30 stores from Maine to Florida.
Basis
of Presentation
The
financial statements are presented in accordance with accounting principles generally accepted in the United States of America
(“GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards
Codification.
The
Company has evaluated subsequent events through the date of the filing of its Form 10-K with the Securities and Exchange Commission.
Other than those events disclosed in Note 15, 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.
Reclassification
Certain
items in the prior year’s financial statements have been reclassified in order to conform with the current year presentation.
Specifically note such reclassifications for discontinued operations.
Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect
the amounts reported in the 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
and other equity issuances.
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 we monitor 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, 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.
Accounts
Receivable
Accounts
receivable are stated at the amount management expects to collect from outstanding balances. 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 December 31, 2017 and 2016, we have
determined there were no amounts deemed uncollectible. We grant credit to our customers without requiring collateral. The amount
of accounting loss for which we are at risk in these unsecured accounts receivable is limited to their carrying value.
Vytex
customers are located in both the United States and internationally.
Property
and Equipment
Property
and equipment is stated at cost. Depreciation is provided by the use of the straight-line and accelerated methods for financial
and tax reporting purposes, respectively, over the estimated useful lives of the assets, generally 5 years. As of December 31,
2017 and 2016, all of our property and equipment was fully depreciated resulting in no net balance being reflected.
Intangible
Assets
Patents
represent legal and other fees associated with the registration of patents. The Company has four issued patents with the United
States Patent and Trade Office (USPTO) as well as four issued international PCT (Patent Cooperation Treaty) patents. Patents are
carried at cost and are being amortized on a straight-line basis over their estimated useful lives, typically 20 years.
The
Company has trademark protection for “Vystar”, “Vytex”, and “Created by Nature. Recreated by Science.”
Trademarks are carried at cost and since their estimated life is indeterminable, no amortization is recognized. Instead, they
are evaluated annually for impairment.
Impairment
of Long-lived Assets
Long-lived
assets, including property and equipment and intangible assets with finite lives, are evaluated for impairment whenever events
or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the sum of the expected
future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recognized in the amount that
the carrying amount of the asset exceeds its fair value. Fair value is determined based on discounted future net cash flows associated
with the use of the asset.
Fair
Value of Financial Instruments
The
Company’s financial instruments consist of cash, accounts receivable, accounts payable, accrued expenses, lines of credit,
shareholder notes payable, and long-term debt. 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 December 31, 2017 and 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.
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 are 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. A
valuation allowance for the full amount of the net deferred tax asset was recorded for the years ended December 31, 2017 and 2016.
Should they occur, interest and penalties related to tax positions are recorded as interest expense. No such interest or penalties
have been incurred as of December 31, 2017 and 2016. The Company is no longer subject to federal examination for years prior to
2013.
On
December 22, 2017 the Tax Cuts and Jobs Act was signed into law, impacting corporations by reducing the maximum tax rate from
35% to 21% as well as various other provisions relating to the deductibility of certain items. The Act is not expected to have
an immediate impact on the Company due to the large net operating loss carryforward as well as the full valuation allowance.
Loss
Per Share
The
Company presents basic and diluted loss per share. Because the Company reported a net loss in 2017 and 2016, common stock equivalents,
including stock options and warrants, were anti-dilutive; therefore, the amounts reported for basic and dilutive loss per share
were the same. Excluded from the computation of diluted loss per share were options to purchase 7,748,271 and 9,418,271 shares
of common stock for 2017 and 2016, respectively, as their effect would be anti-dilutive. Warrants to purchase 14,699,582 and 16,122,332
shares of common stock for 2017 and 2016, respectively, were also excluded from the computation of diluted loss per share as their
effect would be anti-dilutive. In addition, preferred stock convertible to 4,037,977 and 3,761,417 shares of common stock for
2017 and 2016, respectively, were excluded from the computation of diluted loss per share as their effect would be anti-dilutive.
Revenue
Revenue
is derived from sales of or license fees of Vytex NRL raw material to manufacturers and distributors of rubber and rubber end
products. Under both the direct and licensing agreement sales revenue is recognized at the time product is shipped and title passes
to the customer. Revenue is recognized when the following four criteria are met: (1) persuasive evidence of an arrangement exists;
(2) shipment or delivery has occurred; (3) the price is fixed or determinable and (4) collectability is reasonably assured.
Cost
of Revenue
Cost
of revenue consists primarily of product and freight costs.
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 of the Company’s process to produce Vytex NRL.
Recent
Accounting Pronouncements
In
May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers,
a new standard on revenue recognition. The new standard will supersede existing revenue recognition guidance and apply to all
entities that enter into contracts to provide goods or services to customers. The guidance also addresses the measurement and
recognition of gains and losses on the sale of certain non-financial assets, such as real estate, property and equipment. In August
2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which defers the
effective date of the guidance in ASU 2014-09 by one year. This update is now effective for annual and interim period beginning
after December 15, 2017, which will require us to adopt these provisions in the first quarter of fiscal year 2018. Early application
is permitted for annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting
period. This update permits the use of either the retrospective or cumulative effect transition method. The Company has assessed
the impact that this guidance will have on its financial statements and determined it will not have a material effect.
In
February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 requires lessees to recognize the assets and liabilities on their
balance sheet for the rights and obligations created by most leases and continue to recognize expenses on their income statements
over the lease term. It will also require disclosures designed to give financial statement users information on the amount, timing,
and uncertainty of cash flows arising from leases. The guidance is effective for annual reporting periods beginning after December
15, 2018, and interim periods within those years. Early adoption is permitted. The Company is currently assessing the impact that
this guidance will have on its financial statements.
In
August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Receipts and Cash
Payments. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice
in how certain receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently assessing
the impact that this guidance will have on its financial statements.
NOTE
2 – LIQUIDITY AND GOING CONCERN
The Company's financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. However, we have incurred significant losses and experienced negative cash flow since inception. At December 31, 2017, the Company had cash of $13,502 and a deficit in working capital of $2,774,565. For the year ended December 31, 2017, the Company had a net loss of $1,184,474 and an accumulated deficit of $27,999,123. For the year ended December 31, 2016, the Company had a net loss of $1,221,298 and the accumulated deficit amounted to $26,814,649. We use working capital to finance our ongoing operations and since those operations do not currently cover all of our operating costs and managing working capital is essential to our Company's future success.
Net
cash used in operating activities was $498,963 for the year ended December 31, 2017 as compared to $907,441 for the year ended
December 31, 2016. During the year ended December 31, 2017, cash used in operations was primarily due to the net loss for the
year of $1,153,730 net of non-cash related add-back of share-based compensation expense of $710,348.
The
Company had no net cash provided by investing activities during the year ended December 31, 2017. Net cash provided by investing
activities for the year ended December 31, 2016 was $2,701 was a result of selling some equipment.
Net
cash provided by financing activities was $476,183 during the year ended December 31, 2017, as compared to cash provided of $911,963
during the year ended December 31, 2016. During 2017 cash was provided from the issuance of common stock in the amount of $384,500
and $91,683 in proceeds from Shareholder Notes. In 2016, the cash provided by financing activities was provided from the issuance
of common stock in the amount of $723,456, $53,500 from the exercise of common stock warrants and $135,000 in proceeds from Shareholder
Notes.
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, stock warrant exercises
from existing shareholders, and raising capital through private placement memoranda (see Note 13, Subsequent Events).
As
a result of this history of losses and financial condition, there is substantial doubt about the Company’s ability to continue
as a going concern.
There
can be no assurances that the Company will be able to achieve projected levels of revenue in 2018 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 2018, 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 for bankruptcy or cease operations. The financial statements do not
include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities
that might be necessary should the Company be forced to take any such actions.
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; and market acceptance of the Company’s products and services and competing technological developments.
As the Company expands our activities and operations, cash requirements are expected to increase at a rate consistent with revenue
growth after the Company has achieved sustained revenue generation.
NOTE
3 – INTANGIBLE ASSETS
Intangible
assets were as follows at December 31:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
238,551
|
|
|
$
|
238,551
|
|
Trademarks & trade name
|
|
|
9,072
|
|
|
|
9,072
|
|
Subtotal
|
|
|
247,623
|
|
|
|
247,623
|
|
Accumulated amortization
|
|
|
(123,741
|
)
|
|
|
(108,061
|
)
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
123,882
|
|
|
$
|
139,562
|
|
Amortization
expense for the years ended December 31, 2017 and 2016 was $15,680 and $15,861, respectively.
Estimated
future amortization expense for finite-lived intangible assets is as follows:
|
|
2017
|
|
|
2018
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
Thereafter
|
|
Patents & trade name
|
|
$
|
15,680
|
|
|
$
|
15,680
|
|
|
$
|
15,680
|
|
|
$
|
15,680
|
|
|
$
|
15,680
|
|
|
$
|
45,482
|
|
NOTE
4 – 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 of which three of the directors
of the Company (“CMA directors”) are the members (“CMA”), an unsecured line of credit bearing interest
at LIBOR plus 5.25% per annum on amounts drawn and fees. The weighted average interest rate in effect on the borrowings for the
years ended December 31, 2017 and 2016 was 6.37% and 5.75%, respectively.
During
the tenure of the CMA Note Payable, the Company has increased the amount of the Note and in exchange provided benefits to the
CMA directors as follows:
Date
|
Amount
(increase)
|
Benefit
to CMA
|
Impact
to Company
|
Inception
|
$800,000
|
Warrants
to purchase 2,600,000 shares @ $0.45, vesting 20% immediately and 10% per $100,000 drawn
|
Warrant
costs amortized over the term of the CMA Note
|
Sept
4, 2011
|
$200,000
|
Modified
warrant price on 2,600,000 shares from $0.45 to $0.27, and issued additional 1,600,000 shares @ $0.27
|
Warrant
costs amortized over the remaining term of the CMA Note
|
Nov
2, 2012
|
$500,000
|
Warrants
to purchase 2,100,000 shares @ $0.35
|
Warrant
costs amortized over the remaining term of the CMA Note
|
Apr
29, 2013
|
$0
(maturity date extended 1 year)
|
Modified
warrant price on 6,300,000 shares from $0.10, and agreed to forfeit 630,000 of the warrants
|
Warrant
costs amortized over the remaining term of the CMA Note
|
Apr
29, 2014
|
$0
(maturity date extended 1 year)
|
None
|
None
|
Apr
29, 2015
|
$0
(maturity date extended 1 year)
|
None
|
None
|
The
note is currently due on demand.
Shareholder
Notes Payable
Shareholder
notes payable outstanding as of December 31, 2017 and 2016 totaled $881,673 and $835,068, respectively.
On
March 11, 2011, the Company issued to existing shareholders of the Company an aggregate of $175,000 of convertible promissory
notes together with warrants to purchase an aggregate of 160,000 shares of the Company’s common stock at $0.68 per share
for two years from the date of issuance. 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. The outstanding notes are currently due on demand and Vystar
is currently working with the subscription holders of the matured notes to extend the maturity date beyond 2018. One subscription
holder demanded payment for their matured note. The subscription holder and Vystar agreed to three installment payments of $52,785,
the first of which was made in the fourth quarter of 2016; one installment was converted to Vystar common stock shares; and another
holder of Vystar Shareholder Notes has agreed to purchase the third installment.
In
May of 2013, the Company issued to existing shareholders of the Company an aggregate of $420,837 of convertible promissory notes
together with warrants to purchase an aggregate of 50,000 shares of the Company’s common stock at $0.49 per share for two
years from the date of issuance. 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. The outstanding notes are currently due on demand and Vystar is currently
working with the subscription holders of the matured notes to extend the maturity date beyond 2018.
A
summary of terms for the convertible promissory notes discussed above and additional convertible promissory notes issued to shareholders
that are unsecured, bear interest at an annual rate, and have conversion privileges as follows:
Date
|
Amount
|
Interest
Rate
|
Conversion
Rate
|
Maturity
|
March
11, 2011
|
$75,000
|
10%
|
$0.10
of principal and interest for each share
|
Demand
|
March
11, 2011
|
$54,922
|
10%
|
$0.05
of principal and interest for each share
|
Demand
|
May
6, 2013
|
$390,830
|
10%
|
$0.05
of principal and interest for each share
|
Demand
|
May
31, 2013
|
$30,007
|
10%
|
$0.10
of principal and interest for each share
|
Demand
|
Sept
6, 2013
|
$40,769
|
10%
|
$0.075
of principal and interest for each share
|
Sept
6, 2018
|
Dec
30, 2013
|
$25,962
|
10%
|
$0.05
of principal and interest for each share
|
Dec
30, 2018
|
Dec
31, 2015
|
$37,500
|
10%
|
$0.08
of principal and interest for each share
|
Dec
30, 2018
|
Dec
31, 2016
|
$135,000
|
5%
|
$0.05
of principal and interest for each share
|
Dec
30, 2021
|
Oct
10, 2017
|
$20,000
|
5%
|
$0.05
of principal and interest for each share
|
Demand
|
Oct
10, 2017
|
$25,000
|
5%
|
$0.05
of principal and interest for each share
|
Dec
30, 2019
|
Nov
17, 2017
|
$6,683
|
5%
|
$0.05
of principal and interest for each share
|
Dec
30, 2019
|
Dec
13, 2017
|
$30,000
|
5%
|
Convertible
by the Company upon closing of NHS merger at prior 20-day average closing price, discounted 50%
|
Dec
13, 2019
|
Dec
18, 2017
|
$10,000
|
5%
|
Convertible
by the Company upon closing of NHS merger at prior 20-day average closing price, discounted 50%
|
Dec
13, 2019
|
The
maturities (by year) of the principal amount of Shareholder Notes Payable as of December 31, 2017 are as follows:
|
|
|
Amount
|
|
Matured
|
|
|
$
|
570,759
|
|
2018
|
|
|
|
104,231
|
|
2019
|
|
|
|
71,683
|
|
2020
|
|
|
|
—
|
|
2021
|
|
|
|
135,000
|
|
2022 & thereafter
|
|
|
|
—
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
881,673
|
|
The
current base weighted-average conversion price for the above referenced Shareholder and Promissory Notes with an outstanding balance
as of December 31, 2017 of $1,176,668 including accrued interest of $294,995, is $0.053 per share or 22,208,271 shares of the
Company’s common stock. The face value of the Shareholder Notes at December 31, 2017 is $881,673.
NOTE
5 – COMMITMENTS
Employment
Agreements
There
are currently no employment agreements in place; however employment compensation and potential agreements are under discussion
for 2018.
NOTE
6 – DISCONTINUED OPERATIONS
Kiron
Clinical Sleep Lab’s post acquisition performance fell far below Vystar’s expectations. As part of the Company’s
strategy to focus on realizing the potential of the Vytex foam business in the pillow and mattress markets as well as part of
the Company’s cost reduction plan, the Company made the decision to discontinue the operations of the Kiron division acquired
in June 2013 and the division was closed May of 2016
There
was no revenue from the Kiron division for the year ended December 31, 2017.The Kiron division revenue was $82,353 for the year
ended December 31, 2016. Net gains from discontinued operations were $42,056 and $37,979 for the fiscal years ended December 31,
2017 and 2016, respectively. Net gains were recorded directly related to the write-off of payables determined to be no longer
due.
NOTE
7 – STOCKHOLDERS’ EQUITY
Preferred
Stock
At
December 31, 2017 and 2016, the 13,828 shares of outstanding preferred stock had accumulated undeclared dividends of approximately
$63,600 and $49,800 and could be converted into 4,037,977 and 3,761,417 shares of common stock, respectively, at the option of
the holder.
Common
Stock and Warrants
As
part of a September 2014 Private Placement Memorandum, updated in February 2015 and September 2015, the Company issued 12,480,000
shares of common stock to six (6) accredited investors during the fiscal year ended December 31, 2016. Total gross proceeds of
the issuances were $624,000. 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.
As
part of a November 2016 Private Placement Memorandum, the Company issued 1,700,000 shares of common stock to four (4) accredited
investors during the fiscal year ended December 31, 2016. Total gross proceeds of the issuances were $85,000. 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 year ended December 31, 2016, the Company had 1,783,335 common stock warrants exercised at $0.03 per share for $53,500 and
issued 1,296,885 common shares for cashless warrants that were exercised.
On
June 30, 2016, the Company issued 997,466 common shares as compensation under the Company’s Business Development Agreement
with Blue Oar Consulting, Inc. executed in March 2013 as amended in August 2013 and amended February 2014 and 250,000 common shares
as compensation under the Company’s Business Development Agreement with Byron Novosad executed in February 26, 2014.
During the year ended December 31, 2017, the Company had 1,950,000 cashless common stock warrants exercised at $0.05 per share and issued 1,332,109 common shares.
During the year ended December 31, 2017, the Company had 1,750,000 cashless common stock options exercised at $0.05 per share and issued 481,884 common shares.
As
part of the November 2016 Private Placement Memorandum, the Company issued 7,690,000 shares of common stock to sixteen (16) accredited
investors during the period from January 1, 2017 to September 30, 2017. Total gross proceeds of the issuances were $384,500. 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.
On
March 15, 2017, the Company issued 1,150,000 common shares as compensation under Business Development Agreements.
On
April 25, 2017, the Company issued 1,109,406 common shares as a result of a partial conversion of a Shareholder Note and accrued
interest.
On
May 22, 2017, the Company signed a sales and marketing agreement issuing restricted common shares quarterly as goals are achieved
and issued 363,985 shares on September 28, 2017 and 368,218 on October 10, 2017.
On
July 1, 2017, the Company issued 3,125,000 shares under the Company’s Public Relations Services Agreement through December
2018.
On
September 29, 2017, the Company issued 500,000 shares of common stock as part of the existing PPM to its CEO in lieu of salary
earned in August and September 2017.
On
September 27, 2017, the Company issued an additional 200,000 common shares as compensation under a Business Development Agreement.
On
July 30, 2017, the Company issued 200,000 common shares as compensation under a Business Development Agreement.
On
July 25, 2017, the Company issued 1,087,023 shares as part of a prior contract for business development.
On
November 1, 2017, the Company issued 250,000 shares of common stock as part of the existing PPM to its CEO in lieu of salary earned
in October 2017.
NOTE
8 – SHARE-BASED COMPENSATION
Generally
accepted accounting principles require share-based payments to employees, including grants of employee stock options, to be recognized
in the income statement based on their fair values at the date of grant, net of estimated forfeitures.
The
Company used the Black-Scholes option pricing model to estimate the grant-date fair value of awards granted during 2017 and 2016.
The following assumptions were used:
|
●
|
Expected
Dividend Yield – because the Company does not currently pay dividends, the expected dividend yield is zero;
|
|
●
|
Expected
Volatility in Stock Price – Expected volatility calculations were based on the Company’s trading activity which
ranged between and 149.6% and 152.9% during 2017;
|
|
●
|
Risk-free
Interest Rate – reflects the average rate on a United States Treasury bond with maturity equal to the expected term
of the option or warrant, ranging from 1.81% and 2.45% during 2017; and
|
|
●
|
Expected
Life of Awards – because the Company has minimal experience with the exercise of options or warrants for use in determining
the expected life for each award, the simplified method was used to calculate an expected life based on the end of the contractual
term of the stock award.
|
In
total, the Company recorded $60,795 and $55,143 for the years ended December 31, 2017 and 2016, respectively, of share-based compensation
expense related to employee and Board members’ stock options. The unrecognized compensation expense as of December 31, 2017
was $151,730 for non-vested share-based awards to be recognized over a period of approximately five years.
Stock
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 December 31,
2017, there were 2,251,729 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, 2017. 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.
The
weighted-average assumptions used in the option pricing model for stock option grants were as follows:
|
|
2017
|
|
|
2016
|
|
Expected Dividend Yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected Volatility in Stock Price
|
|
|
149.81
|
%
|
|
|
145.82
|
%
|
Risk-Free Interest Rate
|
|
|
2.35
|
%
|
|
|
1.87
|
%
|
Expected Life of Stock Awards – Years
|
|
|
10.0
|
|
|
|
10.0
|
|
Weighted Average Fair Value at Grant Date
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
The
following tables summarize all stock option activity of the Company for the years ended December 31, 2017 and 2016:
|
|
|
Number of Shares
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2015
|
|
|
|
9,381,573
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
500,000
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
(400,000
|
)
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
(63,302
|
)
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2016
|
|
|
|
9,418,271
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2016
|
|
|
|
6,783,271
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
1,500,000
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
(1,750,000
|
)
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
(1,420,000
|
)
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
|
|
7,748,271
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2017
|
|
|
|
5,158,271
|
|
|
$
|
0.25
|
|
Additional
details, including the average remaining contractual life of the options, as well as the range of exercise prices are shown in
the table below:
|
|
|
Number of
Shares
|
|
|
Weighted Average
Remaining
Contractual Life
(Years)
|
|
|
Range of
Exercise Prices
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2015
|
|
|
|
9,381,573
|
|
|
|
6.29
|
|
|
|
$
0.05 - $0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
500,000
|
|
|
|
9.10
|
|
|
|
$0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
(400,000
|
)
|
|
|
|
|
|
|
$0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired/Forfeited
|
|
|
|
(63,302
|
)
|
|
|
|
|
|
|
$0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2016
|
|
|
|
9,418,271
|
|
|
|
4.43
|
|
|
|
$
0.05 - $0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2016
|
|
|
|
6,783,271
|
|
|
|
5.99
|
|
|
|
$
0.10 - $0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
1,500,000
|
|
|
|
9.96
|
|
|
|
$0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
(1,750,000
|
)
|
|
|
|
|
|
|
$0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired/Forfeited
|
|
|
|
(1,420,000
|
)
|
|
|
|
|
|
|
$
0.03 - $0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
|
|
7,748,271
|
|
|
|
5.80
|
|
|
|
$
0.03 - $0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2017
|
|
|
|
5,158,271
|
|
|
|
9.42
|
|
|
|
$
0.03 - $0.68
|
|
The
Company added a director on May 18, 2016. The director was granted 500,000 options with a ten-year term and an exercise price
of $0.05 respectively, the closing price of the Company’s common stock on the OTCBB on the grant date. The options vest
25,000 shares quarterly beginning on June 30, 2016 for a period of five years ending March 31, 2021.
The
Company added three directors on December 17, 2017. Each director was granted 500,000 options with a ten-year term and an exercise
price of $0.05 respectively, the closing price of the Company’s common stock on the OTCBB on the grant date. The options
vest 25,000 shares quarterly beginning on December 31, 2017 for a period of five years ending December 31, 2022.
As
of December 31, 2017, the aggregate intrinsic value of the Company’s outstanding options was $4,000. 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
weighted-average assumptions used in the option pricing model for stock warrant grants were as follows:
|
|
2017
|
|
|
2016
|
|
Expected Dividend Yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected Volatility in Stock Price
|
|
|
152.54
|
%
|
|
|
121.20
|
%
|
Risk-Free Interest Rate
|
|
|
2.01
|
%
|
|
|
2.18
|
%
|
Expected Life of Stock Awards – Years
|
|
|
7.0
|
|
|
|
10.0
|
|
The
following table represents the Company’s warrant activity for the years ended December 31, 2017 and 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
|
|
|
1,713,244
|
|
|
$
|
0.07
|
|
|
$
|
0.07
|
|
|
|
9.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(3,163,336
|
)
|
|
|
|
|
|
$
|
0.05
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(605,734
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2016
|
|
|
16,122,332
|
|
|
|
|
|
|
$
|
0.13
|
|
|
|
5.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,240,250
|
|
|
$
|
0.13
|
|
|
$
|
0.14
|
|
|
|
6.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,950,000
|
)
|
|
|
|
|
|
$
|
0.08
|
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(713,000
|
)
|
|
|
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
|
14,699,582
|
|
|
|
|
|
|
$
|
0.10
|
|
|
|
5.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2017
|
|
|
14,699,582
|
|
|
|
|
|
|
$
|
0.10
|
|
|
|
5.41
|
|
The
stock compensation expense for 2017 and 2016 related to warrants was $159,553 and $115,054, respectively.
NOTE
9 – RELATED PARTY TRANSACTIONS
Officers
and Directors
During
April 2009, the Company’s Board of Directors authorized the inclusion of the Board members in the Company’s stock
option plan in lieu of continuing the previous practice of granting warrants each quarter to independent Board members. Each Board
member was granted options to purchase 400,000 shares of the Company’s common stock, valued at approximately $84,346 each
with an exercise price of $0.68 per share. Vesting occurred at the end of each complete calendar quarter served
as an independent Board member of the Company at a rate of 20,000 shares each per quarter. The options are exercisable in whole
or in part before September 30, 2019.
Beginning
in July 2014, each Board member was granted options to purchase 500,000 shares of the Company’s common stock. The value
of each grant ranged from approximately $14,714 to $53,513 depending on the date of the grant and the exercise price of the option.
Exercise prices ranged between $0.03 and $0.11 per share and were equal to the closing price of Company’s common stock on
the date of the grant. Vesting occurs at the end of each complete calendar quarter served as an independent Board member of the
Company at a rate of 25,000 shares each per quarter. The options are exercisable in whole or in part before December 15, 2027.
One
board member’s unvested options were forfeited when he resigned from the Board in 2017.
NOTE
10 – DEFINED CONTRIBUTION PLAN
The
Company’s tax-qualified retirement plan {401(k)} was terminated in 2016.
NOTE
11 – 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
207, Vytex revenue came from three major customers Natures Home Solutions, RCMA, and Centrotrade, which collectively comprised
100% total Vytex revenue. No amounts were owed to major vendors at December 31, 2017 and December 31, 2016.
NOTE
12 – RISKS AND UNCERTAINTIES
The
Company is exposed to commodity price risk, mainly associated with variations in the market price for NRL as well as wintering
of the Hevea trees, which differs for each country. The timing and magnitude of industry cycles are difficult to predict and are
impacted by general economic conditions including the buying climate in China. The Company responds to changes in NRL prices by
adjusting sales prices on a weekly basis and by turning rather than holding inventory in anticipation of higher prices. The Company
actively manages its exposure to commodity price risk and monitors the actual and expected spread between forward selling prices
and purchase costs and processing and shipping expense. The Company also currently spreads the processing of Vytex NRL among three
continents. Sales contracts are based on forward market prices, and generally orders are placed 30 to 90 days ahead of shipment
date due to these fluctuations. However, financial results may be negatively impacted where selling prices fall more quickly than
purchase price adjustments can be made or when levels of inventory have an anticipated net realizable value that is below cost.
NOTE
13 – SUBSEQUENT EVENTS
From
January 1, 2018 and through the date of these financial statements, the Company has issued certain convertible promissory notes
in varying amounts. The face amount of the notes represents the amount due at maturity along with the accrued interest, at which
time that amount will be converted into shares of the Company stock based on the lowest 2 day closing price for the trailing 20
days prior to conversion and carrying a 35% discount. These notes are included in the table below:
Issue Date
|
|
Face Amount
|
|
|
Interest Rate
|
|
|
Maturity
|
|
|
Net Cash Proceeds
|
|
Jan 29, 2018
|
|
$
|
80,000
|
|
|
|
12
|
%
|
|
|
Jan
29, 2019*
|
|
|
$
|
72,300
|
|
Feb 14, 2018
|
|
$
|
80,000
|
|
|
|
12
|
%
|
|
|
Nov
14, 2018*
|
|
|
$
|
72,500
|
|
Feb 13, 2018
|
|
$
|
76,500
|
|
|
|
5
|
%
|
|
|
Nov
13, 2018*
|
|
|
$
|
72,500
|
|
Feb 14, 2018
|
|
$
|
85,000
|
|
|
|
12
|
%
|
|
|
Feb
14, 2019*
|
|
|
$
|
82,000
|
|
*Note
that these notes can be converted after 6 months from the issue date
From
January 1, 2018 to February 9, 2018, the Company issued Convertible Promissory Notes (the “Notes”) contract work,
investment and in lieu of salary and expense reimbursement in the amount of $195,635. 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 by the Company upon the closing
of the previously announced intention to purchase all of the assets of NHS. 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.
On
February 5, 2018, the Company issued 1,500,000 shares under the terms of a Consulting Agreement dated January 26, 2018.
On
January 7, 2018, the Company signed a Letter of Intent to acquire the assets of NHS, the exclusive U.S. distributor of Vytex®
virtually allergen-, VOC- and odor-free natural rubber latex (NRL) foam. The transaction is expected to close in the second quarter
of 2018.