The accompanying notes are
an integral part of these condensed consolidated financial statements.
The accompanying notes are an
integral part of these condensed consolidated financial statements.
The accompanying notes are
an integral part of these condensed consolidated financial statements.
The accompanying notes are an
integral part of these condensed consolidated financial statements.
The accompanying notes are an
integral part of these condensed consolidated financial statements.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
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DESCRIPTION
OF BUSINESS
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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”). 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. 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 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 Holdings, LLC (“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 Rotmans 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.
In April of 2018, Vystar acquired the assets of NHS Holdings, LLC (“NHS”) executing on the first part of the Company’s vision to move into direct product offerings made from Vytex® latex. NHS was the exclusive U.S. distributor of Vystar’s Vytex® natural rubber latex foam to manufacturers for use in over 200 home furnishings products, including mattresses, toppers, pillows and upholstery, sold through multiple channels. This acquisition provides Vystar with roll packing and cutting equipment to support our bedding manufacturing partners, while lowering the cost of Vytex to the manufacturer by eliminating the middleman.
In May of 2018, Vystar acquired substantially all of the assets of UV Flu Technologies, Inc., formerly traded on the OTC under the ticker UVFT, whose patented ViraTech™ UV light air purification technology destroys greater than 99% of airborne bacteria, viruses and other microorganisms and virtually eliminates concentrations of odors and volatile organic compounds (VOCs).
In May of 2019, Vystar acquired the assets
of Fluid Energy Conversion Inc. (“FEC”), primarily consisting of its patent on the Hughes Reactor, which has the ability
to control, enhance, and focus energy in flowing liquids and gases. Vystar intends to use this technology to enhance the effectiveness
of Vystar’s RxAir purification system to destroy airborne pathogens while decreasing the cost and size of Vystar’s
RxAir units.
As part of Vystar’s mission to offer
eco-friendly, sustainable materials and products that create a better environment for consumers and workers throughout the product
lifecycle, UV Flu Technologies is an excellent counterpart to our Vytex materials and Vytex bedding products. Vystar products will
help create a perfect natural sleep environment starting with Vytex bedding made from the purest latex in the world and UV Flu
Technologies’ RxAir™ air purifier ensuring every breath is free of harmful pathogens, VOCs and odors.
In July of 2019, Vystar acquired 58% of the outstanding shares of common stock of Murida Furniture Co., Inc. dba Rotmans Furniture (“Rotmans”), the largest furniture and flooring store in New England and one of the largest independent furniture retailers in the U.S. Rotmans sells a broad line of residential furniture and decorative accessories and serves customers throughout the New England region. The acquisition is expected to add approximately $30 million in top line revenue and enable Vystar to capitalize on the infrastructure already in place at Rotmans for accounting, retail sales facilities and staff, customer service, warehousing, and delivery. In addition, Rotmans will offer significant marketing and advertising opportunities for all of Vystar’s brands to Rotmans’ thousands of existing customers. The Company and Rotmans are exploring a number of initiatives relating to environmentally friendly product development and distribution that will utilize the access to the capital markets afforded by this combination.
NOTE
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BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Basis of Presentation
The accompanying condensed consolidated balance
sheet at December 31, 2018, which has been derived from audited financial statements, and the unaudited condensed consolidated
financial statements as of September 30, 2019 and for the nine months ended September 30, 2019 have been prepared by the Company
in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim
financial information, and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities
and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by
U.S. GAAP for complete financial statement presentation. However, the Company believes that the disclosures are adequate to make
the information presented not misleading. In the opinion of management, all adjustments (consisting primarily of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the nine months ended
September 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The
unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements
and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
NOTE
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BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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The Company has evaluated subsequent events through the date of the filing of its Form 10-K with the Securities and Exchange Commission. The Company is not aware of any 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.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned or controlled operating subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Segment
Reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company’s chief operating decision maker is the chief executive officer. The Company and the chief executive officer view the Company’s operations and manage its business as one reportable segment with different operating segments.
Estimates
The preparation of financial statements in
conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying disclosures. Significant estimates made by management include, among others, the collectability of
accounts receivable, allowance for obsolete inventory, deferred income taxes, depreciation methods and lives, the allocation of
purchase price related to acquisitions, the recoverability of long-lived assets, valuation of derivative liabilities, recognition
of certain accruals, and fair values of right of use assets and lease liabilities, share-based compensation and other equity issuances.
Although these estimates are based on management’s best knowledge of current events and actions the Company may undertake
in the future, actual results could differ from these estimates.
Fair Value of Financial Instruments
The Company’s financial instruments consist
principally of cash, accounts receivable, equity securities, accounts payable, accrued expenses and interest payable, lines of
credit, shareholder notes payable, long-term debt and unearned revenue. The carrying values of all the Company’s financial
instruments approximate or equal fair value because of their short maturities and market interest rates or, in the case of equity
securities, being stated at fair value.
In specific circumstances, certain assets and liabilities are reported or disclosed at fair value. Fair value is the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the Company’s principal market for such transactions. If there is not an established principal market, fair value is derived from the most advantageous market.
Valuation inputs are classified in the following hierarchy:
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Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
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Level 2 inputs are directly or indirectly observable valuation inputs for the asset or liability, excluding Level 1 inputs.
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Level 3 inputs are unobservable inputs for the asset or liability.
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Highest priority is given to Level 1 inputs and the lowest priority to Level 3 inputs. Acceptable valuation techniques include the market approach, income approach, and cost approach. In some cases, more than one valuation technique is used. The derivative liabilities were recognized at fair value on a recurring basis through the date of the settlement and December 31, 2018 and are level 3 measurements. There have been no transfers between levels during the nine months ended September 30, 2019.
Acquisitions
Amounts paid for acquisitions are allocated to the assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition. The fair value of identifiable intangible assets is based on valuations that use information and assumptions provided by management. Identifiable intangible assets with finite lives are amortized over their useful lives. Acquisition-related costs, including, legal, accounting, and other costs, are capitalized in asset acquisitions and for business combinations are expensed in the periods in which the costs are incurred. The results of operations of acquired assets are included in the financial statements from the acquisition date.
NOTE
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BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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Accounts and Notes Receivable
Accounts and notes receivable are stated at the amount management expects to collect from outstanding balances.
The Company routinely sells, without recourse, trade receivables resulting from retail furniture sales to various financial institutions at an average service charge of 6.0% in 2019. Amounts sold during the period from acquisition to September 30, 2019 was $1,890,000. Retail furniture receivables retained by the Company are generally collateralized by the merchandise sold, represent valid claims against debtors for sales arising on or before the balance sheet date and are reduced to their estimated net realizable value. In addition, the Company grants credit to Vytex customers without requiring collateral. The amount of accounting loss for which Vystar is at risk in these unsecured accounts receivable is limited to their carrying value. Management provides for uncollectible amounts through a charge to earnings and a credit to an allowance for doubtful accounts based upon its assessment of the current status of individual accounts. Balances that are still outstanding after management has performed reasonable collection efforts are written off through a charge to the allowance and a credit to accounts receivable. As of September 30, 2019 and December 31, 2018, the Company considers accounts receivable to be fully collectible.
The Company holds notes receivable from members of the Rotman family, see Note 12 for additional disclosures related to these notes. Current maturities of $36,000 are included in accounts and notes receivable at September 30, 2019.
Inventories
Inventories include those costs directly attributable
to the product before sale. Inventories consist primarily of finished goods of foam toppers, furniture, mattresses and pillows
and is carried at net realizable value, which is defined as selling price less cost of completion, disposal and transportation.
The Company evaluates the need to record write-downs for inventory on a regular basis. Appropriate consideration is given to obsolescence,
slow-moving and other factors in evaluating net realizable values.
Prepaid Expenses and Other Assets
Prepaid
expenses and other assets include amounts related to prepaid insurance policies,
which are expensed on a straight-line basis over the life of the underlying policy, and other expenses.
Investments - Equity Securities
Marketable equity securities have been categorized
as available-for-sale and, as a result, are stated at fair value. Unrealized gains and losses are reflected in the statement of
operations. The Company periodically reviews the available-for-sale securities for other than temporary declines in fair value
below cost and more frequently when events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. As of September 30, 2019, the Company believes that the cost of the available-for-sale securities was recoverable
in all material respects.
Property and
Equipment
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is provided over the estimated useful lives of the assets using straight-line and accelerated methods. Leasehold improvements are being depreciated over their estimated useful lives since management intends to occupy each of its current facilities for the foreseeable future.
Expenditures for major renewals and betterments are capitalized, while routine repairs and maintenance are
expensed as incurred. When property items are retired or otherwise disposed of, the asset and related reserve accounts are relieved
of the cost and accumulated depreciation, respectively, and the resultant gain or loss is reflected in earnings. As of September
30, 2019, the net balance of property and equipment is $1,995,632 with accumulated depreciation of $114,406. As of December 31,
2018, the net balance of property and equipment is $291,346 with accumulated depreciation of $31,485.
Intangible
Assets
Patents represent legal and other fees associated
with the registration of patents. The Company has five issued patents with the United States Patent and Trade Office (“USPTO”)
as well as five issued international Patent Cooperation Treaty (“PCT”) patents. Patents are carried at cost and are
being amortized on a straight-line basis over their estimated useful lives, typically 20 years.
The Company has trademark protection for “Vystar”,
“Vytex”, and “RxAir” among others. Trademarks are carried at cost and since their estimated life is indeterminable,
no amortization is recognized. Instead, they are evaluated annually for impairment.
NOTE
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BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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Long-Lived Assets
We review our long-lived
assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully
recoverable. We evaluate assets for potential impairment by comparing estimated future undiscounted net cash flows to the carrying
amount of the assets. If the carrying amount of the assets exceeds the estimated future undiscounted cash flows, impairment is
measured based on the difference between the carrying amount of the assets and fair value. Assets to be disposed of would be separately
presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to sell
and are no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale would be presented separately
in the appropriate asset and liability sections of the consolidated balance sheet, if material. During the nine months ended September
30, 2019 and 2018, we did not recognize any impairment of our long-lived assets.
Goodwill
Goodwill reflects the cost of an acquisition
in excess of the fair values assigned to identifiable net assets acquired. Goodwill is not amortized; rather, it is subject to
a periodic assessment for impairment by applying a fair value-based test. We perform our annual impairment test at the end of each
calendar year, or more frequently if events or changes in circumstances indicate the asset might be impaired.
Accounting for acquisitions requires us to
recognize, separately from goodwill, the assets acquired and the liabilities assumed at their acquisition- date fair values. Goodwill
as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition-date fair values
of the assets acquired and the liabilities assumed. While we use best estimates and assumptions to accurately value assets acquired
and liabilities assumed at the acquisition date, the estimates are inherently uncertain and subject to refinement.
The impairment model permits, and we utilize,
a simplified approach for determining goodwill impairment. In the first step, we evaluate the recoverability of goodwill by estimating
the fair value of our reporting unit using multiple techniques, including an income approach using a discounted cash flow model
and a market approach. Based on an equal weighting of the results of these two approaches, a conclusion of fair value is estimated.
The fair value is then compared to the carrying value of our reporting unit. If the fair value of a reporting unit is less than
its carrying value, the Company recognizes this amount as an impairment loss. Impairment losses, limited to the carrying value
of goodwill, represent the excess of the carrying amount of goodwill over its implied fair value.
During the three months ended September 30,
2019, goodwill of $590,556 was recognized with the acquisition of Rotmans, see Note 17.
Convertible Notes Payable
Borrowings are recognized initially at the principal amount received. Borrowings are subsequently carried at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized as interest expense in the statements of operation over the period of the borrowings using the effective interest method.
Derivatives
The Company evaluates its debt instruments
or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately
accounted for under the relevant sections of Accounting Standards Codification (“ASC”) Topic 815-40, Derivative Instruments
and Hedging: Contracts in Entity’s Own Equity. The result of this accounting treatment could be that the fair value of a
financial instrument is classified as a derivative instrument and is marked-to-market at each balance sheet date and recorded
as a liability. In the event the fair value is recorded as a liability, the change in fair value is recorded in the statement of
operations as other income or other expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to
fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially
classified as equity that become subject to reclassification under ASC Topic 815-40 are reclassified to a liability account at
the fair value of the instrument on the reclassification date.
The Company applies the accounting standard
that provides guidance for determining whether an equity-linked financial instrument, or embedded feature, is indexed to an entity’s
own stock. The standard applies to any freestanding financial instrument or embedded features that have the characteristics of
a derivative, and to any freestanding financial instruments that are potentially settled in an entity’s own common stock.
From time to time, the Company has issued notes with embedded conversion features. Certain of the embedded conversion features
contain price protection or anti-dilution features that result in these instruments being treated as derivatives for accounting
purposes. Accordingly, during the nine months ended September 30, 2019, the Company has classified all conversion features as derivative
liabilities and has estimated the fair value of these embedded conversion features using a binomial options pricing model.
In accordance with the Financial Accounting Standards Board (“FASB”) fair value measurement guidance Accounting Standards Update (ASU) 2011-04, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
Unearned Revenue
Unearned revenue consists of customer advance payments, deposits on sales of undelivered merchandise and deferred
warranty revenue on self-insured stain protection warranty coverage. Included in current liabilities are customer payments and
deposits of approximately $1,669,000. During the nine months ended September 30, 2019, the Company recorded total proceeds of approximately
$6,049,000 and recognized total revenues of approximately $5,672,000 related to deferred revenue arrangements. During the nine
months ended September 30, 2019, all of the recognized revenue related to deferred revenues originating from the acquisition of
Rotmans.
NOTE
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BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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Loss Per
Share
The Company presents basic and diluted loss per share. Because the Company reported a net loss for nine months
ended September 30, 2019 and 2018, 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 27,733,271 and 7,498,271 shares of common stock for the nine months ended September 30, 2019 and 2018,
respectively, as their effect would be anti-dilutive. Warrants to purchase 14,250,438 and 14,831,069 shares of common stock for
the nine months ended September 30, 2019 and 2018, 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 4,521,020 and 4,244,460 shares of common stock
and common shares to be issued for share-based compensation of 16,677,000 and 6,014,286 for the nine months ended September 30,
2019 and 2018, respectively, were excluded from the computation of diluted loss per share as their effect would be anti-dilutive.
Revenue
On January 1, 2018, we adopted FASB ASC Topic
606, Revenue from Contracts with Customers (“ASC 606”). The new guidance sets forth a new five-step revenue
recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific
pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard
is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers
in an amount that reflects what it expects to receive in exchange for the goods or services. The standard also requires more detailed
disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance.
We reviewed all contracts at the date of initial
application and elected to use the modified retrospective transition method, where the cumulative effect of the initial application
is recognized as an adjustment to opening retained earnings at January 1, 2018. Therefore, comparative prior periods have not been
adjusted and continue to be reported under FASB ASC Topic 605, Revenue Recognition, (“ASC 605”). The adoption
of the new revenue recognition guidance was immaterial to our consolidated balance sheets as of September 30, 2019 and December
31, 2018 and to our consolidated statements of operations and cash flows for the nine months ended September 30, 2019 and 2018.
Our principal
activities from which we generate our revenue are product sales. Revenue is measured based on considerations specified in a
contract with a customer. A contract exists when it becomes a legally enforceable agreement with a customer. The contract is
based on either the acceptance of standard terms and conditions at the retail store, on the websites for e-commerce customers
and via telephone with our third-party call center for our print media and direct mail customers, or the execution of terms
and conditions contracts with retailers and wholesalers. These contracts define each party’s rights, payment terms and
other contractual terms and conditions of the sale.
Consideration is typically paid prior to shipment via credit card or check when our products are sold direct to consumers, which is typically within 1 to 2 days or approximately 30 days from the time control is transferred when sold to wholesalers, distributors and retailers. We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience and, in some circumstances, published credit and financial information pertaining to the customer.
A performance obligation is a promise in a contract to transfer a distinct product to the customer, which for us is transfer of finished goods to our customers. Performance obligations promised in a contract are identified based on the goods that will be transferred to the customer that are both capable of being distinct and are distinct in the context of the contract, whereby the transfer of the goods is separately identifiable from other promises in the contract. We have concluded the sale of finished goods and related shipping and handling are accounted for as the single performance obligation.
The transaction price of a contract is allocated
to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance
obligation. The transaction price is determined based on the consideration to which we will be entitled to receive in exchange
for transferring goods to the customer. We issue refunds to retail, e-commerce and print media customers, upon request, within
30 days of delivery. We estimate the amount of potential refunds at each reporting period using a portfolio approach of historical
data, adjusted for changes in expected customer experience, including seasonality and changes in economic factors. For retailers,
distributors and wholesalers, we do not offer a right of return or refund and revenue is recognized at the time products are shipped
to customers. In all cases, judgment is required in estimating these reserves. Actual claims for returns could be materially different
from the estimates. As of September 30, 2019 and December 31, 2018, reserves for estimated sales returns totaled $3,000, respectively,
and are included in the accompanying consolidated balance sheets as accrued expenses.
We recognize revenue when we satisfy a performance
obligation in a contract by transferring control over a product to a customer when product is shipped based on fulfillment by the
Company. The Company considers fulfillment when it passes all liability at the point of shipping through third party carriers or
in-house delivery services. Delivery fees are charged to customers and are included in revenue in the accompanying consolidated
statements of operations and the costs associated with these deliveries are included in operating expenses in the accompanying
consolidated statements of operations. Taxes assessed by a governmental authority that are both imposed on and concurrent with
a specific revenue-producing transaction, that are collected by us from a customer, are excluded from revenue. Shipping and handling
costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment
cost and are included in cost of revenue in the accompanying consolidated statements of operations.
NOTE
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BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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Revenue (Continued)
The Company also defers revenues for separately-priced stain protection warranty coverage for which it is
ultimately self-insured. Revenue is recognized from the extended warranty sales on a straight-line basis over the respective contract
term. The extended warranty terms primarily range from three to five years from the date of delivery. At September 30, 2019, deferred
warranty revenue is approximately $1,309,000 and included in unearned revenue in the accompanying consolidated balance sheets.
During the nine months ended September 30, 2019, the Company recorded total proceeds of approximately $96,000 and recognized total
revenues of approximately $110,000 related to deferred warranty revenue arrangements. Commission costs in obtaining extended warranty
contracts are capitalized and recognized as expense on a straight-line basis over the period of the warranty contract. At September
30, 2019, deferred commission costs are approximately $347,000. All other costs, such as costs of services performed under the
contract, general and administrative expenses, and advertising costs are expensed as incurred.
Cost of Revenue
Cost of revenue consists primarily of product and freight costs and fees paid to online retailers.
Research and Development
Research and development costs are expensed when incurred. Research and development costs include all costs incurred related to the research, development and testing of the Company’s process to produce Vytex NRL.
Vytex NRL has
produced protein test results on finished products that are both “below detection” and “not
detectable” in terms of the amount of proteins remaining in these finished goods made with Vytex NRL. These results
have been reproduced in many subsequent tests. For the nine months ended September 30, 2019 and 2018, Vystar’s
research and development costs were not significant.
Advertising Costs
Advertising costs, which include television,
radio, newspaper and other media advertising, are expensed upon first showing. Advertising costs included in general and administrative
expenses in the accompanying consolidated statements of operations were approximately $539,000 and $52,000 for the nine months
ended September 30, 2019 and 2018, respectively.
Share-Based
Compensation
The fair value of stock options is estimated
on the grant date using the Black-Scholes option pricing model, based on weighted average assumptions. Expected volatility is based
on historical volatility of our common stock. The Company has elected to use the simplified method described in the Securities
and Exchange Commission Staff Accounting Bulletin Topic 14C to estimate the expected term of employee stock options. The risk-free
rate is based on the U.S. Treasury yield curve in effect at the time of grant. The value of restricted stock awards is determined
using the fair value of the Company’s common stock on the date of grant. The Company accounts for forfeitures as they occur.
Compensation expense is recognized on a straight-line basis over the requisite service period of the award.
Income Taxes
Vystar recognizes income taxes on an accrual basis based on a tax position taken or expected to be taken in its tax returns. A tax position is defined as a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets or liabilities. Tax positions are recognized only when it is more likely than not (i.e., likelihood of greater than 50%), based on technical merits, that the position would be sustained upon examination by taxing authorities. Tax positions that meet the more likely than not threshold will be measured using a probability-weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. A valuation allowance is established to reduce deferred tax assets if all, or some portion, of such assets will more likely than not be realized. Should they occur, interest and penalties related to tax positions are recorded as interest expense. No such interest or penalties have been incurred for the nine months ended September 30, 2019 and 2018.
Concentration of Credit Risk
Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of cash and accounts receivable. Cash held in operating accounts may exceed the Federal Deposit Insurance Corporation, or FDIC, insurance limits. While the Company monitors cash balances in our operating accounts on a regular basis and adjust the balances as appropriate, these balances could be impacted if the underlying financial institutions fail. To date, the Company has experienced no loss or lack of access to our cash; however, the Company can provide no assurances that access to our cash will not be impacted by adverse conditions in the financial markets. Credit concentration risk related to accounts receivable is mitigated as customer credit is checked prior to the sales and accounts receivable consists of a high number of relatively small balances.
NOTE
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BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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Other 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. The Company is also exposed to risks pertinent to the operations of a retailer,
including, but not limited to, the ability to acquire new customers and maintain a strong brand as well as broader economic
factors such as interest rates and changes in customer spending patterns.
Recent
Accounting Pronouncements
In 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 has adopted this standard (see Note 7), and it had no significant impact
upon adoption but significant impact to the Company’s balance sheet upon the acquisition (see Note 17).
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles—Goodwill and Other (“ASC 350”), Simplifying the Test for Goodwill Impairment. The guidance removes
Step 2 of the goodwill impairment test and eliminates the need to determine the fair value of individual assets and liabilities
to measure goodwill impairment. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds
its fair value, not to exceed the carrying amount of goodwill. Entities will continue to have the option to perform a qualitative
assessment to determine if a quantitative impairment test is necessary. The guidance will be applied prospectively and is effective
for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted
for any impairment tests performed on testing dates after January 1, 2017. The Company does not believe adoption will have a material
impact on its financial condition or results of operations.
In July
2017, the FASB issued ASU 2017-11, Earnings per share (Topic 260), Distinguishing Liabilities
from Equity (Topic 480), and Derivatives and Hedging
(Topic 815): Accounting for Certain Financial Instruments with Down
Round Features. The update addresses the complexity of accounting for certain financial instruments with
down round features and the liability or equity classification of financial instruments with warrants or convertible
features. The guidance eliminates the requirement to consider “down round” features when determining whether
certain equity-linked financial instruments or embedded features are indexed to an entity’s own stock. The ASU is
effective for annual periods beginning after December 15, 2018, and for interim periods within those years, with early
adoption permitted. The Company has adopted ASU 2017-11 and it did not have a
material impact on its financial statements.
In June 2018,
the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic
718) to expand the scope of ASC 718, Compensation - Stock Compensation (Topic 718) (“ASU 2017-07”), to
include share-based payment transactions for acquiring goods and services from non- employees. The pronouncement is effective
for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018, with early adoption
permitted. The Company has adopted ASU 2018-17 and it did not have a material
impact on its financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which eliminates, adds and modifies certain disclosure requirements for fair value measurements, including eliminating the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and requiring the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption, either of the entire standard or only the provisions that eliminate or modify requirements, is permitted. The Company has evaluated the disclosure requirements of this standard and does not expect it to have a material impact on the Company’s financial statements.
NOTE
3 -
|
LIQUIDITY AND GOING CONCERN
|
The Company’s financial statements are
prepared using the accrual method of accounting in accordance with U.S. GAAP and have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement of liabilities in the normal course of business. However, the Company
has incurred significant losses and experienced negative cash flow since inception. At September 30, 2019, the Company had cash
of $64,223 and a deficit in working capital of approximately $3.3 million. Further, at September 30, 2019, the accumulated deficit
amounted to approximately $39.2 million. We use working capital to finance our ongoing operations, and since those operations do
not currently cover all our operating costs, managing working capital is essential to our Company’s future success. Because
of this history of losses and financial condition, there is substantial doubt about the Company’s ability to continue as
a going concern.
NOTE
3 -
|
LIQUIDITY AND GOING CONCERN (Continued)
|
A successful transition to attaining profitable
operations is dependent upon obtaining sufficient financing to fund the Company’s planned expenses and achieving a level
of revenue adequate to support the Company’s cost structure. Management plans to finance future operations using cash on
hand, increased revenue from Vytex license fees that now also include the Company’s association with foam cores made from
Vytex used in mattresses, mattress toppers and pillows, and stock warrant exercises from existing shareholders. The Company has
also focused the efforts of key internal employees on the goal of creating efficiencies in each department in our retail furniture
business, including purchasing, marketing, inventory control, advertising, accounting, warehousing and customer service.
In addition, the Company has invested in new accounting and operations software, which will improve our ability to control inventory
levels and monitor the financial performance of our operations.
There can be no assurances that the Company
will be able to achieve projected levels of revenue in 2019 and beyond. If the Company is not able to achieve projected revenue
and obtain alternate additional financing of equity or debt, the Company would need to significantly curtail or reorient operations
during 2020, which could have a material adverse effect on the ability to achieve the business objectives, and as a result, may
require the Company to file bankruptcy or cease operations. The financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts or amounts classified as liabilities that might be necessary should
the Company be forced to take any such actions.
The Company’s future expenditures will
depend on numerous factors, including: the rate at which the Company can introduce and license Vytex NRL raw materials and foam
cores made from Vytex to manufacturers, and subsequently retailers; the costs of filing, prosecuting, defending and enforcing any
patent claims and other intellectual property rights; and market acceptance of the Company’s products, services and competing
technological developments, the Company’s ability to successfully realize synergies through the integration of the merged
companies, our ability to acquire new customers and maintain a strong brand, the success of our efforts to reduce expenses in our
retail furniture business, as well as broader economic factors such as interest rates and changes in customer spending patterns.
As the Company expands its activities and operations, cash requirements are expected to increase at a rate consistent with revenue
growth after the Company has achieved sustained revenue generation.
NOTE
4 -
|
INVESTMENTS – EQUITY SECURITIES
|
Cost and fair value of investments - equity securities are as follows as of September 30, 2019:
Cost
|
|
|
Gross
Unrealized Gains
|
|
|
Fair Value
|
|
$
|
141,225
|
|
|
$
|
7,056
|
|
|
$
|
148,281
|
|
Net unrealized holding gains on available-for-sale
securities were approximately $7,000 since the date of the Rotmans acquisition and have been included in other income (expense).
NOTE
5 -
|
PROPERTY AND EQUIPMENT
|
Property and equipment,
net consists of the following:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Leasehold improvements
|
|
$
|
427,707
|
|
|
$
|
—
|
|
Furniture, fixtures and equipment
|
|
|
761,129
|
|
|
|
3,831
|
|
Capital lease equipment
|
|
|
189,770
|
|
|
|
—
|
|
Tooling and testing equipment
|
|
|
319,000
|
|
|
|
319,000
|
|
Parking lots
|
|
|
365,707
|
|
|
|
—
|
|
Motor vehicles
|
|
|
46,725
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,110,038
|
|
|
|
322,831
|
|
Accumulated depreciation
|
|
|
(114,406
|
)
|
|
|
(31,485
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
1,995,632
|
|
|
$
|
291,346
|
|
Depreciation expense for the nine months ended September 30, 2019 and 2018 was $82,921 and $29,859, respectively.
NOTE 6 -
|
INTANGIBLE ASSETS
|
Intangible assets consist of the following:
|
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
Amortization
Period
(in Years)
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
210,000
|
|
|
$
|
100,000
|
|
|
6 - 10
|
|
Proprietary technology
|
|
|
610,000
|
|
|
|
610,000
|
|
|
10
|
|
Tradename and brand
|
|
|
1,430,000
|
|
|
|
610,000
|
|
|
5 - 10
|
|
Marketing related
|
|
|
410,000
|
|
|
|
—
|
|
|
5
|
|
Patents
|
|
|
351,668
|
|
|
|
242,149
|
|
|
6 - 20
|
|
Noncompete
|
|
|
50,000
|
|
|
|
50,000
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,061,668
|
|
|
|
1,612,149
|
|
|
|
|
Accumulated amortization
|
|
|
(412,894
|
)
|
|
|
(237,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
2,648,774
|
|
|
|
1,374,847
|
|
|
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
9,072
|
|
|
|
9,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
2,657,846
|
|
|
$
|
1,383,919
|
|
|
|
|
During the three months ended
September 30, 2019, amortized intangible assets of $1,340,000 were recognized with the acquisition
of Rotmans (see Note 17).
Amortization expense for the nine
months ended September 30, 2019 and 2018 was $175,592 and $126,653, respectively. Estimated future amortization expense for
finite-lived intangible assets is as follows:
|
|
|
|
|
|
|
|
Amount
|
|
|
|
|
|
|
Remaining in 2019
|
|
|
$
|
108,025
|
|
2020
|
|
|
|
432,101
|
|
2021
|
|
|
|
432,101
|
|
2022
|
|
|
|
432,101
|
|
2023
|
|
|
|
425,490
|
|
Thereafter
|
|
|
|
818,956
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
2,648,774
|
|
After
adoption of ASU 2016-02, the Company has lease arrangements for equipment, showroom and warehouse spaces. These leases expire
at various dates through 2024 with options to extend to 2031.
The
following table presents the lease-related assets and liabilities on the balance sheet:
|
|
|
|
September 30,
|
|
Leases
|
|
Classification
|
|
2019
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Operating lease assets
|
|
Operating lease right-of-use assets
|
|
$
|
9,763,381
|
|
Finance lease assets
|
|
Property and equipment, net
|
|
|
174,335
|
|
Total lease assets
|
|
|
|
$
|
9.937,716
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Operating
|
|
Current operating lease liabilities
|
|
$
|
964,000
|
|
Finance
|
|
Current maturities of long-term debt
|
|
|
77,000
|
|
Noncurrent
|
|
|
|
|
|
|
Operating
|
|
Operating lease liabilities, net of current maturities
|
|
|
8,046,165
|
|
Finance
|
|
Long-term debt, net of current maturities
|
|
|
111,013
|
|
Total lease liabilities
|
|
|
|
$
|
9,198,178
|
|
The
table below presents the lease costs for finance and operating leases for the three and nine months ended September 30, 2019:
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
Lease Cost
|
|
September 30, 2019
|
|
|
September 30, 2019
|
|
Finance lease cost
|
|
|
|
|
|
|
|
|
Amortization of leased assets
|
|
$
|
15,435
|
|
|
$
|
15,435
|
|
Interest on lease liabilities
|
|
|
1,257
|
|
|
|
1,257
|
|
Operating lease cost
|
|
|
323,239
|
|
|
|
323,239
|
|
Total lease cost
|
|
$
|
339,931
|
|
|
$
|
339,931
|
|
NOTE
7 -
|
LEASES (Continued)
|
The
future minimum lease payments required under operating and financing lease obligations as of September 30, 2019 having initial
or remaining non-cancelable lease terms in excess of one year are summarized as follows:
|
|
Operating
Leases
|
|
|
Finance
Leases
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
in 2019
|
|
$
|
368,047
|
|
|
$
|
20,483
|
|
|
$
|
388,530
|
|
2020
|
|
|
1,482,279
|
|
|
|
79,630
|
|
|
|
1,561,909
|
|
2021
|
|
|
1,489,582
|
|
|
|
70,607
|
|
|
|
1,560,189
|
|
2022
|
|
|
1,153,298
|
|
|
|
12,593
|
|
|
|
1,165,891
|
|
2023
|
|
|
906,959
|
|
|
|
11,741
|
|
|
|
918,700
|
|
Thereafter
|
|
|
6,671,179
|
|
|
|
979
|
|
|
|
6,672,158
|
|
Total future minimum
lease payments
|
|
|
12,071,344
|
|
|
|
196,033
|
|
|
|
12,267,377
|
|
Less: Imputed interest
|
|
|
(3,061,179
|
)
|
|
|
(8,020
|
)
|
|
|
(3,069,199
|
)
|
Present value of lease
liabilities
|
|
$
|
9,010,165
|
|
|
$
|
188,013
|
|
|
$
|
9,198,178
|
|
The
following table presents other information related to leases:
|
|
Nine months ended
September 30, 2019
|
|
Supplemental cash flows information:
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
Operating cash flows used for operating leases
|
|
$
|
278,988
|
|
Financing cash flows used for financing leases
|
|
$
|
16,728
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations
|
|
$
|
9,975,859
|
|
Leased assets obtained in exchange for new finance lease liabilities
|
|
$
|
189,770
|
|
|
|
|
|
|
Additional lease information:
|
|
|
|
|
Weighted average remaining lease term:
|
|
|
|
|
Operating leases
|
|
|
10
|
|
Finance leases
|
|
|
3
|
|
|
|
|
|
|
Weighted average discount rate:
|
|
|
|
|
Operating leases
|
|
|
6
|
%
|
Finance leases
|
|
|
3
|
%
|
NOTE
8 -
|
NOTES PAYABLE AND LOAN FACILITY
|
Line
of Credit
The Company has a $2,500,000 revolving line
of credit with Fidelity Co-operative Bank. Advances are limited to 50% of eligible inventory and bear interest at the prime rate
plus 0.50% with a floor of 3.75%. The interest rate was 5.75% at September 30, 2019. The line of credit is due upon demand and
is subject to renewal annually. It is secured by all assets of the Company. The credit line is subject to certain financial and
non-financial covenants. The Company was not in compliance with certain covenants as of September 30, 2019 and has obtained a waiver
through April 30, 2020. Financial covenants are reviewed annually in April. Indebtedness to existing and future Rotman Family
notes are subordinated to the bank debt. The line is also secured with a mortgage on a property of a wholly owned entity of Steven
Rotman.
Borrowings
under this agreement at September 30, 2019 were approximately $2,066,000 and available borrowings were $434,000.
Related
Party Line of Credit (CMA Note Payable)
On November 2, 2012, the Company executed a
$1,500,000 unsecured line of credit agreement with CMA Investments, LLC (“CMA”), a related party and a Georgia limited
liability company (the “CMA Note”). Three of the directors of the Company (“CMA directors”) were initially
the members of CMA Investments, LLC. Pursuant to the terms of the CMA Note, interest is computed at LIBOR plus 5.25% on amounts
drawn and fees.
In July 2018, the Company issued 15 million
shares in escrow, which CMA began to sell in March 2019 at the end of the six-month period. The shares were sold at their discretion
to bring down the balance of the CMA Note. In accordance with the agreement, CMA had to sell all shares at no less than $0.035
per share. As of September 30, 2019, the Company reduced the amounts due by $0.9 million of the $1.5 million CMA Note through the
issuance and sale of 15 million shares of its common stock that were previously held in escrow. The total value received upon the
sale of the 15 million shares was less than the total obligation outstanding after all shares were sold through April 2019.
In
July 2019, the Company issued an additional 30 million shares to CMA to settle the shortfall. The details are as follows:
|
●
|
Upon
delivery of the 30 million shares for the second and third tranches, the debt was fully
satisfied. CMA can sell the shares at least six months after issue at no less than $0.01399
per share (subject to adjustment for stock split, reorganization, recapitalization, reclassification,
reverse stock split or stock dividend).
|
|
●
|
Simultaneous with the CMA Note payoff, CMA was expected to transfer 5 million shares of the third tranche
to StillH2OS Financial, LLC (“StillH2OS”) to settle a claim regarding the conversion of debt if acceleration events
are met. StillH2OS is a related party and former consultant to the Company.
|
|
●
|
The
agreement specifies CMA must purchase up to 19 million shares of the Company if the average
sale prices of the shares in the second and third tranches are at or above certain thresholds. There have been no additional
purchases of Company shares by CMA.
|
Long-Term
Debt
Long-term
debt consists of the following:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Term notes
|
|
$
|
520,839
|
|
|
$
|
500,000
|
|
Rotman Family nonconvertible
notes
|
|
|
507,500
|
|
|
|
—
|
|
Capital
lease obligations
|
|
|
188,013
|
|
|
|
—
|
|
|
|
|
1,216,352
|
|
|
|
500,000
|
|
Less:
current maturities
|
|
|
(126,000
|
)
|
|
|
—
|
|
|
|
$
|
1,090,352
|
|
|
$
|
500,000
|
|
NOTE
8 -
|
NOTES PAYABLE AND LOAN FACILITY (Continued)
|
The
approximate maturities for the succeeding years excluding capital lease obligations are as follows:
Remaining
in 2019
|
|
$
|
4,000
|
|
2020
|
|
|
62,000
|
|
2021
|
|
|
59,000
|
|
2022
|
|
|
62,000
|
|
2023
|
|
|
85,000
|
|
Thereafter
|
|
|
756,339
|
|
|
|
$
|
1,028,339
|
|
Term Notes
During the year ended December 31, 2018, certain
investors guaranteed $100,000 each with Fidelity Bank to establish a $500,000 revolving line of credit. At the present time, the
Company is paying interest only at a rate of 4.5% per annum, with a balloon payment of $500,000 due in 2033. The balance is $500,000
as of September 30, 2019.
Other term debt totaling $20,839 at September
30, 2019 represents three 0% loans on motor vehicles, requiring cumulative monthly payments of $1,488 through maturity in November
2020.
Rotman Family Nonconvertible Notes
In connection with the acquisition of 58% of
Rotmans (see Note 17), Steven and Bernard Rotman were issued related party notes payable in the amounts of $367,500 and $140,000,
respectively. The notes bear interest at an annual rate of five percent (5%). Steven Rotman’s note matures eight years from
issuance and Bernard Rotman’s note matures four years from issuance. Payments of $3,828 and $2,917 to Steven and Bernard
Rotman, respectively, per month begin six months from issuance until maturity in December 2027 and 2023, respectively. The balance
of these notes payable including accrued interest to Steven and Bernard Rotman were approximately $370,000 and $141,000 at September
30, 2019.
Shareholder, Convertible and Contingently
Convertible Notes Payable
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Shareholder,
convertible and contingently convertible notes
|
|
$
|
2,419,858
|
|
|
$
|
542,528
|
|
Accrued interest
|
|
|
53,978
|
|
|
|
35,140
|
|
Debt
discount
|
|
|
—
|
|
|
|
(73,519
|
)
|
|
|
|
2,473,836
|
|
|
|
504,149
|
|
Less:
current maturities
|
|
|
(362,098
|
)
|
|
|
(504,149
|
)
|
|
|
$
|
2,111,738
|
|
|
$
|
—
|
|
Shareholder Notes Payable
From January 1, 2018 to February 9, 2018,
the Company issued Contingently Convertible notes payable (the “Notes”) for contract work performed by other entities
in lieu of compensation 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 at the Company’s option post
April 19, 2018. The Notes mature one year from issuance but may be extended one (1) additional year by the Company. If converted,
the Notes plus accrued interest are convertible into shares of the Company’s common stock at the prior twenty (20) day average
closing price with a 50% discount. As of September 30, 2019, the balance on these notes was $217,554 and they were extended one
additional year until January 2020 at which point they become eligible for conversion.
NOTE
8 -
|
NOTES PAYABLE AND LOAN FACILITY (Continued)
|
Convertible and Contingently Convertible
Notes Payable
From January 1, 2018 and through the date of
these consolidated financial statements, the Company has issued certain Convertible and Contingently Convertible notes payable
in varying amounts, in the aggregate of $710,000. The face amount of the notes represents the amount due at maturity along with
the accrued interest, at which time that amount may 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. The Convertible and Contingently Convertible notes
provide for interest to accrue at an interest rate equal to 12% per annum or the maximum rate permitted under applicable law after
the occurrence of any event of default as provided in the notes. At any time after 180 days from the issue date, the holder, at
its option, may convert the outstanding principal balance and accrued interest into shares of common stock of the Company. The
initial conversion price for the principal and interest in connection with voluntary conversions by a holder of the Convertible
and Contingently Convertible notes ranges from $0.05 to $0.10 per share, subject to adjustment as provided therein. The total outstanding
balance of the Convertible and Contingently Convertible notes was converted as of September 30, 2019. They were converted into
approximately 303 million shares of the Company’s common stock. Based on the variable conversion price, the Company recorded
initial derivative liabilities of $465,905. The remaining balance of $235,085, net of discount, as of December 31, 2018 was reduced
to zero after a change in fair value of $1,044,250 and a decrease of $1,279,335 to the balance of the derivative liabilities upon
the date all notes were converted.
In connection with the issuance of the Convertible
and Contingently Convertible notes, the Company issued warrants to purchase 411,875 shares of the Company’s common stock.
The exercise term of the warrants ranges from issuance to any time on or after the six (6) month anniversary or prior to the maturity
of the related note. The exercise price of the warrants is $0.40 per share of the Company’s common stock, as may be adjusted
from time to time pursuant to the antidilution provisions of the related warrant. Pursuant to ASU 2017-11, such antidilution features
do not subject the Company to derivative accounting pursuant to ASC 815. All warrants were forfeited during the nine months ended
September 30, 2019 upon negotiation and conversion of the remaining outstanding balances.
Peak One Opportunity Fund, L.P.
During the year ended December 31, 2018, the
Company entered into a financing agreement with Peak One Opportunity Fund, L.P. to receive $435,000 of original issue discount
notes in three tranches as follows:
|
1.
|
July 17, 2018, principal $85,000 with an imputed interest rate of 6%, discounted by 10%, and $5,000 for legal fees, for a net of $71,500 due three years from the funding date. The Company has the option of receiving two additional amounts ninety days apart;
|
|
2.
|
September 14, 2018: $150,000 principal, $135,000 net.
|
|
3.
|
November 13, 2018: a final $200,000 principal, $180,000 net.
|
Peak One Opportunity Fund is entitled to convert
the note into common stock at a price equal to 65% of the lowest traded price for the twenty trading days immediately preceding
the date of the date of conversion. The Company had the option to redeem the note at varying prices based upon the redemption date.
As of September 30, 2019, the entire balance had been converted into shares of common stock.
Crown Bridge Partners, LLC
During the year ended December 31, 2018, the
Company entered into a financing agreement with Crown Bridge Partners, LLC to receive $100,000 of original issue discount notes
in two tranches as follows:
|
1.
|
August 6, 2018: principal $50,000 bearing interest at 8%, discounted by 10%, and $2,000 for legal fees, for a net of $43,000 due one year from the funding date;
|
|
2.
|
The remaining tranche may be funded at the holder’s discretion.
|
Crown Bridge Partners has converted the
first tranche into common stock at a price equal to 65% of the average of the two lowest traded prices for the twenty-five
trading days immediately preceding the date of the date of conversion. As of September 30, 2019, the entire balance has been
converted into 32,240,000 shares of common stock.
NOTE
8 -
|
NOTES PAYABLE AND LOAN FACILITY (Continued)
|
Other
Notes Payable
The following notes were convertible after nine months
from the issue date:
|
|
|
Face
|
|
|
Interest
|
|
|
|
|
|
Net Cash
|
|
|
Amount
|
|
Issue Date and Name
|
|
|
Amount
|
|
|
Rate
|
|
|
Maturity
|
|
|
Proceeds
|
|
|
Converted/Paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan 29, 2018 EMA
|
|
|
$
|
80,000
|
|
|
|
12
|
%
|
|
|
Jan 29, 2019
|
|
|
$
|
72,300
|
|
|
$
|
80,000
|
|
Feb 14, 2018 Auctus
|
|
|
$
|
80,000
|
|
|
|
12
|
%
|
|
|
Nov 14, 2018
|
|
|
$
|
72,500
|
|
|
$
|
80,000
|
|
Feb 13, 2018 FirstFire Global
|
|
|
$
|
81,500
|
|
|
|
5
|
%
|
|
|
Nov 13, 2018
|
|
|
$
|
72,500
|
|
|
$
|
81,500
|
|
May 2, 2018 Power Up #3
|
|
|
$
|
83,000
|
|
|
|
12
|
%
|
|
|
May 23, 2019
|
|
|
$
|
80,000
|
|
|
$
|
83,000
|
|
Oct 10, 2018 Power Up #4
|
|
|
$
|
103,000
|
|
|
|
12
|
%
|
|
|
Oct 10, 2019
|
|
|
$
|
103,000
|
|
|
$
|
103,000
|
|
During the nine months ended September 30,
2019, approximately $63,000 of the convertible notes above and approximately $21,000 of accrued interest were exchanged for approximately
227,000,000 shares of common stock. In addition, approximately $142,000 of the Power Up notes have been settled in cash. All convertible
notes above have been paid in full or fully converted as of September 30, 2019.
During the nine months ended September 30,
2019, the Company has issued certain contingently convertible promissory notes in varying amounts to existing shareholders. The
face amount of the notes represents the amount due at maturity along with the accrued interest. The amount can be converted into
shares of the Company’s stock, at the option of the Company, based on the average closing price for the trailing 20 days
prior to conversion and carrying a 35% to 50% discount. These notes can be converted only after an acceleration event which involves
a symbol change, uplisting, or reverse stock split and such conversion is in the control of the Company. These notes, which are
all outstanding at September 30, 2019, are included in the table below:
|
|
|
Face
|
|
|
Interest
|
|
|
|
|
|
Net Cash
|
|
Issue Date
|
|
|
Amount
|
|
|
Rate
|
|
|
Maturity
|
|
|
Proceeds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Jan. 3, 2019
|
|
|
$
|
4,500
|
|
|
|
5
|
%
|
|
|
Jan. 3, 2021
|
|
|
$
|
4,500
|
|
Jan. 3, 2019
|
|
|
$
|
93,750
|
|
|
|
5
|
%
|
|
|
Jan. 3, 2021
|
|
|
$
|
93,750
|
|
Jan. 3, 2019
|
|
|
$
|
102,200
|
|
|
|
5
|
%
|
|
|
Jan. 3, 2021
|
|
|
$
|
102,200
|
|
Feb. 4, 2019
|
|
|
$
|
18,750
|
|
|
|
5
|
%
|
|
|
Feb. 4, 2021
|
|
|
$
|
18,750
|
|
June 4, 2019
|
|
|
$
|
7,500
|
|
|
|
5
|
%
|
|
|
June 4, 2021
|
|
|
$
|
7,500
|
|
June 4, 2019
|
|
|
$
|
50,000
|
|
|
|
5
|
%
|
|
|
June 4, 2021
|
|
|
$
|
50,000
|
|
June 4, 2019
|
|
|
$
|
4,000
|
|
|
|
5
|
%
|
|
|
June 4, 2021
|
|
|
$
|
4,000
|
|
June 4, 2019
|
|
|
$
|
25,000
|
|
|
|
5
|
%
|
|
|
June 4, 2021
|
|
|
$
|
25,000
|
|
June 4, 2019
|
|
|
$
|
25,000
|
|
|
|
5
|
%
|
|
|
June 4, 2021
|
|
|
$
|
25,000
|
|
June 4, 2019
|
|
|
$
|
25,000
|
|
|
|
5
|
%
|
|
|
June 4, 2021
|
|
|
$
|
25,000
|
|
June 4, 2019
|
|
|
$
|
12,000
|
|
|
|
5
|
%
|
|
|
June 4, 2021
|
|
|
$
|
12,000
|
|
July 1, 2019
|
|
|
$
|
5,500
|
|
|
|
5
|
%
|
|
|
June 4, 2021
|
|
|
$
|
5,500
|
|
July 11, 2019
|
|
|
$
|
25,000
|
|
|
|
5
|
%
|
|
|
June 4, 2021
|
|
|
$
|
25,000
|
|
NOTE
8 -
|
NOTES PAYABLE AND LOAN FACILITY (Continued)
|
Rotman Family Notes
On June 30, 2019, the Company
issued contingently convertible promissory notes totaling $180,000, to Steven Rotman ($105,000) and Greg Rotman ($75,000).
These notes are (i) unsecured, (ii) bear interest at an annual rate of eight percent (8%) per annum from date of issuance,
(iii) are convertible at the Company’s option after December 31, 2019, and (iv) mature five years from issuance.
If converted, the notes plus accrued interest are convertible into shares of the Company’s common stock at the average
of the five lowest closing prices in any 90 day period with a 50% discount. The balance of the notes payable including
accrued interest to Steven and Greg Rotman were approximately $107,000 and $57,000, respectively at September 30, 2019.
On July 18, 2019, the Company issued contingently
convertible notes totaling $1,522,500, to Steven Rotman ($1,102,500) and Bernard Rotman ($420,000) as partial consideration for
the acquisition of 58% of Rotmans (see Note 17). These notes are (i) unsecured, and (ii) bear interest at an annual rate of eight
percent (8%) per annum from date of issuance. These notes can be converted only after an acceleration event which involves a symbol
change, or reverse stock split and such conversion is in the control of the Company. Steven Rotman’s note matures eight years
from issuance and Bernard Rotman’s note matures four years from issuance. If converted, the notes plus accrued interest are
convertible into shares of the Company’s common stock at a 20 day average closing price at a 50% discount. The balance of
the notes payable including accrued interest to Steven and Bernard Rotman were approximately $1,114,000 and $424,000, respectively,
at September 30, 2019.
NOTE 9 -
|
DERIVATIVE LIABILITIES
|
As of September 30, 2019, the Company had a
$0 derivative liability balance on the consolidated balance sheet and recorded a loss from change in fair value of derivative liabilities
of $1,044,250 for the nine months ended September 30, 2019. The derivative liability activity comes from the Convertible notes
payable (and any related warrants). The Company analyzed the conversion features and warrants of the various note agreements for
derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the embedded conversion
features should be classified as a derivative because the exercise price of these Convertible notes are subject to a variable conversion
rate. The Company has determined that the conversion feature is not considered to be solely indexed to the Company’s own
stock and is therefore not afforded equity treatment. In accordance with ASC 815, the Company has bifurcated the conversion feature
of the notes and recorded a derivative liability.
The embedded derivatives for the notes are
carried on the Company’s consolidated balance sheet at fair value. The derivative liability is marked-to-market each measurement
period and any unrealized change in fair value is recorded as a component of the consolidated statement of operations and the associated
fair value carrying amount on the consolidated balance sheet is adjusted by the change. The Company fair values the embedded derivative
using a lattice-based valuation model. The conversion feature is valued at the date the feature can be convertible which ranges
from the issuance date of the note to 180 days after the issue date.
The following table summarizes the derivative
liabilities included in the consolidated balance sheet at September 30, 2019:
Fair
Value of Embedded Derivative and Warrant Liabilities:
Fair Value of Embedded Derivative and Warrant
Liabilities:
|
|
|
|
Balance,
December 31, 2018
|
|
$
|
235,085
|
|
Change
in fair value
|
|
|
1,044,250
|
|
Settlement
due to conversion
|
|
|
(1,279,335
|
)
|
|
|
|
|
|
Balance,
September 30, 2019
|
|
$
|
—
|
|
NOTE
10 -
|
STOCKHOLDERS’ EQUITY (DEFICIT)
|
Cumulative
Convertible Preferred Stock
On May 2, 2013, the Company began a private
placement offering to sell up to 200,000 shares of the Company’s 10% Series A Cumulative Convertible Preferred Stock. Under
the terms of the offering, the Company offered to sell up to 200,000 shares of preferred stock at $10 per share for a value of
$2,000,000. The preferred stock accumulates a 10% per annum dividend and was convertible at a conversion price of $0.075 per common
share at the option of the holder after a nine-month holding period. The conversion price was lowered to $0.05 per common share
for those holders who invested an additional $25,000 or more in the Company’s common stock in the aforementioned September
2014 Private Placement. The preferred shares have full voting rights as if converted and have a fully participating liquidation
preference.
As
of September 30, 2019, the 13,828 shares of outstanding preferred stock had undeclared dividends of approximately $88,000 and
could be converted into 4,521,020 shares of common stock, at the option of the holder.
As
of December 31, 2018, the 13,828 shares of outstanding preferred stock had undeclared dividends of approximately $77,000 and could
be converted into 4,314,537 shares of common stock, at the option of the holder.
NOTE
10 -
|
STOCKHOLDERS’ EQUITY (DEFICIT) (Continued)
|
Common Stock and Warrants
In January 2019, the Company repurchased 30,000
shares of common stock from an existing shareholder for $30 in cash. The transaction was recorded as treasury stock repurchased
and is included in the accompanying consolidated financial statements as a separate item in the condensed statements of stockholders’
equity (deficit).
During the three months ended March 31, 2019,
through majority shareholder consent, the Company increased the amount of authorized common stock shares to 1,500,000,000 which
increased the available shares to be issued and outstanding.
During the nine months ended September 30,
2019, the Company issued 158,895,513 shares under equity purchase agreements for cash proceeds totaling $613,800. Included in this
amount are 12,999,999 of shares purchased for $14,000 from related parties. Approximately 54,999,997 shares were issued during
the nine months ended September 30, 2019 but were included in shares issued and outstanding at December 31, 2018 as the related
cash was received prior to year-end 2018. There were additional share issuances to First Fire Global Opportunities Fund, LLC and
Crown Bridge Partners, LLC for cash related to the settlement of warrants previously attached to convertible notes payable. See
discussion below in Other Shares Issued.
During the nine months ended September 30,
2019, the Company issued 227,336,218 shares due to the conversion of principal and interest totaling $85,000. The fair value at
dates of conversion totaled approximately $1.3 million which were offset by the settlement of derivative liabilities upon conversion
of approximately $1.3 million. The difference was recognized as a gain on settlement of debt of approximately $21,000 and is included
in the condensed consolidated statements of operations in other income (expense) for the nine months ended September 30, 2019.
See Note 8 for further details on conversion of the Contingently Convertible Notes.
As discussed in Note 8, in July 2018, the Company
issued 15,000,000 shares in escrow which CMA Investments, LLC began to sell in March 2019 at the end of the six-month period. The
shares were sold at their discretion to bring down the balance of the debt. In accordance with the agreement, CMA Investments,
LLC had to sell all shares at no less than $0.035 per share. As of September 30, 2019, the Company has fully satisfied the CMA
note through the issuance of an additional 30,000,000 shares of its common stock.
Other Shares Issued
In January 2019, the Company issued 14,746,324
shares to Peak One Opportunity Fund, L.P. as part of a settlement. The shares were issued to settle any exercise of the 600,000
warrants previously granted to the investor related to convertible debt that was already converted, in addition to under conversion
of previously outstanding convertible notes payable. As part of settlement to consider any remaining dispute over convertible notes
payable and to avoid returning shares to the Company, the parties agreed the debt would be considered fully converted as of March
31, 2019. As part of that settlement agreement, the previously issued warrants were forfeited during the three months ended March
31, 2019 in exchange for shares noted above. On the date of settlement, the shares had a fair value of $33,917.
In March 2019, the Company issued a total of
31,333,333 shares for $200,000 in cash received from First Fire Global Opportunities Fund, LLC. The shares were issued to settle
any exercise of the 286,875 warrants previously granted to the investor related to convertible debt that was already converted
in addition to over conversion of previously outstanding convertible notes payable. These warrants were issued in connection with
convertible notes payable. As part of settlement to consider any remaining dispute over convertible notes payable and to avoid
returning shares to the Company, the parties agreed the debt would be considered fully converted as of March 31, 2019. As part
of that settlement agreement, the previously issued warrants were forfeited during the three months ended March 31, 2019 in exchange
for shares issued for cash noted above.
In January and March of 2019, the Company issued
31,166,667 shares for $100,000 in cash received from Crown Bridge Partners, LLC. The shares were issued to settle any exercise
of the 125,000 warrants previously granted to the investor related to convertible debt that was already converted. As part of settlement
to consider any remaining dispute over convertible notes payable, the parties agreed the debt would be considered fully converted
as of March 31, 2019. As part of that settlement agreement, the previously issued warrants were forfeited during the three months
ended March 31, 2019 in exchange for shares issued for cash noted above.
In May and June 2019, the Company issued 2,500,000
shares related to the purchase of the assets of Fluid Energy Conversion Inc. and 666,667 shares to Crown Bridge Partners, LLC for
amounts received after the close of the quarter.
During the nine months ended September
30, 2019, the Company issued 151,951,451 shares for consulting services valued at approximately $2,383,440 based on the
respective measurement dates. Of these shares, 90,791,655 were issued to related parties, see further detail of related party
shares in Note 12.
NOTE
11 -
|
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.
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 nine months ended September 30, 2019:
|
●
|
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.
|
In total for the nine months ended
September 30, 2019 and 2018, the Company recorded $2,406,409 and $2,100,736, respectively, of share-based compensation
expense related to employee and Board Members’ stock options. The unrecognized compensation expense as of September 30,
2019 was $56,544 for non-vested share-based awards to be recognized over a period of approximately four years.
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 September 30, 2019, there are 2,251,729 shares of common stock
available for issuance under the Plan. In 2014, the Board of Directors adopted an additional stock option plan which provides
for an additional 5,000,000 shares which are all available as of September 30, 2019. 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 nine-month
period ended September 30, 2019. 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 Term
|
|
|
|
|
|
|
|
Outstanding, December 31, 2018
|
|
|
29,098,270
|
|
|
$
|
0.21
|
|
|
|
4.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,325,000
|
)
|
|
|
0.21
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2019
|
|
|
27,773,270
|
|
|
$
|
0.21
|
|
|
|
3.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2019
|
|
|
26,558,271
|
|
|
$
|
0.21
|
|
|
|
3.98
|
|
As of September 30, 2019 and
December 31, 2018, the aggregate intrinsic value of the Company’s outstanding options was approximately $1,000 and $22,000,
respectively. The aggregate intrinsic value will change based on the fair market value of the Company’s common stock.
NOTE
11 -
|
SHARE-BASED
COMPENSATION (Continued)
|
Warrants
Warrants are issued to third
parties as payment for services, debt financing compensation and conversion and in conjunction with the issuance of common stock.
The fair value of each common stock warrant issued for services is estimated on the date of grant using the Black-Scholes option
pricing model.
The following table represents
the Company’s warrant activity for the nine months ended September 30, 2019:
|
|
Number
of Shares
|
|
|
Weighted
Average
Fair Value
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31,
2018
|
|
|
15,488,832
|
|
|
|
|
|
|
$
|
0.12
|
|
|
|
4.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,238,394
|
)
|
|
|
|
|
|
|
1.01
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2019
|
|
|
14,250,438
|
|
|
|
|
|
|
$
|
0.07
|
|
|
|
3.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2019
|
|
|
14,250,438
|
|
|
|
|
|
|
$
|
0.07
|
|
|
|
3.77
|
|
Of the warrants that were forfeited,
1,011,875 of them were issued in connection with convertible notes payable. When the notes fully converted, 411,875 warrants were
forfeited during the nine months ended September 30, 2019 as part of a settlement in two separate cash transactions. The remaining
600,000 warrants were forfeited during the nine months ended September 30, 2019 as part of a separate settlement in a cashless
issuance. See further discussion in Note 10 of these consolidated financial statements.
NOTE 12 -
|
RELATED PARTY TRANSACTIONS
|
Officers and Directors
Per Steven Rotman’s
Employment agreement dated July 22, 2019, he is to be paid approximately $125,000 per year in cash, $10,417 per month in shares
based on a 20-day average price at a 50% discount to market, $5,000 per month in cash for expenses as well as access to a Company
provided vehicle and health and life insurance. During the nine months ended September 30, 2019, the Company issued Steven Rotman
28,016,022 shares in accordance with his previous employment agreement that were accrued and expensed as of December 31, 2018.
The Company expensed $276,000 during the nine months ended September 30, 2019 related to 4,000,000 shares issued for Steven Rotman’s
services as a Board Member of the Company. In addition, the Company accrued and expensed approximately $378,000 related to approximately
9,127,000 shares to be issued in the future.
Designcenters.com
This entity is owned by Jamie Rotman,
who is the daughter of the Company’s CEO, Steven Rotman. Designcenters.com provided bookkeeping and management services to
the Company. In exchange for such services, the Company entered into a consulting agreement with the related party entity through
July 2019.
Per the Designcenter.com consulting
agreement, Designcenter.com was to receive approximately $7,100 per month to be paid in cash or shares based on a 20-day average
at a 50% discount to market, and a $10,000 quarterly bonus to be paid in shares using the same formula. During the nine months
ended September 30, 2019, the Company issued Designcenters.com 20,030,407 shares in accordance with the consulting agreement that
were accrued and expensed as of December 31, 2018. During the nine months ended September 30, 2019, the Company expensed approximately
$83,000 related to the consulting agreement. Of the expensed amount, approximately $41,000 was paid in cash. As of September 30,
2019, the Company had an accrued stock-based compensation balance of $42,000, for approximately 850,000 shares related to this
party.
NOTE 12 -
|
RELATED PARTY
TRANSACTIONS (Continued)
|
Blue Oar Consulting, Inc.
This entity is owned by
Gregory Rotman, who is the son of the Company’s CEO, Steven Rotman. Blue Oar Consulting, Inc. (“Blue Oar”) provides
business consulting services to the Company. In exchange for such services, the Company has entered into a consulting agreement
with the related party entity.
Per Blue Oar’s consulting
agreement, it is to be paid $15,000 per month in cash for expenses, and $12,500 per month to be paid in shares based on a 20-day
average at a 50% discount to market. During the nine months ended September 30, 2019, the Company issued Blue Oar 33,618,226 shares
in accordance with the consulting agreement that were accrued and expensed as of December 31, 2018. During the nine months ended
September 30, 2019, the Company expensed approximately $400,000. Of the expensed amount, approximately $135,000 was paid in cash.
As of September 30, 2019, the Company had an accrued stock-based compensation balance of $265,000, or approximately 6,700,000 shares
related to this party.
Polymer Consultancy Services,
Ltd.
This entity is owned in
part by Dr. R.K. Matthan, a director of the Company. Polymer Consultancy Services, Ltd. provides research and development consulting
services related to the Company’s latex products. The Company paid Polymer Consultancy Services, Ltd. approximately $23,000
for these services in the nine months ended September 30, 2019.
Rotman Family Notes Receivable
The Company entered into
separate agreements with members of the Rotman family to convert previous advances to ten-year term notes. The notes require annual
payments totaling approximately $36,000 plus interest at 0.30% through maturity in April 2024. As of September 30, 2019, the balance
on these notes is $182,020.
Employment and Consulting
Agreements
The Company has entered
into employment and consulting agreements with certain of our officers, employees, and affiliates. For employees, payment and benefits
would become payable in the event of termination by us for any reason other than cause, or upon change in control of our Company,
or by the employee for good reason.
There is currently one employment
agreement in place for 2019 with the CEO, Steven Rotman. See compensation terms in Note 12.
During the nine months ended
September 30, 2019, the Company entered into various services agreement with consultants for financial reporting, advisory, and
compliance services.
Litigation
From time to time, the Company
is party to certain legal proceedings that arise in the ordinary course and are incidental to our business. Future events or circumstances,
currently unknown to management, will determine whether the resolution of pending or threatened litigation or claims will ultimately
have a material effect on our consolidated financial position, liquidity or results of operations in any future reporting periods.
On February 19, 2019, EMA
Financial, Inc. filed a lawsuit in the Southern District of New York against the Company. The lawsuit alleged various breaches
of an underlying convertible promissory note and stock purchase agreement and sought four claims for relief: (i) specific performance
to enforce a stock conversion and contractual obligations; (ii) breach of contract; (iii) permanent injunction to enforce the stock
conversion and contractual obligations; and (iv) legal fees and costs of the litigation. The complaint was filed with a motion
seeking: (i) a preliminary injunction seeking an immediate resolution of the case through the stock conversion; (ii) a consolidation
of the trial with the preliminary injunctive hearing; and (iii) summary judgment on the first and third claims for relief.
The Company filed an opposition
to the motion and at oral argument the motion for injunctive relief was denied. The Court issued a decision permitting a motion
for summary judgment to proceed and permitted the Company the opportunity to supplement its opposition papers together with the
plaintiff who was also provided opportunity to submit reply papers. On April 5, 2019, the Company filed the opposition papers as
well as a motion to dismiss the first and third causes of action in the complaint. As of September 30, 2019, there was no accurate
assumption of liability to be accrued. It is the Company’s position that they issued all shares under the conversion terms.
NOTE 14 -
|
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.
NOTE 14 -
|
MAJOR CUSTOMERS AND VENDORS (Continued)
|
During the nine months ended
September 30, 2019, the Company made approximately 26% of its purchases from two major vendors. The Company owed its major vendors
approximately $400,000 at September 30, 2019. There were no significant customer or vendor concentrations at September 30, 2018.
Deferred tax assets consist of the following
as of:
|
|
September 30, 2019
|
|
|
September 30, 2018
|
|
Noncurrent deferred tax:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
4,853,337
|
|
|
$
|
4,190,337
|
|
State
|
|
|
210,000
|
|
|
|
—
|
|
Valuation allowance
|
|
|
(4,781,337
|
)
|
|
|
(4,190,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
282,000
|
|
|
$
|
—
|
|
Deferred taxes are caused
by temporary differences in the valuation of inventories, depreciation and a large net operating loss carryforward.
A benefit from income taxes
and related deferred taxes for the nine months ended September 30, 2019 and 2018 have not been computed due to the Company’s
large net operating loss carryforwards and valuation allowance. The deferred tax asset as of September 30, 2019 was acquired with
the Rotmans purchase (see Note 17).
For federal income tax purposes,
the Company has a net operating loss carryforward of approximately $20,940,000 as of December 31, 2018, of which approximately
$18,410,000 expires beginning in 2024 and $2,530,000 which can be carried forward indefinitely. For state income tax purposes,
the Company has a net operating loss carryforward of approximately $18,280,000 and $2,470,000 as of December 31, 2018 in Georgia
and Massachusetts, respectively, which expires beginning in 2023.
In addition, Rotmans has
a net operating loss carryforward of approximately $2,662,000 for federal income tax purposes of which $1,812,000 expires beginning
in 2029 and $850,000 can be carried forward indefinitely. Rotmans has a state operating loss carryforward of approximately $1,728,000
which expires beginning in 2022.
Pursuant to Internal Revenue
Code Section 382, the future realization of our net operating loss carryforwards to offset future taxable income may be suject
to an annual limitation as a result of ownership changes that may have occurred previously or that could occur in the future.
NOTE 16 -
|
PROFIT SHARING PLAN
|
The Company sponsors a qualified 401(k) profit
sharing plan covering all eligible employees. The plan permits participants to make tax-deferred contributions to the plan by salary
reduction. Company contributions are discretionary and are determined annually by the Board of Directors.
There were no Company contributions in 2019.
Participant and Company contributions are limited to amounts allowed under the Internal Revenue Code.
The Company offers no post-retirement benefits
other than the plan discussed above and no significant post-employment benefits.
NOTE 17 -
|
ACQUISITION OF ROTMANS
|
On July 18, 2019, the
Company acquired 58% of the outstanding shares of common stock of Rotmans, the largest furniture and flooring store
in New England, for an aggregate purchase price of $2,030,000. The consideration is to be paid in 25% notes payable over
4 to 8 years and 75% in notes convertible to common shares (see Note 8). The Company and Rotmans are exploring a number of
initiatives relating to environmentally friendly product development and distribution that will utilize the access to the
capital markets afforded by this combination.
NOTE 17 -
|
ACQUISITION OF ROTMANS (Continued)
|
The transaction has been accounted for using the acquisition
method of accounting which requires, among other things, the assets acquired and liabilities assumed to be recognized at their
fair values at the date of acquisition. The following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition:
Consideration Paid:
|
|
|
|
Notes
payable
|
|
$
|
507,500
|
|
Contingently convertible notes payable
|
|
|
1,522,500
|
|
|
|
|
|
|
Total consideration
|
|
$
|
2,030,000
|
|
|
|
|
|
|
Purchase Price Allocation:
|
|
|
|
|
Accounts
and notes receivable
|
|
$
|
300,836
|
|
Inventories
|
|
|
5,065,913
|
|
Other
current assets
|
|
|
654,293
|
|
Operating
lease right-of-use assets
|
|
|
9,975,859
|
|
Property
and equipment
|
|
|
1,786,707
|
|
Other
assets
|
|
|
559,153
|
|
Customer
relationships
|
|
|
110,000
|
|
Trade
name
|
|
|
820,000
|
|
Marketing
related intangibles
|
|
|
410,000
|
|
Goodwill
|
|
|
590,556
|
|
|
|
|
|
|
Total identifiable assets
|
|
|
20,273,317
|
|
Line
of credit
|
|
|
(2,374,090
|
)
|
Notes
payable
|
|
|
(225,311
|
)
|
Accounts
payable
|
|
|
(1,988,789
|
)
|
Accrued
expenses
|
|
|
(504,597
|
)
|
Operating
lease liabilities
|
|
|
(9,204,189
|
)
|
Unearned
revenue
|
|
|
(2,600,140
|
)
|
Noncontrolling
interest in net assets
|
|
|
(1,346,201
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
2,030,000
|
|
The assessment of
fair value is preliminary and is based on information that was available to management at the time the unaudited condensed consolidated
financial statements were prepared. Measurement period adjustments will be recorded in the period in which they are determined,
as if they had been completed at the acquisition date.
The goodwill of $590,000 recognized in the third quarter is derived from the acquisition of Rotmans.
The combined capabilities of our two organizations, including improved infrastructure in support of purchasing, marketing, inventory
control, advertising, accounting, warehousing and customer service create an opportunity to grow our brands and accelerate long
term growth and value for our people, customers, and suppliers. The addition of Rotmans to Vystar’s platform, positions the
Company as an authority in our customers’ homes and also creates a showcase for Vystar’s products. This partnership
represents a key opportunity to drive long-term growth and value creation for our shareholders. The Company has invested approximately
$400,000 in the completion of the merger and has committed a considerable amount of staff resources, most of which is a one-time
cost.
Unaudited
pro forma financial information
The following
unaudited pro forma information presents a summary of the Company’s combined operating results for the three and
nine months ended September 30, 2019 and 2018, as if the acquisition and the related financing transactions had
occurred on January 1, 2018. The following pro forma financial information is not necessarily indicative of the
Company’s operating results as they would have been had the acquisition been effected on the assumed date, nor is it
necessarily an indication of trends in future results for a number of reasons, including, but not limited to, differences
between the assumptions used to prepare the pro forma information, basic shares outstanding and dilutive equivalents, cost
savings from operating efficiencies, potential synergies, and the impact of incremental costs incurred in integrating the
businesses.
|
|
Three Months
Ended
September 30, 2019
|
|
Three Months
Ended
September 30, 2018
|
|
Nine Months
Ended
September 30, 2019
|
|
Nine Months
Ended
September 30, 2018
|
Total revenues
|
|
$
|
7,258,091
|
|
|
$
|
7,913,988
|
|
|
$
|
21,262,403
|
|
|
$
|
23,515,972
|
|
Loss from operations
|
|
$
|
(1,136,151
|
)
|
|
$
|
(925,336
|
)
|
|
$
|
(4,751,198
|
)
|
|
$
|
(4,253,978
|
)
|
Net loss
|
|
$
|
(1,531,289
|
)
|
|
$
|
(1,492,526
|
)
|
|
$
|
(6,169,176
|
)
|
|
$
|
(4,589,945
|
)
|
Basic and dilated loss per share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
NOTE 18 -
|
SUBSEQUENT EVENTS
|
The Company has evaluated subsequent events
through the date of the filing of its Form 10-K with the Securities and Exchange Commission. The Company is not aware of any 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 condensed consolidated financial statements.