The accompanying
notes are an integral part of these condensed financial statements.
The accompanying notes are an integral part of these condensed financial statements.
The accompanying notes are an integral part of these condensed financial statements.
NOTES
TO FINANCIAL STATEMENTS
NOTE
1 -
|
DESCRIPTION
OF BUSINESS
|
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 (NHS) who sources eco-friendly materials and technologies for use in furnishings and other
markets. On March 4, 2015, the Company announced that Hartford, CT based Gold Bond formed a strategic alliance with NHS to produce
and market the world’s first Vytex NRL based mattress. In June 2015, the first mattresses made with Vytex (hybrid and pure
Vytex) were placed on the sales floor at Rotmans Furniture and Carpet Store in Worcester, MA using the “Evaya” brand
and Gold Bond had shipped four versions of their “Brilliance” inner coil and pure foam mattresses (Emerald, Ruby,
Sapphire Plush and Sapphire Firm) to over 30 stores from Maine to Florida.
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 the 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’s
RxAir
™ air purifier ensuring every breath is free of
harmful pathogens, VOCs and odors.”
NOTE
2 -
|
BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Presentation
The
accompanying condensed balance sheet at December 31, 2018, which has been derived from audited financial statements and the unaudited
condensed consolidated financial statements 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 six months ended June 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
2 -
|
BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
The
Company has evaluated subsequent events through the date of the filing of its Form 10-K with the Securities and Exchange Commission.
Other than those events disclosed in Note 13, the Company is not aware of any other significant events that occurred subsequent
to the balance sheet date but prior to the filing of this report that would have a material impact on the Company’s financial
statements.
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. Although these estimates are based on management’s best knowledge
of current events and actions the Company may undertake in the future, actual results could differ from these estimates. Examples
include valuation allowances for deferred tax assets, provisions for bad debts, valuation of derivative liabilities, and fair
values of share-based compensation and other equity issuances.
Fair
Value of Financial Instruments
The
Company’s financial instruments consist of cash, accounts receivable, accounts payable, accrued expenses and interest payable,
lines of credit, shareholder notes payable, and long-term debt. The carrying values of all the Company’s financial instruments
approximate fair value because of their short maturities. In addition to the short maturities, the carrying amounts of our line
of credit and shareholder notes payable approximate fair value because the interest rates at June 30, 2019 and December 31, 2018
approximate market interest rates for the respective borrowings.
In
specific circumstances, certain assets and liabilities are reported or disclosed at fair value. Fair value is the exit price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date in the Company’s principal market for such transactions. If there is not an established principal market,
fair value is derived from the most advantageous market.
Valuation
inputs are classified in the following hierarchy:
|
●
|
Level
1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
|
|
|
|
|
●
|
Level
2 inputs are directly or indirectly observable valuation inputs for the asset or liability, excluding Level 1 inputs.
|
|
|
|
|
●
|
Level
3 inputs are unobservable inputs for the asset or liability.
|
Highest priority is given to Level 1 inputs
and the lowest priority to Level 3 inputs. Acceptable valuation techniques include the market approach, income approach, and cost
approach. In some cases, more than one valuation technique is used. 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 six months ended June 30, 2019.
Acquisition
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
2 -
|
BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Accounts
Receivable
Accounts
receivable are stated at the amount management expects to collect from outstanding balances. Management provides for uncollectible
amounts through a charge to earnings and a credit to an allowance for doubtful accounts based upon its assessment of the current
status of individual accounts. Balances that are still outstanding after management has performed reasonable collection efforts
are written off through a charge to the allowance and a credit to accounts receivable. As of June 30, 2019 and December 31, 2018,
the Company determined there were no amounts deemed uncollectible. The Company grants credit to 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. Vytex customers are located in both the United States and internationally.
Loan
Receivable, Related Party
The loan receivable, related party represents
advances to Murida Furniture Co., Inc. dba Rotmans Furniture (“Rotmans”) during the six months ended June 30, 2019.
As discussed in Notes 6 and 10, two shareholders advanced Rotmans funds directly for working capital purposes. Repayment terms
have not been determined at this time and funds are considered due upon demand.
Inventories
Inventories
include those costs directly attributable to the product before sale. Inventories consist primarily of finished goods of foam
toppers, mattresses and pillows and is carried at the lower of cost or market (net realizable value), using first-in, first-out
method.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation is provided by the use of the straight-line and accelerated methods for financial
and tax reporting purposes, respectively, over the estimated useful lives of the assets, generally 5 to 10 years. As of June 30,
2019, the net balance of property and equipment is $271,424 with accumulated depreciation of $51,907. 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 PCT (Patent Cooperation Treaty) patents. Patents are
carried at cost and are being amortized on a straight-line basis over their estimated useful lives, typically 20 years.
The
Company has trademark protection for “Vystar”, “Vytex”, and “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.
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 six months ended June 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 that the asset
might be impaired.
NOTE
2 -
|
BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Accounting
for acquisitions requires us to recognize, separately from goodwill, the assets acquired, and the liabilities assumed at their
acquisition-date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the
net of the acquisition-date fair values of the assets acquired and the liabilities assumed. While we use best estimates and assumptions
to accurately value assets acquired and liabilities assumed at the acquisition date, the estimates are inherently uncertain and
subject to refinement.
The
impairment model permits, and we utilize, a simplified approach for determining goodwill impairment. In the first step, we
evaluate the recoverability of goodwill by estimating the fair value of our reporting unit using multiple techniques,
including an income approach using a discounted cash flow model and a market approach. Based on an equal weighting of the
results of these two approaches, a conclusion of fair value is estimated. The fair value is then compared to the carrying
value of our reporting unit. If the fair value of a reporting unit is less than its carrying value, the Company recognizes
this amount as an impairment loss. Impairment losses, limited to the carrying value of goodwill, represent the excess of the
carrying amount of goodwill over its implied fair value.
Convertible
Notes Payable
Borrowings
are recognized initially at the principal amount received. Borrowings are subsequently carried at amortized cost; any difference
between the proceeds (net of transaction costs) and the redemption value is recognized as interest expense in the statements of
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 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 that 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, the Company has classified all conversion features as derivative
liabilities as of March 31, 2019, 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.
Loss
Per Share
The
Company presents basic and diluted loss per share. Because the Company reported a net loss for six months ended June 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
27,898,271 and 7,498,271 shares of common stock for six months ended June 30, 2019 and 2018, respectively, as their effect would
be anti-dilutive. Warrants to purchase 14,373,493 and 14,831,069 shares of common stock for six months ended June 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 4,451,880 and 4,175,121 shares of common stock for six months ended June 30, 2019
and 2018, respectively, were excluded from the computation of diluted loss per share as their effect would be anti-dilutive.
NOTE
2 -
|
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
Revenue
On
January 1, 2018, we adopted FASB Accounting Standards Codification (“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 balance sheets as of June
30, 2019 and December 31, 2018 and to our statements of operations and cash flows for the six months ended June 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 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 e-commerce and print
media customers, upon request, within 30 days of delivery. We estimate the amount of potential refunds at each reporting period
using a portfolio approach of historical data, adjusted for changes in expected customer experience, including seasonality and
changes in economic factors. For retailers, distributors and wholesalers, we do not offer a right of return or refund and revenue
is recognized at the time products are shipped to customers. In all cases, judgment is required in estimating these reserves.
Actual claims for returns could be materially different from the estimates. As of June 30, 2019 and December 31, 2018, reserves
for estimated sales returns totaled $3,000, respectively and are included in accompanying financial statements as accrued expenses
in the balance sheets.
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.
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.
Cost
of Revenue
Cost
of revenue consists primarily of product and freight costs and fees paid to online retailers for costs of material.
NOTE
2 -
|
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
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 six months ended June 30, 2019, Vystar’s research and development costs were approximately
$20,000.
Advertising
Costs
Advertising costs are expensed as incurred.
Advertising costs included in general and administrative expenses were approximately $43,000 and $33,000 for the six months ended
June 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 fair value of performance share awards is estimated
using a Monte-Carlo simulation model utilizing several key assumptions including expected peer group share price volatility, correlation
coefficients between peers, the risk-free rate of return, the expected dividend yield and other award design features. 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. A
valuation allowance for the full amount of the net deferred tax asset was recorded for the six months ended June 30, 2019 and
for the year ended December 31, 2018. 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 six months ended June 30, 2019 and 2018. The Company is no longer
subject to federal examination for years prior to 2015.
On
December 22, 2017, the Tax Cuts and Jobs Act was signed into law impacting corporations by reducing the maximum tax rate from
35% to 21%, as well as various other provisions relating to the deductibility of certain items. The Act is not expected to have
an immediate impact on the Company due to the large net operating loss carryforward as well as the full valuation allowance.
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.
NOTE
2 -
|
BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
|
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.
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 and any
cumulative effect from this change will not have a material impact on its financial statements.
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 and any cumulative effect from this change
will not have a material impact on its financial statements.
Recent
Accounting Pronouncements (Continued)
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 and any cumulative effect from
this change will 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 accounting principles
generally accepted in the United States of America and have been prepared on a going concern basis, which contemplates the realization
of assets and the settlement of liabilities in the normal course of business. However, the Company has incurred significant losses
and experienced negative cash flow since inception. At June 30, 2019, the Company had cash of $505,449 and a deficit in working
capital of approximately $1.0 million. Further, at June 30, 2019, the accumulated deficit amounted to approximately $37.6 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.
A
successful transition to attaining profitable operations is dependent upon obtaining sufficient financing to fund the Company’s
planned expenses and achieving a level of revenue adequate to support the Company’s cost structure. Management plans to
finance future operations through the use of cash on hand, increased revenue from the Vytex products, RxAir products, license
fees, stock warrant exercises from existing shareholders. As a result of this history of losses and financial condition, there
is substantial doubt about the Company’s ability to continue as a going concern.
There
can be no assurances that the Company will be able to achieve projected levels of revenue in 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 2019, which could have a material adverse effect on the ability to achieve the business
objectives and as a result may require the Company to file for bankruptcy or cease operations. The financial statements do not
include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities
that might be necessary should the Company be forced to take any such actions.
The
Company’s future expenditures will depend on numerous factors, including: the rate at which the Company can introduce and
license Vytex NRL to manufacturers; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual
property rights; and market acceptance of the Company’s products, services and competing technological developments. As
the Company expands its activities and operations, cash requirements are expected to increase at a rate consistent with revenue
growth after the Company has achieved sustained revenue generation.
NOTE
4 -
|
PROPERTY AND EQUIPMENT
|
Property
and equipment, net consists of the following:
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
Tooling
and testing equipment
|
|
$
|
319,000
|
|
|
$
|
319,000
|
|
Warehouse
equipment
|
|
|
3,831
|
|
|
|
3,831
|
|
Website
development
|
|
|
500
|
|
|
|
—
|
|
|
|
|
323,331
|
|
|
|
322,831
|
|
Accumulated
depreciation
|
|
|
(51,907
|
)
|
|
|
(31,485
|
)
|
Property
and equipment, net
|
|
$
|
271,424
|
|
|
$
|
291,346
|
|
The
Company incurred $20,422 and $26,394 in depreciation expense for the six months ended June 30, 2019 and 2018, respectively.
NOTE 5 -
|
INTANGIBLE ASSETS
|
Intangible
assets were as follows:
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
Period
|
|
|
|
2019
|
|
|
2018
|
|
|
(in
Years)
|
|
Amortized
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
|
10
|
|
Prioprietary
technology
|
|
|
610,000
|
|
|
|
610,000
|
|
|
|
10
|
|
Tradename
and brand
|
|
|
610,000
|
|
|
|
610,000
|
|
|
|
10
|
|
Patents
|
|
|
351,668
|
|
|
|
242,149
|
|
|
|
6
- 20
|
|
Noncompete
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,721,668
|
|
|
|
1,612,149
|
|
|
|
|
|
Accumulated
amortization
|
|
|
(316,984
|
)
|
|
|
(237,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
Assets, net
|
|
|
1,404,684
|
|
|
|
1,374,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
147,092
|
|
|
|
147,092
|
|
|
|
|
|
Trademarks
|
|
|
9,072
|
|
|
|
9,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
intangible assets
|
|
$
|
1,560,848
|
|
|
$
|
1,531,011
|
|
|
|
|
|
Amortization
expense for the six months ended June 30, 2019 and 2018 was $79,682 and $55,791, respectively.
Estimated
future amortization expense for finite-lived intangible assets is as follows:
|
|
|
Amount
|
|
Remaining
in 2019
|
|
|
$
|
83,884
|
|
2020
|
|
|
|
167,768
|
|
2021
|
|
|
|
167,768
|
|
2022
|
|
|
|
167,768
|
|
2023
|
|
|
|
167,768
|
|
Thereafter
|
|
|
|
649,728
|
|
Total
|
|
|
$
|
1,404,684
|
|
On
May 28, 2019, Vystar acquired the assets of Fluid Energy Conversion Inc., primarily consisting of a patent on the Hughes Reactor,
which has the ability to control, enhance, and focus energy in flowing liquids and gases. The Company paid consideration of $100,000
in restricted common stock (2,500,000 shares) for the patent.
NOTE
6 -
|
NOTES PAYABLE AND LOAN FACILITY
|
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, 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%
(7.45% at June 30, 2019) on amounts drawn and fees. The weighted average interest rate in effect on the borrowings for the six
months ended June 30, 2019 was 6.08%. There are no available borrowings under the CMA note at June 30, 2019.
The
holders of CMA Investments, LLC agreed as of July 10, 2018, to change the terms of the debt as follows:
|
●
|
The
Company will continue to service the interest on the debt.
|
|
|
|
|
●
|
The
Company entered into a Loan Payoff and Share Payment Agreement on July 10, 2018. The Company had borrowed approximately
$1,500,000 from CMA Investments, LLC (a related party) (the “Lender”) pursuant to several promissory notes.
The Lender made the loans by using proceeds from a loan through Atlantic Capital Bank (the “ACB Loan”). In
lieu of cash, the Company has paid the Lender 15,000,000 shares of restricted common stock (the “Shares”),
which based on closing price on June 10, 2018 of $0.034 is equal to $510,000, provided that the Company continue to pay
interest on the ACB Loan on Lender’s behalf for a six-month period. The certificate representing the Shares was
delivered to an escrow agent. After six months, the Escrow Agent was authorized to sell the Shares at a price of no less
than $0.035 per share with a targeted date to complete sales of July 1, 2022. The Company is required to pay any shortfall
between the proceeds Lender receives on the sale of the Shares and the total principal outstanding on the Company Loan
at the settlement date. In the event of a surplus, the Company was authorized to repurchase the remaining Shares at par
value. As of June 30, 2019, the Company reduced the amounts due by approximately $900,000 of the $1.5 million CMA note
through the issuance out of escrow and sale of 15,000,000 shares of its common stock. The balance as of June 30, 2019
on the CMA note was $600,000. See Note 13.
Accrued
interest on the loan was $6,250 and $0 as of June 30, 2019 and December 31, 2018, respectively. The Company incurred approximately
$100,000 of consulting services with CMA during the six months ended June 30, 2019.
|
Loan
Payable Fidelity Bank
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 June 30, 2019.
NOTE 6 -
|
NOTES PAYABLE AND LOAN FACILITY (Continued)
|
Shareholder, Convertible and Contingently
Convertible Notes Payable
The
following table summarizes the shareholder notes payable:
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
Shareholder, convertible and contingently convertible notes
|
|
$
|
885,895
|
|
|
$
|
542,528
|
|
Accrued
interest
|
|
|
25,697
|
|
|
|
35,140
|
|
Debt
discount
|
|
|
—
|
|
|
|
(73,519
|
)
|
Total
shareholder notes and accrued interest
|
|
|
911,592
|
|
|
|
504,149
|
|
|
|
|
|
|
|
|
|
|
Less:
current portion
|
|
|
(374,871
|
)
|
|
|
(504,149
|
)
|
|
|
|
|
|
|
|
|
|
Total
long-term debt
|
|
$
|
536,721
|
|
|
$
|
—
|
|
Shareholder
Notes Payable
Included
in the table above, there were shareholder notes payable outstanding as of June 30, 2019 and December 31, 2018 totaling $885,895
and $338,195, respectively.
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 June 30, 2019, the balance on these notes was$215,046 and they were extended one additional
year until January 2020 at which point they become eligible for conversion.
Convertible
and Contingently Convertible Notes Payable
From January 1, 2018 and through the date
of these 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 June 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 six months ended June 30, 2019 upon negotiation and conversion of the remaining outstanding balances.
NOTE 6 -
|
NOTES PAYABLE AND LOAN FACILITY (Continued)
|
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 has the option to redeem the note
at varying prices based upon the redemption date. As of March 31, 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.
Other
Notes Payable
In
addition, the following notes were Convertible after six 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
|
|
|
76,500
|
|
|
|
5
|
%
|
|
|
Nov
13, 2018
|
|
|
|
72,500
|
|
|
|
81,500
|
|
May
2, 2018 Power Up #3
|
|
|
83,000
|
|
|
|
12
|
%
|
|
|
May
23, 2019
|
|
|
|
80,000
|
|
|
|
83,000
|
|
October
10, 2018 Power Up #4
|
|
|
103,000
|
|
|
|
12
|
%
|
|
October 10, 2019
|
|
|
|
103,000
|
|
|
|
103,000
|
|
All
notes have been paid in full or fully converted as of June 30, 2019.
During
the six months ended June 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.
NOTE 6 -
|
NOTES PAYABLE AND LOAN FACILITY (Continued)
|
During the six months ended
June 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 lowest 2 day closing price for the trailing
20 days prior to conversion and carrying a 35% discount. These notes are included in the table below:
|
|
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
|
|
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.
On
June 30, 2019, the Company issued contingently convertible promissory notes totaling $180,000, to Steve 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, and (iii) are convertible at the Company’s option after December 31, 2019. These notes 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.
NOTE
7
-
|
DERIVATIVE
LIABILITIES
|
As
of June 30, 2019, the Company had a $0 derivative liability balance on the balance sheet and recorded a loss from derivative fair
value adjustments of $1,044,250 for the six months ended June 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 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 statement of
operations and the associated fair value carrying amount on the 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 balance sheet at June 30, 2019:
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,
June 30, 2019
|
|
$
|
—
|
|
NOTE
8
-
|
STOCKHOLDERS’
DEFICIT
|
Cumulative
Convertible Preferred Stock
On
May 2, 2013, the Company began a private placement offering to sell up to 200,000 shares of the Company’s 10% Series A Cumulative
Convertible Preferred Stock. Under the terms of the offering, the Company offered to sell up to 200,000 shares of preferred stock
at $10.00 per share for a value of $2,000,000. The preferred stock accumulates a 10% per annum dividend and was convertible at
a conversion price of $0.075 per common share at the option of the holder after a nine-month holding period. The conversion price
was lowered to $0.05 per common share for those holders who invested an additional $25,000 or more in the Company’s common
stock in the aforementioned September 2014 Private Placement. The preferred shares have full voting rights as if converted and
have a fully participating liquidation preference.
As
of June 30, 2019, the 13,828 shares of outstanding preferred stock had undeclared dividends of approximately $84,000 and could
be converted into 4,451,881 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.
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 financial statements as a separate item in the condensed statement of stockholders’ 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 six months ended June 30, 2019, the Company issued 156,715,384 shares under equity purchase agreements for cash proceeds totaling
$583,299. 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 six months ended June 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 for cash related to the settlement of warrants previously attached to convertible notes payable.
See discussion below in
Other Shares Issued.
During
the six months ended June 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 statement of operations in other income (expense) for the six months ended June 30, 2019.
See Note 6 for further details on conversion of the Contingently Convertible Notes.
As
discussed in Note 6, 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 June 30,
2019, the Company reduced the amounts due by approximately $900,000 of the $1.5 million CMA note through the issuance and sale
of 15,000,000 shares of its common stock that were previously held in escrow.
NOTE
8
-
|
STOCKHOLDERS’
DEFICIT (Continued)
|
Other
Shares Issued
In
January 2019, the Company issued 14,746,324 shares to Peak One 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. 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 Technology and 666,667
shares to Crown Bridge Partners for amounts received after the close of the quarter.
During
the six months ended June 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, 81,664,655 were issued to related parties, see further detail of related
party shares in Note 10.
NOTE
9 -
|
SHARE-BASED
COMPENSATION
|
Generally
accepted accounting principles require share-based payments to employees, including grants of employee stock options, warrants,
and common stock to be recognized in the income statement based on their fair values at the date of grant, net of estimated forfeitures.
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 six months ended June 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 six months ended June 30, 2019 and 2018, the Company recorded $2,100,736 and $1,611,911, respectively, of share-based
compensation expense related to employee and Board Members’ stock options. The unrecognized compensation expense as of June
30, 2019 was $64,155 for non-vested share-based awards to be recognized over a period of approximately four years.
NOTE
9 -
|
SHARE-BASED
COMPENSATION (Continued)
|
Options
During
2004, the Board of Directors of the Company adopted a stock option plan (the “Plan”) and authorized up to 4,000,000
shares to be issued under the Plan. In April 2009, the Company’s Board of Directors authorized an increase in the number
of shares to be issued under the Plan to 10,000,000 shares and to include the independent Board Members in the Plan in lieu of
continuing the previous practice of granting warrants each quarter to independent Board Members for services. At June 30, 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 June 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 six-month period ended June 30, 2019. The following table summarizes all stock option activity
of the Company for the period.
|
|
|
|
|
|
Weighted
|
|
|
|
|
Number
|
|
|
Average
|
|
|
|
|
of
Shares
|
|
|
Exercise
Price
|
|
Outstanding,
December 31, 2018
|
|
|
|
29,098,270
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
1,200,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
June 30, 2019
|
|
|
|
27,898,270
|
|
|
$
|
0.21
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
June 30, 2019
|
|
|
|
26,733,271
|
|
|
$
|
0.22
|
|
As
of June 30, 2019 and December 31, 2018, the aggregate intrinsic value of the Company’s outstanding options was
approximately $1,100,000 and $22,000, respectively. The aggregate intrinsic value will change based on the fair market value
of the Company’s common stock.
Warrants
Warrants
are issued to third parties as payment for services, debt financing compensation and conversion and in conjunction with the issuance
of common stock. The fair value of each common stock warrant issued for services is estimated on the date of grant using the Black-Scholes
option pricing model.
The
following table represents the Company’s warrant activity for the six months ended June 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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
December 31, 2018
|
|
|
|
15,488,832
|
|
|
|
|
|
|
|
0.12
|
|
|
|
4.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
(1,115,339
|
)
|
|
|
|
|
|
|
0.44
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
June 30, 2019
|
|
|
|
14,373,493
|
|
|
|
|
|
|
$
|
0.08
|
|
|
|
4.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
June 30, 2019
|
|
|
|
14,373,493
|
|
|
|
|
|
|
$
|
0.08
|
|
|
|
4.01
|
|
NOTE
9 -
|
SHARE-BASED
COMPENSATION (Continued)
|
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 six months ended June 30, 2019 as part of a settlement in two separate cash
transactions. The remaining 600,000 warrants were forfeited during the six months ended June 30, 2019 as part of a separate settlement
in a cashless issuance. See further discussion in Note 8 of these financial statements.
NOTE 10 -
|
RELATED PARTY TRANSACTIONS
|
Officers
and Directors
Per
Steven Rotman’s Employment agreement, he is to be paid approximately $1 per year in cash and $20,833 per month in shares
based on a 20-day average price at a 0% discount to market. During the six months ended June 30, 2019, the Company issued Steven
Rotman 28,016,022 shares in accordance with his employment agreement that were accrued and expensed as of December 31, 2018. The
Company expensed $276,000 during the six months ended June 30, 2019 related to 4,000,000 shares issued for services as a Board
Member of the Company. In addition, the Company accrued and expensed approximately $157,000 related to approximately 3,925,000
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 provides bookkeeping
and management services to the Company. In exchange for such services, the Company has entered into a consulting agreement with
the related party entity.
Per Designcenter.com
consulting agreement, it is to receive approximately $7,100 per month to be paid in 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 six months ended
June 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 six months ended June 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 June 30,
2019, the Company had an accrued stock-based compensation balance of $42,000, or approximately 1,050,000 shares related to
this party.
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 six months ended June 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 six months ended June
30, 2019, the Company expensed approximately $278,000. Of the expensed amount, approximately $90,000 was paid in cash. As of June
30, 2019, the Company had an accrued stock-based compensation balance of $188,000, or approximately 4,700,000 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 six months ended June 30, 2019.
Rotmans
Furniture
During
the six months ended June 30, 2019, the Company had sales of approximately $54,000 to Rotmans. Steven Rotman, the Company’s
CEO, is a 42% owner of Rotmans. At June 30, 2019 and December 31, 2018, the Company had an amount receivable of approximately
$1,400 and $2,254, respectively.
NOTE 10 -
|
RELATED PARTY TRANSACTIONS (Continued)
|
During
the six months ended June 30, 2019 and 2018, the Company utilized certain warehouse staff, warehouse and office space/services
and an executive assistant of Rotmans for the Company’s purposes. The Company estimates the cost of such services to be
approximately $40,000 per month or approximately $240,000, respectively, for the six months ended June 30, 2019 and 2018 (based
on the term such resources were used). The Company was not charged for these resources utilized through April 30, 2019. Beginning
May 1, 2019, the Company is being charged for a proportionate share of the warehouse labor utilized by the Company. These charges
totaled an aggregate of $32,000 for May and June, 2019.
In
April and May 2019, two shareholders advanced $180,000 directly to Rotmans on behalf of the Company for working capital purposes.
See Note 6 for further discussion.
Employment
and Consulting Agreements
We
have 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 10.
During
the six months ended June 30, 2019, the Company entered into various services agreement with consultants for financial reporting,
advisory, and compliance services. The services agreement calls for monthly payments.
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 June 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 12 -
|
MAJOR CUSTOMERS AND VENDORS
|
Major
customers and vendors are defined as a customer or vendor from which the Company derives at least 10% of its revenue and cost
of revenue, respectively.
During the six months ended June 30,
2019, revenue came from three major customers; Jeffco, Med Air Solutions, and Rotmans. During the six months ended June 30,
2018, revenue came from three major customers; Jeffco, King Koil, and Rotmans. There was no receivable for Jeffco and Med Air
Solutions as of June 30, 2019. Rotmans owed the Company approximately $1,400 at June 30, 2019. The receivable for Jeffco and
Rotmans was approximately $7,000 and $2,300, respectively, at December 31, 2018. There was no receivable for Med Air
Solutions as of December 31, 2018.
NOTE 12 -
|
MAJOR CUSTOMERS AND VENDORS (Continued)
|
During
the six months ended June 30, 2019 and 2018, the Company made purchases from one major vendor; Lien A American, Inc. (“Lien
A”). The Company owed Lien A approximately $89,000 and $83,000 at June 30, 2019 and December 31, 2018, respectively.
NOTE
13 -
|
SUBSEQUENT
EVENTS
|
As
discussed in Note 8, in July 2018, the Company issued 15 million shares in escrow, which CMA Investments, LLC (“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 debt. In accordance with the agreement, CMA had to sell all shares at no less than $0.035 per share. As of June 30, 2019,
the Company reduced the amounts due by $.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 finalized an agreement
to issue an additional 30 million shares to CMA to settle the shortfall. The details are as follows:
|
•
|
Upon
delivery of 15 million shares for the second tranche, the debt will be considered 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 will 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
Company has a right to repurchase an option on or 5 million shares of the third tranche
of CMA shares for $1.
|
|
•
|
CMA
will provide consulting services to the Company for the next twelve months at no cost.
|
|
•
|
The
agreement specifies that if the second tranche shares are sold at an average price of
$0.08 and $0.10 per share, CMA must purchase 4 million shares of the Company. If the
average price is between $0.15 and $0.20 per share, CMA must purchase 5 million shares
of the Company.
|
|
•
|
The
agreement specifies that if the third tranche shares are sold at an average price of
$0.08 through $0.20, CMA must purchase 6 million shares of the Company.
|
On
July 18, 2019, the Company entered into a $3 million loan facility with Fidelity Co-operative Bank, whereby it and Rotmans executed
a Master Credit Agreement, a $3,000,000 Revolving Demand Line of Credit Note and a Master Security Agreement. As a demand note,
the creditor may make a demand for payment at any time. Absent an extension, the line will be reduced to $2.5 million in September
2019. Steven Rotman personally guaranteed the Fidelity Co-operative Bank loan facility. As consideration for his guaranty, he
was granted rights to preferred stock. The preferred stock has a redemption right (for 299 shares) for $75,000 after two years
and voting rights equal to 40% of the voting class taken with all other classes of stock. The Company intends to file a Certificate
of Designations to create the preferred class, after which Mr. Rotman will receive his preferred shares. Five other stockholders
(some of whom are affiliates of the Company) who delivered a guarantee of $500,000 were granted rights to a separate class of
preferred stock, which rights include a redemption right of $100,000 after two years and voting rights equal to 20% of the voting
class taken with all other classes of stock. The Company intends to file one or more Certificates of Designations to create the
preferred class, after which the guarantors will receive their preferred shares.
On
July 22, 2019, the Company purchased 58% of the outstanding shares of common stock of Rotmans for an aggregate purchase price
of $2,030,000, pursuant to a stock purchase agreement. The consideration is to be paid in 25% cash over 8 years and 75% in notes
convertible to common shares. The Company expects this transaction to be accounted for as an acquisition of Rotmans by Vystar;
however, the final accounting treatment is currently being assessed by the Company and its advisors. The Company and Rotmans are
exploring a number of initiatives relating to environmentally friendly product development and distribution that will utilize
the access to the capital markets afforded by this combination.
The
Company is in the process of finalizing the purchase price allocation and this preliminary allocation is subject to adjustment.
Accordingly, differences between these preliminary estimates and the final allocation could have a material impact on the pro
forma disclosures. The following table summarizes the preliminary allocation of consideration paid to the acquisition date fair
value of the assets acquired and liabilities assumed based on management’s estimate of fair value (in thousands):
Consideration Paid:
|
|
|
|
Notes payable
|
|
|
$
|
507
|
|
Convertible notes payable
|
|
|
|
1,523
|
|
|
|
|
|
|
|
Total consideration
|
|
|
$
|
2,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Price Allocation:
|
|
|
|
|
|
Accounts and notes receivable
|
|
|
$
|
568
|
|
Inventories
|
|
|
|
5,308
|
|
Other current assets
|
|
|
|
573
|
|
Property and equipment
|
|
|
|
971
|
|
Other assets
|
|
|
|
537
|
|
Goodwill
|
|
|
|
2,175
|
|
|
|
|
|
|
|
Total identifiable assets
|
|
|
|
10,132
|
|
Line of credit
|
|
|
|
(2,196
|
)
|
Notes payable
|
|
|
|
(414
|
)
|
Accounts payable
|
|
|
|
(2,203
|
)
|
Accrued expenses
|
|
|
|
(640
|
)
|
Deferred revenue
|
|
|
|
(2,753
|
)
|
Minority interest in net assets
|
|
|
|
104
|
|
|
|
|
|
|
|
Net assets acquired
|
|
|
$
|
2,030
|
|
Acquisition
costs associated with this transaction were approximately $60,000 through June 30, 2019 and were charged to expense. These costs
were primarily for auditing and legal fees and are included in general and administrative expenses.
The
following table contains an unaudited pro forma condensed consolidated statement of operations for the six months ended June 30,
2019 and 2018, as if the Rotmans acquisition had occurred at the beginning of each of the respective periods (in thousands):
|
|
Six
Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
|
(unaudited)
|
|
(unaudited)
|
Revenue
|
|
$
|
13,936
|
|
|
$
|
15,474
|
|
Loss from operations
|
|
$
|
(3,634
|
)
|
|
$
|
(3,350
|
)
|
Net loss
|
|
$
|
(4,595
|
)
|
|
$
|
(2,897
|
)
|
Basic and diluted loss
per share:
|
|
|
|
|
|
|
|
|
Net loss per share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.02
|
)
|