UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

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

 

For the Fiscal Year Ended December 31, 2020

 

OR

 

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

 

Commission File No. 000-53754

 

VYSTAR CORPORATION

(Exact name of registrant as specified in its charter)

 

GEORGIA   20-2027731
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

725 Southbridge St    
Worcester, MA   01610
(Address of principal executive offices)   (Zip Code)

 

Registrants telephone number, including area code: (508) 791-9114

 

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

 

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

 

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

 

Common Stock, par value $0.0001 per share

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ] No [X]

 

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

 

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

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [  ]

 

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

 

Large Accelerated Filer [  ]   Accelerated Filer [  ]   Non-Accelerated Filer [X]   Smaller Reporting Company [X]
             
            Emerging growth Company [  ]

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

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

 

As of June 30, 2020, the aggregate market value of shares held by non-affiliates of the registrant (based upon the closing sale price of such shares on the OTC Market on June 30, 2020) was $22,178,492. See Item 12.

 

As of April 15, 2021, there were 1,264,072,966 shares of the registrant’s common stock outstanding and 8,698 shares of the registrants Series A preferred stock.

 

 

 

 
 

 

Vystar Corporation

Annual Report on Form 10-K

For the Year Ended December 31, 2020

Table of Contents

 

Part I
       
Item 1.   Business 4
Item 1A   Risk Factors 6
Item 1B.   Unresolved Staff Comments 12
Item 2.   Properties 12
Item 3.   Legal Proceedings 12
Item 4.   Mine Safety Disclosures 13
       
Part II
       
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 13
Item 6.   Selected Financial Data 15
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
Item 7A.   Quantitative and Qualitative Disclosures about Market Risk 20
Item 8.   Financial Statements and Supplementary Data 20
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 21
Item 9A.   Controls and Procedures 21
Item 9B.   Other Information 22
       
Part III
       
Item 10.   Directors, Executive Officers and Corporate Governance 22
Item 11.   Executive Compensation 25
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 27
Item 13.   Certain Relationships and Related Transactions, and Director Independence 29
Item 14.   Principal Accountant Fees and Services 30
       
Part IV
       
Item 15.   Exhibits and Financial Statement Schedules 32
Item 16.   Form 10K Summary 34
Signatures 35

 

2
 

 

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

 

Certain oral and written statements made by Vystar Corporation about future events and expectations, including statements in this Annual Report on Form 10-K (the “Report”) contain forward-looking statements, within the meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Securities Act of 1933, as amended (the “Securities Act”), that involve risks and uncertainties. For those statements, we claim the protection of the safe-harbor for forward-looking statements contained in the Private Securities Litigation Act of 1995. In some cases, forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may” and similar expressions. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Report or the statement. All of these forward-looking statements are based on information available to us at this time, and we assume no obligation to update any of these statements. Actual results could differ from those projected in these forward-looking statements as a result of many factors, including those identified in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere. We urge you to review and consider the various disclosures made by us in this Report, and those detailed from time to time in our filings with the Securities and Exchange Commission (the “SEC”), that attempt to advise you of the risks and factors that may affect our future results. We qualify any forward-looking statements entirely by these cautionary factors.

 

The above-mentioned risk factors are not all-inclusive. Given these uncertainties and that such statements, speak only as of the date made; you should not place undue reliance on forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

3
 

 

PART I

 

ITEM 1. BUSINESS

 

Overview

 

Vystar Corporation (“Vystar”, the “Company”, “we,” “us,” or “our”) is based in Worcester, Massachusetts. The Company uses patented technology to produce a line of innovative air purifiers, which destroy viruses and bacteria through the use of ultraviolet light. In addition, Vystar manufactures and sells reduced allergen natural rubber latex used primarily in various bedding products.

 

Vystar has a majority ownership in Murida Furniture Co., Inc. dba Rotmans Furniture, one of the largest independent furniture stores in the U.S.

 

Company Background

 

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) and created the RxAir division.

 

The RxAir product line includes:

 

  RXair™ Residential Filterless Air Purifier
     
  RX400 ™ FDA cleared Class II Filterless Air Purifier
     
  RX3000™ Commercial FDA cleared Class II Air Purifier

 

RxAir promotes a healthy lifestyle improving the quality of life of each and every customer. Independently tested by EPA- and FDA-certified laboratories, the RxAir has been proven to destroy greater than 99% of bacteria and viruses and reduce concentrations of odors and Volatile Organic Compounds (“VOCs”). The RxAir uses high-intensity germicidal UV lamps that destroy bacteria and viruses instead of just trapping them, setting it apart from ordinary air filtration units. RxAir units are sold online at www.RxAir.com and are available through multiple third-party distributors. RxAir® and ViraTech ® are registered trademarks of Vystar Corporation.

 

Vystar is the exclusive creator of Vytex Natural Rubber Latex (NRL), a multi-patented, all-natural, raw material that contains significantly reduced levels of the proteins found in natural rubber latex and can be used in over 40,000 products. Vytex NRL is a 100% renewable resource, environmentally safe, “green” and fully biodegradable. Vystar is working with manufacturers across a broad range of consumer and medical products bringing Vytex NRL to market in adhesives, gloves, balloons, condoms, other medical devices and natural rubber latex foam mattresses, toppers, and pillows.

 

In April of 2018, Vystar acquired the assets of NHS Holdings, LLC (“NHS”) 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.

 

4
 

 

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.

 

In July of 2019, Vystar acquired 58% of the outstanding shares of common stock of Murida Furniture Co., Inc. dba Rotmans Furniture (“Rotmans”), 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 enabled 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 offers significant marketing and advertising opportunities for all of Vystar’s brands to Rotmans’ thousands of existing customers.

 

In December of 2020, Vystar selected Corrie MacColl Limited, a subsidiary of global natural rubber supply chain manager Halcyon Agri, as its exclusive global partner for all aspects of product market development and distribution of patented Vytex deproteinized latex.

 

Competition

 

RxAir

 

The residential air purification market is a highly fragmented competitive business. Vystar competes with a large number of companies on many factors including price, quality, innovation, reputation, distribution and promotion.

 

Furniture Store

 

The retail sale of home furnishings is a highly competitive business. There has been growth in the e-commerce channel both from internet only retailers and those with a brick-and-mortar presence. We also compete with numerous individual retail stores as well as chains in our immediate geographic area. Mass merchants and certain department stores also have limited furniture product offerings.

 

Natural Rubber Latex

 

Synthetic raw materials such as ethylene, propylene, styrene and butadiene compete with NRL. Currently, it is estimated that NRL processors have lost one-half of the overall latex market to synthetic latex. Despite the switch to non-latex alternatives, it is estimated that almost 70% of exam gloves and nearly 80% of surgical gloves used in U.S. hospitals are still made with NRL.

 

Intellectual Property

 

The Company currently holds a portfolio of patents and trademarks in the U.S. and other various foreign countries. No assurance can be given that such patent and trademark protection will provide substantial protection from competition. We are committed to aggressively challenging any infringements of our patents and/or trademarks.

 

Government Regulation

 

We are not subject to direct governmental regulation other than the laws and regulations generally applicable to businesses in the domestic and foreign jurisdictions in which we operate.

 

Our RxAir400 product was cleared by the FDA as a Class II medical device in November 2008. FDA clearance to sell our product as a Class II medical device provides invaluable credibility in the marketplace. By granting a listing, the FDA indicates it has reviewed all aspects of a product, including efficacy of the technology, independent test results and product safety to ensure that the product complies with our claims. Few air purification products are listed by the FDA, and it is extremely important that we expend the resources necessary to maintain this listing as a Class II medical device with the FDA.

 

5
 

 

Seasonality

 

Our business is affected by traditional retail seasonality, advertising and promotion programs and general economic trends.

 

Employees

 

As of December 31, 2020, Vystar had one employee, Steven Rotman, CEO. Rotmans had 63 full-time and 20 part-time employees. None of the employees are represented by a labor organization or a party to any collective bargaining arrangement.

 

Corporate Information

 

Vystar Corporation is a Georgia corporation that was incorporated in 2003. Our predecessor company, Vystar LLC, was formed by our founder, Travis Honeycutt, in February 2000 as a Georgia limited liability company. Our corporate office is located at 725 Southbridge Street, Worcester, Massachusetts 01610. Our website address is www.vystarcorp.com.

 

The information contained on, or that can be accessed through, our website is not a part of this Report. We have links on our website to reports, information statements, and other information that we file electronically with the Securities and Exchange Commission, or SEC, at the Internet website maintained by the SEC, www.sec.gov. In addition to visiting our website and the SEC’s website, you may read and copy public reports we file with or furnish to the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

ITEM 1A. RISK FACTORS

 

Our business is subject to a number of risks and uncertainties — many of which are beyond our control — that may cause our actual operating results or financial performance to be materially different from our expectations. If one or more of the events discussed below were to occur, actual outcomes could differ materially from those expressed in or implied by any forward-looking statements we make in this report or our other filings with the SEC, and our business, financial condition, results of operations or liquidity could be materially adversely affected; furthermore, the trading price of our common stock could decline and our shareholders could lose all or part of their investment.

 

Vystar presently does not generate the cash needed to finance its current and anticipated operations.

 

The Company is still in the early stage of establishing our business including attracting new customers and increasing sales. Our financial success will be dependent upon the soundness of our business concept, our management’s ability to successfully and profitably execute our plan, and our ability to raise additional capital.

 

Our limited operating history makes it difficult to evaluate our business. We expect to make significant future operating expenditures to develop and expand our business into areas such as OEM product lines and offerings in the mattress and furniture arenas. We may incur significant losses in the future for a number of reasons, including due to the other risks described in this Report, and we may encounter unforeseen expenses, difficulties, complications and delays and other unknown events. Accordingly, we may not be able to achieve or maintain profitability, and we may incur significant losses for the foreseeable future. See additional discussion under Liquidity and Capital Resources.

 

At December 31, 2020 our cash position was $620,539 and we had an accumulated deficit of $48,713,184. We plan to finance our operations for the next twelve (12) months through the use of cash on hand, funds afforded by second round of the Paycheck Protection Program, raising capital through private placement and increased sales from RxAir products by exploring sales partnerships with third-party wholesalers and retailers. The Company is also evaluating adopting a consignment-based sales model at Rotmans. You should consider, among other factors, our prospects for success in light of the risks and uncertainties encountered by companies that, like us, have not generated net earnings on an annual basis. Various factors, such as economic conditions, regulatory and legislative considerations, and competition, may also impede our ability to expand our market presence. We may not successfully address these risks and uncertainties or successfully implement our operating strategies. If we fail to do so, it could materially harm our business and impair the value of our common stock. Even if we accomplish these objectives, we may not generate positive cash flows or profits we anticipate in the future.

 

6
 

 

The following risk factors apply to our RxAir business:

 

We face significant competition from multinational and regional manufacturers.

 

The growing air purification market is highly competitive with companies offering wide range of air purifiers sold through e-commerce websites, company-owned websites, retailer and their websites and distributors. Market particpants compete on product performance, quality, price and reputation.

 

We are dependent upon the ability of our third-party producers to meet our requirements.

 

We source our products from non-exclusive, third-party producers, many of which are located in foreign countries. We depend upon the ability of third-party producers to secure a sufficient supply of raw materials, a skilled workforce, adequately finance the production of goods ordered and maintain sufficient maufacturing and shipping capacity. We cannot be certain that we will not experience operational difficulties with our manufacturers, such as insufficient quality control, failures to meet production deadlines or increases in manufacturing costs.

 

The following risk factors apply to our furniture business:

 

We face a volatile retail environment and changing economic conditions that may further adversely affect consumer demand and spending.

 

Historically, the home furnishings industry has been subject to cyclical variations in the general economy and to uncertainty regarding future economic prospects. Should the current economic recovery falter or the current recovery in housing starts stall, consumer confidence and demand for home furnishings could deteriorate which could adversely affect our business.

 

Our retail store faces significant competition from national, regional and local retailers of home furnishings, including increasing on-line competition via the internet.

 

The retail market for home furnishings is highly fragmented and intensely competitive. We currently compete against a diverse group of retailers, including mass merchants, national department stores, regional or independent specialty stores, and dedicated franchises of furniture manufacturers. We also compete with retailers that market products through store catalogs and the internet. In addition, there are few barriers to entry into our current and contemplated markets, and new competitors may enter our current or future markets at any time. We have also seen increasing competition from retailers offering consumers the ability to purchase home furnishings via the internet for home delivery, and this trend is expected to continue. Our existing competitors or new entrants into our industry may use a number of different strategies to compete against us, including aggressive advertising, pricing and marketing, extension of credit to customers on terms more favorable than we offer, and expansion into markets where we currently operate.

 

Competition from any of these sources could cause us to lose market share, revenues and customers, increase expenditures or reduce prices, any of which could have a material adverse effect on our results of operations.

 

Failure to successfully anticipate or respond to changes in consumer tastes and trends in a timely manner could adversely impact our business, operating results and financial condition.

 

Sales of our furniture are dependent upon consumer acceptance of specific designs, styles, quality and price. As with all retailers, our business is susceptible to changes in consumer tastes and trends. We attempt to monitor changes in consumer tastes and home design trends through communication with our design consultants who provide valuable input on consumer tendencies. However, such tastes and trends can change rapidly and any delay or failure to anticipate or respond to changing consumer tastes and trends in a timely manner could adversely impact our business, operating results and financial condition. In addition, certain suppliers may require extensive advance notice of our requirements in order to produce products in the quantities we desire. This long lead time may require us to place orders far in advance of the time when certain products will be offered for sale, thereby exposing us to risks relating to shifts in consumer demand and trends, and any downturn in the U.S. economy.

 

7
 

 

The following risk factors apply to our Vytex business:

 

Our Vytex operating results could fluctuate and differ considerably from our financial forecasts.

 

Our business model is based on assumptions derived from (i) the experience of the principals of the Company, and (ii) third party market information and analysis. There are no assurances that these assumptions will prove to be valid for our future operations or plans.

 

Our operating results may fluctuate significantly as a result of a variety of factors, including:

 

  Acceptance by manufacturers of the Vytex Natural Rubber Latex technology;
     
  Our ability to achieve and sustain profitability;
     
  Consumer confidence in products manufactured using our Vytex Natural Rubber Latex technology;
     
  Our ability to raise additional capital.

 

Our Vytex NRL business is totally dependent on market demand for, and acceptance of, the Vytex Natural Rubber Latex process.

 

We expect to derive most of our Vytex NRL business revenue from the sales of our Vytex Natural Rubber Latex raw material to various manufacturers of rubber and rubber end products using NRL through our distribution agreement with Centrotrade Deutschland. We pay natural rubber latex processors a fee for the service of manufacturing and creating Vytex NRL for us under our toll manufacturing agreements. Conversely, Vystar collects a fee under the Centrotrade and Occidente (PICA) licensing models. Our Vytex NRL product operates within broad, diverse and rapidly changing markets. As a result, widespread acceptance and use of product is critical to our future growth and success. If the market for our product fails to grow or grows more slowly than we currently anticipate, demand for our product could be negatively affected.

 

Our ability to generate significant revenue in the Vytex business is substantially dependent upon the willingness of consumers to make discretionary purchases and the willingness of manufacturers to utilize capital for research and development and the retooling of their manufacturing process, both of which are impacted by the state of the economy.

 

The current state of the world economy has and likely will in the future impact upon our ability to increase revenue. Certain products that we anticipate will be manufactured with our Vystar NRL process, such as mattresses and sponge products, are considered discretionary consumer purchases which decline during economic downturns. Additionally, certain manufacturers who might otherwise utilize the Vytex NRL process in the manufacturing of products with NRL have determined not to expend capital to complete the research of the Vytex NRL process or to retool their manufacturing process because of the general downturn in the economy. As part of a strategy to increase awareness of the Vytex NRL brand, the Company has been aggressively seeking to have end products produced and labeled “made with Vytex NRL” such as mattresses, toppers and pillows. As these products enter the market, the Company plans to create consumer awareness of these end products and in so doing begin to develop consumer demand pull through as part of the Company’s efforts to complete the push-pull cycle using an ingredient branding strategy.

 

8
 

 

Assertions by a third party that our Vytex process infringes its intellectual property, whether or not correct, could subject us to costly and time-consuming litigation or expensive licenses.

 

There is frequent litigation based on allegations of infringement or other violations of intellectual property rights. As we face increasing competition and become increasingly visible as an operating company, the possibility of intellectual property rights claims against us may grow.

 

Any intellectual property rights claim against us or our customers, with or without merit, could be time-consuming, expensive to litigate or settle and could divert management attention and financial resources. An adverse determination also could prevent us from offering our process, require us to pay damages, require us to obtain a license or require that we stop using technology found to be in violation of a third party’s rights or procure or develop substitute services that do not infringe, which could require significant resources and expenses.

 

The latex market in which we will participate is competitive and if we do not compete effectively, our operating results may be harmed.

 

The markets for our product are competitive and rapidly changing. With the introduction of new technologies, increasing scrutiny of alternative lattices such as Russian dandelion, and new market entrants, we expect competition to intensify in the future. In addition, pricing pressures and increased competition generally could result in reduced sales, reduced margins or the failure of our products to achieve or maintain widespread market acceptance.

 

While early interest was strong in a new innovative product in the natural rubber latex industry, pricing and regulatory approvals remain a key selling factor especially in the exam glove arena. There is no exam glove manufacturer signed to date that has accepted Vytex NRL into its product mix.

 

Our Vytex revenue will vary based on fluctuations in commodity prices for NRL.

 

NRL is a commodity and, as such, its price fluctuates on a daily basis. Our raw material revenue including licensing fees and cost of goods will also fluctuate upward or downward based upon changing market prices for the raw material used to produce Vytex NRL. Prolonged periods of lowered market prices can also cause manufacturers to review synthetic price drops as they look for even lower cost alternatives to NRL.

 

While Vytex NRL has received 510(k) clearance from the FDA for condoms and exam gloves, there is no assurance that future applications will be cleared.

 

In order for Vytex to be used in medical device applications, the manufacturer of the end product must submit an application to the FDA. If the device is classified by the FDA as Class II (e.g., condoms, surgical gloves, and most non-cardiac and non-renal/dialysis catheters) and in some cases Class I (e.g., exam gloves), a 510(k) application must be filed with the FDA seeking clearance to market the device based on the fact that there is at least one other predicate or similar device already marketed. If the product is classified as a Class III product (e.g., most cardiac and renal/dialysis catheters, certain adhesives and other in vivo devices), or is otherwise a new device with no predicate on the market already, then the manufacturer of the end product must submit a Pre-Market Approval (“PMA”) application seeking approval by the FDA to market the device. The PMA approval process is much more in depth and lengthy and requires a greater degree of clinical data and FDA review than does a 510(k) clearance process.

 

Since Vytex is a raw material and not an end-product, Vystar is not the entity that files with the FDA for any clearance or approval to market a device. Instead, the end-product manufacturers who will be selling and marketing the device(s) must submit applications and seek FDA clearance or approval depending upon the device classification. Vystar’s role in this process is only as background support to the manufacturers to supply information and any technical or test data regarding the Vytex raw material.

 

An American manufacturer of condoms and exam gloves had been engaged in production work and had completed required testing and received FDA clearance for using Vytex NRL in their condom and exam glove lines. However, this manufacturer is not currently producing products made with Vytex NRL or any other type of raw material. Notwithstanding such approvals, we have no assurance that future products will provide acceptable test results and even if they do, there is no certainty that the FDA will approve the applications.

 

9
 

 

Each of the above mentioned 510(k)s have been sold to other manufacturers hence the need to pursue 510(k)s for the newer manufacturing facilities.

 

Vytex may seek to have lower protein claims than what is currently on the market today for exam gloves and may ultimately seek to have latex warnings removed from or modified on all FDA-regulated products, but it cannot guarantee that either of such actions will be approved by the FDA.

 

The FDA heavily scrutinizes any and all claims categorizing the protein levels and other claims of an NRL product. Currently, the FDA has allowed claims only stating the level of less than 50 micrograms/gram of total extractable proteins pursuant to only one of two FDA-recognized standards on exam or surgical gloves. Vystar intends to claim protein levels pursuant to both of the two FDA-recognized standards, which will result in claiming the lowest level of antigenic proteins for a Hevea NRL product currently on the market. Although the FDA has cleared such claims on the condom using Vytex NRL, the FDA rejected those claims for the exam glove. There is no guarantee that the FDA will ultimately or ever allow these claims on an exam glove.

 

Additionally, for many years, the FDA has required warnings on products containing latex due to the latex allergy issue that exists. Vystar plans on petitioning the FDA to have that label removed from or modified on products manufactured with Vytex NRL, by filing a Citizen’s Petition. The Petition will be filed when we see that the benefits of filing will far outweigh the costs since such Petition is likely to require clinical test results indicating acceptable allergic reactions associated with Vytex NRL. There are no assurances that the FDA will grant that request.

 

Manufacturers are implementing trials of Vytex NRL in their facilities but final data is not yet available from all these manufacturers on its viability for their particular environments.

 

Over the past several years, samples of Vytex NRL have been made available to over 50 natural rubber latex and latex substitute end product manufacturers, 30 of which have been in place since early 2009. Since the completion of the Vytex NRL Standard Operation Procedures (SOPs), Vytex has been produced at Revertex (Malaysia), Occidente (Guatemala), KAPVL (India) and most recently Mardec-Yala (Thailand) and MMG (Thailand). Manufacturers that have signed a ‘sampling’ agreement with us have been provided with samples of Vytex NRL for validating its use in their manufacturing processes. To date, a number of manufacturers have completed those runs and feedback is often minimal. Although most feedback to date has been positive, there is no assurance that such feedback will continue to be satisfactory.

 

Another risk is the validity of the customer as testing completes. Recently Vystar has completed more than three years of a specialized version of Vytex NRL only to have the end product manufacturer fail to upgrade their production line and fulfill their own contract.

 

As part of the Company’s learnings, we have found that in listening closely to customer challenges and needs, our technical team has been able to develop solutions. The Company has come to realize that what we offer is not just a raw material but often a technology solution to a production or product development challenge.

 

While many of these new formulations look promising, there is no guarantee that these technological innovations will be successfully scaled up or successfully implemented by the customer.

 

The following risk factors apply to our company as a whole:

 

The COVID-19 pandemic has had, and will likely continue to have, a material effect on our business and results of operations.

 

The impacts of COVID-19 and measures to prevent its spread across the globe have affected businesses in a number of ways. When we closed our showroom at the end of March 2020, there was significant uncertainty as to when we could resume business. When we re-opened in June, consumer demand was strong but our supply chain was strained and resulted in late arrivals of products. Our inability to deliver products in a timely manner negatively affected our sales.

 

10
 

 

As we enter the vaccine stage of the pandemic, no one can effectively predict how the consumer’s spending will change when the COVID-19 restrictions are lifted.

 

Our use of foreign sources of production for a portion of our products exposes us to certain additional risks associated with international operations.

 

Our use of foreign sources for the supply of certain of our products exposes us to risks associated with overseas sourcing. These risks are related to government regulation, volatile ocean freight costs, delays in shipments, and extended lead time in ordering. Governments in the foreign countries where we source our products may change their laws, regulations and policies, including those related to tariffs and trade barriers, investments, taxation and exchange controls which could make it more difficult to service our customers resulting in an adverse effect on our earnings. We could also experience increases in the cost of ocean freight shipping which could have an adverse effect on our earnings. Shipping delays and extended order lead times may adversely affect our ability to respond to sudden changes in demand, resulting in the purchase of excess inventory in the face of declining demand, or lost sales due to insufficient inventory in the face of increasing demand, either of which would also have an adverse effect on our earnings or liquidity.

 

Significant fluctuations in the cost of raw materials could adversely affect our profits.

 

On a global and regional basis, the raw materials used in our products are susceptible to significant price fluctuations due to supply/demand trends, transportation costs, government regulations and tariffs, changes in currency rates, the economic and political climate and other circumstances. Significant increases in the future could materially affect our costs and profits.

 

Because our stock price may be volatile due to factors beyond our control, you could lose all or part of your investment.

 

Price and volume of stock, including additional stock issuances may cause price decline and dilution.

 

If we do not attract and retain highly qualified employees, we may not be able to grow effectively.

 

Our ability to compete and grow depends in large part on the efforts and talents of our executive officers or employees. We require the key employee(s) to enter into employment agreements, but in the U.S., employees are free to leave an employer at any time without penalties. The loss of key employees or the inability to hire additional skilled employees as necessary could result in significant disruptions of our business, and the integration of replacement personnel could be time-consuming and expensive and cause us additional disruptions.

 

We do not expect to declare any dividends in the foreseeable future.

 

We do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future. Consequently, shareholders must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our common stock.

 

There is no assurance that any significant public market for our shares of common stock will develop.

 

While our shares of common stock trade on the OTC Bulletin Board under the symbol “VYST”, there is currently no significant public market for our common stock and there is no assurance that there will be any such significant public market for our common stock in the future.

 

11
 

 

The utilization of our tax losses could be substantially limited if we experience an ownership change as defined in the Internal Revenue Code.

 

Because of net operating losses we have experienced for federal income tax purposes at December 31, 2020, we had federal net operating loss (“NOL”) carry-forwards of approximately $32.0 million ($26.0 million for 2019) available to offset future taxable income. Our ability to utilize NOL carry-forwards to reduce future taxable income may be limited under Section 382 of the Internal Revenue Code if certain ownership changes in our Company occur during a rolling three-year period. These ownership changes include purchases of common stock under share repurchase programs, the offering of stock by us, the purchase or sale of our stock by 5% shareholders, as defined in the Treasury regulations, or the issuance or exercise of rights to acquire our stock. If such ownership changes by 5% shareholders result in aggregate increases that exceed 50 percentage points during the three-year period, then Section 382 imposes an annual limitation on the amount of our taxable income that may be offset by our NOL carry-forwards or tax credit carry-forwards at the time of ownership change. The limitation may affect the amount of our deferred income tax asset and, depending on the limitation, a significant portion of our NOL carry-forwards or tax credit carry-forwards could expire before we are able to use them. In such an event, our business, financial condition, results of operations or cash flows could be adversely affected. We believe we have not experienced an ownership change under Section 382 of the Internal Revenue Code as of December 31, 2020; however, the amount by which our ownership may change in the future could be affected by purchases and sales of stock by 5% shareholders and new issuances of stock by us, should we choose to do so.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

Although we believe that our current space is adequate for the foreseeable future, if additional office space is required, we believe that suitable space will be available at market rates.

 

ITEM 3. LEGAL PROCEEDINGS

 

EMA Financial

 

On February 19, 2019, EMA Financial, Inc. filed a lawsuit in the Southern District of New York against the Company. The lawsuit alleged various breaches of an underlying convertible promissory note and stock purchase agreement and sought four claims for relief: (i) specific performance to enforce a stock conversion and contractual obligations; (ii) breach of contract; (iii) permanent injunction to enforce the stock conversion and contractual obligations; and (iv) legal fees and costs of the litigation. The complaint was filed with a motion seeking: (i) a preliminary injunction seeking an immediate resolution of the case through the stock conversion; (ii) a consolidation of the trial with the preliminary injunctive hearing; and (iii) summary judgment on the first and third claims for relief.

 

The Company filed an opposition to the motion and upon oral argument the motion for injunctive relief was denied. The Court issued a decision permitting a motion for summary judgment to proceed and permitted the Company the opportunity to supplement its opposition papers together with the plaintiff who was also provided opportunity to submit reply papers. On April 5, 2019, the Company filed the opposition papers as well as a motion to dismiss the first and third causes of action in the complaint. On March 13, 2020, the Court granted the Company’s motion dismissing the first and third claims for relief and denied the motion for summary judgment as moot.

 

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

 

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

 

12
 

 

Payment of Wages Actions

 

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

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

PART II.

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND PURCHASES OF EQUITY SECURITIES

 

Market Price Information

 

Our common stock is traded in the United States on the Over the Counter Bulletin Board (OTCBB) under the symbol “VYST.” The following table shows the range of high and low closing prices for our common stock.

 

    High     Low  
December 31, 2019                
                 
First Quarter   $ 0.06     $ 0.007  
                 
Second Quarter   $ 0.08     $ 0.04  
                 
Third Quarter   $ 0.04     $ 0.03  
                 
Fourth Quarter   $ 0.03     $ 0.01  
                 
December 31, 2020                
                 
First Quarter   $ 0.01     $ 0.004  
                 
Second Quarter   $ 0.07     $ 0.005  
                 
Third Quarter   $ 0.10     $ 0.01  
                 
Fourth Quarter   $ 0.07     $ 0.02  

 

These quotations do not reflect retail markup, markdown or commission and may not necessarily represent the prices of actual transactions during these quarterly periods.

 

13
 

 

Holders of Record

 

As of December 31, 2020, there were 220 holders of record of our common stock. Because some of our shares are held by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of stockholders represented by these record holders.

 

Dividend Policy

 

We have never paid or declared any cash dividends on our common stock and we do not intend to pay or declare dividends on our common stock in the near future. We presently expect to retain any future earnings to fund continuing development and growth of our business. Our payment of dividends is subject to the discretion of our board of directors and will depend on earnings, financial condition, capital requirements and other relevant factors.

 

Issuer Purchases of Equity Securities

 

None.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

Information concerning our equity compensation plans is set forth in Item 12 of Part III of this Annual Report on Form 10-K.

 

Recent Sales of Unregistered Securities

 

Common Stock and Warrant Grants

 

From January 1, 2020 through December 31, 2020, we issued 22,441,878 shares of our common stock valued at $554,169 for services rendered to the Company, 30,433,402 shares were issued for cash for $456,490, 41,250,000 shares were issued for conversion of line of credit valued at $1,773,750 and 44,357 shares were issued upon conversion of 130 shares of preferred stock.

 

Stock Option Grants

 

There were no stock option grants from January 1, 2020 through December 31, 2020.

 

Proceeds from loans and shareholder, convertible and contingently convertible notes payable

 

There were no proceeds from October 1, 2020 through December 31, 2020.

 

Application of Securities Laws and Other Matters

 

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

 

The issuance of stock options as described above were issued pursuant to written compensatory plans or arrangements with our employees, directors and consultants, in reliance on the exemption provided by Rule 701 promulgated under the Securities Act. All recipients either received adequate information about us or had access, through employment or other relationships, to such information.

 

14
 

 

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

 

ITEM 6. SELECTED FINANCIAL DATA

 

As a smaller reporting company, we are not required to provide the information required by this Item pursuant to 301(c) of Regulation S-K.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

This analysis of our results of operations should be read in conjunction with the accompanying financial statements, including notes thereto, contained in Item 8 of this Report. This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. Statements that are predictive in nature and that depend upon or refer to future events or conditions are forward-looking statements. Although we believe that these statements are based upon reasonable expectations, we can give no assurance that projections will be achieved. Please refer to the discussion of forward-looking statements included in Part I of this Report.

 

Overview

 

About RxAir

 

RxAir promotes a healthy lifestyle through the use of its innovative, patented ViraTech air purification technology, thereby improving the quality of life of each and every customer. Independently tested by EPA- and FDA-certified laboratories, the RxAir has been proven to destroy greater than 99% of bacteria and viruses and reduce concentrations of odors and VOCs. The RxAir uses high-intensity germicidal UV lamps that destroy bacteria and viruses instead of just trapping them, setting it apart from ordinary air filtration units. RxAir® and ViraTech® are registered trademarks of Vystar Corp. For more information, visit http://www.RxAir.com.

 

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

 

The RxAir product line includes:

 

  RxAir™ Residential Filterless Air Purifier
     
  RX400 ™ FDA cleared Class II Filterless Air Purifier
     
  RX3000™ Commercial FDA cleared Class II Air Purifier

 

Vystar produces the RxAir product line with a world-class manufacturer and an expert U.S. engineer with a full understanding of the RxAir technology. Vystar sells RxAir residential and commercial units via distributors, online and through retail channels. Vystar is assembling the distribution network to relaunch sales of RX400 and RX3000 units to the healthcare and medical markets, which UV Flu had ceased due to a lack of sales force, distribution and cash flow constraints. Once sales are firmly re-established, Vystar expects that the air purification products will produce margins of approximately 70%.

 

15
 

 

About Rotmans

 

Rotmans, the largest furniture and flooring store in New England and one of the largest independent furniture retailers in the U.S., encompassing over 170,000 square feet in Worcester, Mass., and employing 83 people, was founded and has been under the leadership of the Rotman family for the past 50 years. Rotmans adds approximately $20 million annually to Vystar’s top line revenue and enables Vystar to capitalize on the infrastructure already in place for accounting, retail sales facilities and staff, customer service, warehousing, and delivery. Significant marketing and advertising opportunities are available for all of Vystar’s brands to Rotmans’ thousands of existing customers. As CEO of both Rotmans and Vystar, Steven Rotman provides continuity of management and customer-focused values for the Company.

 

Impact of COVID-19 on Our Business

 

The COVID-19 pandemic has resulted in significant economic disruption and adversely impacted our business. We closed the Rotmans showroom on March 24, 2020. At that time, most of our team members were furloughed. During this period, we paid the cost of enrolled health benefits of those furloughed. We successfully reopened the showroom on June 10, 2020. We continue to work closely with local authorities and follow the guidance of the Centers for Disease Control and Prevention (“CDC”), implementing enhanced cleaning measures, social distancing and the utilization of face masks for the safety of team members, customers and communities.

 

In addition, the COVID-19 pandemic has caused, among other things, interruptions in our supply chains and suppliers, including problems with inventory availability, higher cost of products and international freight due to the high demand of products and low supply during this volatile period of time.

 

The COVID-19 pandemic is complex and continues to evolve with the vaccine rollout. At this point, we cannot reasonably estimate the duration and severity of the pandemic and its impact on our business, results of operations, financial position and cash flows.

 

Management Objectives

 

The COVID-19 pandemic has raised awareness of airborne disease transmission and consumers’ desire to reduce their risk of infection through the use of air purifiers. The Company has pivoted its resources to meeting the demand for air purifiers, by increasing its manufacturing capacity of up to 600 Rx400 units per day if needed, adding additional distributors to the RxAir sales network, and contracting the development of the next generation RxAir Ultraviolet-C light air purifiers.

 

Vystar and the Indian Rubber Manufacturers Research Association’s (IRMRA) are actively collaborating to develop viscoelastic deproteinized natural rubber (DPNR) variants having properties for expanding applications in specific new arenas such as green tires, biodegradable and other unique bioelastoplast product lines that desire a new approach.

 

Vystar entered into a Market Development and Distribution Agreement with Corrie MacColl to produce, develop and manage the Vytex product and supply lines. This agreement will allow Vystar to expand the market for its Natural Rubber Latex products.

 

Critical Accounting Policies and Estimates

 

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. As such, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. Our management reviews its estimates on an on-going basis. We base our estimates and assumptions on historical experience, knowledge of current conditions and our understanding of what we believe to be reasonable that might occur in the future considering available information. Actual results may differ from these estimates, and material effects on our operating results and financial position may result.

 

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

 

16
 

 

Fair Value Inputs Related to Share-based and Other Equity Compensation

 

Generally accepted accounting principles require all share-based payments, including grants of employee stock options, stock grants and warrants, to be recognized in the financial statements based on their fair values. We compute the value of option awards granted by utilizing the Black-Scholes valuation model based upon their expected lives, expected volatility, expected dividend yield, and the risk-free interest rate. The value of the awards is then straight-line expensed over the service period of the awards. Issuance in shares of common stock is valued using the closing market price on the measurement date.

 

Inventories

 

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

 

Revenue

 

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. Consideration is typically paid prior to shipment via credit card or check when our products are sold direct to consumers, which is typically within a 1 to 2 days or approximately 30 days from the time control is transferred when sold to wholesalers, distributors and retailers. 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 product sales. We assess our estimates of expected returns at each financial reporting date.

 

Valuation and Impairment of Intangible and Long-Lived Assets

 

We perform an impairment assessment of intangible assets including goodwill annually or more frequently as warranted by events or changes in circumstances. We review long-lived assets such as property and equipment for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. If the total of the estimated undiscounted future cash flows is less than the carrying value of the assets, an impairment loss is recognized for the excess of the carrying value over the fair value of the long-lived assets. Included in other income (expense) in 2020 is an impairment charge of $240,350 related to the discontinuation of the NHS tradename.

 

Accounting for Derivative Financial Instruments

 

The Company evaluates stock options, stock warrants, notes payable 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 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 815-40 are reclassified to a liability account at the fair value of the instrument on the reclassification date.

 

17
 

 

Purchase Accounting for Acquisition

 

In 2019, the Company acquired Murida Furniture Co., Inc. dba Rotmans Furniture. Acquisition of a business requires companies to record assets acquired and liabilities assumed at their respective fair market value at the date of acquisition. Any amount of the purchase price paid in excess of the estimated fair value of the net assets acquired is recorded as goodwill. The Company determined the fair value of Murida Furniture Co., Inc. using widely accepted valuation techniques. In addition, proper accounting for any acquisition required the Company to record the transactions of the acquired entity in the Company’s financial statements from the date of acquisition and forward.

 

Leases

 

The Company has adopted and implemented ASC 842, Leases, where the Company recognized right-of use assets and lease liabilities. For leases in which the acquiree is a lessee, the Company measured the lease liability at the present value of the remaining lease payments, as if the acquired lease were a new lease at the acquisition date. The Company measured the right-of-use asset at the same amount as the lease liability as adjusted to reflect favorable and unfavorable terms of the lease when compared with market terms.

 

RESULTS OF OPERATIONS

 

Year ended December 31, 2020 compared to year ended December 31, 2019

 

    Year Ended December 31,  
    2020     2019     $ Change     % Change  
    CONSOLIDATED  
                         
Revenue   $ 20,979,243     $ 13,685,872     $ 7,293,371       53.3 %
                                 
Cost of revenue     10,005,075       7,332,271       2,672,804       36.5 %
                                 
Gross profit     10,974,168       6,353,601       4,620,567       72.7 %
                                 
Operating expenses:                                
Salaries, wages and benefits     5,105,668       3,355,593       1,750,075       52.2 %
Share-based compensation     1,031,850       2,968,898       (1,937,048 )     -65.2 %
Agent fees     1,388,598             1,388,598       0.0 %
Professional fees     983,764       1,132,251       (148,487 )     -13.1 %
Advertising     1,808,115       1,050,459       757,656       72.1 %
Rent     1,243,949       570,779       673,170       117.9 %
Service charges     523,124       436,183       86,941       19.9 %
Depreciation and amortization     795,241       444,890       350,351       78.8 %
Other operating     2,697,090       1,335,204       1,361,886       102.0 %
                                 
Total operating expenses     15,577,399       11,294,257       4,283,142       37.9 %
                                 
Loss from operations     (4,603,231 )     (4,940,656 )     337,425       -6.8 %
                                 
Other income (expense):                                
Interest expense     (1,845,916 )     (1,390,407 )     (455,509 )     32.8 %
Change in fair value of derivative liabilities     (238,900 )     (1,079,450 )     840,550       -77.9 %
Loss on settlement of debt, net     (1,497,061 )     (327,433 )     (1,169,628 )     357.2 %
Loss on impairment    

(240,350

)      -      

(240,350

)     

100.0

%

Other income, net

    92,764       12,395       80,369       648.4 %
                                 
Total other expense, net     (3,729,463 )     (2,784,895 )     (944,568 )     33.9 %
                                 
Net loss     (8,332,694 )     (7,725,551 )     (607,143 )     7.9 %
                                 
Net loss attributable to noncontrolling interest     724,477       20,929       703,548       3361.6 %
                                 
Net loss attributable to Vystar   $ (7,608,217 )   $ (7,704,622 )   $ 96,405       -1.3 %

  

18
 

 

Revenues

 

Consolidated revenues for the year ended December 31, 2020 and 2019 were $20,979,243 and $13,685,872, respectively, for an increase of $7,293,371 or 53.3%. The increase in revenues from operations was principally due to the acquisition of Rotmans in July of 2019, which was partially offset by the impact of COVID-19 as the Rotmans showroom was closed from March 24 through June 9, 2020. During this period, the Company processed limited customer deliveries for prior orders and web sales. Subsequent to this period, sales are gradually returning to pre-COVID-19 levels.

 

Consolidated gross profit for the year ended December 31, 2020 and 2019 were $10,974,168 and $6,353,601, respectively, for an increase of $4,620,567 or 72.7%. Consolidated cost of revenue for year ended December 31, 2020 and 2019 was $10,005,1075 and $7,332,271, respectively, an increase of $2,672,804 or 36.5%. The increase in gross profit and cost of revenue was primarily due to a change in purchasing and the reduction of special offers. Merchandise is being purchased in large quantities from fewer vendors.

 

Operating Expenses

 

The Company’s operating expenses consist primarily of compensation and support costs for management, sales and administrative staff, and for other general and administrative costs, including professional fees related to accounting, finance, and legal services as well as other operating expenses such as advertising and occupancy costs. The Company’s consolidated operating expenses were $15,577,399 and $11,294,257 for the year ended December 31, 2020 and 2019, respectively, for an increase of $4,283,142 or 37.9%. The increase in operating expenses was primarily due to the acquisition of Rotmans in July of 2019 and fees incurred under an agreement with a third-party agent to assist the Company with a high-impact sale at Rotmans.

 

Other Income (Expense)

 

Other income (expense) for the year ended December 31, 2020 and 2019 were ($3,729,463) and ($2,784,895), respectively, for a net increase of $944,568 or 33.9%. Increases in other expenses in 2020 included interest expense of $455,509, loss on settlement of debt of $1,169,628 and loss on impairment of $240,350 which were offset with a decrease in change in value value of derivative liabilities of $840,550 and an increase in other income of $80,369.

 

Net Loss

 

Net loss for the year ended December 31, 2020 and 2019 were $8,332,694 and $7,725,551, respectively, for an increase in net loss of $607,143 or 7.9%. Net loss in 2020 and 2019 includes net loss attributable to noncontrolling interest of $724,477 and $20,929, respectively. The larger net loss the Company experienced in the year ended December 31, 2020 versus the same period in 2019 was attributable to the large increase in operating expenses for the year and other expenses, primarily related to the increase in interest expense and loss on settlement of debt.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. However, we have incurred significant losses and experienced negative cash flow since inception. At December 31, 2020, the Company had cash of $620,539 and a deficit in working capital of $10,161,370. For the year ended December 31, 2020, the Company had a net loss of $8,332,694 and an accumulated deficit of $48,713,184. For the year ended December 31, 2019, the Company had a net loss of $7,725,551 and the accumulated deficit amounted to $41,104,967. We use working capital to finance our ongoing operations, and since those operations do not currently cover all of our operating costs, managing working capital is essential to our Company’s future success. Because of this history of losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.

 

Net cash used in operating activities was $2,262,940 for the year ended December 31, 2020 as compared to $1,513,997 for the year ended December 31, 2019. During the year ended December 31, 2020, cash used in operations was primarily due to the net loss for the year of $8,332,694 net of non-cash related add-back of loss of share-based compensation, depreciation and amortization.

 

19
 

 

The Company had $133,878 cash used in investing activities during the year ended December 31, 2020 as compared to $9,519 for the year ended December 31, 2019. During the year ended December 31, 2020, cash used in investing activities was related to the purchase of property and equipment.

 

Net cash provided by financing activities was $2,945,002 during the year ended December 31, 2020, as compared to cash provided of $1,545,818 during the year ended December 31, 2019. During 2020, cash was provided from the proceeds in notes payable in the amount of $3,309,400, repayments on notes payable and finance leases in the amount of $967,938, net repayments on line of credit of $210,200, $456,490 in proceeds from common stock issuances, advances from stock subscription payable of $308,000 and proceeds from stock subscription receivable of $49,250. During 2019, cash was provided from the proceeds in notes payable in the amount of $713,700, repayments on notes payable and finance lease in the amount of $61,645, net borrowings on line of credit of $39,449, $1,000,550 in proceeds from common stock issuances, repayments of convertibles notes of $146,206 and treasury stock repurchases of $30.

 

A successful transition to profitable operations is dependent upon obtaining sufficient financing to fund the Company’s planned expenses and achieving a level of revenue adequate to support the Company’s cost structure. Management plans to finance future operations using cash on hand, as well as increased revenue from RxAir air purifier sales and Vytex license fees that now also include the Company’s association with foam cores made from Vytex used in mattresses, mattress toppers and pillows.

 

There can be no assurances that we will be able to achieve projected levels of revenue in 2021 and beyond. If we are not able to achieve projected revenue and obtain alternate additional financing of equity or debt, we would need to significantly curtail or reorient operations during 2021, which could have a material adverse effect on our ability to achieve our business objectives and as a result, may require the Company to file 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.

 

Our future expenditures will depend on numerous factors, including: the rate at which we can introduce RxAir products and license Vytex NRL raw material and the foam cores made from Vytex to manufacturers and subsequently retailers; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, along with market acceptance of our products, and services and competing technological developments. As we expand our activities and operations, our cash requirements are expected to increase at a rate consistent with revenue growth after we achieve sustained revenue generation.

 

Off-Balance Sheet Arrangements

 

We do not have any material off-balance sheet arrangements.

 

Certain Relationships and Related Transactions

 

Per Steven Rotman’s Employment agreement dated July 22, 2019, as amended, he is to be paid $125,000 per year in cash, $10,417 per month in shares based on a 20-day average price at a 50% discount to market, $5,000 per month in cash for expenses as well as access to a Company provided vehicle and health and life insurance. During the year ended December 31, 2020, the Company expensed approximately $443,000 related to this employment agreement. As of December 31, 2020, the Company had a stock subscription payable balance of $700,000, or approximately 25,420,000 shares to be issued in the future and $60,000 of reimbursable expenses payable.

 

Blue Oar Consulting, Inc. (“Blue Oar”) provides business consulting services to the Company. This entity is owned by Gregory Rotman, who is the son of the Company’s CEO, Steven Rotman. In exchange for such services, the Company has entered into a consulting agreement with the related party entity. Per the consulting agreement, Blue Oar is to be paid $15,000 per month in cash for expenses, and $12,500 per month to be paid in shares based on a 20-day average at a 50% discount to market. During the year ended December 31, 2020, the Company expensed approximately $490,000 related to the consulting agreement. As of December 31, 2020, the Company had a stock subscription payable balance of $640,000, or approximately 30,038,000 shares and a balance of $180,000 in accounts payable related to this related party. In connection with litigation matters involving both Blue Oar and the Company, legal invoices totaling approximately $27,000 have been paid on Blue Oar’s behalf during the year ended December 31, 2020 and expensed as consulting services.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a smaller reporting company, we are not required to provide the information required by this Item pursuant to 301(c) of Regulation S-K.

 

ITEM 8. INDEX TO FINANCIAL STATEMENTS

 

Reports of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Stockholders’ Deficit F-6
Consolidated Statements of Cash Flows F-7

 

20
 

 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of Vystar Corporation

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheet of Vystar Corporation (the “Company”) as of December 31, 2020, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of Vystar Corporation as of December 31, 2020, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Going Concern

 

The accompanying financial statements have been prepared assuming that the entity will continue as a going concern. As discussed in Note 3 to the financial statements, the entity has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on these financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to Vystar Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Vystar Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

F- 1
 

 

 

Excess, Slow-Moving and Obsolete Inventory

 

As of December 31, 2020, the Company’s inventory balance is significant. Management adjusts excess, slow-moving and obsolete inventory to its estimated net realizable value. Management writes down its inventory for estimated obsolescence or unmarketable inventory by an amount equal to the difference between the cost of inventory and the estimated net realizable value based on assumptions about future demand, which are affected by changes in the Company’s strategic direction, discontinuance of a product or introduction of newer versions of a product, declines in the sales of or forecasted demand for certain products, and general market conditions.

 

We identified the evaluation of inventory net realizable value adjustments related to excess, slow-moving and obsolete inventory as a critical audit matter due to the amount of judgment required by the Company in making such estimates. As a result, there was a high degree of subjective auditor judgment in assessing such estimates, specifically as it related to the future salability of inventories.

 

The following are the primary procedures we performed to address this critical audit matter. We obtained an understanding of the Company’s process of estimating net realizable values related to excess, slow-moving and obsolete inventory. This included the future salability of inventories, assumptions used for excess and slow-moving inventory, and the Company’s review of inventory net realizable value adjustments. We compared a selection of inventory units to historical performance to assess possible write-down indications and future salability. We analyzed trends of total adjustments to net realizable values in relation to total inventory to test the Company’s determination of the inventory valuation and adjustments related to excess, slow-moving and obsolete inventory.

 

Fair Value of Derivative Liability

 

As of December 31, 2020, the Company has significant derivative liabilities totaling $1,766,700 and recorded a $238,900 loss from change in fair value of derivative liabilities during the year ended December 31, 2020. The derivative liability activity relates to embedded conversion features within convertible notes payable. The Company analyzed the conversion features of the various note agreements for derivative accounting consideration under Accounting Standards Codification (“ASC”) 815-15 “Derivatives and Hedging” and determined that the embedded conversion features should be classified as derivatives because the conversion prices of these convertible notes payable 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.

 

Auditing the Company’s valuation of this derivative is challenging as the Company uses complex valuation methodologies that incorporate significant assumptions which include the discount rate and forecasted volatility of the Company’s common stock price. The valuation includes assumptions about economic and market conditions with uncertain future outcomes.

 

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included obtaining an understanding of the Company’s valuation of the derivative liabilities, such as management’s review of the valuation models, the underlying assumptions used in the model and the related accounting conclusions. To test the valuation of the derivative liability, our audit procedures included, among others, evaluating the methodologies used in the valuation model and testing the significant assumptions. For example, we compared the discount rate that was adjusted for the Company’s credit risk to the interest rates on comparable debt instruments, and we compared the forecasted volatility of the Company’s common stock price to its historical volatility. We also assessed the completeness and accuracy of the underlying data. We involved professionals with specialized skill and knowledge to assist in our evaluation of the significant assumptions and methodologies used by the Company. Lastly, we also evaluated the Company’s financial statement disclosures related to these matters.

 

/s/ Macias Gini & O’Connell LLP

 

We have served as Vystar Corporation auditor since 2018.

 

Irvine, CA

April 15, 2021

F- 2
 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of Vystar Corporation

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheet of Vystar Corporation (the "Company") as of December 31, 2019, and the related consolidated statements of operations, stockholders’ deficit and cash flows for the year then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has suffered recurring losses from operations and has a net capital deficiency that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

 

 

We served as the Company’s auditor since 2018.

 

Irvine, CA

July 6, 2020

 

F- 3
 

 

VYSTAR CORPORATION

CONSOLIDATED BALANCE SHEETS

 

    December 31,  
    2020     2019  
ASSETS                
Current assets:                
Cash   $ 620,539     $ 72,355  
Accounts receivable     236,106       38,526  
Stock subscription receivable     -       49,250  
Inventories     6,546,481       4,114,977  
Investments - equity securities, at fair value     127,910       149,517  
Prepaid expenses and other     565,550       602,980  
Deferred commission costs     106,954       129,123  
Total current assets     8,203,540       5,156,728  
                 
Property and equipment, net     1,631,651       1,879,739  
Operating lease right-of-use assets     9,199,730       10,379,685  
Finance lease right-of-use assets, net     730,761       849,209  
                 
Other assets:                
Intangible assets, net     1,835,987       2,489,612  
Goodwill     460,301       460,301  
Inventories, long-term     438,161       935,121  
Deferred commission costs, net of current portion     134,213       217,024  
Other     26,253       34,377  
Total other assets     2,894,915       4,136,435  
                 
Total assets   $ 22,660,597     $ 22,401,796  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
Current liabilities:                
Line of credit   $ -     $ 2,413,539  
Term notes - current maturities     -       16,374  
Accounts payable     4,830,143       2,846,306  
Accrued expenses     3,422,796       681,758  
Stock subscription payable     2,589,556       1,150,125  
Operating lease liabilities - current maturities     1,095,500       1,055,000  
Finance lease liabilities - current maturities     172,900       167,000  
Shareholder, convertible and contingently convertible notes payable and accrued interest - current maturities     1,046,059       366,326  
Related party debt - current maturities     1,537,000       46,000  
Unearned revenue     1,904,256       1,677,171  
Derivative liabilities     1,766,700       1,499,800  
Total current liabilities     18,364,910       11,919,399  
Long-term liabilities:                
Term notes, net of current maturities     1,402,900       500,000  
Operating lease liabilities, net of current maturities     6,515,103       7,490,431  
Finance lease liabilities, net of current maturities     577,192       694,487  
Unearned revenue, net of current maturities     523,515       823,401  
Shareholder, convertible and contingently convertible notes payable and accrued interest, net of current maturities and debt discount     -       494,363  
Related party debt, net of current maturities and debt discount     2,035,934       1,712,259  
Total long-term liabilities     11,054,644       11,714,941  
Total liabilities     29,419,554       23,634,340  
                 
Stockholders’ deficit:                
Convertible preferred stock, $0.0001 par value 15,000,000 shares authorized; 13,698 and 13,828 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively (liquidation preference of $100,698 and $91,275 at December 31, 2020 and December 31, 2019 , respectively)     1       1  
Common stock, $0.0001 par value, 1,500,000,000 shares authorized; 1,199,931,717 and 1,105,762,080 shares issued at December 31, 2020 and December 31, 2019, respectively, and 1,199,901,717 and 1,105,732,080 shares outstanding at December 31, 2020 and December 31, 2019, respectively     119,990       110,573  
Additional paid-in capital     41,233,471       38,436,607  
Accumulated deficit     (48,713,184 )     (41,104,967 )
Common stock in treasury, at cost; 30,000 shares     (30 )     (30 )
Total Vystar stockholders’ deficit     (7,359,752 )     (2,557,816 )
Noncontrolling interest     600,795       1,325,272  
Total stockholders’ deficit     (6,758,957 )     (1,232,544 )
Total liabilities and stockholders’ deficit   $ 22,660,597     $ 22,401,796  

 

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

 

F- 4
 

 

VYSTAR CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

 

    Year Ended
    December 31,
    2020   2019
         
Revenue   $ 20,979,243     $ 13,685,872  
                 
Cost of revenue     10,005,075       7,332,271  
                 
Gross profit     10,974,168       6,353,601  
                 
Operating expenses:                
Salaries, wages and benefits     5,105,668       3,355,593  
Share-based compensation     1,031,850       2,968,898  
Agent fees     1,388,598       –   
Professional fees     983,764       1,132,251  
Advertising     1,808,115       1,050,459  
Rent     1,243,949       570,779  
Service charges     523,124       436,183  
Depreciation and amortization     795,241       444,890  
Other operating     2,697,090       1,335,204  
                 
Total operating expenses     15,577,399       11,294,257  
                 
Loss from operations     (4,603,231 )     (4,940,656 )
                 
Other income (expense):                
Interest expense     (1,845,916 )     (1,390,407 )
Change in fair value of derivative liabilities     (238,900 )     (1,079,450 )
Loss on settlement of debt, net     (1,497,061 )     (327,433 )
Loss on impairment    

(240,350

)      -  
Other income, net     92,764       12,395  
                 
Total other expense, net     (3,729,463 )     (2,784,895 )
                 
Net loss     (8,332,694 )     (7,725,551 )
                 
Net loss attributable to noncontrolling interest     724,477       20,929  
                 
Net loss attributable to Vystar   $ (7,608,217 )   $ (7,704,622 )
                 
Basic and diluted loss per share:                
Net loss per share   $ (0.01 )   $ (0.01 )
                 
Basic and diluted weighted average number of common shares outstanding    

1,123,842,260

      1,009,072,209  

 

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

 

F- 5
 

 

VYSTAR CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2020 AND 2019

 

    Attributable to Vystar        
    Number of       Number of       Additional       Number of       Total Vystar       Total
    Preferred   Preferred   Common   Common   Paid-in   Accumulated   Treasury   Treasury   Stockholders’   Noncontrolling   Stockholders’
    Shares   Stock   Shares   Stock   Capital   Deficit   Shares   Stock   Deficit   Interest   Deficit
                                             
Ending balance December 31, 2018     13,828     $ 1       457,747,818     $ 45,774     $ 31,485,532     $ (33,400,345 )                    -      $     $      (1,869,038 )   $     $     (1,869,038 )
                                                                                         
Common stock issued for services                     142,538,209       14,253       2,628,683                               2,642,936               2,642,936  
                                                                                         
Share based compensation - options                                     50,789                               50,789               50,789  
                                                                                         
Common stock issued for settlement of warrants                     77,912,991       7,791       386,459                               394,250               394,250  
                                                                                         
Common stock issued for cash received, net                     155,226,844       15,522       590,778                               606,300               606,300  
                                                                                         
Common stock issued for conversion of related party line of credit                     45,000,000       4,500       1,973,435                               1,977,935               1,977,935  
                                                                                         
Common stock issued upon conversion of convertible notes and settlement of derivatives                     227,336,218       22,733       1,320,931                               1,343,664               1,343,664  
                                                                                         
Treasury stock repurchases                                                     (30,000 )     (30 )     (30 )             (30 )
                                                                                         
Acquisition of noncontrolling interest                                                                     -       1,346,201       1,346,201  
                                                                                         
Net loss     -       -       -       -       -       (7,704,622 )     -       -       (7,704,622 )     (20,929 )     (7,725,551 )
                                                                                         
Ending balance December 31, 2019     13,828     $ 1       1,105,762,080     $ 110,573     $ 38,436,607     $   (41,104,967 )     (30,000 )   $ (30 )   $ (2,557,816 )   $ 1,325,272     $ (1,232,544 )
                                                                                         
Common stock issued for services                     22,441,878       2,245       551,924                               554,169               554,169  
                                                                                         
Share based compensation - options                                     21,872                               21,872               21,872  
                                                                                       
Common stock issued for cash received, net                     30,433,402       3,043       453,447                               456,490               456,490  
                                                                                       
Common stock issued for conversion of loan                     41,250,000       4,125       1,769,625                               1,773,750               1,773,750  
                                                                                         
Preferred stock conversion     (130 )             44,357       4       (4 )                             -               -  
                                                                                         
Net loss     -       -       -       -             (7,608,217 )     -       -       (7,608,217 )     (724,477 )     (8,332,694 )
                                                                                         
Ending balance December 31, 2020     13,698     $         1         1,199,931,717     $   119,990     $   41,233,471     $ (48,713,184 )     (30,000 )   $     (30 )   $ (7,359,752 )   $ 600,795     $ (6,758,957 )

 

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

 

F- 6
 

 

VYSTAR CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    Year Ended
    December 31,
    2020   2019
Cash flows from operating activities:                
Net loss   $ (8,332,694 )   $ (7,725,551 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Share-based compensation     1,031,850       2,968,898  
Depreciation     378,282       177,314  
Bad debts     15,130       2,183  
Amortization of intangible assets     416,959       267,576  
Noncash lease expense     423,035       35,120  
Amortization of debt discount     746,207       73,519  
Impairment loss     240,350       -  
Change in fair value of derivative liabilities     238,900       1,079,450  
Interest on derivative liabilities     -       741,725  
Interest charged on related party line of credit     -       121,957  
Interest paid by issuance of common stock     160,000       -  
Amortized debt issuance costs     16,500       -  
Net unrealized (gain) loss on available-for-sale investments     21,607       (8,292 )
Loss on settlement of debt, net     1,497,061       327,433  
(Increase) decrease in assets:                
Accounts receivable     (212,710 )     (5,131 )
Stock subscription receivable     -       (49,250 )
Inventories     (1,934,544 )     424,988  
Prepaid expenses and other     45,554       (375,990 )
Deferred commission costs     104,980       3,842  
Increase (decrease) in liabilities:                
Accounts payable     28,522       300,000  
Accrued expenses and interest payable     2,924,874       134,263  
Unearned revenue     (72,801 )     (8,051 )
                 
Net cash used in operating activities     (2,262,940 )     (1,513,997 )
                 
Cash flows from investing activities:                
Acquisition of property and equipment     (130,195 )     -  
Patents and trademark fees     (3,683 )     (9,519 )
                 
Net cash used in investing activities     (133,878 )     (9,519 )
                 
Cash flows from financing activities:                
Net borrowings (repayments) on line of credit     (210,200 )     39,449  
Proceeds from issuance of term debt     2,211,400       -  
Repayment of term debt     (797,084 )     (8,931 )
Repayment of finance lease obligations     (170,854 )     (32,921 )
Proceeds from the issuance of notes - related parties     1,098,000       713,700  
Advances from stock subscription payable     308,000       -  
Proceeds from stock subscription receivable     49,250       -  
Repayment of notes payable - related parties     -       (19,793 )
Repayment of convertible notes     -       (146,206 )
Proceeds from issuance of common stock, net of costs     456,490       1,000,550  
Treasury stock repurchases     -       (30 )
                 
Net cash provided by financing activities     2,945,002       1,545,818  
                 
Net increase (decrease) in cash     548,184       22,302  
                 
Cash - beginning of year     72,355       50,053  
                 
Cash - end of year   $ 620,539     $ 72,355  
                 
Cash paid during the year for:                
Interest   $ 728,002     $ 410,164  
                 
Non-cash transactions:                
Third-party settlement of the Company’s line of credit   $ 2,203,339     $ -  
Common stock issued for settlement of term debt and accrued interest     660,000       -  
Common stock issued for accrued compensation     201,200       771,203  
Derivatives issued as a debt discount     28,000       722,875  
Term debt issuance costs   $ 16,500       -  
Purchase of intangible assets with common stock     -       103,750  
Acquisition of Rotmans with notes payable     -       2,030,000  
Convertible notes and accrued interest payable converted to common stock     -       1,343,664  
Common stock issued for settlement of related party line of credit     -       1,977,935  
Shareholder advances to related party on behalf of the Company     -       180,000  
Common stock issued for settlement of warrant exercises     -       32,442  
Settlement of derivative liabilities     -       1,279,335  

 

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

 

F- 7
 

 

VYSTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2020 and 2019

 

NOTE 1 - DESCRIPTION OF BUSINESS

 

Nature of Business

 

Vystar Corporation (“Vystar”, the “Company”, “we,” “us,” or “our”) is based in Worcester, Massachusetts and produces a line of innovative air purifiers, which destroy viruses and bacteria through the use of ultraviolet light. Vystar is also the creator and exclusive owner of the innovative technology to produce Vytex® Natural Rubber Latex (“NRL”). Vystar manufactures and sells NRL used primarily in various bedding products. In addition, Vystar has a majority ownership in Murida Furniture Co., Inc. dba Rotmans Furniture (“Rotmans”), one of the largest independent furniture retailers in the U.S.

 

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

 

Basis of Presentation

 

The consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification.

 

The Company has evaluated subsequent events through the date of the filing of its Form 10-K with the Securities and Exchange Commission. Other than those events disclosed in Note 19, the Company is not aware of any other significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on the Company’s financial statements.

 

Basis of Consolidation

 

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned or controlled operating subsidiaries. All significant intercompany accounts and transactions have been eliminated.

 

COVID-19

 

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

 

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

 

The pandemic continues to cause economic disruption. Although our showroom has reopened, some business segments remain closed or are operating on a reduced scale. The COVID-19 pandemic is complex and continues to evolve with sporadic resurgences, new virus variants and the vaccine rollout. We cannot reasonably estimate the duration of COVID-19 and its impact on Vystar. Accordingly, the estimates and assumptions made as of December 31, 2020 could change in subsequent interim reports, and it is reasonably possible that such changes could be significant (although the potential effects cannot be measured at this time).

 

F- 8
 

 

Segment Reporting

 

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

 

Estimates

 

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

 

Fair Value of Financial Instruments

 

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

 

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

 

Valuation inputs are classified in the following hierarchy:

 

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

 

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

 

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.

 

Cash, Cash Equivalents and Restricted Cash

 

Cash and cash equivalents include all liquid investments with a maturity date of less than three months when purchased. Cash equivalents also include amounts due from third-party financial institutions for credit and debit card transactions which typically settle within five days. Restricted cash represents cash balances restricted as to withdrawal or use and are included in prepaid expenses and other on the consolidated balance sheets.

 

F- 9
 

 

Accounts Receivable

 

Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company routinely sells, without recourse, trade receivables resulting from retail furniture sales to two financial institutions at an average service charge of 3.7% in 2020. Amounts sold during the year ended December 31, 2020 were approximately $4,420,000. 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 Vystar 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 December 31, 2020 and 2019, the Company considers accounts receivable to be fully collectible and no allowance for doubtful accounts was recorded.

 

Inventories

 

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

 

Prepaid Expenses and Other

 

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

 

Investments - Equity Securities

 

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

 

Property and Equipment

 

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

 

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

 

F- 10
 

 

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 ranging from 9 to 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.

 

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

 

Our intangible assets are reviewed for impairment annually or more frequently as warranted by events of changes in circumstances. During the year ended December 31, 2020, we recognized an impairment charge of $240,350 related to the NHS tradename due to its discontinuation in the product line.

 

Long-Lived Assets

 

We review our long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be fully recoverable. We evaluate assets for potential impairment by comparing estimated future undiscounted net cash flows to the carrying amount of the assets. If the carrying amount of the assets exceeds the estimated future undiscounted cash flows, impairment is measured based on the difference between the carrying amount of the assets and fair value. Assets to be disposed of would be separately presented in the 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 years ended December 31, 2020 and 2019, we did not recognize any impairment of our long-lived assets.

 

Goodwill

 

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

 

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

 

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

 

Convertible Notes Payable

 

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

 

F- 11
 

 

Derivatives

 

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

 

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

 

Unearned Revenue

 

Unearned revenue consists of customer advance payments, deposits on sales of undelivered merchandise and deferred warranty revenue on self-insured stain protection warranty coverage.

 

Changes to unearned revenue during the years ended December 31, 2020 and 2019 are summarized as follows:

 

    2020   2019
         
Balance, beginning of the year   $ 2,500,572