NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - DESCRIPTION OF BUSINESS
Nature
of Business
Vystar
Corporation (“Vystar”, the “Company”, “we,” “us,” or “our”) is based in Worcester,
Massachusetts. The Company uses patented technology to 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 to produce Vytex® Natural Rubber
Latex (“NRL”) currently being 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
condensed consolidated financial statements of the Company and the accompanying notes included in this Quarterly Report on Form 10-Q
are unaudited. In the opinion of management, all adjustments necessary for the fair presentation of the condensed consolidated financial
statements have been included. Such adjustments are of a normal, recurring nature. The condensed consolidated financial statements, and
the accompanying notes, are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S.
GAAP”) and do not contain certain information included in the Company’s Annual Report and Form 10-K for the year ended December
31, 2021. Therefore, the interim condensed consolidated financial statements should be read in conjunction with that Annual Report on
Form 10-K.
The
Company has evaluated subsequent events through the date of the filing of its Form 10-Q with the Securities and Exchange Commission.
Other than those events disclosed in Note 18, 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
The
novel coronavirus (“COVID-19”) pandemic continues to cause economic disruption and impact to our business and results of
operations. During the six months ended June 30, 2022, we experienced rising product prices, volatile transportation costs and supply
chain disruptions. In addition, discretionary consumer spending has been adversely impacted by rising inflation, including fuel costs
and interest rates. We cannot reasonably estimate the duration of COVID-19 and its impact on Vystar. Accordingly, the estimates and assumptions
made as of June 30, 2022 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).
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 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, 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 June 30, 2022 and are level 3 measurements. There have been
no transfers between levels during the six months ended June 30, 2022.
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
condensed consolidated balance sheets.
Accounts
Receivable, Net
Accounts
receivable, net 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% in
2022. Amounts sold during the six months ending June 30, 2022 were approximately $1,574,000. 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 June 30, 2022 and December 31, 2021, the Company has recorded an allowance for doubtful accounts of $273,000.
Other
Receivables
Under
the provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) signed into law on March 27, 2020
and the subsequent extension of the CARES Act, the Company was eligible for a refundable employee retention credit subject to certain
criteria. The Company recognized employee retention credits of $771,287 during the year ended December 31, 2021 which has been included
in other income, net in the consolidated statements of operations. The Company has filed for refunds of the employee retention credits
and as of the date of this Quarterly Report on Form 10-Q has subsequently received $154,468 and estimates receiving the remaining refunds
by the end of 2022.
Rotmans
terminated its agreement with a supplier in 2021 and will receive $100,000 in consideration. As of December 31, 2021, the remaining account
balance of $104,075 represents funds due from this termination. The Company has received $37,408 during the six months ended June 30,
2022.
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.
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 June 30, 2022, the net balance of property and equipment is $703,563 with
accumulated depreciation of $772,520. As of December 31, 2021, the net balance of property and equipment is $832,099 with accumulated
depreciation of $643,984.
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.
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 condensed 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 condensed consolidated balance sheet, if material. During the six months ended
June 30, 2022 and 2021, 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.
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 June 30, 2022, 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 six months ended June 30, 2022 and 2021 are summarized as follows:
SCHEDULE OF UNEARNED REVENUE
| |
2022 | | |
2021 | |
| |
| | |
| |
Balance,
beginning of the period | |
$ | 1,122,195 | | |
$ | 2,427,771 | |
| |
| | | |
| | |
Customer
deposits received | |
| 6,273,932 | | |
| 15,819,352 | |
| |
| | | |
| | |
Gift
cards purchased | |
| 1,200 | | |
| 260 | |
| |
| | | |
| | |
Revenue
earned | |
| (6,456,937 | ) | |
| (17,245,116 | ) |
| |
| | | |
| | |
Balance,
end of the period | |
$ | 940,390 | | |
$ | 1,002,267 | |
Income
(Loss) Per Share
The
Company presents basic and diluted income (loss) per share. For the three and six months ended June 30, 2022 and 2021, common stock
equivalents, including stock options and warrants, were anti-dilutive; therefore, the amounts reported for basic and dilutive income
(loss) per share were the same. Excluded from the computation of diluted income (loss) per share were options to purchase 26,524,938
and 27,124,938
shares of common stock for the six months ended June 30, 2022 and 2021, respectively, as their effect would be anti-dilutive.
Warrants to purchase 3,885,823
and 11,641,566
shares of common stock for the six months ended June 30, 2022 and 2021, respectively, were also excluded from the computation of
diluted income (loss) per share as their effect would be anti-dilutive. In addition, preferred stock convertible to 3,317,200
and 3,143,240
shares of common stock for the six months ended June 30, 2022 and 2021, respectively, were excluded from the computation of diluted
income (loss) per share as their effect would be anti-dilutive. Both shareholder and Rotman Family contingently convertible notes
payable convertible to 1,034,176,791
and 300,832,047
shares of common stock for the six months ended June 30, 2022 and 2021, respectively, were also excluded from the computation of
diluted income (loss) per share as their effect would be anti-dilutive.
Revenue
Our
principal activities from which we generate our revenue are product sales. Revenue is measured based on considerations specified in a
contract with a customer. A contract exists when it becomes a legally enforceable agreement with a customer. The contract is based on
either the acceptance of standard terms and conditions at the retail store and on the websites for e-commerce customers, or the execution
of terms and conditions contracts with retailers and wholesalers. These contracts define each party’s rights, payment terms and
other contractual terms and conditions of the sale.
Consideration
is typically paid prior to shipment via credit card or check when our products are sold direct to consumers, which is typically within
1 to 2 days or approximately 30 days from the time control is transferred when sold to wholesalers, distributors and retailers. We apply
judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s
historical payment experience and, in some circumstances, published credit and financial information pertaining to the customer.
A
performance obligation is a promise in a contract to transfer a distinct product to the customer, which for us is transfer of finished
goods to our customers. Performance obligations promised in a contract are identified based on the goods that will be transferred to
the customer that are both capable of being distinct and are distinct in the context of the contract, whereby the transfer of the goods
is separately identifiable from other promises in the contract. We have concluded the sale of finished goods and related shipping and
handling are accounted for as the single performance obligation.
The
transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer
receives the benefit of the performance obligation. The transaction price is determined based on the consideration to which we will be
entitled to receive in exchange for transferring goods to the customer. We issue refunds to retail, e-commerce and print media customers,
upon request, within 30 days of delivery. We estimate the amount of potential refunds at each reporting period using a portfolio approach
of historical data, adjusted for changes in expected customer experience, including seasonality and changes in economic factors. For
retailers, distributors and wholesalers, we do not offer a right of return or refund and revenue is recognized at the time products are
shipped to customers. In all cases, judgment is required in estimating these reserves. Actual claims for returns could be materially
different from the estimates. As of June 30, 2022 and December 31, 2021, reserves for estimated sales returns totaled $283,000 and $337,000,
respectively, and are included in the accompanying condensed consolidated balance sheets as accrued expenses.
We
recognize revenue when we satisfy a performance obligation in a contract by transferring control over a product to a customer when product
is shipped based on fulfillment by the Company. The Company considers fulfillment when it passes all liability at the point of shipping
through third party carriers or in-house delivery services. Delivery fees are charged to customers and are included in revenue in the
accompanying condensed consolidated statements of operations and the costs associated with these deliveries are included in revenues
as a third-party delivery service is engaged. Taxes assessed by a governmental authority that are both imposed on and concurrent with
a specific revenue-producing transaction, that are collected by us from a customer, are excluded from revenue. Shipping and handling
costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment
cost and are included in cost of revenue in the accompanying condensed consolidated statements of operations.
The
Company also defers revenues for separately-priced stain protection warranty coverage for which it is ultimately self-insured. Revenue
is recognized from the extended warranty sales on a straight-line basis over the respective contract term. The extended warranty terms
primarily range from three to five years from the date of delivery. The Company ended this warranty
program during 2020 but continues to amortize the previously contracted warranties over their original terms. The Company currently offers
a separately-priced stain protection warranty serviced by a third-party. At June 30, 2022 and December 31, 2021, deferred warranty
revenue was approximately $368,000 and $524,000, respectively, and is included in unearned revenue in the accompanying consolidated balance
sheets. During the six months ended June 30, 2022 and 2021, the Company recognized total revenues of approximately $152,000 and $207,000,
respectively, related to deferred warranty revenue arrangements. Commission costs in obtaining extended warranty contracts are capitalized
and recognized as expense on a straight-line basis over the period of the warranty contract. At June 30, 2022 and December 31, 2021,
deferred commission costs were approximately $93,000 and $134,000, respectively, and are included in the accompanying condensed consolidated
balance sheets. All other costs, such as costs of services performed under the contract, general and administrative expenses, and advertising
costs are expensed as incurred.
Cost
of Revenue
Cost
of revenue consists primarily of product and freight costs and fees paid to online retailers.
Research
and Development
Research
and development costs are expensed when incurred. Research and development costs include all costs incurred related to the research,
development and testing. For the six months ended June 30, 2022 and 2021, Vystar’s research and development costs were not significant.
Advertising
Costs
Advertising
costs, which include television, radio, newspaper, digital and other media advertising, are expensed upon first showing. Advertising
costs were approximately $608,000 and $1,409,000 for the six months ended June 30, 2022 and 2021, respectively.
Share-Based
Compensation
The
fair value of stock options is estimated on the grant date using the Black-Scholes option pricing model, based on weighted average assumptions.
Expected volatility is based on historical volatility of our common stock. The Company has elected to use the simplified method described
in the Securities and Exchange Commission Staff Accounting Bulletin Topic 14C to estimate the expected term of employee stock options.
The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The value of restricted stock awards is
determined using the fair value of the Company’s common stock on the date of grant. The Company accounts for forfeitures as they
occur. Compensation expense is recognized on a straight-line basis over the requisite service period of the award.
Income
Taxes
Vystar
recognizes income taxes on an accrual basis based on a tax position taken or expected to be taken in its tax returns. A tax position
is defined as a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected
in measuring current or deferred income tax assets or liabilities. Tax positions are recognized only when it is more likely than not
(i.e., likelihood of greater than 50%), based on technical merits, that the position would be sustained upon examination by taxing authorities.
Tax positions that meet the more likely than not threshold will be measured using a probability-weighted approach as the largest amount
of tax benefit that is greater than 50% likely of being realized upon settlement. Income taxes are accounted for using an asset and liability
approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that
have been recognized in our financial statements or tax returns. A valuation allowance is established to reduce deferred tax assets if
all, or some portion, of such assets will more likely than not be realized. Should they occur, interest and penalties related to tax
positions are recorded as interest expense. No such interest or penalties have been incurred for the six months ended June 30, 2022
and 2021.
The
Company remains subject to income tax examinations from Federal and state taxing jurisdictions for 2018 through 2021.
Concentration
of Credit Risk
Certain
financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily
of cash and accounts receivable. Cash held in operating accounts may exceed the Federal Deposit Insurance Corporation, or FDIC, insurance
limits. While the Company monitors cash balances in our operating accounts on a regular basis and adjust the balances as appropriate,
these balances could be impacted if the underlying financial institutions fail. To date, the Company has experienced no loss or lack
of access to our cash; however, the Company can provide no assurances that access to our cash will not be impacted by adverse conditions
in the financial markets. Credit concentration risk related to accounts receivable is mitigated as customer credit is checked prior to
the sales.
Other
Risks and Uncertainties
The
Company is exposed to risks pertinent to the operations of a retailer, including, but not limited to, the ability to acquire new customers
and maintain a strong brand as well as broader economic factors such as interest rates and changes in customer spending patterns.
Recent
Accounting Pronouncements
In
August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and
Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). The new ASU eliminates the beneficial conversion and cash
conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own
equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies
how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation.
The amendments in the ASU are effective for public business entities that meet the definition of an SEC filer, excluding entities eligible
to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods
within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including
interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15,
2020, including interim periods within those fiscal years. The Board also specified that an entity should adopt the guidance as of the
beginning of its annual fiscal year and is not permitted to adopt the guidance in an interim period. The Company is still evaluating
the effect the adoption will have on its financial statements.
NOTE
3 - LIQUIDITY AND GOING CONCERN
The
Company’s financial statements are prepared using the accrual method of accounting in accordance with U.S. GAAP and have been prepared
on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business.
However, the Company has incurred significant losses and experienced negative cash flow since inception. At June 30, 2022, the Company
had cash of $70,023 and a deficit in working capital of approximately $8.8 million. Further, at June 30, 2022 the accumulated deficit
amounted to approximately $51.5 million. We use working capital to finance our ongoing operations, and since those operations do not
currently cover all our operating costs, managing working capital is essential to our Company’s future success. Because of this
history of losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.
A
successful transition to attaining profitable operations is dependent upon obtaining sufficient financing to fund the Company’s
planned expenses and achieving a level of revenue adequate to support the Company’s cost structure. Management plans to finance
future operations using cash on hand, increased revenue from RxAir air purification units, Vytex license fees and stock issuances to
new and existing shareholders. The Company has also focused the efforts of key internal employees on the goal of creating efficiencies
in each department in our retail furniture business, including purchasing, marketing, inventory control, advertising, accounting, warehousing
and customer service.
There
can be no assurances the Company will be able to achieve projected levels of revenue in 2022 and beyond. If the Company is not able to
achieve projected revenue and obtain alternate additional financing of equity or debt, the Company would need to significantly curtail
or reorient operations during 2022, which could have a material adverse effect on the ability to achieve the business objectives, and
as a result, may require the Company to file bankruptcy or cease operations. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities that might be necessary
should the Company be forced to take any such actions.
The
Company’s future expenditures will depend on numerous factors, including: the rate at which the Company can introduce RxAir air
purification units and license Vytex NRL raw materials to manufacturers, and subsequently retailers; the costs of filing, prosecuting,
defending and enforcing any patent claims and other intellectual property rights; market acceptance of the Company’s products,
services and competing technological developments; the Company’s ability to successfully realize synergies through the integration
of the merged companies, acquire new customers and maintain a strong brand; the success of our efforts to reduce expenses in our retail
furniture business; and broader economic factors such as interest rates and changes in customer spending patterns. As the Company expands
its activities and operations, cash requirements are expected to increase at a rate consistent with revenue growth after the Company
has achieved sustained revenue generation.
NOTE
4 - INVESTMENTS – EQUITY SECURITIES
Investments,
which represented equity securities in a publicly traded company, were sold during the three months ended September 30, 2021. Unrealized
holding gains on available-for-sale securities were approximately $21,000 in the first six months of 2021, and have been included in
other income (expense) in the accompanying condensed statements of operations.
NOTE
5 - PROPERTY AND EQUIPMENT
Property
and equipment, net consists of the following:
SCHEDULE OF PROPERTY AND EQUIPMENT, NET
| |
June
30, | | |
December
31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Furniture,
fixtures and equipment | |
$ | 588,624 | | |
$ | 588,624 | |
Tooling
and testing equipment | |
| 338,572 | | |
| 338,572 | |
Parking
lots | |
| 365,707 | | |
| 365,707 | |
Leasehold
improvements | |
| 134,014 | | |
| 134,014 | |
Motor
vehicles | |
| 49,166 | | |
| 49,166 | |
| |
| | | |
| | |
Property
and equipment, gross | |
| 1,476,083 | | |
| 1,476,083 | |
Accumulated
depreciation | |
| (772,520 | ) | |
| (643,984 | ) |
| |
| | | |
| | |
Property
and equipment, net | |
$ | 703,563 | | |
$ | 832,099 | |
Depreciation
expense for the six months ended June 30, 2022 and 2021 was $128,536 and $192,401, respectively.
NOTE
6 - INTANGIBLE ASSETS
Intangible
assets consist of the following:
SCHEDULE OF INTANGIBLE ASSETS
| |
| | | |
| | | |
|
| |
| | |
| | |
Amortization |
| |
June
30, | | |
December
31, | | |
Period |
| |
2022 | | |
2021 | | |
(in
Years) |
Amortized
intangible assets: | |
| | | |
| | | |
|
Customer
relationships | |
$ | 150,000 | | |
$ | 150,000 | | |
6
- 10 |
Proprietary
technology | |
| 280,000 | | |
| 280,000 | | |
10 |
Tradename
and brand | |
| 1,050,000 | | |
| 1,050,000 | | |
5
- 10 |
Marketing
related | |
| 380,000 | | |
| 380,000 | | |
5 |
Patents | |
| 361,284 | | |
| 361,284 | | |
6
- 20 |
Noncompete | |
| 50,000 | | |
| 50,000 | | |
5 |
| |
| | | |
| | | |
|
Total | |
| 2,271,284 | | |
| 2,271,284 | | |
|
Accumulated
amortization | |
| (1,244,110 | ) | |
| (1,071,486 | ) | |
|
| |
| | | |
| | | |
|
Intangible
assets, net | |
| 1,027,174 | | |
| 1,199,798 | | |
|
Indefinite-lived
intangible assets: | |
| | | |
| | | |
|
Trademarks | |
| 9,072 | | |
| 9,072 | | |
|
| |
| | | |
| | | |
|
Total
intangible assets | |
$ | 1,036,246 | | |
$ | 1,208,870 | | |
|
Amortization
expense for the six months ended June 30, 2022 and 2021 was $172,624 and $191,980, respectively.
Estimated
future amortization expense for finite-lived intangible assets is as follows:
SCHEDULE OF ESTIMATED FUTURE AMORTIZATION EXPENSE
| |
Amount | |
| |
| |
Remaining
in 2022 | |
$ | 172,625 | |
2023 | |
| 338,638 | |
2024 | |
| 239,411 | |
2025 | |
| 90,550 | |
2026 | |
| 71,232 | |
Thereafter | |
| 114,718 | |
| |
| | |
Total | |
$ | 1,027,174 | |
NOTE
7 - LEASES
The
Company leases equipment, a showroom, offices and warehouse facilities. These leases expire at various dates through 2024 with options
to extend to 2031.
The
table below presents the lease costs for the three and six months ended June 30, 2022 and 2021:
SCHEDULE OF LEASE COST
| |
| | | |
| | | |
| | | |
| | |
| |
Three
Months Ended | | |
Six
Months Ended | |
| |
June
30, | | |
June
30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
| | |
| | |
| | |
| |
Operating
lease cost | |
$ | 288,134 | | |
$ | 396,492 | | |
$ | 575,804 | | |
$ | 792,544 | |
| |
| | | |
| | | |
| | | |
| | |
Finance
lease cost: | |
| | | |
| | | |
| | | |
| | |
| |
| | | |
| | | |
| | | |
| | |
Amortization
of right-of-use assets | |
| 39,706 | | |
| 45,912 | | |
| 84,174 | | |
| 91,824 | |
Interest
on lease liabilities | |
| 6,785 | | |
| 8,933 | | |
| 14,097 | | |
| 18,421 | |
| |
| | | |
| | | |
| | | |
| | |
Total
lease cost | |
$ | 334,625 | | |
$ | 451,337 | | |
$ | 674,075 | | |
$ | 902,789 | |
During
the six months ended June 30, 2022 and 2021, the Company recognized sublease income of approximately $68,000 and $77,000, respectively,
which in included in other income (expense), net in the accompanying condensed consolidated statements of operations.
Our
leases generally do not provide an implicit rate, and therefore we use our incremental borrowing rate as the discount rate when measuring
operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement
to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease. We used incremental borrowing rates
as of the implementation date for operating leases that commenced prior to that date.
The
following table presents other information related to leases:
SCHEDULE OF OTHER INFORMATION RELATED TO LEASES
| |
| | | |
| | | |
| | | |
| | |
| |
Three
Months Ended | | |
Six
Months Ended | |
| |
June
30, | | |
June
30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
| | |
| | |
| | |
| |
Cash
paid for amounts included in the measurement of lease liabilities: | |
| | | |
| | | |
| | | |
| | |
Operating
cash flows used for operating leases | |
$ | 262,004 | | |
$ | 375,911 | | |
$ | 525,620 | | |
$ | 751,822 | |
Financing
cash flows used for financing leases | |
| 45,499 | | |
| 52,427 | | |
| 95,160 | | |
| 104,854 | |
Assets
obtained in exchange for operating lease liabilities | |
| - | | |
| - | | |
| - | | |
| - | |
Assets
obtained in exchange for finance lease liabilities | |
| - | | |
| - | | |
| - | | |
| - | |
Weighted average
remaining lease term: | |
| | | |
| | | |
| | | |
| | |
Operating
leases | |
| 8.6
years | | |
| 8.6
years | | |
| 8.6
years | | |
| 8.6
years | |
Finance
leases | |
| 3.9
years | | |
| 4.6
years | | |
| 3.9
years | | |
| 4.6
years | |
Weighted average
discount rate: | |
| | | |
| | | |
| | | |
| | |
Operating
leases | |
| 5.60 | % | |
| 5.56 | % | |
| 5.60 | % | |
| 5.56 | % |
Finance
leases | |
| 5.16 | % | |
| 5.16 | % | |
| 5.16 | % | |
| 5.16 | % |
The
future minimum lease payments required under operating and financing lease obligations as of June 30, 2022 having initial or remaining
non-cancelable lease terms in excess of one year are summarized as follows:
SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS REQUIRED UNDER OPERATING AND FINANCING LEASE OBLIGATIONS
| |
Operating
Leases | | |
Finance
Leases | | |
Total | |
| |
| | |
| | |
| |
Remainder
of 2022 | |
$ | 443,807 | | |
$ | 70,342 | | |
$ | 514,149 | |
2023 | |
| 878,807 | | |
| 139,080 | | |
| 1,017,887 | |
2024 | |
| 870,000 | | |
| 139,080 | | |
| 1,009,080 | |
2025 | |
| 870,000 | | |
| 139,080 | | |
| 1,009,080 | |
2026 | |
| 870,000 | | |
| 68,395 | | |
| 938,395 | |
Thereafter | |
| 3,552,500 | | |
| - | | |
| 3,552,500 | |
| |
| | | |
| | | |
| | |
Total
undiscounted lease liabilities | |
| 7,485,114 | | |
| 555,977 | | |
| 8,041,091 | |
Less:
imputed interest | |
| (1,522,194 | ) | |
| (54,419 | ) | |
| (1,576,613 | ) |
| |
| | | |
| | | |
| | |
Net
lease liabilities | |
$ | 5,962,920 | | |
$ | 501,558 | | |
$ | 6,464,478 | |
As
of June 30, 2022, the Company has entered into a two-year operating lease that has not yet commenced.
NOTE
8 - NOTES PAYABLE AND LOAN FACILITY
Letter
of Credit
The
Company entered into a $125,000 letter of credit agreement with Fidelity Co-operative Bank in November 2020. The pledged collateral of
a $125,000 cash deposit account is included in prepaid expenses and other. The letter of credit was required pursuant to an agreement
with a third-party financial institution for customer financing.
Advances
On
May 29, 2020, Rotmans entered into a sale promotion consulting agreement with a national furniture sales event company. Under the agreement,
Rotmans appointed the third-party as its exclusive agent to assist with a high-impact sale. Before the sale, the agent advanced the Company
funds of approximately $2,300,000 to pay off a bank line of credit and certain other vendors. The agent will be reimbursed for the advance
from the proceeds of the sale. The initial sales agreement with the agent ended in May 2021. A new agreement was entered into with the
agent in June 2021. The remaining inventories on hand were used to pay off the liability of the first sale and then simultaneously purchased
back for the next sale. The agreement has been amended numerous times and is scheduled to end in October 2022. The agent has a senior
first priority security interest and lien in Rotmans inventories and other assets until all obligations and liabilities are satisfied.
The outstanding balance of the advance is approximately $1,947,000 and $2,082,000 as of June 30, 2022 and December 31, 2021, respectively,
and is included in accounts payable in the accompanying condensed consolidated balance sheet.
Term
Notes
On
April 16, 2020, Rotmans received $1,402,900 in loan funding from the Paycheck Protection Program (the “PPP”), established
pursuant to the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and administered by
the U.S. Small Business Administration (“SBA”). The unsecured loan (the “PPP Loan”) was evidenced by a promissory
note of the Company dated April 16, 2020 (the “Note”) in the principal amount of $1,402,900 with United Community Bank (the
“Bank”), the lender. Under the terms of the Note and the PPP Loan, interest accrues on the outstanding principal at the rate
of 1.0% per annum. The term of the Note was two years, though it may be payable sooner in connection with an event of default under the
Note. On January 24, 2021, the PPP loan was fully forgiven by the SBA.
On
February 2, 2021, Rotmans received an additional $1,402,900 in PPP loan funding from the SBA. The terms of the Note are the same as the
original PPP Loan. On June 25, 2021, the PPP loan was fully forgiven by the SBA.
Shareholder,
Convertible and Contingently Convertible Notes Payable
The
following table summarizes shareholder, convertible and contingently convertible notes payable:
SCHEDULE OF LONG-TERM DEBT
| |
| | | |
| | |
| |
June
30, | | |
December
31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Shareholder,
convertible and contingently convertible notes | |
$ | 309,500 | | |
$ | 1,241,895 | |
Accrued
interest | |
| 18,733 | | |
| 147,009 | |
Total shareholder notes and accrued interest | |
| 328,233 | | |
| 1,388,904 | |
| |
| | | |
| | |
Less:
current maturities | |
| (328,233 | ) | |
| (1,388,904 | ) |
| |
| | | |
| | |
Total long-term debt | |
$ | - | | |
$ | - | |
Shareholder
Convertible Notes Payable
During
the year ended December 31, 2018, the Company issued shareholder contingently convertible notes payable, some of which were for contract
work performed by other entities in lieu of compensation and expense reimbursement, totaling approximately $335,000. The notes are (i)
unsecured, (ii) bear interest at an annual rate of five percent (5%) from date of issuance, and (iii) are convertible at the Company’s
option post April 19, 2018. The notes mature one year from issuance but may be extended one (1) additional year by the Company. If converted,
the notes plus accrued interest are convertible into shares of the Company’s common stock at the prior twenty (20) day average
closing price with a 50% discount. The outstanding balance of all of these notes of as June 30, 2022 and December 31, 2021 is $338,195.
The notes matured in January 2020 and continue to accrue interest until settlement. The unpaid balance on the notes bears interest at
an annual rate of eight percent (8%) in arrears. All of these notes except one were settled in April 2022 at a gain of approximately
$89,000 and included in stock subscription payable at June 30, 2022.
During
the year ended December 31, 2019, the Company issued certain contingently convertible promissory notes in varying amounts to existing
shareholders which totaled $613,700. The face amount of the note represents the amount due at maturity along with the accrued interest
at an annual rate of five percent (5%). The amount can be converted into shares of the Company’s stock, at the option of the Company,
based on the average closing price for the trailing 20 days prior to conversion and carrying a 35% to 50% discount. These notes can be
converted only after an acceleration event which involves a symbol change, uplisting, or reverse stock split and such conversion is in
the control of the Company. All of these notes were settled in April 2022 at a gain of approximately $142,000 and included in stock subscription
payable at June 30, 2022.
During
the year ended December 31, 2021, the Company issued certain contingently convertible promissory notes in varying amounts to existing
shareholders which totaled $290,000. The notes are unsecured and bear interest at an annual rate of five percent (5%) from date of issuance.
The face amount of the notes represents the amount due at maturity along with the accrued interest. In the event that the spin-off of
RxAir does not occur within 2022, the Company will convert these notes into common stock at a conversion price of $0.016. If the spin-off
does occur, these notes will convert into RxAir common stock with two conversion prices of $0.15 and $2, which equates to a blended conversion
price of $0.18. All of these notes are outstanding as of June 30, 2022. At the issuance date of these notes, it was determined they contain
a beneficial conversion feature amounting to approximately $90,000. As these notes are contingently convertible, the beneficial conversion
feature will not be recorded on the consolidated financial statements until the actual conversion occurs.
Based
on the variable conversion price of these notes issued prior to 2021, the Company recorded the embedded conversion features as derivative
liabilities, which amounted to $647,100 at December 31, 2021. With the debt settlements in April 2022, the value of the embedded conversion
features on the one remaining note was $17,800 at June 30, 2022.
Related
Party Debt
The
following table summarizes related party debt:
SCHEDULE OF RELATED PARTY DEBT
| |
| | | |
| | |
| |
June
30, | | |
December
31, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Rotman
Family convertible notes | |
$ | 1,967,737 | | |
$ | 1,967,737 | |
Rotman
Family nonconvertible notes | |
| 2,491,009 | | |
| 1,953,509 | |
Accrued
interest | |
| 490,022 | | |
| 384,238 | |
Debt
discount | |
| - | | |
| (27,083 | ) |
Long term debt, current | |
| 4,948,768 | | |
| 4,278,401 | |
Less:
current maturities | |
| (2,694,000 | ) | |
| (1,487,000 | ) |
| |
| | | |
| | |
Long term debt | |
$ | 2,254,768 | | |
$ | 2,791,401 | |
Rotman
Family Convertible Notes
On
September 30, 2019, the Company issued contingently convertible promissory notes totaling $180,000 to Steven Rotman ($105,000) and Greg
Rotman ($75,000). These notes are (i) unsecured, (ii) bear interest at an annual rate of eight percent (8%) from date of issuance, (iii)
are convertible at the Company’s option after December 31, 2019, and (iv) mature five years from issuance. If converted, the notes
plus accrued interest are convertible into shares of the Company’s common stock at the average of the five lowest closing prices
in the 90-day period prior to conversion with a 50% discount. The balance of the notes payable including accrued interest to Steven and
Greg Rotman is approximately $130,000 and $68,000, respectively, at June 30, 2022 and approximately $126,000 and $66,000, respectively,
at December 31, 2021.
On
July 18, 2019, the Company issued contingently convertible notes totaling $1,522,500 to Steven Rotman ($1,102,500) and Bernard Rotman
($420,000) as partial consideration for the acquisition of 58% of Rotmans. These notes are (i) unsecured, and (ii) bear interest at an
annual rate of five percent (5%) from date of issuance. These notes can be converted only after an acceleration event which involves
a symbol change, or reverse stock split and such conversion is in the control of the Company. Steven Rotman’s note matures eight
years from issuance and Bernard Rotman’s note matures four years from issuance. If converted, the notes plus accrued interest are
convertible into shares of the Company’s common stock at a 20-day average closing price at a 50% discount. The balance of the notes
payable including accrued interest to Steven and Bernard Rotman were approximately $1,266,000 and $482,000, respectively, at June 30,
2022 and approximately $1,238,000 and $472,000, respectively, at December 31, 2021.
On
December 19, 2019, the Company issued a contingently convertible promissory note totaling $100,000 to Steven Rotman. The face amount
of the note represents the amount due at maturity along with the accrued interest at 5%. The amount can be converted into shares of the
Company’s stock, at the option of the Company, based on the average closing price for the trailing 20 days prior to conversion
and carrying 50% discount. The note can be converted only after an acceleration event which involves a symbol change, uplisting, or reverse
stock split and such conversion is in the control of the Company. The note was extended to mature two years from issuance. The balance
of the note payable including accrued interest to Steven Rotman is approximately $113,000 and $110,000 at June 30, 2022 and December
31, 2021, respectively.
On
February 20, 2020, the Company issued a contingently convertible promissory note totaling $50,000 to Steven Rotman. The face amount of
the note represents the amount due at maturity along with the accrued interest at 5%. The amount can be converted into shares of the
Company’s stock, at the option of the Company, based on the average closing price for the trailing 20 days prior to conversion
and carrying 50% discount. The note can be converted only after an acceleration event which involves a symbol change, uplisting, or reverse
stock split and such conversion is in the control of the Company. The note matures two years from issuance. The balance of the note payable
including accrued interest to Steven Rotman is approximately $56,000 and $55,000 at June 30, 2022 and December 31, 2021, respectively.
On
June 3, 2021, the Company issued a contingently convertible promissory note totaling $130,030 to Gregory Rotman. The face amount of the
note represents the amount due at maturity along with the accrued interest at 5%. The amount can be converted into shares of the Company’s
stock, at the holder’s option, based on the average closing price for the trailing 20 days prior to conversion and carrying 50%
discount or $0.165 per share whichever is lower. The holder may elect to accelerate conversion in the event of a spin-out or reverse
split. The note matures two years from issuance. The balance of the note payable including accrued interest to Gregory Rotman is approximately
$137,000 and $134,000 at June 30, 2022 and December 31, 2021, respectively.
On
August 17, 2021, the Company issued a contingently convertible promissory note totaling $5,000 to Jamie Rotman. The note is unsecured
and bears interest at an annual rate of five percent (5%) from date of issuance. The face amount of the note represents the amount due
at maturity along with the accrued interest. In the event that the spin-off of RxAir does not occur within one year, the Company will
convert the note into common stock at a conversion price of $0.016. If the spin-off does occur, the note will convert into RxAir common
stock with two conversion prices of $0.15 and $2, which equates to a blended conversion price of $0.18. At the issuance date of this
note, it was determined to contain a beneficial conversion feature amounting to approximately $2,000. As this note is contingently convertible,
the beneficial conversion feature will not be recorded on the consolidated financial statements until the actual conversion occurs. The
balance of the note payable including accrued interest to Jamie Rotman is approximately $5,000 at June 30, 2022 and December 31, 2021.
As
disclosed in note 18, Steven and Gregory Rotman notes were converted into Preferred Class C shares in July 2022.
The
following table summarizes the Rotman Family Convertible Notes:
SCHEDULE OF NOTES PAYABLE
| |
| |
| | | |
| Carrying
Amount | |
| |
| |
| Principal | | |
| June
30, | | |
| December
31, | |
| |
Issue
Date | |
| Amount | | |
| 2022 | | |
| 2021 | |
Steven Rotman 8.00% note due July 2024 | |
07/18/19 | |
$ | 105,000 | | |
$ | 130,200 | | |
$ | 126,000 | |
Steven
Rotman 8.00% note due July 2024 | |
07/18/19 | |
$ | 105,000 | | |
$ | 130,200 | | |
$ | 126,000 | |
Gregory
Rotman 8.00% note due July 2024 | |
07/18/19 | |
| 55,207 | | |
| 68,472 | | |
| 66,264 | |
Steven
Rotman 5.00% note due July 2027 | |
07/18/19 | |
| 1,102,500 | | |
| 1,265,578 | | |
| 1,238,016 | |
Bernard
Rotman 5.00% note due July 2023 | |
07/18/19 | |
| 420,000 | | |
| 482,125 | | |
| 471,625 | |
Steven
Rotman 5.00% note due December 2021 | |
12/19/19 | |
| 100,000 | | |
| 112,708 | | |
| 110,208 | |
Steven
Rotman 5.00% note due February 2022 | |
02/02/20 | |
| 50,000 | | |
| 55,833 | | |
| 54,583 | |
Gregory
Rotman 5.00% note due June 2023 | |
06/03/21 | |
| 130,030 | | |
| 137,073 | | |
| 133,822 | |
Jamie
Rotman 5.00% note due August 2022 | |
08/17/21 | |
| 5,000 | | |
| 5,219 | | |
| 5,094 | |
| |
| |
| | | |
| | | |
| | |
| |
| |
$ | 1,967,737 | | |
| 2,257,208 | | |
| 2,205,612 | |
| |
| |
| | | |
| | | |
| | |
Debt
Discount | |
| |
| | | |
| - | | |
| (27,083 | ) |
| |
| |
| | | |
| | | |
| | |
| |
| |
| | | |
$ | 2,257,208 | | |
$ | 2,178,529 | |
Based
on the variable conversion price for these convertible notes excluding the one issued in August 2021, the Company recorded the embedded
conversion features as derivative liabilities, which amounted to $1,131,000 at December 31, 2021. With the subsequent conversions of Steven and Gregory Rotman notes in July 2022, the value of the embedded conversion features was $240,300 at June 30, 2022.
Rotman
Family Nonconvertible Notes
In
connection with the acquisition of 58% of Rotmans, Steven and Bernard Rotman were issued related party notes payable in the amounts of
$367,500 and $140,000, respectively. The notes bear interest at an annual rate of five percent (5%). Steven Rotman’s note matures
eight years from issuance and Bernard Rotman’s note matures four years from issuance. Payments of $3,828 and $2,917 to Steven and
Bernard Rotman, respectively, per month were scheduled to begin six months from issuance until maturity in December 2027 and 2023, respectively.
The balance of these notes payable including accrued interest to Steven and Bernard Rotman is approximately $422,000 and $161,000, respectively,
at June 30, 2022 and approximately $413,000 and $157,000, respectively, at December 31, 2021. No payments have been made by the Company
as of June 30, 2022.
During
the six months ended December 31, 2020, Steven Rotman advanced the Company funds totaling $1,048,000. In December 2020, the Company formalized
the advances and issued a promissory note to Steven Rotman. The note bears interest at an annual rate of five percent (5%) and was due
one year from issuance. The maturity date has been extended to December 2022. The face amount of the note represents the amount due at
maturity along with accrued interest. The balance of the note payable including accrued interest to Steven Rotman is approximately $1,141,000
and $1,115,000, at June 30, 2022 and December 31, 2021, respectively.
During
2021, Steven Rotman advanced the Company funds totaling $398,009. The Company formalized the advances and issued promissory notes to
Steven Rotman. The notes bear interest at an annual rate of five percent (5%) and are due no later than two years from the issuance date.
The face amount of the notes represents the amount due at maturity along with accrued interest. The balance of the notes payable including
accrued interest to Steven Rotman is approximately $425,000 and $415,000 at June 30, 2022 and December 31, 2021, respectively.
During
2022, Gregory Rotman and Steven Rotman advanced the Company funds totaling $50,733 and $19,087, respectively. The Company has not yet
formalized the advances. The advances will bear interest at an annual rate of five percent (5%) and will be due no later than two years
from the date of receipt.
In
April 2022, Blue Oar Consulting, Inc. (“Blue Oar”), an entity wholly owned by Gregory Rotman, advanced the Company
$500,000
and paid bills totaling $100,000
on the Company’s behalf. The Company formalized the advances and issued a promissory note to Blue Oar. The note bears interest
at an annual rate of six percent (6%)
and requires weekly
payments of $12,500
until the note and interest is paid in full. The Company also granted Blue Oar a security interest in Murida’s inventory and
the employee retention credit receivable. Upon receipt of the tax credits, the Company will escrow funds equal to the amount of the
outstanding principal and interest on the loan.
The
following table summarizes the Rotman Family Nonconvertible Notes:
SCHEDULE OF NOTES PAYABLE
| |
| |
| | | |
| Carrying
Amount | |
| |
| |
| Principal | | |
| June
30, | | |
| December
31, | |
| |
Issue
Date | |
| Amount | | |
| 2022 | | |
| 2021 | |
Steven Rotman 5.00% note due July 2027 | |
07/18/19 | |
$ | 367,500 | | |
$ | 421,859 | | |
$ | 412,672 | |
Steven
Rotman 5.00% note due July 2027 | |
07/18/19 | |
$ | 367,500 | | |
$ | 421,859 | | |
$ | 412,672 | |
Bernard
Rotman 5.00% note due July 2023 | |
07/18/19 | |
| 140,000 | | |
| 160,708 | | |
| 157,208 | |
Steven
Rotman 5.00% note due December 2022 | |
12/22/20 | |
| 1,048,000 | | |
| 1,141,442 | | |
| 1,115,243 | |
Steven
Rotman 5.00% note due March 2023 | |
03/31/21 | |
| 395,000 | | |
| 421,528 | | |
| 411,652 | |
Steven
Rotman 5.00% note due June 2023 | |
06/02/21 | |
| 3,009 | | |
| 3,172 | | |
| 3,097 | |
Blue
Oar 6.00% note due May 2023 | |
04/28/22 | |
| 600,000 | | |
| 542,851 | | |
| - | |
| |
| |
| | | |
| | | |
| | |
| |
| |
$ | 2,553,509 | | |
$ | 2,691,560 | | |
$ | 2,099,872 | |
Approximate
maturities for the succeeding years are as follows:
SCHEDULE OF MATURITIES OF NOTES PAYABLE
| |
| | |
Remainder
of 2022 | |
$ | 1,888,000 | |
2023 | |
| 1,342,000 | |
2024 | |
| 233,000 | |
2025 | |
| 36,000 | |
2026 | |
| 38,000 | |
Thereafter | |
| 1,411,768 | |
| |
| | |
Long term debt | |
$ | 4,948,768 | |
NOTE
9 - DERIVATIVE LIABILITIES
As
of June 30, 2022 and December 31, 2021, the Company had a $258,100 and $1,778,100, respectively, derivative liability balance on the condensed
consolidated balance sheet and recorded a gain from change in fair value of derivative liabilities of $1,463,000 and $1,520,000 for the
three months and six months ended June 30, 2022, respectively. The derivative liability activity comes from the convertible notes payable.
The Company analyzed the conversion features and warrants of the various note agreements for derivative accounting consideration under
ASC 815-15 “Derivatives and Hedging” and determined that the embedded conversion features should be classified as a derivative
because the exercise price of these Convertible notes are subject to a variable conversion rate. The Company has determined that the
conversion feature is not considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment.
In accordance with ASC 815, the Company has bifurcated the conversion feature of the notes and recorded a derivative liability. As disclosed
in note 18, with the conversion of the notes payable in July 2022, the value of the embedded conversion features decreased significantly at June
30, 2022.
The
embedded derivatives for the notes are carried on the Company’s condensed consolidated balance sheet at fair value. The derivative
liability is marked-to-market each measurement period and any unrealized change in fair value is recorded as a component of the condensed
consolidated statement of operations and the associated fair value carrying amount on the consolidated balance sheet is adjusted by the
change. The Company fair values the embedded derivative using a lattice-based valuation model or Monte Carlo simulation.
The
following table summarizes the derivative liabilities included in the condensed consolidated balance sheet at June 30, 2022 and December
31, 2021:
Fair
Value of Embedded Derivative Liabilities:
SCHEDULE OF DERIVATIVE LIABILITIES
| |
| | | |
| | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Balance,
beginning of the period | |
$ | 1,778,100 | | |
$ | 1,766,700 | |
| |
| | | |
| | |
Initial
measurement of liabilities | |
| - | | |
| 65,000 | |
| |
| | | |
| | |
Change
in fair value | |
| (1,520,000 | ) | |
| (53,600 | ) |
| |
| | | |
| | |
Balance,
end of the period | |
$ | 258,100 | | |
$ | 1,778,100 | |
NOTE
10 - STOCKHOLDERS’ DEFICIT
Cumulative
Convertible Preferred Stock
On
May 2, 2013, the Company began a private placement offering to sell up to 200,000 shares of the Company’s 10% Series A Cumulative
Convertible Preferred Stock. Under the terms of the offering, the Company offered to sell up to 200,000 shares of preferred stock at
$10 per share for a value of $2,000,000. The preferred stock accumulates a 10% per annum dividend and was convertible at a conversion
price of $0.075 per common share at the option of the holder after a nine-month holding period. The conversion price was lowered to $0.05
per common share for those holders who invested an additional $25,000 or more in the Company’s common stock in the aforementioned
September 2014 Private Placement. The preferred shares have full voting rights as if converted and have a fully participating liquidation
preference.
As
of June 30, 2022, the 8,698 shares of outstanding preferred stock had undeclared dividends of approximately $79,000 and could be converted
into 3,317,200 shares of common stock, at the option of the holder.
As
of December 31, 2021, the 8,698 shares of outstanding preferred stock had undeclared dividends of approximately $75,000 and could be
converted into 3,230,220 shares of common stock, at the option of the holder.
Common
Stock and Warrants
During
the six months ended June 30, 2022, the Company retired 20,000
shares of previously issued common stock at par
value. Included in stock subscription payable at June 30, 2022, is $270,000 received under common stock subscription agreements for 18,000,001
shares during the year ended December 31, 2020.
NOTE
11 - REVENUES
The following table presents our revenues disaggregated by each major product category and service for the three and six months ended
June 30, 2022 and 2021:
SCHEDULE OF REVENUES
| |
Three
Months Ended June 30, | | |
Six
Months Ended June 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| |
| | |
%
of | | |
| | |
%
of | | |
| | |
%
of | | |
| | |
%
of | |
| |
Net
Sales | | |
Net
Sales | | |
Net
Sales | | |
Net
Sales | | |
Net
Sales | | |
Net
Sales | | |
Net
Sales | | |
Net
Sales | |
Merchandise: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Case
Goods | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Bedroom
Furniture | |
$ | 318,113 | | |
| 10.0 | | |
$ | 546,548 | | |
| 8.8 | | |
$ | 686,163 | | |
| 9.8 | | |
$ | 1,326,781 | | |
| 7.0 | |
Dining
Room Furniture | |
| 203,021 | | |
| 6.3 | | |
| 333,010 | | |
| 5.4 | | |
| 380,919 | | |
| 5.4 | | |
| 1,101,558 | | |
| 5.8 | |
Occasional | |
| 454,215 | | |
| 14.2 | | |
| 811,375 | | |
| 13.1 | | |
| 957,896 | | |
| 13.6 | | |
| 2,764,204 | | |
| 14.5 | |
| |
| 975,349 | | |
| 30.5 | | |
| 1,690,933 | | |
| 27.3 | | |
| 2,024,978 | | |
| 28.8 | | |
| 5,192,543 | | |
| 27.3 | |
Upholstery | |
| 1,201,242 | | |
| 37.6 | | |
| 2,173,613 | | |
| 35.0 | | |
| 2,755,881 | | |
| 39.2 | | |
| 6,573,783 | | |
| 34.5 | |
Mattresses
and Toppers | |
| 689,014 | | |
| 21.5 | | |
| 1,044,395 | | |
| 16.8 | | |
| 1,533,449 | | |
| 21.8 | | |
| 2,833,851 | | |
| 14.8 | |
Broadloom,
Flooring and Rugs | |
| 127,098 | | |
| 4.0 | | |
| 532,777 | | |
| 8.6 | | |
| 279,775 | | |
| 4.0 | | |
| 1,853,000 | | |
| 9.7 | |
Warranty | |
| 123,096 | | |
| 3.9 | | |
| 181,248 | | |
| 2.9 | | |
| 255,252 | | |
| 3.6 | | |
| 447,020 | | |
| 2.3 | |
Air
Purification Units | |
| 38,941 | | |
| 1.2 | | |
| 431,924 | | |
| 6.9 | | |
| 142,231 | | |
| 2.0 | | |
| 1,591,210 | | |
| 8.3 | |
Accessories
and Other | |
| 41,293 | | |
| 1.3 | | |
| 161,114 | | |
| 2.5 | | |
| 43,725 | | |
| 0.6 | | |
| 592,716 | | |
| 3.1 | |
| |
$ | 3,196,033 | | |
| 100.0 | | |
$ | 6,216,004 | | |
| 100.0 | | |
$ | 7,035,291 | | |
| 100.0 | | |
$ | 19,084,123 | | |
| 100.0 | |
NOTE 12 - SHARE-BASED COMPENSATION
Generally
accepted accounting principles require share-based payments to employees, including grants of employee stock options, warrants, and common
stock to be recognized in the income statement based on their fair values at the date of grant, net of estimated forfeitures.
In
total, the Company recorded $476,805 and $416,119 of stock-based compensation for the six months ended June 30, 2022 and 2021, respectively,
including shares to be issued related to consultants and board member stock options and common stock and warrants issued to non-employees.
Included in stock subscription payable is accrued stock-based compensation of $1,284,723 and $873,799 at June 30, 2022 and December 31,
2021, respectively.
The
Company used the Black-Scholes option pricing model to estimate the grant-date fair value of option and warrant awards:
|
● |
Expected
Dividend Yield - because the Company does not currently pay dividends, the expected dividend yield is zero; |
|
● |
Expected
Volatility in Stock Price - volatility based on the Company’s trading activity was used to determine expected volatility; |
|
● |
Risk-free
Interest Rate - reflects the average rate on a United States Treasury Bond with a maturity equal to the expected term of the option;
and |
|
● |
Expected
Life of Award - because we have minimal experience with the exercise of options or warrants for use in determining the expected life
of each award, we used the option or warrant’s contractual term as the expected life. |
In
total for the six months ended June 30, 2022 and 2021, the Company recorded $7,682 and $8,607, respectively, of share-based compensation
expense related to employee and Board Members’ stock options. The unrecognized compensation expense as of June 30, 2022 was $3,688
for non-vested share-based awards to be recognized over a period of less than one year.
Options
During
2004, the Board of Directors of the Company adopted a stock option plan (the “Plan”) and authorized up to 4,000,000 shares
to be issued under the Plan. In April 2009, the Company’s Board of Directors authorized an increase in the number of shares to
be issued under the Plan to 10,000,000 shares and to include the independent Board Members in the Plan in lieu of continuing the previous
practice of granting warrants each quarter to independent Board Members for services. At June 30, 2022, there are 2,251,729 shares of
common stock available for issuance under the Plan. In 2014, the Board of Directors adopted an additional stock option plan which provides
for an additional 5,000,000 shares which are all available as of June 30, 2022. In 2019, the Board of Directors adopted an additional
stock option plan with provides for 50,000,000 shares which are all available as of June 30, 2022. The Plan is intended to permit stock
options granted to employees to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended
(“Incentive Stock Options”). All options granted under the Plan that are not intended to qualify as Incentive Stock Options
are deemed to be non-qualified options. Stock options are granted at an exercise price equal to the fair market value of the Company’s
common stock on the date of grant, typically vest over periods up to 4 years and are typically exercisable up to 10 years.
There
were no options granted during the six months ended June 30, 2022 and 2021, respectively.
The
following table summarizes all stock option activity of the Company for the six months ended June 30, 2022:
SCHEDULE OF STOCK OPTION ACTIVITY
| |
| | |
| | |
Weighted | |
| |
| | |
Weighted | | |
Average | |
| |
| | |
Average | | |
Remaining | |
| |
Number | | |
Exercise | | |
Contractual | |
| |
of
Shares | | |
Price | | |
Life
(Years) | |
| |
| | |
| | |
| |
Outstanding,
December 31, 2021 | |
| 27,174,938 | | |
$ | 0.19 | | |
| 1.53 | |
| |
| | | |
| | | |
| | |
Granted | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | |
Exercised | |
| (500,000 | ) | |
| - | | |
| - | |
| |
| | | |
| | | |
| | |
Forfeited | |
| - | | |
$ | - | | |
| - | |
| |
| | | |
| | | |
| | |
Outstanding,
June 30, 2022 | |
| 26,674,938 | | |
$ | 0.20 | | |
| 1.01 | |
| |
| | | |
| | | |
| | |
Exercisable,
June 30, 2022 | |
| 26,524,938 | | |
$ | 0.20 | | |
| 0.99 | |
As
of June 30, 2022 and 2021, the aggregate intrinsic value of the Company’s outstanding options was minimal. The aggregate intrinsic
value will change based on the fair market value of the Company’s common stock.
Warrants
Warrants
are issued to third parties as payment for services, debt financing compensation and conversion and in conjunction with the issuance
of common stock. The fair value of each common stock warrant issued for services is estimated on the date of grant using the Black-Scholes
option pricing model.
The
following table represents the Company’s warrant activity for the six months ended June 30, 2022:
SCHEDULE OF WARRANT ACTIVITY
| |
| | |
| | |
| | |
Weighted | |
| |
| | |
| | |
| | |
Average | |
| |
| | |
Weighted | | |
Weighted | | |
Remaining | |
| |
Number | | |
Average | | |
Average | | |
Contractual | |
| |
of
Shares | | |
Fair
Value | | |
Exercise
Price | | |
Life
(Years) | |
| |
| | |
| | |
| | |
| |
Outstanding,
December 31, 2021 | |
| 10,174,259 | | |
| - | | |
$ | 0.08 | | |
| 2.36 | |
| |
| | | |
| | | |
| | | |
| | |
Granted | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Exercised | |
| (5,203,256 | ) | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Forfeited | |
| - | | |
| - | | |
| - | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Expired | |
| (1,085,180 | ) | |
| - | | |
$ | 0.15 | | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Outstanding,
June 30, 2022 | |
| 3,885,823 | | |
| - | | |
$ | 0.08 | | |
| 1.75 | |
| |
| | | |
| | | |
| | | |
| | |
Exercisable,
June 30, 2022 | |
| 3,885,823 | | |
| - | | |
$ | 0.08 | | |
| 1.75 | |
NOTE
13 - RELATED PARTY TRANSACTIONS
Officers
and Directors
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 six months ended June 30, 2022, the Company expensed approximately $212,000
related to this employment agreement. As of June 30, 2022, the Company had a stock subscription payable balance of $406,000, or approximately
33,895,000 shares to be issued in the future and $153,155 of reimbursable expenses payable and $116,403 of unpaid salary related to this
party. In addition, 6,666,667 shares are owed to this party under a stock subscription agreement dated in July 2020 for $100,000.
The
Board of Directors authorized their board fees for 2021 be paid in common stock of the Company. Included in stock subscription payable
at June 30, 2022 and December 31, 2021 is 10 million shares valued at $291,000, of which 2 million shares valued at $58,200 is included
in Steven Rotman’s balance above.
Blue
Oar Consulting, Inc.
This
entity is owned by Gregory Rotman, who is the son of the Company’s CEO, Steven Rotman. Blue Oar provides business consulting services
to the Company. In exchange for such services, the Company has entered into a consulting agreement with the related party entity.
Per
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 six months ended June 30, 2022, the Company expensed approximately $233,000
related to the consulting agreement. As of June 30, 2022, the Company had a stock subscription payable balance of $424,000, or approximately
38,519,000 shares and a balance of $270,000 in accounts payable related to this related party. In addition, 4,666,667 shares are owed
to this party under a stock subscription agreement dated in July 2020 for $70,000.
Related
Party Advances
During
the six months ended June 30, 2022, Gregory Rotman and Steven Rotman advanced the Company funds totaling $50,733 and $19,087, respectively.
The advances are due on demand as repayment terms have not yet been finalized.
Fluid
Energy Conversion Inc.
In
May of 2019, the Company acquired the assets of Fluid Energy Conversion Inc. (“FEC”) for 2,500,000 shares of common stock.
FEC is owned by Dr. Bryan Stone, one of the Company’s directors. The assets consist of a patent on the Hughes Reactor, which has
the ability to control, enhance and focus energy in flowing liquids and gases. Included in subscription stock payable at June 30, 2022
is $103,750 representing the value of the 2,500,000 shares on the purchase date.
Designcenters.com
This
entity is owned by Jamie Rotman, who is the daughter of the Company’s CEO, Steven Rotman. Designcenters.com (“Design”)
provided bookkeeping and management services to the Company through July 2019. In exchange for such services, the Company had entered
into a consulting agreement with the related party entity. As of June 30, 2022, the Company had a stock subscription payable balance
of $42,000, for approximately 850,000 shares related to this party for services incurred and expensed in 2019.
NOTE
14 - COMMITMENTS
Employment
and Consulting Agreements
The
Company has entered into employment and consulting agreements with certain of our officers, employees, and affiliates. For employees,
payment and benefits would become payable in the event of termination by us for any reason other than cause, or upon change in control
of our Company, or by the employee for good reason.
There
is currently one employment agreement in place with the CEO, Steven Rotman. See compensation terms in Note 13.
During
the six months ended June 30, 2022, the Company entered into various service agreements with consultants for financial reporting, advisory,
and compliance services.
Litigation
From
time to time, the Company is party to certain legal proceedings that arise in the ordinary course and are incidental to our business.
Future events or circumstances, currently unknown to management, will determine whether the resolution of pending or threatened litigation
or claims will ultimately have a material effect on our consolidated financial position, liquidity or results of operations in any future
reporting periods.
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. On March 29, 2021, the Court issued a decision granting in part and denying in part the motion. Specifically, the Court
granted that part of the motion seeking summary judgment and dismissal on the Company’s affirmative defense and counterclaim regarding
Sections 15(a)/29(b) of the Exchange Act. Two weeks later the Company filed a motion for reconsideration as to the dismissal portion
of the order, or, for the alternative, a motion for certification for the right to file a petition to the Second Circuit Court of Appeals
on the issue. The Court denied the motion for reconsideration and certification. Subsequently, fact discovery has been completed and
on June 24, 2022, the parties submitted competing motions for summary judgment.
EMA
seeks summary judgment on its breach of contract and attorneys’ fees claims, specifically seeking damages in the amount of $1,820,000
with 24% interest premised on the argument it was entitled to effectuate a January 15 and February 5, 2019, notices of conversions. EMA
further seeks to dismiss Vystar’s affirmative defenses and counterclaims. Conversely, Vystar filed its motion for summary judgment
seeking an order to dismiss the EMA complaint on the grounds: (i) the underlying note was satisfied on December 11, 2018; and (ii) EMA,
through multiple breaches of the note, over-converted the note by 36,575,555 shares equating to a request of damages against EMA and
in favor of Vystar for $4,802,000, with interest accruing at 24%, and attorneys’ fees. The briefing by the parties was fully submitted
on July 29, 2022, and we now await a decision by the Court.
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 operating expenses
in the accompanying financial statements for the year ended December 31, 2020. On May 21, 2021, one former and one current employee of
Rotmans filed suit in the Worcester District Court on substantially the same allegations as LaChapelle. In January 2022, the parties
settled for a similarly immaterial amount and a Stipulation of Dismissal with prejudice was filed in June 2022.
Stock
Subscription Payable
At
June 30, 2022 and December 31, 2021, the Company recorded $2,610,589 and $1,247,549, respectively, of stock subscription payable related
to common stock to be issued. The following summarizes the activity of stock subscription payable during the period ended June 30, 2022
and December 31, 2021:
SCHEDULE
OF ACTIVITY OF STOCK SUBSCRIPTION PAYABLE
| |
Amount | | |
Shares | |
| |
| | |
| |
Balance,
January 1, 2021 | |
$ | 2,589,556 | | |
| 99,431,356 | |
Additions,
net | |
| 806,082 | | |
| 42,185,365 | |
Issuances,
net | |
| (2,148,089 | ) | |
| (81,110,994 | ) |
| |
| | | |
| | |
Balance, December
31, 2021 | |
| 1,247,549 | | |
| 60,505,727 | |
Debt
and other settlements, Preferred Class B | |
| 952,116 | | |
| 162,755 | |
Additions | |
| 410,924 | | |
| 42,071,271 | |
| |
| | | |
| | |
Balance,
June 30, 2022 | |
$ | 2,610,589 | | |
| 102,739,753 | |
As
of June 30, 2022, Preferred Class B and common shares to be issued totaled 162,755
and 102,576,998,
respectively.
NOTE
15 - MAJOR CUSTOMERS AND VENDORS
Major
customers and vendors are defined as a customer or vendor from which the Company derives at least 10% of its revenue and cost of revenue,
respectively.
During
the six months ended June 30, 2022, the Company made approximately 16% of its purchases from one major vendor. The Company owed its major
vendor approximately $81,000 at June 30, 2022.
During
the six months ended June 30, 2021, the Company made approximately 18% of its purchases from one major vendor. The Company owed its major
vendor approximately $207,000 at June 30, 2021.
NOTE
16 - INCOME TAXES
The
provision (benefit) for income taxes for the three months ended June 30, 2022 and 2021 assumes a % effective tax rate for federal income
taxes. A reconciliation of the federal statutory income tax rate and the effective income tax rate as a percentage of income before income
taxes is as follows:
SCHEDULE OF PROVISION FOR INCOME TAXES
| |
| | | |
| | |
| |
Six
Months Ended | |
| |
June
30, | |
| |
2022 | | |
2021 | |
| |
| | |
| |
Federal
statutory income tax rate | |
| (21.0 | %) | |
| (21.0 | %) |
| |
| | | |
| | |
Change
in valuation allowance on net operating loss carryforwards | |
| 21.0 | | |
| 21.0 | |
| |
| | | |
| | |
Effective
income tax rate | |
| 0.0 | % | |
| 0.0 | % |
Deferred
tax assets as of June 30, 2022 and December 31, 2021 are as follows:
SCHEDULE OF DEFERRED TAX ASSETS
| |
2022 | | |
2021 | |
| |
| | |
| |
NOL
carryforwards | |
$ | 7,600,000 | | |
$ | 7,500,000 | |
| |
| | | |
| | |
Less
valuation allowance | |
| (7,600,000 | ) | |
| (7,500,000 | ) |
| |
| | | |
| | |
Deferred
tax assets | |
$ | - | | |
$ | - | |
Deferred
taxes are caused primarily by net operating loss carryforwards. U.S. Tax Legislation enacted in 2017 (the “TCJA”) has significantly
changed certain aspects of U.S. federal income taxation. Net Operating Losses (“NOLs”) generated in 2017 and prior years
can be carried forward for 20 years. NOLs generated in 2018 – 2020, as enacted by the CARES Act, can be carried forward indefinitely.
However, NOLs generated in 2021 is also carried forward indefinitely but limited to 80% of taxable income.
For
federal income tax purposes, the Company has a net operating loss carryforward of approximately $36,500,000 as of June 30, 2022, of which
approximately $18,400,000 expires beginning in 2024 and $18,100,000 which can be carried forward indefinitely. For state income tax purposes,
the Company has a net operating loss carryforward of approximately $18,400,000 and $17,800,000 as of June 30, 2022 in Georgia and Massachusetts,
respectively, which expires beginning in 2023.
In
addition, as of June 30, 2022, Rotmans has a net operating loss carryforward of approximately $5,100,000 for federal income tax purposes
of which $1,500,000 expires beginning in 2029 and $3,600,000 can be carried forward indefinitely. Rotmans has a state operating loss
carryforward of approximately $4,200,000 which expires beginning in 2022.
Pursuant
to Internal Revenue Code Section 382, the future realization of our net operating loss carryforwards to offset future taxable income
may be subject to an annual limitation as a result of ownership changes that may have occurred previously or that could occur in the
future.
NOTE
17 - PROFIT SHARING PLAN
The
Company sponsors a qualified 401(k) profit sharing plan covering all eligible employees. The plan permits participants to make tax-deferred
contributions to the plan by salary reduction. Company contributions are discretionary and are determined annually by the Board of Directors.
There
were no Company contributions in 2022 and 2021. Participant and Company contributions are limited to amounts allowed under the Internal
Revenue Code.
The
Company offers no post-retirement benefits other than the plan discussed above and no significant post-employment benefits.
NOTE
18 - SUBSEQUENT EVENTS
In
July 2022, the Company amended its Articles of Incorporation to increase the number of authorized shares of Series B and Series C preferred
stock to 2,500,000. Both Series B and C are convertible into 1,000 shares of the Company’s common stock and have voting rights.
Certain actions of the Company require the written consent of at least 75% of the Series C preferred stockholders.
In
July and September, the Company issued approximately 2,256,000
shares of its Series B and Series C Preferred
Stock to payoff convertible notes, stock subscription payable and vendor payables of approximately $7,500,000.
Blue Oar and Steve Rotman has advanced the Company
funds totaling $32,911 and $5,000, respectively. The Company has not formalized agreements with repayment terms as of this date.
Other investors have advanced the Company $45,000. The Company has not formalized agreements with repayment terms as of this date.