Quarterly Report (10-q)

Date : 05/15/2019 @ 10:49PM
Source : Edgar (US Regulatory)
Stock : Vystar Corp. (PC) (VYST)
Quote : 0.035  -0.000072 (-0.21%) @ 9:00PM

Quarterly Report (10-q)

 

 

UNITED STATES  

SECURITIES AND EXCHANGE COMMISSION  

WASHINGTON, DC 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2019

 

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

 

For the transition period from _______________ to ________________

 

Commission File Number 000-53754

 

 

 

VYSTAR CORPORATION  

(Exact Name of Registrant as Specified in its Charter)

 

Georgia   20-2027731

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer 

Identification No.)

 

101 Aylesbury Rd  

Worcester, MA 01609  

 

(Address of Principal Executive Offices, Zip Code) 

 

(508) 791-9114  

 

(Registrant’s telephone number including area code)

 

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 ☐  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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒   NO ☐

 

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,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☐ Smaller reporting company ☒
(Do not check if a smaller reporting company) Emerging growth company ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) YES ☐  NO ☒

 

Class   Outstanding as of May 15, 2019
Preferred Stock, $0.0001 par value per share   13,828   shares
Common Stock, $0.0001 par value per share   1,041,770,559   shares

 

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

 

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

 

 

 

 

 

INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS

 

In addition to historical information, this Form 10-Q contains statements relating to our future results (including certain projections and business trends) that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are subject to the “safe harbor” created by those sections. The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the financial statements and the related notes thereto included in this Quarterly Report on Form 10-Q (this “Report”). This Report contains certain forward-looking statements and the Company’s future operating results could differ materially from those discussed herein. Our disclosure and analysis included in this Report concerning our operations, cash flows and financial position, including, in particular, the likelihood of our success in expanding our business and raising debt and capital securities include forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expect”, “anticipate”, “intend”, “plan”, “believe”, “estimate”, “may”, “project”, “will likely result”, and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to certain risks, uncertainties, and assumptions, including prevailing market conditions and are more fully described under “Part I, Item 1A - Risk Factors” of our Form 10-K for the year ended December 31, 2018. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. In any event, these and other crucial factors, including those set forth in Item 1A - “Risk Factors” of our Form 10-K for the year ended December 31, 2018 may cause actual results to differ materially from those indicated by our forward-looking statements.

 

Although we believe that these statements are based upon reasonable assumptions, we cannot guarantee future results and readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date of this filing. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct or (iv) our strategy, which is based in part on this analysis, will be successful. The Company undertakes no obligation to update or revise forward-looking statements.

 

All references to “we”, “us”, “our”, “Vystar”, or “Kiron” in this Quarterly Report on Form 10-Q mean Vystar Corporation, and affiliates.

 

2  

 

Vystar Corporation 

Form 10-Q for the Quarter Ended March 31, 2019

 

Index

 

Part I. Financial Information  
     
Item 1. Financial Statements  
  Balance Sheets at March 31, 2019 (unaudited) and December 31, 2018 4
  Statements of Operations for the Three Months Ended March 31, 2019 (unaudited) and 2018 (unaudited) 5
  Statement of Stockholders’ Deficit for the Three Months Ended March 31, 2019 and 2018 (unaudited) 6
  Statements of Cash Flows for the Three Months Ended March 31, 2019 (unaudited) and 2018 (unaudited) 7
  Notes to Financial Statements (unaudited) 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 21
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 24
     
Item 4. Controls and Procedures 24
     
Part II. Other Information  
   
Item 1. Legal Proceedings 25
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 25
     
Item 3. Defaults Upon Senior Securities 29
     
Item 4. Mine Safety Disclosures 29
     
Item 5. Other Information 29
     
Item 6. Exhibits 30
     
SIGNATURES 31

 

3  

 

Part I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

VYSTAR CORPORATION

CONDENSED BALANCE SHEETS

 

    March 31,   December 31,
    2019   2018
ASSETS                
Current assets:                
Cash   $ 438,164     $ 50,053  
Accounts receivable     20,245       19,732  
Inventories     595,680       570,587  
Prepaid expenses     448       6,683  
Total current assets     1,054,536       647,055  
Property and equipment, net     281,614       291,346  
Other assets:                
Intangible assets, net     1,494,430       1,531,011  
Total assets   $ 2,830,580     $ 2,469,412  
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
Current liabilities:                
Accounts payable   $ 571,349     $ 538,461  
Accounts payable – related parties     131,064       187,698  
Accrued expenses and interest payable     93,208       101,979  
Accrued stock-based compensation     297,525       771,203  
Shareholder, convertible and contingently convertible notes payable and accrued interest, net of debt discount – current maturities     353,643       504,149  
Derivative liabilities     —         235,085  
Total current liabilities     1,446,789       2,338,575  
Long-term liabilities:                
Loan payable Fidelity Bank     500,000       500,000  
Related party line of credit     1,361,945       1,499,875  
Shareholder, convertible and contingently convertible notes payable and accrued interest – net of current maturities     219,634       —    
Total long-term liabilities     2,081,579       1,999,875  
Total liabilities     3,528,369       4,338,450  
Stockholders’ deficit:                
Preferred stock, $0.0001 par value 15,000,000 shares authorized; 13,828 issued and outstanding at March 31, 2019 and December 31, 2018 (liquidation preference of $80,857 and $77,447 at March 31, 2019 and December 31, 2018, respectively)     1       1  
Common stock, $0.0001 par value, 1,500,000,000 shares authorized; 1,057,482,127 and 457,747,818 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively     105,746       45,774  
Additional paid-in capital     35,730,012       31,485,532  
Accumulated deficit     (36,533,519 )     (33,400,345 )
Common stock in treasury, at cost; 30,000 and 0 shares at March 31, 2019 and December 31, 2018, respectively     (30 )     —    
Total stockholders’ deficit     (697,789 )     (1,869,038 )
Total liabilities and stockholders’ deficit   $ 2,830,580     $ 2,469,412  

   

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

 

4  

 

VYSTAR CORPORATION

CONDENSED STATEMENTS OF OPERATIONS

(unaudited)

 

    March 31,
2019
  March 31,
2018
Revenue   $ 191,667     $ 3,944  
                 
Cost of revenue     199,842       49,421  
                 
Gross loss     (8,175 )     (45,477 )
                 
Operating expenses:                
General and administrative, including non-cash share-based compensation of $1,612,286 and $1,404,889 in 2019 and 2018, respectively     1,995,880       1,763,449  
                 
Loss from operations     (2,004,055 )     (1,808,926 )
                 
Other income (expense):                
Other expense     (152 )     —    
Gain on settlement of debt     14,945       —    
Interest expense     (99,663 )     (41,448 )
Change in fair value of derivative liabilities     (1,044,250 )     —    
                 
Total other expense, net     (1,129,119 )     (41,448 )
                 
Net loss   $ (3,133,174 )   $ (1,850,374 )
Basic and diluted loss per share:                
Net loss per share   $ (0.00 )   $ (0.01 )
                 
Basic and diluted weighted average number of common shares outstanding     770,752,984       133,875,885  

 

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

 

5  

 

VYSTAR CORPORATION
CONDENSED STATEMENT OF STOCKHOLDERS’ DEFICIT
For the Three Months Ended March 31, 2018
 
    Numbers of
Preferred
Shares
    Preferred
Shares
    Number of
Common
Shares
    Common
Stock
   

Additional
Paid-in

Capital

    Accumulated
Deficit
    Total  
Ending Balance, December 31, 2017     13,828     $ 1       132,809,218     $ 13,280     $ 25,128,476     $ (27,999,123 )   $ (2,857,366 )
                                                         
Common stock issued for services                     1,498,000       150       68,898               69,048  
                                                         
Net Loss                                             (1,850,374 )     (1,850,374 )
                                                         
Ending Balance, March 31, 2018     13,828     $ 1       134,307,218     $ 13,430     $ 25,197,374     $ (29,849,497 )   $ (4,638,692 )

 

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

 

VYSTAR CORPORATION
CONDENSED STATEMENT OF STOCKHOLDERS’ DEFICIT
For the Three Months Ended March 31, 2019
 

    Numbers of
Preferred
Shares
    Preferred
Shares
    Number of
Common
Shares
    Common
Stock
   

Additional
Paid-in  

Capital

    Accumulated
Deficit
    Number of
Treasury
Shares
    Treasury
Stock
    Total  
Ending Balance, December 31, 2018     13,828     $ 1       457,747,818     $ 45,774     $ 31,485,532     $ (33,400,345 )         $     $ (1,869,038 )
                                                                         
Common stock issued for services                     147,704,875       14,771       2,017,465                               2,032,236  
                                                                         
Share-based compensation – options                                     17,783                               17,783  
                                                                         
Common stock issued for settlement of warrants                     77,246,324       7,725       324,717                               332,442  
                                                                         
Common stock issued for cash received                     144,933,992       14,493       420,307                               434,800  
                                                                         
Common stock issued for conversion of line of credit                     2,512,900       251       143,278                               143,529  
                                                                         
Common stock issued upon conversion of convertible notes and settlement of derivatives                     227,336,218       22,732       1,320,931                               1,343,663  
                                                                         
Treasury stock repurchases                                                     (30,000 )     (30 )     (30 )
                                                                         
Net Loss                                             (3,133,174 )                     (3,133,174 )
                                                                         
Ending Balance, March 31, 2019     13,828     $ 1       1,057,482,127     $ 105,746     $ 35,730,012     $ (36,533,519 )     (30,000 )   $ (30 )   $ (697,789 )

  

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

 

6  

 

VYSTAR CORPORATION  

CONDENSED STATEMENTS OF CASH FLOWS  

(unaudited)

 

    Three months ended
March 31,
 
    2019     2018  
Cash flows from operating activities:                
Net loss   $ (3,133,174 )   $ (1,850,374 )
Adjustments to reconcile net loss to cash used in operating activities                
Gain on settlement of debt     (14,945 )      
Share-based compensation     1,612,286       1,404,889  
Depreciation     10,232        
Amortization of intangible assets     39,421       3,920  
Amortization of debt discount     73,519        
Change in fair value of derivative liabilities     1,044,250        
(Increase) decrease in assets                
Accounts receivable     (513 )     (569 )
Inventories     (25,093 )     (103,055 )
Prepaid expenses     6,235       6,515  
   Increase (decrease) in liabilities                
   Accounts payable     32,888       (83,436 )
   Accounts payable – related parties     (56,634 )     122,846  
   Accrued expenses and interest payable     1,163       174,682  
Net cash used in operating activities     (410,364 )     (324,582 )
                 
Cash flows from investing activities:                
Patents and trademark fees     (2,839 )      
Website development costs     (500 )      
Net cash used in investing activities     (3,339 )      
                 
Cash flows from financing activities:                
Proceeds of Fidelity loan           500,000  
Treasury stock repurchases     (30 )      
Issuance of common stock, net of costs     731,020        
Repayments of notes payable     (146,176 )      
Proceeds from the issuance of notes           444,050  
Proceeds from the issuance of notes – related parties     217,000        
Net cash provided by financing activities     801,814       944, 050  
                 
Net increase in cash     388,111       619,468  
                 
Cash – beginning of period     50,053       13,502  
                 
Cash – end of period   $ 438,164     $ 632,970  
Cash paid during the period for:                
Interest   $ 16,209     $ 32,869  
                 
Non-cash transactions:                
Debt and accrued interest payable converted to common stock   $ 1,487,192     $  
Shares issued for accrued compensation     771,203        
Shares issued for settlement of warrant exercises     32,442        
Reclass of derivative liabilities to additional paid-in capital     1,279,335        

  

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

7  

 

VYSTAR CORPORATION  

NOTES TO FINANCIAL STATEMENTS

 

NOTE 1 DESCRIPTION OF BUSINESS

 

History and Nature of Business

 

Vystar Corporation (“Vystar”, the “Company”, “we”, “us”, or “our”) is the creator and exclusive owner of the innovative technology to produce Vytex® Natural Rubber Latex (“NRL”). Vytex NRL uses a global multi-patented technology and proprietary formulation to reduce non-rubber particles including the antigenic proteins associated with latex allergies, resulting in a cleaner form of latex. The antigenic protein levels are reduced to virtually undetectable levels. On January 22, 2015, Vystar announced the signing of an exclusive domestic distribution agreement with Worcester, MA based Nature’s Home Solutions (NHS) who sources eco-friendly materials and technologies for use in furnishings and other markets. On March 4, 2015, the Company announced that Hartford, CT based Gold Bond formed a strategic alliance with NHS to produce and market the world’s first Vytex NRL based mattress. In June 2015, the first mattresses made with Vytex (hybrid and pure Vytex) were placed on the sales floor at Rotmans Furniture and Carpet Store in Worcester, MA using the “Evaya” brand and Gold Bond had shipped four versions of their “Brilliance” inner coil and pure foam mattresses (Emerald, Ruby, Sapphire Plush and Sapphire Firm) to over 30 stores from Maine to Florida.

 

In April of 2018, Vystar acquired the assets of NHS Holdings, LLC (NHS) executing on the first part of the Company’s vision to move into direct product offerings made from Vytex ® latex. NHS was the exclusive U.S. distributor of Vystar’s Vytex® natural rubber latex foam to manufacturers for use in over 200 home furnishings products, including mattresses, toppers, pillows and upholstery, sold through multiple channels. This acquisition provides Vystar with roll packing and cutting equipment to support our bedding manufacturing partners, while lowering the cost of Vytex to the manufacturer by eliminating the middleman.

 

In May of 2018, Vystar acquired substantially all of the assets of UV Flu Technologies , Inc., formerly traded on the OTC under the ticker UVFT, whose patented ViraTech™ UV light air purification technology destroys greater than 99% of airborne bacteria, viruses and other microorganisms and virtually eliminates concentrations of odors and volatile organic compounds (VOCs).

 

As part of Vystar’s mission to offer eco-friendly, sustainable materials and products that create a better environment for consumers and workers throughout the product lifecycle, UV Flu Technologies is an excellent counterpart to our Vytex materials and Vytex bedding products. Vystar products will help create a perfect natural sleep environment starting with Vytex bedding made from the purest latex in the world and UV Flu’s RxAir ™ air purifier ensuring every breath is free of harmful pathogens, VOCs and odors.”

 

NOTE 2 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statement presentation. However, the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments (consisting primarily of normal recurring accruals) considered necessary for a fair presentation have been included.

 

Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

The Company has evaluated subsequent events through the date of the filing of its Form 10-K with the Securities and Exchange Commission. Other than those events disclosed in Note 13, the Company is not aware of any other significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on the Company’s financial statements.

 

Segment Reporting

 

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

 

Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures. Although these estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future, actual results could differ from these estimates. Examples include valuation allowances for deferred tax assets, provisions for bad debts, valuation of derivative liabilities, and fair values of share-based compensation and other equity issuances.

 

Fair Value of Financial Instruments

 

The Company’s financial instruments consist of cash, accounts receivable, accounts payable, accrued expenses and interest payable, lines of credit, shareholder notes payable, and long-term debt. The carrying values of all the Company’s financial instruments approximate fair value because of their short maturities. In addition to the short maturities, the carrying amounts of our line of credit and shareholder notes payable approximate fair value because the interest rates at March 31, 2019 and December 31, 2018 approximate market interest rates for the respective borrowings.

 

8  

 

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 are recognized at fair value on a recurring basis at March 31, 2019 and December 31, 2018 and are level 3 measurements. There has been no transfers between levels during the three months ended March 31, 2019.

 

Acquisition

 

Amounts paid for acquisitions are allocated to the assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition. The fair value of identifiable intangible assets is based on valuations that use information and assumptions provided by management. Identifiable intangible assets with finite lives are amortized over their useful lives. Acquisition-related costs, including, legal, accounting, and other costs, are capitalized in asset acquisitions and for business combinations are expensed in the periods in which the costs are incurred. The results of operations of acquired assets are included in the financial statements from the acquisition date.

 

Accounts Receivable

 

Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for uncollectible amounts through a charge to earnings and a credit to an allowance for doubtful accounts based upon its assessment of the current status of individual accounts. Balances that are still outstanding after management has performed reasonable collection efforts are written off through a charge to the allowance and a credit to accounts receivable. As of March 31, 2019 and December 31, 2018, the Company determined there were no amounts deemed uncollectible. The Company grants credit to customers without requiring collateral. The amount of accounting loss for which Vystar is at risk in these unsecured accounts receivable is limited to their carrying value. Vytex customers are located in both the United States and internationally.

 

Inventories

Inventory cost includes those costs directly attributable to the product before sale. Inventory consists primarily of finished goods of foam toppers, mattresses and pillows and is carried at the lower of cost or market (net realizable value), using first-in, first-out method.

 

Property and Equipment

 

Property and equipment are stated at cost. Depreciation is provided by the use of the straight-line and accelerated methods for financial and tax reporting purposes, respectively, over the estimated useful lives of the assets, generally 5 to 10 years. As of March 31, 2019, the net balance of property and equipment is $281,614 with accumulated depreciation of $41,717. As of December 31, 2018, the net balance of property and equipment is $291,346 with accumulated depreciation of $31,485.

 

Intangible Assets

 

Patents represent legal and other fees associated with the registration of patents. The Company has four issued patents with the United States Patent and Trade Office (USPTO) as well as four issued international PCT (Patent Cooperation Treaty) patents. Patents are carried at cost and are being amortized on a straight-line basis over their estimated useful lives, typically 20 years.

 

The Company has trademark protection for “Vystar”, “Vytex”, and “Created by Nature. Recreated by Science.” Trademarks are carried at cost and since their estimated life is indeterminable, no amortization is recognized. Instead, they are evaluated annually for impairment.

 

We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. We evaluate assets for potential impairment by comparing estimated future undiscounted net cash flows to the carrying amount of the assets. If the carrying amount of the assets exceeds the estimated future undiscounted cash flows, impairment is measured based on the difference between the carrying amount of the assets and fair value. Assets to be disposed of would be separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale would be presented separately in the appropriate asset and liability sections of the consolidated balance sheet, if material. During the three months ended March 31, 2019 and 2018, we did not recognize any impairment of our long-lived assets.

 

Goodwill

 

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

 

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.

 

9  

 

Convertible Notes Payable

 

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

 

Derivatives

 

The Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

 

In accordance with the FASB’s fair value measurement guidance (ASU 2011-04), the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

 

Loss Per Share

 

The Company presents basic and diluted loss per share. Because the Company reported a net loss for three months ended March 31, 2019 and 2018, common stock equivalents, including stock options and warrants, were anti-dilutive; therefore, the amounts reported for basic and dilutive loss per share were the same. Excluded from the computation of diluted loss per share were options to purchase 29,098,270 and 7,498,271 shares of common stock for three months ended March 31, 2019 and 2018, respectively, as their effect would be anti-dilutive. Warrants to purchase 14,382,380 and 14,831,069 shares of common stock for three months ended March 31, 2019 and 2018, respectively, were also excluded from the computation of diluted loss per share as their effect would be anti-dilutive. In addition, preferred stock convertible to 4,382,730 and 4,106,170 shares of common stock for three months ended March 31, 2019 and 2018, respectively, were excluded from the computation of diluted loss per share as their effect would be anti-dilutive.

 

Revenue

 

On January 1, 2018, we adopted FASB Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”) . The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects to receive in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance.

 

We reviewed all contracts at the date of initial application and elected to use the modified retrospective transition method, where the cumulative effect of the initial application is recognized as an adjustment to opening retained earnings at January 1, 2018. Therefore, comparative prior periods have not been adjusted and continue to be reported under FASB ASC Topic 605, Revenue Recognition , (“ASC 605”). The adoption of the new revenue recognition guidance was immaterial to our balance sheets as of March 31, 2019 and December 31, 2018 and to our statements of operations and cash flows for the three months ended March 31, 2019 and 2018.

 

Our principal activities from which we generate our revenue are product sales. Revenue is measured based on considerations specified in a contract with a customer. A contract exists when it becomes a legally enforceable agreement with a customer. The contract is based on either the acceptance of standard terms and conditions on the websites for e-commerce customers and via telephone with our third-party call center for our print media and direct mail customers, or the execution of terms and conditions contracts with retailers and wholesalers. These contracts define each party’s rights, payment terms and other contractual terms and conditions of the sale. Consideration is typically paid prior to shipment via credit card or check when our products are sold direct to consumers, which is typically within a 1 to 2 days or approximately 30 days from the time control is transferred when sold to wholesalers, distributors and retailers. We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience and, in some circumstances, published credit and financial information pertaining to the customer.

 

A performance obligation is a promise in a contract to transfer a distinct product to the customer, which for us is transfer of finished goods to our customers. Performance obligations promised in a contract are identified based on the goods that will be transferred to the customer that are both capable of being distinct and are distinct in the context of the contract, whereby the transfer of the goods is separately identifiable from other promises in the contract. We have concluded the sale of finished goods and related shipping and handling are accounted for as the single performance obligation.

 

The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation. The transaction price is determined based on the consideration to which we will be entitled to receive in exchange for transferring goods to the customer. We issue refunds to e-commerce and print media customers, upon request, within 30 days of delivery. We estimate the amount of potential refunds at each reporting period using a portfolio approach of historical data, adjusted for changes in expected customer experience, including seasonality and changes in economic factors. For retailers, distributors and wholesalers, we do not offer a right of return or refund and revenue is recognized at the time products are shipped to customers. In all cases, judgment is required in estimating these reserves. Actual claims for returns could be materially different from the estimates. As of March 31, 2019 and December 31, 2018, reserves for estimated sales returns totaled $3,000, respectively and are included in accompanying financial statements as accrued expenses in the balance sheets

 

We recognize revenue when we satisfy a performance obligation in a contract by transferring control over a product to a customer when product is shipped based on fulfillment by the Company. The Company considers fulfillment when it passes all liability at the point of shipping through third party carriers. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of product sales.

 

Cost of Revenue

 

Cost of revenue consists primarily of product and freight costs and fees paid to online retailers for costs of material.

 

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Research and Development

 

Research and development costs are expensed when incurred. Research and development costs include all costs incurred related to the research, development and testing of the Company’s process to produce Vytex NRL.

 

Vytex NRL has produced protein test results on finished products that are both “below detection” and “not detectable” in terms of the amount of proteins remaining in these finished goods made with Vytex NRL. These results have been reproduced in many subsequent tests. From inception through March 31, 2019, Vystar’s research and development costs have been approximately $2.4 million.

 

Advertising Costs

 

Advertising costs are expensed as incurred. Included in general and administrative expenses is approximately $20,483 for the three months ended March 31, 2019. There were no advertising costs for the three months ended March 31, 2018.

 

Stock-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 are determined using the fair value of the Company’s common stock on the date of grant. The fair value of performance share awards are estimated using a Monte-Carlo simulation model utilizing several key assumptions including expected peer group share price volatility, correlation coefficients between peers, the risk-free rate of return, the expected dividend yield and other award design features. The Company accounts for forfeitures as they occur. Compensation expense is recognized on a straight-line basis over the requisite service period of the award

 

Income Taxes

 

Vystar recognizes income taxes on an accrual basis based on a tax position taken or expected to be taken in its tax returns. A tax position is defined as a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets or liabilities. Tax positions are recognized only when it is more likely than not (i.e., likelihood of greater than 50%), based on technical merits, that the position would be sustained upon examination by taxing authorities. Tax positions that meet the more likely than not threshold is measured using a probability-weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. A valuation allowance is established to reduce deferred tax assets if all, or some portion, of such assets will more likely than not be realized. A valuation allowance for the full amount of the net deferred tax asset was recorded for the three months ended March 31, 2018 and for the year ended December 31, 2018. Should they occur, interest and penalties related to tax positions are recorded as interest expense. No such interest or penalties have been incurred for the three months ended March 31, 2019 and 2018. The Company is no longer subject to federal examination for years prior to 2015.

 

On December 22, 2017, the Tax Cuts and Jobs Act was signed into law impacting corporations by reducing the maximum tax rate from 35% to 21%, as well as various other provisions relating to the deductibility of certain items. The Act is not expected to have an immediate impact on the Company due to the large net operating loss carryforward as well as the full valuation allowance.

 

Concentration of Credit Risk

 

Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of cash and accounts receivable. Cash held in operating accounts may exceed the Federal Deposit Insurance Corporation, or FDIC, insurance limits. While the Company monitors cash balances in our operating accounts on a regular basis and adjust the balances as appropriate, these balances could be impacted if the underlying financial institutions fail. To date, the Company has experienced no loss or lack of access to our cash; however, the Company can provide no assurances that access to our cash will not be impacted by adverse conditions in the financial markets.

 

Other Risks and Uncertainties

 

The Company is exposed to commodity price risk, mainly associated with variations in the market price for NRL as well as wintering of the Hevea trees, which differs for each country. The timing and magnitude of industry cycles are difficult to predict and are impacted by general economic conditions including the buying climate in China. The Company responds to changes in NRL prices by adjusting sales prices on a weekly basis and by turning rather than holding inventory in anticipation of higher prices. The Company actively manages its exposure to commodity price risk and monitors the actual and expected spread between forward selling prices and purchase costs and processing and shipping expense. The Company also currently spreads the processing of Vytex NRL among three continents. Sales contracts are based on forward market prices, and generally orders are placed 30 to 90 days ahead of shipment date due to these fluctuations. However, financial results may be negatively impacted where selling prices fall more quickly than purchase price adjustments can be made or when levels of inventory have an anticipated net realizable value that is below cost.

 

Recent Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers , a new standard on revenue recognition. The new standard will supersede existing revenue recognition guidance and apply to all entities that enter into contracts to provide goods or services to customers. The guidance also addresses the measurement and recognition of gains and losses on the sale of certain non-financial assets, such as real estate, property and equipment. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which defers the effective date of the guidance in ASU 2014-09 by one year. This update is now effective for annual and interim period beginning after December 15, 2017, and has been adopted for the year ended December 31, 2018. The Company has finalized its assessment of ASU 2014-09 and adopted the standard using the modified retrospective method. The Company concluded that the adoption will not have an impact on the timing of its revenue recognition for revenue. Any cumulative effect from this change would be recorded to the accumulated deficit but as March 31, 2019 and December 31, 2018, there was no material impact.

 

In February 2016, the FASB issued ASU 2016-02, Leases . ASU 2016-02 requires lessees to recognize the assets and liabilities on their balance sheet for the rights and obligations created by most leases and continue to recognize expenses on their income statements over the lease term. It will also require disclosures designed to give financial statement users information on the amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for annual reporting periods beginning after December 15, 2018, and interim periods within those years. Early adoption is permitted. The Company has adopted and any cumulative effect from this change will not have a material impact on its financial statements.

 

11  

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Receipts and Cash Payments . This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company has adopted this update for the three months ended March 31, 2019 and the year ended December 31, 2018

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement , which eliminates, adds and modifies certain disclosure requirements for fair value measurements, including eliminating the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, and requiring the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The new guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption, either of the entire standard or only the provisions that eliminate or modify requirements, is permitted. The Company has evaluated the disclosure requirements of this standard and does not expect it to have a material impact on the Company’s financial statements.

 

1In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718) to expand the scope of ASC 718, Compensation - Stock Compensation (Topic 718) (“ASU 2017-07”), to include share-based payment transactions for acquiring goods and services from non-employees. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. The Company has adopted and any cumulative effect from this change will not have a material impact on its financial statements.

 

In July 2017, the FASB issued ASU 2017-11, Earnings per share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivatives and Hedging (Topic 815): Accounting for Certain Financial Instruments with Down Round Features . The update addresses the complexity of accounting for certain financial instruments with down round features and the liability or equity classification of financial instruments with warrants or convertible features. The guidance eliminates the requirement to consider “down round” features when determining whether certain equity-linked financial instruments or embedded features are indexed to an entity’s own stock. The ASU is effective for annual periods beginning after December 15, 2018, and for interim periods within those years, with early adoption permitted. The Company has adopted and any cumulative effect from this change will not have a material impact on its financial statements.

 

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business . The update provides that when substantially all the fair value of the assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This update is effective for annual and interim periods beginning after December 15, 2017, and interim periods within that reporting period. We adopted this ASU on January 1, 2018 and the impact on our financial statements will depend on the facts and circumstances of any specific future transactions.

 

NOTE 3 LIQUIDITY AND GOING CONCERN

 

The Company’s financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. However, the Company has incurred significant losses and experienced negative cash flow since inception. At March 31, 2019, the Company had cash of $438,164 and a deficit in working capital of $392,253. Further, at March 31, 2019, the accumulated deficit amounted to approximately $36.5 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.

 

A successful transition to attaining profitable operations is dependent upon obtaining sufficient financing to fund the Company’s planned expenses and achieving a level of revenue adequate to support the Company’s cost structure. Management plans to finance future operations through the use of cash on hand, increased revenue from Vytex division license fees, stock warrant exercises from existing shareholders, and raising capital through private placement memoranda (see Note 13, Subsequent Events).

 

As a result of this history of losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.

 

There can be no assurances that the Company will be able to achieve projected levels of revenue in 2019 and beyond. If the Company is not able to achieve projected revenue and obtain alternate additional financing of equity or debt, the Company would need to significantly curtail or reorient operations during 2019, which could have a material adverse effect on the ability to achieve the business objectives and as a result may require the Company to file for bankruptcy or cease operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities that might be necessary should the Company be forced to take any such actions.

 

The Company’s future expenditures will depend on numerous factors, including: the rate at which the Company can introduce and license Vytex NRL to manufacturers; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and market acceptance of the Company’s products, services and competing technological developments. As the Company expands our activities and operations, cash requirements are expected to increase at a rate consistent with revenue growth after the Company has achieved sustained revenue generation.

 

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NOTE 4 – PROPERTY AND EQUIPMENT

 

Property and equipment, net consists of the following at December 31:

 

    March 31,     December 31,  
    2019     2018  
Tooling and testing equipment   $ 319,000     $ 319,000  
Warehouse equipment     3,831       3,831  
Website development     500        
                 
      323,331       322,831  
Accumulated depreciation     (41,717 )     (31,485 )
                 
Property and equipment, net   $ 281,614     $ 291,346  

 

The Company incurred $10,232 in depreciation expense for the three months ended March 31, 2019. There was no depreciation expense incurred for the three months ended March 31, 2018.

 

NOTE 5 – INTANGIBLE ASSETS

 

Intangible assets were as follows at March 31, 2019 and December 31, 2018:

 

   

March 31,

2019

   

December 31,

2018

    Amortization
Period
(in years)
 
Amortized intangible assets                      
Customer relationships   $ 100,000     $ 100,000     10  
Proprietary technology     610,000       610,000     10  
Tradename and brand     610,000       610,000     10  
Patents     242,149       242,149     6 - 20  
Noncompete     50,000       50,000     5  
                       
Total     1,612,149       1,612,149        
Accumulated amortization     (276,723 )     (237,302 )      
                       
Net amortized intangibles     1,335,426       1,374,847        
                       
Indefinite-lived intangible assets                      
Goodwill     147,092       147,092        
Trademarks     11,912       9,072        
                       
Total intangible assets   $ 1,494,430     $ 1,531,011        

 

Amortization expense for the three months ended March 31, 2019 and 2018 was $39,421 and $3,920, respectively.

 

Estimated future amortization expense for finite-lived intangible assets is as follows:

 

      Amount  
Remaining in 2019     $ 118,263  
2020       157,684  
2021       157,684  
2022       157,684  
2023 & thereafter       744,111  
Total     $ 1,335,426  

 

As discussed in Note 13, in May 2018, nine (9) shareholders of the Company consented to purchase substantially all the assets of UV Flu Technologies, Inc., a Nevada corporation (“UV Flu”). Pursuant to the Asset Purchase Agreement, the purchase of substantially all assets of UV Flu was consummated on May 7, 2018. Vystar acquired all UV Flu intellectual property and two patents, product lines, tooling, FDA clearances, research data, websites and other assets for the purchase price of $1,814,670 or 27,918,000 shares of Vystar restricted common stock which may not be assigned or sold by UV Flu for twelve months. In addition, In April 2018, the Company issued 27,769,500 shares of its restricted common stock valued at approximately $1,110,780 based on the closing price of the Company’s common stock on April 18, 2018 in exchange for certain assets of NHS Holdings, LLC (NHS), the exclusive U.S. distributorship of Vystar’s Vytex® virtually allergen-, VOC-, and odor-free natural rubber latex (NRL) foam.

 

In determining the fair value of the intangible assets related to the purchases, the Company considered, among other factors, the best use of acquired assets such as tooling and testing equipment, analysis of historical financial performance of the products and estimates of future performance of the products and intellectual properties acquired. An analysis was done of historical financial performance of the products and estimates of future performance of the products and intellectual properties acquired. This helped determine the fair values of the identified intangible assets related to the website, FDA Certification, tradename and branding, reacquired distribution rights and customer relationships.

 

NOTE 6 NOTES PAYABLE AND LOAN FACILITY

 

Related Party Line Loan (CMA Note Payable)

 

On November 2, 2012, the Company executed a $1,500,000 unsecured line of credit agreement with CMA Investments, LLC, a related party and a Georgia limited liability company (the “CMA Note”). Three of the directors of the Company (“CMA directors”) were initially the members of CMA. Pursuant to the terms of the CMA Note, interest is computed at LIBOR plus 5.25% (8.22% at March 31, 2019) on amounts drawn and fees. The weighted average interest rate in effect on the borrowings for the three months ended March 31, 2019 was 7.99%. There are no available borrowings under the CMA note at March 31, 2019.

 

13  

 

The holders of CMA Investments, LLC agreed as of July 10, 2018, to change the terms of the debt as follows:

 

  The Company will continue to service the interest on the debt through 2019.

 

  This debt is considered long-term.
     
   

The Company entered into a Loan Payoff and Share Payment Agreement on July 10, 2018. The Company had borrowed approximately $1,500,000 from CMA Investments, LLC (a related party) (the “Lender”) pursuant to several promissory notes. The Lender made the loans by using proceeds from a loan through Atlantic Capital Bank (the “ACB Loan”). In lieu of cash, the Company has paid the Lender 15,000,000 shares of restricted common stock (the “Shares”), which based on closing price on June 10, 2018 of $0.034 is equal to $510,000, provided that the Company continue to pay interest on the ACB Loan on Lender’s behalf for a six-month period. The certificate representing the Shares will be delivered to an escrow agent. After six months, the Escrow Agent is authorized to sell the Shares at a price of no less than $0.035 per share with a targeted date to complete sales of July 1, 2022. The Company shall be required to pay any shortfall between the proceeds Lender receives on the sale of the Shares and the total principal outstanding on the Company Loan at the settlement date. In the event of a surplus, the Company shall be authorized to repurchase the remaining Shares at par value. As of March 31, 2019, the Company reduced the amounts due by approximately $144,000 of the $1.5 million dollar CMA loan through the issuance out of escrow and sale of approximately 2,512,900 shares of its common stock. The balance as of March 31, 2019 on the CMA loan was approximately $1.4 million. See Note 13.

 

There was no accrued interest on the loan as of March 31, 2019 and December 31, 2018, respectively.  

 

Fidelity Note Payable

 

During the year ended December 31, 2018, certain investors have guaranteed $100,000 each with Fidelity Bank to establish a $500,000 revolving line of credit. At the present time, the Company is paying interest only at a rate of 4.5% per annum, with a balloon payment of $500,000 due in 2033. The balance is $500,000 as of March 31, 2019.

 

Shareholder convertible and contingent convertible Notes Payable

 

The following table summarizes the shareholder notes payable:

 

    March 31,
2019
    December 31,
2018
 
             
Shareholder convertible notes   $ 200,695     $ 338,195  
Contingent convertible notes     354 ,500       204,333  
Accrued interest     18,082       35,140  
Debt discount           (73,519 )
Total shareholder notes & accrued interest     573,278       504,149  
                 
Less: current portion     (353,643 )     (504,149 )
Total long-term debt   $ 219,634     $  

 

Shareholder Convertible Notes Payable

 

Included in the table above, there were shareholder notes payable outstanding as of March 31, 2019 and December 31, 2018 totaling $555,195 and $200,695, respectively.

 

From January 1, 2018 to February 9, 2018, the Company issued contingently convertible promissory notes (the “Notes”) for contract work performed by other entities in lieu of compensation and expense reimbursement in the amount of $200,695. The Notes are (i) unsecured, (ii) bear interest at an annual rate of five percent (5%) per annum from date of issuance, and (iii) are convertible at the Company’s option post April 19, 2018. The Notes mature one year from issuance but may be extended one (1) additional year by the Company. If converted, the Notes plus accrued interest are convertible into shares of the Company’s common stock at the prior twenty (20) day average closing price with a 50% discount. As of March 31, 2019, the balance on these notes was $212,537 and they were extended one additional year until January 2020 at which point they become eligible for conversion.

 

Convertible and Contingently Convertible Notes Payable

 

From January 1, 2018 and through the date of these financial statements, the Company has issued certain convertible and contingently convertible promissory notes in varying amounts, in the aggregate of $710,000. The face amount of the notes represents the amount due at maturity along with the accrued interest, at which time that amount may be converted into shares of the Company stock based on the lowest 2 day closing price for the trailing 20 days prior to conversion and carrying a 35% discount. The contingently convertible notes provide for interest to accrue at an interest rate equal to 12% per annum or the maximum rate permitted under applicable law after the occurrence of any event of default as provided in the notes. At any time after 180 days from the issue date, the holder, at its option, may convert the outstanding principal balance and accrued interest into shares of common stock of the Company. The initial conversion price for the principal and interest in connection with voluntary conversions by a holder of the convertible notes ranges from $0.05 to $0.10 per share, subject to adjustment as provided therein. The total outstanding balance of the contingent convertible notes was converted as of March 31, 2019. They were converted into into approximately 303 million shares of the Company’s common stock. Based on the variable conversion price, the Company recorded initial derivative liabilities of $465,905. The remaining balance of $235,085, net of discount, as of December 31, 2018 was reduced to zero after a change in fair value of $1,044,250 and a decrease of $1,279,335 to the balance of the derivative liabilities upon the date all notes were converted.

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In connection with the issuance of the convertible notes, the Company issued warrants to purchase 411,875 shares of the Company’s common stock. The exercise term of the warrants ranges from issuance to any time on or after the six (6) month anniversary or prior to the maturity of the related note. The exercise price of the warrants is $0.40 per share of the Company’s common stock, as may be adjusted from time to time pursuant to the antidilution provisions of the related warrant. Pursuant to ASU 2017-11, such antidilution features do not subject the Company to derivative accounting pursuant to ASC 815. All warrants were forfeited during the three months ended March 31, 2019 upon negotiation and conversion of the remaining outstanding balances.

 

Peak One Opportunity Fund, L.P.

 

During the year ended December 31, 2018, the Company entered into a financing agreement with Peak One Opportunity Fund, L.P. to receive $435,000 of original issue discount notes in three tranches as follows:

 

  1. July 17, 2018, principal $85,000 with an imputed interest rate of 6%, discounted by 10%, and $5,000 for legal fees, for a net of $71,500 due three years from the funding date. The Company has the option of receiving two additional amounts ninety days apart;
  2. September 14, 2018: $150,000 principal, $135,000 net.
  3. November 13, 2018: a final $200,000 principal, $180,000 net.

 

Peak One Opportunity Fund is entitled to convert the note into common stock at a price equal to 65% of the lowest traded price for the twenty trading days immediately preceding the date of the date of conversion. The Company has the option to redeem the note at varying prices based upon the redemption date. As of March 31, 2019, the entire balance has been converted into shares of common stock.

 

Crown Bridge Partners, LLC

 

During the year ended December 31, 2018, the Company entered into a financing agreement with Crown Bridge Partners, LLC to receive $100,000 of original issue discount notes in two tranches as follows:

 

  1. August 6, 2018: principal $50,000 bearing interest at 8%, discounted by 10%, and $2,000 for legal fees, for a net of $43,000 due one year from the funding date;
  2. The remaining tranche may be funded at the holder’s discretion.

 

Crown Bridge Partners was entitled to convert the note into common stock at a price equal to 65% of the average of the two lowest traded prices for the twenty-five trading days immediately preceding the date of the date of conversion.

 

In addition, the following notes were convertible after six months from the issue date:

 

    Face     Interest           Net Cash     Amount  
Issue Date and Name   Amount     Rate     Maturity     Proceeds     Converted/Paid  
Jan 29, 2018 EMA   $ 80,000       12 %     Jan 29, 2019     $ 72,300     $ 80,000  
Feb 14, 2018 Auctus     80,000       12 %     Nov 14, 2018       72,500       80,000  
Feb 13, 2018 FirstFire Global     76,500       5 %     Nov 13, 2018       72,500       81,500  
May 2, 2018 Power Up #3     83,000       12 %     May 23, 2019       80,000       83,000  
October 10, 2018 Power Up #4     103,000       12 %     Oct 10, 2019       103,000     $ 103,000  

All notes have been paid in full.

 

During the three months ended March 31, 2019, approximately $63,000 of the convertible notes and approximately $21,000 of accrued interest were exchanged for approximately 227,000,000 shares of common stock. In addition, approximately $142,000 of the Power Up notes have been settled in cash and all notes have been fully converted or paid as of March 31, 2019

 

During the three months ended March 31, 2019, the Company has issued certain convertible promissory notes in varying amounts to existing shareholders. The face amount of the notes represents the amount due at maturity along with the accrued interest, at which time that amount can be converted upon the triggering event of a reverse stock split. At which time the conversion into shares of the Company stock will be based on the lowest 2 day closing price for the trailing 20 days prior to conversion and carrying a 35% discount. These notes are included in the table below:

 

Issue Date   Face Amount     Interest Rate     Maturity     Net Cash Proceeds  
Jan 3, 2019   $ 4,500       5 %     Jan 3, 2021     $ 4,500  
Jan 3, 2019   $ 93,750       5 %     Jan 3, 2021     $ 93,750  
Jan 3, 2019   $ 102,200       5 %     Jan 3, 2021     $ 102,200  
Feb 4, 2019   $ 18,750       5 %     Feb 4, 2021     $ 18,750  

Note that these notes can be converted only after an acceleration event which involves a symbol change, uplisting, or reverse stock split.

NOTE 7 DERIVATIVE LIABILITIES

 

As of March 31, 2019, the Company had a $0 derivative liability balance on the balance sheet and recorded a loss from derivative fair value adjustments of $1,044,250 for the three months ended March 31, 2019. The derivative liability activity comes from the convertible notes payable (and any related warrants). The Company analyzed the conversion features and warrants of the various note agreements for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the embedded conversion features should be classified as a derivative because the exercise price of these convertible notes are subject to a variable conversion rate. The Company has determined that the conversion feature is not considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment. In accordance with ASC 815, the Company has bifurcated the conversion feature of the notes and recorded a derivative liability.

 

The embedded derivatives for the notes are carried on the Company’s balance sheet at fair value. The derivative liability is marked-to-market each measurement period and any unrealized change in fair value is recorded as a component of the statement of operations and the associated fair value carrying amount on the balance sheet is adjusted by the change. The Company fair values the embedded derivative using a lattice-based valuation model. The conversion feature is valued at the date the feature can be convertible which ranges from the issuance date of the note to 180 days after the issue date.

 

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The following table summarizes the derivative liabilities included in the balance sheet at March 31, 2019:

 

Fair Value of Embedded Derivative and Warrant Liabilities:
       
Balance, December 31, 2018   $ 235,085  
         
Change in fair value     1,044,250  
         
Settlement due to conversion     (1,279,335 )
         
Balance, March 31, 2019   $  

 

NOTE 8 STOCKHOLDERS’ DEFICIT

 

Cumulative Convertible Preferred Stock

 

On May 2, 2013, the Company began a private placement offering to sell up to 200,000 shares of the Company’s 10% Series A Cumulative Convertible Preferred Stock. Under the terms of the offering, the Company offered to sell up to 200,000 shares of preferred stock at $10.00 per share for a value of $2,000,000. The preferred stock accumulates a 10% per annum dividend and was convertible at a conversion price of $0.075 per common share at the option of the holder after a nine-month holding period. The conversion price was lowered to $0.05 per common share for those holders who invested an additional $25,000 or more in the Company’s common stock in the aforementioned September 2014 Private Placement. The preferred shares have full voting rights as if converted and have a fully participating liquidation preference.

 

As of March 31, 2019, the 13,828 shares of outstanding preferred stock had accumulated undeclared dividends of approximately $80,857 and could be converted into 4,382,730 shares of common stock, at the option of the holder.

 

As of December 31, 2018, the 13,828 shares of outstanding preferred stock had accumulated undeclared dividends of approximately $77,447 and could be converted into 4,314,537 shares of common stock, at the option of the holder.

 

Common Stock and Warrants

  

From January 1, 2018 through March 31, 2018, we issued 1,498,000 shares of our common stock valued at approximately $69,048 for services rendered to the Company in 2018. 

 

During the three months ended March 31, 2019, through majority shareholder consent, the Company increased the amount of authorized common stock shares to 1,500,000,000 which increased the available shares to be issued and outstanding.

 

During the three months ended March 31, 2019, the Company issued 144,933,992 shares under equity purchase agreements for cash proceeds totaling $434,800 (included in this were approximately 19,999,999 shares to be subsequently issued in connection with cash proceeds received during the three months ended March 31, 2019). Included in this amount are 12,999,999 of shares purchased for $14,000 from related parties. Approximately 54,999,997 shares were issued during the three months ended March 31, 2019 but were included in shares issued and outstanding at December 31, 2018 as the related cash was received prior to year end 2018. There were additional shares issuances to First Fire Global Opportunities Fund, LLC and Crown Bridge Partners for cash related to the settlement of warrants previously attached to convertible notes payable. See discussion below in Other Shares Issued.

 

During the three months ended March 31, 2019, the Company issued 227,336,218 shares due to the conversion of principal and interest totaling $85,000. The fair value at dates of conversion totaled approximately $1.3 million which were offset by the settlement of derivative liabilities upon conversion of approximately $1.3 million. The difference was recognized as a gain on settlement of debt of approximately $21,000 and is included in the condensed statement of operations in other income (expense) for the three months ended March 31, 2019. See Note 6 for further details on conversion of the contingent convertible notes

 

As discussed in Note 6, in July 2018, the Company issued 15 million shares in escrow which CMA began to sell in March 2019 at the end of the six-month period. The sales were sold at their discretion to bring down the balance of the debt. In accordance with the agreement, CMA had to sell all shares at no less than $0.035 per share. As of March 31, 2019, the Company reduced the amounts due by approximately $144,000 of the $1.5 million CMA loan through the issuance and sale of approximately 2,512,900 shares of its common stock that were previously held in escrow. Subsequent to year end the remaining balance of the loan has been settled (see Note 13).

 

On February 25, 2019, Vystar issued an aggregate of 4,000,000 shares to each Board member for compensation totaling 24,000,000 shares. The shares were valued at $1,207,200 for six (6) board members (based on the fair value on the measurement date).

 

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Other Shares Issued

 

On February 5, 2018, the Company issued 1,500,000 shares under the terms of a Consulting Agreement dated January 26, 2018 to STILLH20s Financial, LLC. The shares were valued at $75,000.

 

In January 2019, the Company repurchased 30,000 shares of common stock from an existing shareholder for $30 in cash. The transaction was recorded as treasury stock repurchased and is included in the accompanying financial statements as a separate item in the condensed statement of stockholders’ deficit.

 

In January 2019, the Company issued 14,746,324 shares to Peak One as part of a settlement. The shares were issued to settle any exercise of the 600,000 warrants previously granted to the investor related to convertible debt that was already converted, in addition to under conversion of previously outstanding convertible notes payable. As part of settlement to consider any remaining dispute over convertible notes payable and to avoid returning shares to the Company, the parties agreed the debt would be considered fully converted as of March 31, 2019. As part of that settlement agreement, the previously issued warrants were forfeited during the three months ended March 31, 2019 in exchange for shares issued for cash noted above. On the date of settlement, the shares had a fair value of $33,917.

 

In March 2019, the Company issued a total of 31,133,333 shares for $200,000 in cash received from First Fire Global Opportunities Fund, LLC. The shares were issued to settle any exercise of the 286,875 warrants previously granted to the investor related to convertible debt that was already converted in addition to over conversion of previously outstanding convertible notes payable. These warrants were issued in connection with convertible notes payable. As part of settlement to consider any remaining dispute over convertible notes payable and to avoid returning shares to the Company, the parties agreed the debt would be considered fully converted as of March 31, 2019. As part of that settlement agreement, the previously issued warrants were forfeited during the three months ended March 31, 2019 in exchange for shares issued for cash noted above.

 

In January and March of 2019, the Company issued 31,166,667 shares for $100,000 in cash received from Crown Bridge. The shares were issued to settle any exercise of the 125,000 warrants previously granted to the investor related to convertible debt that was already converted. As part of settlement to consider any remaining dispute over convertible notes payable, the parties agreed the debt would be considered fully converted as of March 31, 2019. As part of that settlement agreement, the previously issued warrants were forfeited during the three months ended March 31, 2019 in exchange for shares issued for cash noted above.

 

During the three months ended March 31, 2019, the Company issued 147,704,875 shares for consulting services valued at approximately $842,000 based on the respective measurement dates. Of these shares, 81,664,655 were issued to related parties and the total expense amount of approximately $700,000 was accrued at December 31, 2018. See further detail of related party shares in Note 10.

 

NOTE 9 SHARE-BASED COMPENSATION

 

Generally accepted accounting principles require share-based payments to employees, including grants of employee stock options, warrants, and common stock to be recognized in the income statement based on their fair values at the date of grant, net of estimated forfeitures.

 

The Company used the Black-Scholes option pricing model to estimate the grant-date fair value of option and warrant awards granted. The following assumptions were used for warrant awards during the three months ended March 31, 2019:

 

  Expected Dividend Yield - because we do not currently pay dividends, the expected dividend yield is zero;
  Expected Volatility in Stock Price - volatility based on our own trading activity was used to determine expected volatility;
  Risk-free Interest Rate - reflects the average rate on a United States Treasury Bond with a maturity equal to the expected term of the option; and
  Expected Life of Award - because we have minimal experience with the exercise of options or warrants for use in determining the expected life of each award, we used the option or warrant’s contractual term as the expected life.

 

In total for the three months ended March 31, 2019 and 2018, the Company recorded $17,783 and $1,404,889, respectively, of share-based compensation expense related to employee and Board Members’ stock options. The unrecognized compensation expense as of March 31, 2019 was $81,938 for non-vested share-based awards to be recognized over a period of approximately four years.

 

Options

 

During 2004, the Board of Directors of the Company adopted a stock option plan (the “Plan”) and authorized up to 4,000,000 shares to be issued under the Plan. In April 2009, the Company’s Board of Directors authorized an increase in the number of shares to be issued under the Plan to 10,000,000 shares and to include the independent Board Members in the Plan in lieu of continuing the previous practice of granting warrants each quarter to independent Board Members for services. At March 31, 2019, there are 2,251,729 shares of common stock available for issuance under the Plan. In 2014, the Board adopted an additional stock option plan which provides for an additional 5,000,000 shares which are all available as of March 31, 2019. The Plan is intended to permit stock options granted to employees to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (“Incentive Stock Options”). All options granted under the Plan that are not intended to qualify as Incentive Stock Options are deemed to be non-qualified options. Stock options are granted at an exercise price equal to the fair market value of the Company’s common stock on the date of grant, typically vest over periods up to 4 years and are typically exercisable up to 10 years.

 

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There were no options granted during the three-month period ended March 31, 2019. The following table summarizes all stock option activity of the Company for the period.

 

    Options - Number of Shares     Weighted Average Exercise Price  
Outstanding, December 31, 2018     29,098,270     $ 0.04  
                 
Granted         $    
                 
Exercised         $    
                 
Forfeited         $    
                 
Outstanding, March 31, 2019     29,098,270     $ 0.04  
                 
Exercisable, March 31, 2019     27,273,270     $ 0.03  

 

As of March 31, 2019 and December 31, 2018, the aggregate intrinsic value of the Company’s outstanding options was $52,380 and $22,000, respectively. The aggregate intrinsic value will change based on the fair market value of the Company’s common stock. 

 

Warrants

 

Warrants are issued to third parties as payment for services, debt financing compensation and conversion and in conjunction with the issuance of common stock. The fair value of each common stock warrant issued for services is estimated on the date of grant using the Black-Scholes option pricing model.

 

The following table represents the Company’s warrant activity for the three months ended March 31, 2019:

 

      Number
of
Shares
    Weighted
Average
Grant Date
Fair Value
   

Weighted
Average
Exercise Price

    Weighted
Average
Remaining
Contractual
Life
(Years)
 
                           
Outstanding, December 31, 2018       15,488,832     $       $ 0.12       4.27  
Exercisable, December 31, 2018       15,488,832               0.12       4.27  
Granted                                
Exercised                                
Forfeited       (1,106,452 )             0.48        
Expired                                
Outstanding, March 31, 2019       14,382,380               0.09       2.56  
Exercisable, March 31, 2019       14,382,380     $       $ 0.09       2.56  

 

Of the warrants that were forfeited, 1,011,875 of them were issued in connection with convertible notes payable. When the notes fully converted, 411,875 warrants were forfeited during the three months ended March 31, 2019 as part of a settlement in two separate cash transactions. The remaining 600,000 warrants were forfeited during the three months ended March 31, 2019 as part of a separate settlement in a cashless issuance. See further discussion in Note 8 of these financial statements.

 

There was no stock compensation expense for the three months ended March 31, 2019 related to warrants. The stock compensation expense for the three months ended March 31, 2018 was $13,947.

 

NOTE 10 – RELATED PARTY TRANSACTIONS

 

Officers and Directors

 

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Per Steven Rotman’s Employment agreement, he is to be paid approximately $1 per year in cash and $20,833 per month to be paid in shares based on a 20-day average at a 0% discount to market. During the three months ended March 31, 2019, the Company issued Steven Rotman 28,016,022 shares in accordance with his employment agreement that were accrued and expensed as of December 31, 2018. The Company expensed $201,000 during the three months ended March 31, 2019 related to 4,000,000 shares issued for services as a Board Member of the Company. In addition, the Company accrued and expensed approximately $103,000  related to shares to be issued in the future.

 

Designcenters.com

 

This entity is owned by Jamie Rotman, who is the daughter of the Company’s CEO, Steven Rotman. Designcenters.com provides bookkeeping and management services to the Company. In exchange for such services, the Company has entered into a consulting agreement with the related party entity.

 

Per Designcenter.com consulting agreement, it is to be paid approximately $7,100 per month to be paid in shares based on a 20-day average at a 50% discount to market, and a $10,000 quarterly bonus to be paid in shares using the same formula. During the three months ended March 31, 2019, the Company issued Designcenters.com 20,030,407 shares in accordance with the consulting agreement that were accrued and expensed as of December 31, 2018. During the three months ended March 31, 2019, the Company expensed approximately $46,122  related to the consulting agreement. Of the expensed amount, approximately $17,992 was paid in cash. As of March 31, 2019, the Company had an accrued stock-based compensation balance of $22,820 related to this party.

 

Blue Oar Consulting, Inc.

 

This entity is owned by Gregory Rotman, who is the son of the Company’s CEO, Steven Rotman. Blue Oar Consulting provides business consulting services to the Company. In exchange for such services, the Company has entered into a consulting agreement with the related party entity.

 

Per Blue Oar Consulting consulting agreement, it is to be paid approximately $15,000 per month in cash for expenses, and $12,500 per month to be paid in shares. It will be based on a 20-day average at a 50% discount to market. During the three months ended March 31, 2019, the Company issued Blue Oar 33,618,226 shares in accordance with the consulting agreement that were accrued and expensed as of December 31, 2018. During the three months ended March 31, 2019, the Company expensed approximately $82,500. Of the expensed amount, approximately $45,000 was paid in cash. As of March 31, 2019, the Company had an accrued stock-based compensation balance of $123,002 related to this party.

 

Rotmans Furniture

 

During the three months ended March 31, 2019, the Company had sales of approximately $42,000 to Murida Furniture Co., Inc, DBA Rotmans Furniture (“Rotmans”). Steven Rotman, the Company’s CEO, is a 42% owner of Rotmans. At March 31, 2019 and December 31, 2018, the Company had an amount receivable of approximately $15,522 and $2,254, respectively.

 

During the three months ended March 31, 2019 and 2018, the Company utilized certain warehouse staff, warehouse and office space/services and an executive assistant of Rotmans for the Company’s purposes. The Company estimates the cost of such services to be approximately $40,000 per month or approximately $120,000, respectively, for the three months ended March 31, 2019 and 2018 (based on the term such resources were used). The Company was not charged for these resources and does not owe any amounts to Rotmans for the services utilized through March 31, 2019.

 

NOTE 11 – COMMITMENTS

 

Employment and Consulting Agreements

 

We have entered into employment and consulting agreements with certain of our officers, employees, and affiliates. For employees, payment and benefits would become payable in the event of termination by us for any reason other than cause, or upon change in control of our Company, or by the employee for good reason.

 

There is currently one employment agreement in place for 2018 and 2019 with the CEO, Steven Rotman. See compensation terms in Note 10.

 

During the 3 months ended March 31, 2019, the Company entered into various services agreement with consultants for financial reporting, advisory, and compliance services. The services agreement calls for monthly payments.

 

Litigation

 

From time to time, the Company is party to certain legal proceedings that arise in the ordinary course and are incidental to our business. Future events or circumstances, currently unknown to management, will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on our consolidated financial position, liquidity or results of operations in any future reporting periods.  

 

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

 

The Company filed an opposition to the motion and at oral argument the motion for injunctive relief was denied. The Court issued a decision permitting a motion for summary judgment to proceed and permitted the Company the opportunity to supplement its opposition papers together with the plaintiff who was also provided opportunity to submit reply papers. As of March 31, 2019, there was no accurate assumption of liability to be accrued. It is the Company’s position that they issued all shares under the conversion terms. 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.

 

NOTE 12 – MAJOR CUSTOMERS AND VENDORS

 

Major customers and vendors are defined as a customer or vendor from which the Company derives at least 10% of its revenue and cost of revenue, respectively.

 

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During the three months ended March 31, 2019, Vytex licensing revenue came from three major customers; Wurfbian Polymer, Centrotrade and Mast Global, which collectively comprised 100% of the total Vytex licensing revenue. No amounts were owed to major vendors at March 31, 2019 and December 31, 2018.

 

During the three months ended March 31, 2019, Vytex Foam revenue came from three major customers; Jeffco, King Koil, and Rotmans. The receivable for Rotmans was $15,522 as of March 31, 2019. There was no receivable for Jeffco and King Koil as of March 31, 2019.

 

During the three months ended March 31, 2019 Vytex licensing revenue came from three major customers; Wurfbian Polymer, Centrotrade, Mast Global, which collectively comprised 100% total Vytex licensing revenue. No amounts were owed to major vendors at December 31, 2018 and December 31, 2017.

 

During the three months ended March 31, 2019, Vytex Foam revenue came from three major customers; Jeffco, King Koil, and Rotmans. The receivable for Rotmans was $2,254 as of December 31, 2018. There was no receivable for Jeffco and King Koil as of December 31, 2018.

 

NOTE 13 SUBSEQUENT EVENTS

 

As discussed in Note 8, in July 2018, the Company issued 15 million shares in escrow which CMA began to sell in March 2019 at the end of the six-month period. The sales were sold at their discretion to bring down the balance of the debt. In accordance with the agreement, CMA had to sell all shares at no less than $0.035 per share. As of March 31, 2019, the Company reduced the amounts due by approximately $138,000 of the $1.5 million CMA loan through the issuance and sale of approximately 2,512,900 shares of its common stock that were previously held in escrow. Subsequent to March 31, 2019, the remaining shares were considered issued by the Company when CMA sold the remaining 12,487,100 shares held in escrow. The total value received upon the sale of the 15 million shares of approximately $1.1 million was less than the total obligation outstanding after all shares were sold through April 2019. In May 2019, the Company began to negotiate the remaining shortfall and was finalizing an agreement to issue an additional 30,000,000 shares to CMA for approximately $500,000. This would settle the shortfall in accordance with the agreement. At such point, the Company would reduce any remaining amounts due on the outstanding debt to become fully satisfied.

 

On April 29, 2019, the previously approved increase to the authorized shares by majority shareholder consent was ratified by the board. The authorized common stock shares increased to 1,500,000,000 for the three months ended March 31, 2019, which increased the available shares to be issued and outstanding.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

OVERVIEW

 

Vystar LLC, the predecessor to the Company, was formed February 2, 2000, as a Georgia limited liability company by Travis W. Honeycutt. Operations under the LLC entity were focused substantially on the research, development and testing of the Vytex® Natural Rubber Latex (“NRL”) process, as well as attaining intellectual property rights. In 2003, the Company reorganized as Vystar Corporation, a Georgia corporation, at which time all assets and liabilities of the limited liability company became assets and liabilities of Vystar Corporation, including all intellectual property rights, patents and trademarks. 

 

We are the creator and exclusive owner of the innovative technology to produce Vytex NRL. This technology reduces antigenic protein in natural rubber latex products to virtually undetectable levels in both liquid NRL and finished latex products. The process also removes many of the naturally occurring non-rubber particles superfluous to end product function, resulting in a cleaner latex base material. We have introduced Vytex NRL, our “ultra-low protein” natural rubber latex, throughout the worldwide marketplace that uses NRL or latex substitutes as a component of manufactured products. Natural rubber latex is used in an extensive range of products including balloons, textiles, footwear and clothing (threads), adhesives, foams, furniture, carpet, paints, coatings, protective equipment, sporting equipment, and especially health care products such as condoms, surgical and exam gloves. We produce Vytex through licensing agreements and have introduced Vytex NRL into the supply channels with aggressive, targeted marketing campaigns directed to the end users.

 

We transitioned from a development stage company to the operating stage during the last quarter of 2009. During the period of 2010 to 2015, our financial condition and results of operations have experienced substantial fluctuations as we provided introductory pricing in 2010 and then began to switch to a licensing rather than a toll model in 2011. Our licensing model will continue in 2019 for the raw material business and we will continue our focus in 2019 onward on the licensing contracts associated with the foam and furniture offerings. Accordingly, the financial condition and results of operations reflected in our historical financial statements are not expected to be indicative of our future financial condition and results of operations.

 

We believe that the key for increased Vytex NRL product acceptance is to focus on companies seeking solutions to production challenges or ways to differentiate their product offering. Vystar’s technical team has been successful in developing customized formulations to meet specific manufacturer needs. Some of these formulations will become new line extensions. Vystar is becoming less of a raw material provider and more of a technology innovator through its technical consultation and formulation activities.

 

In addition to this technology focus, we are determined to have the “made with Vytex” claim added to products made using various forms of Vytex NRL. To help drive this effort we’re focusing on products that benefit from Vytex NRL low non-rubber features. As part of this effort, we are working with a licensee to launch a line of foam core products used in various bedding products including pillows, mattresses and mattress toppers.

 

In January 2015 Vystar announced that it had entered into an exclusive agreement with NHS to distribute mattresses, mattress toppers and pillows made with its multi-patented Vytex NRL raw material. NHS is a distribution company led by Steven Rotman of Rotmans Furniture and as of December 18, 2017 is the CEO of Vystar and focuses on innovative, sustainably sourced, eco-friendly material and technologies for use in furnishings and other markets. Our Vytex NRL fits the needs of this unique new distributor which has already attracted such firms as mattress manufacturer Gold Bond that was formed in 1899 to manufacture and then distribute mattresses, toppers and pillows along with a plan to reach specific segments of the United States by targeting other manufacturers. Vystar has focused on these segments since 2015 and will continue into 2019 as we display at furniture and mattress conventions and attend and sell at sleep products meetings such as ISPA 2016 (International Sleep Products Association) held in Orlando, FL and ISPA 2017 in Tampa, FL and attended ISPA 2018 in Charlotte, NC. Vystar will also continue to develop specialty versions of Vytex NRL after presenting to the International Latex Conference in Akron OH in July 2016 and 2017 and sending out samples for lab trials. Vystar is currently producing Vytex thread samples for an entry into the thread marketplace. In September 2016, the Vystar Board of Directors voted to end the January 2015 agreement with NHS and replace it with a global exclusive for foam manufactured with Vytex and sold into the home furnishings industry. This change reflects the global nature of the mattress, topper and pillow businesses.

 

In April of 2018 Vystar acquired the assets of NHS Holdings, LLC (NHS) executing on the first part of the company’s vision to move into direct product offerings made from  Vytex ® latex. NHS was the exclusive U.S. distributor of Vystar’s Vytex® natural rubber latex foam to manufacturers for use in over 200 home furnishings products, including mattresses, toppers, pillows and upholstery, sold through multiple channels. This acquisition provides Vystar with roll packing and cutting equipment to support our bedding manufacturing partners, while lowering the cost of Vytex to the manufacturer by eliminating the middleman.

 

Now unified under the Vytex brand, we anticipate developing additional product offerings and solidifying partnerships with multiple major manufacturing partners throughout the home furnishings industry.  We anticipate our new offerings will include cushions and padding for use in seating and other products which we believe will achieve higher margins.

 

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).  

 

As part of Vystar’s mission to offer eco-friendly, sustainable materials and products that create a better environment for consumers and workers throughout the product lifecycle, UV Flu Technologies is an excellent counterpart to our Vytex materials and Vytex bedding products. Vystar products will help create a perfect natural sleep environment starting with Vytex bedding made from the purest latex in the world and UV Flu’s  RxAir ™ air purifier ensuring every breath is free of harmful pathogens, VOCs and odors.”

 

UV Flu products 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. (see news video with RX3000 in use) 

 

UV Flu’s product line includes:

 

  RXair™ Residential Filterless Air Purifier
  UV400  ™ FDA cleared Class II Filterless Air Purifier
  RX3000 ™ Commercial FDA cleared Class II Air Purifier (news  video  with RX3000)

 

Vystar acquired all UV Flu intellectual property and multiple patents, product lines, tooling, FDA clearances, research data, websites and other assets related to the business for the purchase price of $975,000 or 27,918,000 shares of Vystar restricted common stock which may not be assigned or sold by UV Flu for 12 months.

 

Manufacturing, Distribution and Sales

 

Vystar will continue production of UV Flu product lines with BOI, a world-class manufacturer. Vystar plans to sell RxAir residential and commercial units via Distributors, online and through retail channels. Vystar has been selling the RXAIR units after receiving a substantial number of units by container in the first quarter. In addition, master distributors and manufacturers representatives have signed contracts with Vystar. The first large scale distributor order was placed and paid for in May 2019.

 

21  

Vystar is assembling the distribution network to relaunch sales of UV400 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 production and sales are firmly re-established, Vystar expects that the air purification products will produce margins of approximately 75%.

UV Flu’s products have world class engineering, are made to the highest quality standards and are extremely effective in settings ranging from homes to offices, healthcare facilities, salons, restaurants and nursing homes.

 

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

 

In the first quarter Vystar also made huge strides in enhancing Vystar’s large patent portfolio, continuing the outstanding work from previous management. Today Vystar has 28 patents encompassing many continents. Vystar will be adding significant resources in the near term to enforce and prosecute infringers of our patents ensuring Vystar has the ability to fully collect on its proprietary Vytex investment.

 

During the first quarter the company focused on shoring up the raw material Vytex supply and distribution chain and further announcements will be made during the second quarter on these partnerships. In addition, during the second quarter, the company brought in 3,000 plus products, consisting of foam slabs and mattress toppers, encompassing about hundred SKUs which are currently for sale, wholesale and retail, through various platforms and placed additional orders for a multitude of containers of new product currently en-route to us. With the new containers we will be adding about a dozen different pillow styles and a new super Firm 95 density topper category, thos follows the first of its kind 55 density super plush made with Vytex. This is the first all-natural topper product we are aware of to be commercially developed world-wide at this low a density using natural rubber latex and, in our case, Vytex.

 

RESULTS OF OPERATIONS

 

Comparison of the Three Months Ended March 31, 2019 with the Three Months Ended March 31, 2018

 

    3 Months Ended March 31,              
    2019     2018     $ change     % change  
    Consolidated     Consolidated     Consolidated     Consolidated  
Revenue   $ 191,667     $ 3,944     $ 187,723       4760 %
Cost of revenue     199,842       49,421       150,421       304 %
Gross loss     (8,175 )     (45,477 )     37,302       (82 %)
                                 
Operating Expenses                                
General and administrative     1,995,880       1,763,449       232,431       13 %
Total operating expenses     1,995,880       1,763,449       232,431       13 %
                                 
Loss from Operations     (2,004,055 )     (1,808,926 )     (195,129  )     11 %
                                 
Other expense     (152 )           (152 )     100 %
Gain on settlement of debt     14,945               14,945       100 %
Change in fair value of derivative liabilities     (1,044,250 )           (1,044,250 )     100 %
Interest expense     (99,663 )     (41,448 )     (58,215 )     141 %
Total Expense     (1,129,119 )     (41,448 )     (1,087,671 )     2624 %
                                 
Net loss   $ (3,133,174 )   $ (1,850,374 )   $ (1,282,800 )     69 %

 

 

Revenues

 

Revenues for the three months ended March 31, 2019 and 2018 from the Company were $191,667 and $3,944, respectively, for an increase of $187,723 or 4760%. The increase in revenues was due to an increase in operations as a whole due to multiple acquisitions since March 31, 2018 and also due to the increase in Vytex licensing fees.

 

For the Company, the gross loss decreased from $45,477 for the three-month period ended March 31, 2018 to a gross loss of $8,175 for the three-month period ended March 31, 2019, an increase of $37,302. Cost of revenue for the three months ended March 31, 2019 and 2018 was $199,842 and $49,421, respectively an increase of $150,421. The increase is consistent with the increase in revenue in addition to the recent acquisitions providing additional revenue channels for the Company and the ability to reduce costs of purchasing from a third-party supplier. In addition, as the Company increases its sales through Amazon, the fees charged by the online e-commerce site will begin to level out which will effectively begin generating increased margins.

 

Operating Expenses

 

The Company’s operating expenses consist of general and administrative expenses. General and administrative expenses consist primarily of compensation and support costs for management 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. The Company’s operating expenses were $1,995,880 and $1,763,449 for the three months ended March 31, 2019 and 2018, respectively, for an increase of $195,129 or 11%. Operating expenses included patents, latex consultants, accounting fees, and employee expenses. The increase is mainly due to the approximate increase of $200,000 in shared-based compensation related to services for related parties, third-party contracted expenses, and accounting fees.

 

22  

 

Other Expense

 

Other expense for the three months ended March 31, 2019 was $1,129,119 which consisted of interest expense of ($99,663), gain on settlement of convertible notes payable of $14,945, change in fair value of derivative liabilities of ($1,044,250) and other expense of ($152). This compares to other expense that includes interest expense of ($41,448) for the three months ended March 31, 2018. The reason for the increase in other expense for the three months ended March 31, 2019 was due to a gain recognized on the conversion of toxic debt instruments into shares of common stock, in addition to the increase in the fair value of derivative liabilities related to the convertible notes payable. The increase in interest expense for the three months ended March 31, 2019 was due to a non-cash expense related to debt discount amortization for convertible notes payable the fully converted during the period causing full recognition of the discount.

 

Net Loss

 

Net loss was $3,133,174 and $1,850,374 for the three months ended March 31, 2019 and 2018, respectively, an increase to net loss of $1,282,800 or 69% increase in the net loss. The larger net loss the Company experienced in the quarter ended March 31, 2018 versus the same period in 2019 was primarily attributable to the unusual and infrequent loss recognized from fair value changes to the derivative liabilities and the increase in interest expense arising from the conversion of convertible notes payable that fully converted into common stock during the period which resulted in expensing the remaining debt discount in full.

 

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 March 31, 2019, the Company had cash of $438,164 and a deficit in working capital of $393,253. Further, at March 31, 2019, the accumulated deficit amounted to $36,533,519. 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.

 

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, increased revenue from Vytex license fees that now also include the Company’s association with foam cores made from Vytex used in mattresses, mattress toppers and pillows, stock warrant exercises from existing shareholders, and raising capital through private placement memoranda (see Note 13, Subsequent Events).

 

There can be no assurances that we will be able to achieve projected levels of revenue in 2019 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 2019, 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 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.

 

Sources and Uses of Cash

 

For the three months ended March 31, 2019 and 2018, net cash used in operations was $410,364 and $324,582 respectively. The negative cash flow from operations for the three months ended March 31, 2019 resulted primarily from the net loss of $3,133,174 primarily attributable to our non-cash share-based compensation expense of $1,612,286, non-cash gain recognized for the settlement of debt of $14,945, the non-cash change in fair value of derivative liabilities of $1,044,250, an increase to operating assets of $19,371 and a decrease to our operating liabilities of $22,583. The negative cash flow for the three months ended March 31, 2018 resulted primarily from the net loss of $1,850,374, offset by non-cash charges related to non-cash share-based compensation expense of $1,404,889.

 

Net cash used in investing activities of $3,339 for the three months ended March 31, 2019 was for costs associated with patent and trademark fees and website development costs. There was no investing activity during the three months ended March 31, 2018.

 

Net cash provided by financing activities of $801,814 for the three months ended March 31, 2019 consisted of $731,020 in proceeds from issuances of common stock, net of costs and $217,000 in new loans from related parties. In addition, the Company made repayments of $146,176 related to convertible notes payable. Net cash provided by financing activities for the three months ended March 31, 2018 was $500,000 in proceeds from a loan from Fidelity and $444,050, net in new loans from investors.

 

23  

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that may be reasonably likely to have a current or future material effect on our financial condition, liquidity, or results of operations.

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth;  product development, introduction and acceptance; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.

 

Although the forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

None

 

ITEM 4. CONTROLS AND PROCEDURES

 

The Company’s Chief Executive Officer and Chief Financial Officer (the Certifying Officer) is responsible for establishing and maintaining disclosure controls and procedures for the Company. Although the Certifying Officer has designed such disclosure controls and procedures to ensure that material information is made known to them, particularly during the period in which this report was prepared, certain material weaknesses occurred during the period March 31, 2019 and subsequent to period end. The Certifying Officer has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e) (the Rules) under the Securities Exchange Act of 1934 (or Exchange Act) as of the end of the period covered by this Quarterly Report and is working on improving controls with an outside CPA firm and a more dedicated internal resources.

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d - 15(f) under the Securities Exchange Act of 1934). Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those policies and procedures that: (i) in reasonable detail accurately and fairly reflect our transactions; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; (iii) provide reasonable assurance that our receipts and expenditures are made in accordance with management authorization; and (iv) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting, however well designed and operated, can provide only reasonable, and not absolute, assurance that the controls will prevent or detect misstatements. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only the reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.

 

Management, under the supervision and with the participation of our Chief Executive Officer and our acting Chief Financial Officer, conducted an evaluation of our internal control over financial reporting as of March 31, 2019 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) 2013. Based on our evaluation under the COSO framework, management concluded that our internal control over financial reporting was not effective as of March 31, 2019. Such conclusion was reached based on the following material weaknesses noted by management:

 

a) We have a lack of segregation of duties due to the small size of the Company.

 

b) The Company did not maintain reasonable control over records underlying transactions necessary to permit preparation of the Company’s financial statements.

 

c) Lack of controls that provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposal of the Company’s assets that could have a material effect on the financial statements.

 

d) Lack of a formal CFO position who can devote significant attention to financial reporting resulted in multiple audit adjustments.

 

e) Lack of a functioning audit committee, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures. Management believes the lack of a functioning audit committee results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future period.

 

Management expects to strengthen internal control during 2019 by developing stronger business and financial processes for accounting for transactions such as warrant/stock issuances, which will enhance internal control for the Company.

 

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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

None

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Set forth below is information regarding shares of common stock, warrants and options to purchase common stock issued by the Company for the three months ended March 31, 2018, that were not registered under the Securities Act of 1933, as amended (the “Securities Act”). Also included is the consideration, if any, received by the Company for such shares, warrants and options and information relating to the section of the Securities Act, or rule of the Securities and Exchange Commission, under which exemption from registration was claimed.

 

(a) Common Stock and Warrant Financings

 

From January 1, 2018 through December 31, 2018, we issued 1,011,875 warrants to purchase shares of common stock per the following:

 

Warrants     Exercise Price per Share  
         
286,875       $0.40 per share  
600,000       $0.40 per share  
125,000       $0.40 per share  

 

These warrants were issued in connection with convertible notes payable. When the notes fully converted, 411,875 warrants were forfeited during the three months ended March 31, 2019 as part of a settlement in two separate cash transactions. The remaining 600,000 warrants were forfeited during the three months ended March 31, 2019 as part of a separate settlement in a cashless issuance.

 

During the three months ended March 31, 2019, through majority shareholder consent, the Company increased the amount of authorized common stock shares to 1,500,000,000 which increased the available shares to be issued and outstanding.

 

In January 2019, the Company repurchased 30,000 shares of common stock from an existing shareholder for $30 in cash. The transaction will be recorded as treasury stock repurchased and is included in the accompanying financial statements as a separate item in the condensed statement of stockholders’ deficit.

 

In January 2019, the Company issued 14,746,324 shares to Peak One as part of a settlement. The shares were issued to settle any exercise of the 600,000 warrants previously granted to the investor related to convertible debt that was already converted, in addition to under conversion of previously outstanding convertible notes payable. As part of settlement to consider any remaining dispute over convertible notes payable and to avoid returning shares to the Company, the parties agreed the debt would be considered fully converted as of March 31, 2019. As part of that settlement agreement, the previously issued warrants were forfeited during the three months ended March 31, 2019 in exchange for shares issued for cash noted above. On the date of settlement, the shares had a fair value of $33,917.

 

On February 25, 2019, Vystar issued an aggregate of 4,000,000 shares to each Board members for compensation. The shares valued at $2,800 for 6 board members (based on the fair value on the measurement date). There was a total of 24,000,000 shares issued to board members for a total value of $16,800 related to service.

 

During the three months ended March 31, 2019, the Company issued 144,933,992 shares under equity purchase agreements for cash proceeds totaling $434,800 (included in this were approximately 19,999,999 shares to be subsequently issued in connection with cash proceeds received during the three months ended March 31, 2019). Included in this amount are 12,999,999 of shares purchased for $14,000 from related parties. Approximately 54,999,997 shares were issued during the three months ended March 31, 2019 but were included in shares issued and outstanding at December 31, 2018 as the related cash was received prior to year end 2018. There were additional shares issuances to First Fire Global Opportunities Fund, LLC and Crown Bridge Partners for cash related to the settlement of warrants previously attached to convertible notes payable. See discussion below in Other Shares Issued.

 

During the three months ended March 31, 2019, the Company issued 227,336,218 shares due to the conversion of principal and interest totaling $85,000. The fair value at dates of conversion totaled approximately $1.3 million which were offset by the reclassification of derivative liabilities upon conversion of approximately $1.3 million. The difference was recognized as a gain on settlement of debt of approximately $21,000 and is included in the condensed statement of operations in other income (expense) for the three months ended March 31, 2019.

 

As discussed in Note 6, in July 2018, the Company issued 15 million shares in escrow which CMA began to sell in March 2019 at the end of the six-month period. The sales were sold at their discretion to bring down the balance of the debt. In accordance with the agreement, CMA had to sell all shares at no less than $0.035 per share. As of March 31, 2019, the Company reduced the amounts due by approximately $144,000 of the $1.5 million CMA loan through the issuance and sale of approximately 2,512,900 shares of its common stock that were previously held in escrow.

 

In March 2019, the Company issued a total of 31,133,333 shares for $200,000 in cash received from First Fire Global Opportunities Fund, LLC. The shares were issued to settle any exercise of the 286,875 warrants previously granted to the investor related to convertible debt that was already converted. These warrants were issued in connection with convertible notes payable. As part of settlement to consider any remaining dispute over convertible notes payable, the parties agreed the debt would be considered fully converted as of March 31, 2019. As part of that settlement agreement, the previously issued warrants were forfeited during the three months ended March 31, 2019 in exchange for shares issued for cash noted above.

 

25  

 

In January and March of 2019, the Company issued 31,166,667 shares for $100,000 in cash received from Crown Bridge. The shares were issued to settle any exercise of the 125,000 warrants previously granted to the investor related to convertible debt that was already converted. As part of settlement to consider any remaining dispute over convertible notes payable, the parties agreed the debt would be considered fully converted as of March 31, 2019. As part of that settlement agreement, the previously issued warrants were forfeited during the three months ended March 31, 2019 in exchange for shares issued for cash noted above.

 

During the three months ended March 31, 2019, the Company issued 147,704,875 shares for consulting services valued at approximately $842,000 based on the respective measurement dates. Of these shares, 81,664,655 were issued to related parties and the total expense amount of approximately $700,000 was accrued at December 31, 2018.

 

(b) Stock Option Grants

 

From January 1, 2018 through December 31, 2018, we issued 21,800,000 options to purchase common stock to Board members and consultants valued at $1,161,132.

 

From December 31, 2018 through March 31, 2019, the Company did not grant any stock options.

 

(c) Proceeds from loans and shareholder, convertible and contingently convertible notes payable

 

Related Party Line Loan (CMA Note Payable)

 

On November 2, 2012, the Company executed a $1,500,000 unsecured line of credit agreement with CMA Investments, LLC, a related party and a Georgia limited liability company (the “CMA Note”). Three of the directors of the Company (“CMA directors”) were initially the members of CMA. Pursuant to the terms of the CMA Note, interest is computed at LIBOR plus 5.25% (8.22% at March 31, 2019) on amounts drawn and fees. The weighted average interest rate in effect on the borrowings for the three months ended March 31, 2019 was 7.99%. There are no available borrowings under the CMA note at March 31, 2019.

 

The holders of CMA Investments, LLC agreed as of July 10, 2018, to change the terms of the debt as follows:

 

  The Company will continue to service the interest on the debt through 2019.

 

  This debt is now considered long-term.
     
  The Company entered into a Loan Payoff and Share Payment Agreement on July 10, 2018. The Company had borrowed approximately $1,500,000 from CMA Investments, LLC (a related party) (the “Lender”) pursuant to several promissory notes. The Lender made the loans by using proceeds from a loan through Atlantic Capital Bank (the “ACB Loan”). In lieu of cash, the Company has paid the Lender 15,000,000 shares of restricted common stock (the “Shares”), which based on closing price on June 10, 2018 of $0.034 is equal to $510,000, provided that the Company continue to pay interest on the ACB Loan on Lender’s behalf for a six-month period. The certificate representing the Shares will be delivered to an escrow agent. After six months, the Escrow Agent is authorized to sell the Shares at a price of no less than $0.035 per share with a targeted date to complete sales of July 1, 2022. The Company shall be required to pay any shortfall between the proceeds Lender receives on the sale of the Shares and the total principal outstanding on the Company Loan at the settlement date. In the event of a surplus, the Company shall be authorized to repurchase the remaining Shares at par value.

 

  The Company issued the 15 million shares in escrow which CMA began to sell at the end of the six-month waiting period. In the event that the total value received upon the sale of the shares was less than the total obligation, the Company shall either issue additional shares or pay in cash the shortfall. As of March 31, 2019, the Company reduced the amounts due by approximately $144,000 of the $1.5 million dollar CMA loan through the issuance out of escrow and sale of approximately 2,512,900 shares of its common stock. The balance as of March 31, 2019 on the CMA loan was approximately $1.4 million.

 

26  

 

There was no accrued interest on the loan as of March 31, 2019 and December 31, 2018, respectively.

 

Fidelity Note Payable

 

During the year ended December 31, 2018, certain investors have guaranteed $100,000 each with Fidelity Bank to establish a $500,000 revolving line of credit. At the present time, the Company is paying interest only at a rate of 4.5% per annum, with a balloon payment of $500,000 due in 2033. The balance is $500,000 as of March 31, 2019.

 

Shareholder and contingent convertible Notes Payable

 

The following table summarizes the shareholder notes payable:

 

    March 31,
2019
    December 31,
2018
 
             
Shareholder convertible notes   $     $ 338,195  
Contingent convertible notes     555,195       204,333  
Accrued interest     18,082       35,140  
Debt discount           (73,519 )
Total shareholder notes & accrued interest     573,278       504,149  
                 
Less: current portion     (353,643 )     (504,149 )
Total long-term debt   $ 219,634     $  

 

    March 31,
2019
    December 31,
2018
 
             
Shareholder convertible notes   $     $ 338,195  
Contingent convertible notes     555,195       204,333  
Accrued interest     18,082       35,140  
Debt discount           (73,519 )
Total shareholder notes & accrued interest     573,278       504,149  
                 
Less: current portion     (353,643 )     (504,149 )
Total long-term debt   $ 219,634     $  

 

Shareholder Notes Payable

 

Included in the table above, there were shareholder notes payable outstanding as of March 31, 2019 and December 31, 2018 totaled $555,195 and $200,695, respectively.

 

From January 1, 2018 to February 9, 2018, the Company issued contingently convertible promissory notes (the “Notes”) for contract work performed by other entities in lieu of compensation and expense reimbursement in the amount of $195,635. The Notes are (i) unsecured, (ii) bear interest at an annual rate of five percent (5%) per annum from date of issuance, and (iii) are convertible at the Company’s option post April 19, 2018. The Notes mature one year from issuance but may be extended one (1) additional year by the Company. If converted, the Notes plus accrued interest are convertible into shares of the Company’s common stock at the prior twenty (20) day average closing price with a 50% discount.

 

Convertible and Contingently Convertible Notes Payable

 

From January 1, 2018 and through the date of these financial statements, the Company has issued certain convertible and contingently convertible promissory notes in varying amounts, in the aggregate of $710,000. The face amount of the notes represents the amount due at maturity along with the accrued interest, at which time that amount may be converted into shares of the Company stock based on the lowest 2 day closing price for the trailing 20 days prior to conversion and carrying a 35% discount. The contingently convertible notes provide for interest to accrue at an interest rate equal to 12% per annum or the maximum rate permitted under applicable law after the occurrence of any event of default as provided in the notes. At any time after 180 days from the issue date, the holder, at its option, may convert the outstanding principal balance and accrued interest into shares of common stock of the Company. The initial conversion price for the principal and interest in connection with voluntary conversions by a holder of the convertible notes ranges from $0.05 to $0.10 per share, subject to adjustment as provided therein. The total outstanding balance of the contingent convertible notes were converted as of March 31, 2019. They we converted into into approximately 303 million shares of the Company’s common stock. Based on the variable conversion price, the Company recorded initial derivative liabilities of $465,905. The remaining balance of $235,085 as of December 31, 2018 was reduced to zero after a change in fair value of $1,044,250 and a decrease of $1,279,335 upon the date all notes became were converted.

 

27  

 

In connection with the issuance of the convertible notes, the Company issued warrants to purchase 411,875 shares of the Company’s common stock. The exercise term of the warrants ranges from issuance to any time on or after the six (6) month anniversary or prior to the maturity of the related note. The exercise price of the warrants is $0.40 per share of the Company’s common stock, as may be adjusted from time to time pursuant to the antidilution provisions of the related warrant. Pursuant to ASU 2017-11, such antidilution features do not subject the Company to derivative accounting pursuant to ASC 815. All warrants were forfeited during the three months ended March 31, 2019 upon negotiation and conversion of the remaining outstanding balances.

 

Peak One Opportunity Fund, L.P.

 

During the year ended December 31, 2018, the Company entered into a financing agreement with Peak One Opportunity Fund, L.P. to receive $435,000 of original issue discount notes in three tranches as follows:

 

  1. July 17, 2018, principal $85,000 with an imputed interest rate of 6%, discounted by 10%, and $5,000 for legal fees, for a net of $71,500 due three years from the funding date. The Company has the option of receiving two additional amounts ninety days apart;
  2. September 14, 2018: $150,000 principal $135,000 net.
  3. November 13, 2018: a final $200,000 principal, $180,000 net.

 

Peak One Opportunity Fund is entitled to convert the note into common stock at a price equal to 65% of the lowest traded price for the twenty trading days immediately preceding the date of the date of conversion. The Company has the option to redeem the note at varying prices based upon the redemption date. As of March 31, 2019, the entire balance has been converted into shares of common stock.

 

Crown Bridge Partners, LLC

 

During the year ended December 31, 2018, the Company entered into a financing agreement with Crown Bridge Partners, LLC to receive $100,000 of original issue discount notes in two tranches as follows:

 

  1. August 6, 2018: principal $50,000 bearing interest at 8%, discounted by 10%, and $2,000 for legal fees, for a net of $43,000 due one year from the funding date;
  2. The remaining tranche may be funded at the holder’s discretion.

 

Crown Bridge Partners is entitled to convert the note into common stock at a price equal to 65% of the average of the two lowest traded prices for the twenty-five trading days immediately preceding the date of the date of conversion.

 

As of March 31, 2019, the entire balance has been converted into 32,240,000 shares of common stock.

 

In addition, the following notes are convertible after six months from the issue date:

 

    Face     Interest           Net Cash     Amount  
Issue Date and Name   Amount     Rate     Maturity     Proceeds     Converted/Paid  
Jan 29, 2018 EMA   $ 80,000       12 %     Jan 29, 2019     $ 72,300     $ 80,000  
Feb 14, 2018 Auctus     80,000       12 %     Nov 14, 2018       72,500       80,000  
Feb 13, 2018 FirstFire Global     76,500       5 %     Nov 13, 2018       72,500       81,500  
May 2, 2018 Power Up #3     83,000       12 %     May 23, 2019       80,000       83,000  
October 10, 2018 Power Up #4     103,000       12 %     Oct 10, 2019       103,000     $ 103,000  

 

*All notes have been paid in full.

 

28  

 

During the three months ended March 31, 2019 approximately $63,000 of the convertible notes and approximately $21,000 of accrued interest were exchanged for approximately 227,336,218 shares of common stock. In addition, approximately $142,000 of the Power Up notes have been settled in cash.

 

During the three months ended March 31, 2019, the Company has issued certain convertible promissory notes in varying amounts to existing shareholders. The face amount of the notes represents the amount due at maturity along with the accrued interest, at which time that amount will be converted upon the triggering event of a reverse stock split. At which time the conversion into shares of the Company stock will be based on the lowest 2 day closing price for the trailing 20 days prior to conversion and carrying a 35% discount. These notes are included in the table below:

 

Issue Date   Face Amount     Interest Rate     Maturity    

Net Cash
Proceeds

 
Jan 3, 2019   $ 4,500       5 %     Jan 3, 2021     $ 4,500  
Jan 3, 2019   $ 93,750       5 %     Jan 3, 2021     $ 93,750  
Jan 3, 2019   $ 102,200       5 %     Jan 3, 2021     $ 102,200  
Feb 4, 2019   $ 18,750       5 %     Feb 4, 2021     $ 18,750  

 

*Note that these notes can be converted only after an acceleration event which involves a symbol change, or uplisting.

 

(d) Application of Securities Laws and Other Matters

 

No underwriters were involved in the foregoing sales of securities. The securities described in section (a) of this Item 2 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.

 

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 in this Item 2 included appropriate legends setting forth that the securities had not been registered and the applicable restrictions on transfer.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable

 

ITEM 5. OTHER INFORMATION

 

None

 

29  

 

ITEM 6. EXHIBITS

 

Exhibit Index

 

Number   Description
     
31.1 *   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1 *   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema Document
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith

 

30  

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  VYSTAR CORPORATION
   
Date: May 15, 2019 By: /s/ Steven Rotman
    Steven Rotman
    President, Chief Executive Officer, Chief Financial Officer and Director

 

31  

 

Vystar Corp. (PC) (USOTC:VYST)
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