NOTES
TO CONDENSED FINANCIAL STATEMENTS
NOTE
1
|
DESCRIPTION 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”). Our global
multi-patented technology reduces antigenic and total protein in natural rubber latex products to virtually undetectable levels.
Vytex® NRL, our “ultra-low protein” natural rubber latex has been introduced throughout the worldwide marketplace
that uses NRL or latex substitutes as a raw material for end products. Natural rubber latex or latex substitutes are used in an
extensive range of products including balloons, textiles, footwear and clothing (threads), adhesives, foams (mattresses, pillows,
mattress toppers, etc.), furniture (foam and adhesives), carpet, paints, coatings, protective equipment, sporting equipment, and,
especially health care products such as condoms, surgical and exam gloves, among others.
Vystar
has expanded into the consumer arena with an introduction into mattresses, mattress toppers and pillows aligning with key foam
manufacturers, producers of mattresses, toppers and pillows, and furniture stores in specific areas of the Unites States. On January
22, 2015, Vystar announced the signing of an exclusive domestic distribution agreement with Worcester, MA based NHS Holdings,
LLC (NHS) who sources eco-friendly materials and technologies for use in furnishings and other markets. In September 2016, the
Vystar Board of Directors voted to end the January 2015 NHS agreement 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, the need for local warehousing, and access to container loads of foam cores and pillows for domestic, European and
Asian manufacturers. As of April 18, 2018, Vystar reacquired its distribution rights from NHS and purchased NHS's inventory and
related assets and began selling and distributing the Vytex® NRL products itself. (See Note 10)
NOTE
2
|
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis
of Presentation
The
accompanying unaudited condensed financial statements (“the financial statements”) have been prepared in accordance
with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Accordingly,
certain information and footnotes required by GAAP for complete financial statements may be condensed or omitted. These
interim financial statements should be read in conjunction with our audited financial statements and notes thereto included in
the Company's annual report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission
("SEC"). In the opinion of Vystar management, these financial statements contain all adjustments (which comprise
only normal and recurring accruals) necessary to present fairly the financial position and results of operations as of and for
the periods ended September 30, 2018 and 2017.
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
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 valuation of intangible assets acquired, realization and valuation of inventories and
fair values of derivatives and share-based compensation.
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 banks in many cases exceeds the Federal Deposit Insurance Corporation,
or FDIC, insurance limits. While we monitor our cash balances on a regular basis and adjust the balances as appropriate,
these balances could be impacted if the underlying financial institutions fail. To date, we have experienced no loss or
lack of access to our cash; however, we can provide no assurances that access to our cash will not be impacted by adverse conditions
in the financial markets.
Loss
Per Share
Because
the Company reported a net loss for the nine-month periods ended September 30, 2018 and 2017, common stock equivalents, including
stock options and warrants, were anti-dilutive; therefore, the amounts reported for basic and diluted loss per share were the
same. Excluded from the computation of diluted loss per share were options outstanding to purchase 7,498,271 shares
and 8,298,271 shares of common stock for the nine months ended September 30, 2018 and 2017, respectively, as their effect would
be anti-dilutive. Warrants to purchase 14,831,069 and 16,469,582 shares of common stock for the nine months ended September
30, 2018 and 2017, respectively, were also excluded from the computation of diluted loss per share as their effect would be anti-dilutive.
Acquisition
of Assets
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 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.
Inventories
Inventory
cost includes those costs directly attributable to the product before sale. Inventory consists 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. As of September
30, 2018, the Company had approximately $432,000 in finished goods inventory. At December 31, 2017 there was no inventory.
Property
and Equipment
Property
and equipment is recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of
the assets ranging from three to seven years.
Revenues
Revenue
Recognition
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 condensed statements of operations,
balance sheet, and cash flows as of and for the nine months ended September 30, 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 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. There were no estimated reserves for sales returns and
allowances at September 30, 2018 and December 31, 2017, respectively.
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. 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.
Advertising
Costs
Advertising costs are expensed as incurred. Included in general and administrative expenses is approximately $52,000 and $3,000
for the nine months ended September 30, 2018 and 2017, respectively and $18,000 and $2,000 for the three months ended September
30, 2018 and 2017, respectively.
Fair
Value of Financial Instruments
The
Company’s financial instruments consist of cash, accounts receivable, accounts payable, accrued expenses, line of credit
and shareholder notes payable. 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 September 30, 2018 approximate market interest rates for the
respective borrowings.
In
specific circumstances, certain assets and liabilities are reported or disclosed at fair value. Fair value is the exit price
that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date in the Company's principal market for such transactions. If there is not an established principal
market, fair value is derived from the most advantageous market.
Valuation
inputs are classified in the following hierarchy:
|
●
|
Level 1 inputs
are unadjusted quoted prices in active markets for identical
assets or liabilities.
|
|
|
|
|
●
|
Level 2 inputs
are directly or indirectly observable valuation inputs for the asset or liability,
excluding Level 1 inputs.
|
|
|
|
|
●
|
Level 3 inputs
are unobservable inputs for the asset or liability.
|
Highest
priority is given to Level 1 inputs and the lowest priority to Level 3 inputs. Acceptable valuation techniques include the
market approach, income approach, and cost approach. In some cases, more than one valuation technique is used.
Recent
Accounting Pronouncements
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 condensed financial statements.
In
June 2018, the FASB issued ASU 2018-07,
Compensation - Stock Compensation (Topic 718)
to expand the scope of ASC 718, Compensation
- Stock Compensation (Topic 718) ("ASU 2017-07"), to include share-based payment transactions for acquiring goods and
services from non-employees. The pronouncement is effective for fiscal years, and for interim periods within those fiscal years,
beginning after December 15, 2018, with early adoption permitted. We do not expect this ASU to have a significant impact on our
condensed consolidated financial statements and related disclosures.
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. We do not expect this ASU to have a significant impact on our condensed
financial statements and related disclosures.
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 GAAP and have been prepared
on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course
of business. However, the Company has incurred significant losses and experienced negative cash flow from operations since
its inception. At September 30, 2018, the Company had cash of $191,000 and a deficit in working capital of approximately
$986,000. Further, at September 30, 2018, the accumulated deficit amounted to approximately $31 million. As a result
of the Company's history of losses and financial condition, there is substantial doubt about the ability of the Company to continue
as a going concern.
A
successful transition to attaining profitable operations is dependent upon obtaining sufficient revenues from our recent acquisitions
in the second quarter of 2018 and financing to fund the Company’s planned expenses and achieving a level of revenue adequate
to support the Company’s cost structure. Management plans to finance future operations through the use of cash on hand,
increased revenue from the sale of Vytex NRL products, Vytex division license fees, our credit facility, stock warrant exercises
from existing shareholders and raising capital through private placements of capital stock and debt.
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; market acceptance of the Company’s products and services; revenue from the sale of Vytex NRL products;
and competing technological developments. As the Company expands its activities and operations, cash requirements are expected
to increase at a rate consistent with revenue growth after the Company has achieved sustained revenue generation.
There
can be no assurances that the Company will be able to achieve its projected level of revenue in 2018 and beyond. If the Company
is unable to achieve its projected revenue and is not able to obtain alternate additional financing of equity or debt, the Company
would need to significantly reorient its operations during 2018, which could have a material adverse effect on the Company’s
ability to achieve its 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.
NOTE
4
|
PROPERTY AND EQUIPMENT
|
Property
and equipment, net consists of:
|
|
September 30,
|
|
December 31,
|
|
|
2018
|
|
2017
|
Tooling and testing equipment
|
|
$
|
319,000
|
|
|
$
|
—
|
|
Warehouse equipment
|
|
|
22,000
|
|
|
|
—
|
|
Furniture and fixtures
|
|
|
8,522
|
|
|
|
8,522
|
|
|
|
|
349,522
|
|
|
|
8,522
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
(38,381
|
)
|
|
|
(8,522
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
311,141
|
|
|
$
|
—
|
|
Depreciation
for the nine and three months ended September 30, 2018 was $29,859 and $3,465 respectively. There was no depreciation for the
nine or three months ended September 30, 2017.
Intangible
assets consist of the following as of September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Intangible Assets
|
|
Amortization Period
(in years)
|
Amortized intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
250,000
|
|
|
$
|
22,917
|
|
|
$
|
227,083
|
|
|
5
|
Website
|
|
|
156,000
|
|
|
|
14,625
|
|
|
|
141,375
|
|
|
4
|
FDA Certification
|
|
|
650,000
|
|
|
|
48,750
|
|
|
|
601,250
|
|
|
5
|
Patents
|
|
|
440,294
|
|
|
|
148,001
|
|
|
|
292,293
|
|
|
6 - 20
|
Drawings, mechanical engineering and software
|
|
|
214,670
|
|
|
|
16,101
|
|
|
|
198,569
|
|
|
5
|
Total Amortized Intangibles
|
|
|
1,710,964
|
|
|
|
250,394
|
|
|
|
1,460,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reacquired distribution rights
|
|
|
481,341
|
|
|
|
—
|
|
|
|
481,341
|
|
|
|
Tradename and brand
|
|
|
286,752
|
|
|
|
—
|
|
|
|
286,752
|
|
|
|
Total Intangible Assets
|
|
$
|
2,479,057
|
|
|
$
|
250,394
|
|
|
$
|
2,228,663
|
|
|
|
Patents
represent legal and other fees associated with the registration of patents. The Company has multiple patents with the
United States Patent and Trade Office (USPTO), as well as many international PCT (Patent Cooperation Treaty) patents.
Amortization
expense for the three months ended September 30, 2018 and 2017 was $70,862 and $3,920, respectively. Amortization expense for
the nine months ended September 30, 2018 and 2017 was $126,653 and $11,760, respectively.
Estimated
future amortization expense for finite-lived intangible assets is as follows:
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
$
|
310,947
|
|
|
$
|
310,947
|
|
|
$
|
310,947
|
|
|
$
|
296,322
|
|
|
$
|
184,129
|
|
|
$
|
47,278
|
|
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 September 30, 2018), on amounts drawn and fees. The weighted average interest rate in effect on the
borrowings for the nine months ended September 30, 2018 was 7.99%. There are no available borrowings under the CMA note at
September 30, 2018.
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 debt for the next six months.
|
|
|
|
|
●
|
The
Company issued 15 million shares in escrow which CMA could start to sell at the end of
the six month period, at their discretion to bring down the debt over the
next four years. 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.
|
|
|
|
|
●
|
This
debt is now considered long-term.
|
During the nine and three months ended September 30, 2018, the Company recorded approximately $90,000 and $30,000 respectively
of interest expense and at September 30, 2018, approximately $9,000 is included in accrued expenses and interest payable.
During the nine and three months ended September 30, 2017, the Company recorded approximately $72,000 and $25,000 respectively
of interest expense and at September 30, 2017, approximately $8,000 is included in accrued expenses and interest payable.
Fidelity
Bank Note Payable
During
the nine months ended September 30, 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.
Shareholder,
Convertible and Contingently Convertible Notes Payable
The
following table summarizes shareholder, convertible and contingently convertible notes payable:
|
|
September 30,
|
|
December 31,
|
|
|
2018
|
|
2017
|
Shareholder, convertible and contingently convertible notes
|
|
$
|
860,669
|
|
|
$
|
881,673
|
|
Accrued interest
|
|
|
25,307
|
|
|
|
294,995
|
|
Total notes and accrued interest
|
|
|
885,976
|
|
|
|
1,176,668
|
|
|
|
|
|
|
|
|
|
|
Less - Accrued interest
|
|
|
(25,307
|
)
|
|
|
(294,995
|
)
|
- Debt discount
|
|
|
(180,686
|
)
|
|
|
—
|
|
- Current maturities
|
|
|
(584,983
|
)
|
|
|
(674,990
|
)
|
Long-term portion
|
|
$
|
95,000
|
|
|
$
|
206,683
|
|
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 $607,500. 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. If the total outstanding balance of the
contingent convertible notes were convertible as of September 30, 2018, they would have been convertible into approximately 26
million shares of the Company’s common stock. Based on the variable conversion price, the Company recorded initial derivative
liabilities of $541,492, debt discount of $394,069 and interest expense related to the excess fair value of $147,423 upon the
date such notes became convertible.
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 range 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 ASC815.
Peak
One Opportunity Fund, L.P.
During
the quarter 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 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. An initial derivative liability of $130,769 was recorded for this note.
As
of November 16, 2018, only the first tranche had been received and none of it had been converted to stock.
Crown
Bridge Partners, LLC
During
the quarter 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 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. An initial derivative liability of
$51,282 was recorded for this note.
As
of November 16, 2018, only the first tranche had been received and none of it had been converted to 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
|
Jan 29, 2018 EMA
|
|
$
|
80,000
|
|
|
|
12
|
%
|
|
|
Jan 29, 2019
|
|
$
|
72,300
|
|
|
$
|
24,640
|
|
Feb 14, 2018 Auctus
|
|
|
80,000
|
|
|
|
12
|
%
|
|
|
Nov 14, 2018
|
|
|
72,500
|
|
|
|
58,850
|
|
Feb 13, 2018 FirstFire Global
|
|
|
76,500
|
|
|
|
5
|
%
|
|
|
Nov 13, 2018
|
|
|
72,500
|
|
|
|
62,375
|
|
May 23, 2018 Power Up
|
|
|
83,000
|
|
|
|
12
|
%
|
|
|
May 23, 2019
|
|
|
80,000
|
|
|
|
—
|
|
Jun 25, 2018 Power Up
|
|
|
68,000
|
|
|
|
12
|
%
|
|
|
Jun 25, 2019
|
|
|
65,000
|
|
|
|
—
|
|
During
the three months ended September 30, 2018 approximately $230,000 of the convertible notes and approximately $15,000 of accrued
interest were exchanged for approximately 37,336,000 shares of common stock. In addition, approximately $75,000 of the notes have
been subsequently converted to approximately 24,288,000 of common stock.
Shareholder
Notes
From
January 1, 2018 to February 9, 2018, the Company issued contingently convertible promissory notes (the “Notes”) for
contract work performed by other entities, and 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.
NOTE
7
|
DERIVATIVE LIABILITIES
|
As
of September 30, 2018, the Company had a $296,241 derivative liability balance on the balance sheet and recorded a loss from
derivative fair value adjustments of $95,365 during the nine months ended September 30, 2018. The derivative liability
activity comes from the convertible notes payable. The Company analyzed the conversion features and warrants of the various
note agreements for derivative accounting consideration under ASC 815-15 "Derivatives and Hedging" and determined
that the embedded conversion features should be classified as a derivative because the exercise price of these convertible
notes are subject to a variable conversion rate. The Company has determined that the conversion feature is not considered to
be solely indexed to the Company's own stock and is therefore not afforded equity treatment. In accordance with AC 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 the Black-Scholes option pricing model. The conversion feature is valued at the date the feature can be convertible
which ranges from the issuance date of the note to 180 days after the issue date.
The
following table summarizes the derivative liabilities included in the balance sheet at September 30, 2018:
Fair Value of Embedded Derivative and Warrant Liabilities:
|
|
|
|
Balance, December 31, 2017
|
|
$
|
—
|
|
|
|
|
|
|
Initial measurement of liabilities
|
|
|
541,492
|
|
|
|
|
|
|
Change in fair value
|
|
|
95,365
|
|
|
|
|
|
|
Reclassification due to conversion
|
|
|
(340,616
|
)
|
|
|
|
|
|
Balance, September 30, 2018
|
|
$
|
296,241
|
|
NOTE
8
|
STOCKHOLDERS’ EQUITY
|
Common
Stock and Warrants
On
June 30, 2016, the Company issued 997,466 common shares as compensation under the Company’s Business Development Agreement
with Blue Oar Consulting, Inc. executed in March 2013 as amended in August 2013, as amended in February 2014, as amended in June
2016. On April 27, 2018, 7,500,000 shares were issued under the same agreement, as amended January 3, 2018. The Company recorded
an expense of $375,000 for these shares. In addition, the Company accrued approximately $225,000, which approximates the fair
value of the additional common stock compensation earned during 2018, included in the terms of the agreement, on the measured
dates (included in accrued stock based compensation on the condensed balance sheet). This agreement will remain in force unless
terminated by either party after twelve months from the date of the agreement, upon thirty days prior written notice to the other
party. Also, $175,000 has been recorded in accounts payable during the current year for fees due to Blue Oar as of December 31,
2017. The balance due as of September 30, 2018 was $152,500.
On
April 27, 2018, the Company issued 300,000 common shares as compensation under the Company’s Business Development Agreement
with Designcenters.com with an effective date of January 3, 2018. The Company recorded an expense of $15,000 for these shares.
In addition, the Company accrued approximately $116,000, which approximates the fair value of the additional common stock compensation,
included in the terms of the agreement, on the measured dates (included in accrued stock based compensation on the condensed balance
sheet). The terms of this agreement will remain in force unless terminated by either party after nine months from the effective
date, upon thirty days prior written notice to the other party. During the three months ended September 30, 2018 the majority
of Designcenters' compensation was paid in cash in lieu of shares (see Note 11).
On
April 27, 2018, the Company issued 11,000,000 common shares as a signing bonus under an employment agreement to the CEO Steven
Rotman with an effective date of January 3, 2018. The Company recorded an expense of $385,000 for these shares.
On
April 27, 2018, the Company issued 3,721,408 common shares as compensation under the Company’s Business Development Agreement
with Anchor Group, LLC with an effective date of January 3, 2018. The Company recorded an expense of $165,000 for these shares.
In addition the Company accrued approximately $80,000, which approximates the fair value of the additional common stock, included
in the terms of the agreement, on the measured dates (included in accrued stock based compensation on the condensed balance sheet).
The terms of this agreement will remain in force unless terminated by either party after nine months from the effective date,
upon thirty days prior written notice to the other party. During the three months ended September 30, 2018 the majority of Anchor
Group's compensation was paid in cash in lieu of shares.
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 $150,000 (based on the value of the shares on the measurement date and expensed during
the three months ended March 31, 2018).
On
April 9, 2018, the Company issued 428,571 shares under the terms of a Consulting Agreement dated April 9, 2018 to vSource1 Capital
Corporation. The shares were valued at $15,000 (based on the value of the shares on the measurement date and expensed during the
three months ended June 30, 2018).
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.
At
September 30, 2018, the 13,828 shares of outstanding preferred stock had accumulated undeclared dividends of approximately $74,000
and could be converted into 4,244,829 shares of common stock, at the option of the holder.
At
December 31, 2017, the 13,828 shares of outstanding preferred stock had accumulated undeclared dividends of approximately $63,600
and could be converted into 4,037,977 shares of common stock, at the option of the holder.
NOTE
9
|
SHARE-BASED COMPENSATION
|
GAAP
requires share-based payments to employees, including grants of employee stock options, warrants, and common stock to be recognized
in the income statement based on their fair values at the date of grant, net of estimated forfeitures.
In
total, the Company recorded approximately $115,000 and $242,000 of stock-based compensation expense for the three-month period
ended September 30, 2018 and 2017, respectively, and approximately $1,727,000 and $428,000 of stock-based compensation for the
nine-month period ended September 30, 2018 and 2017, respectively, including shares to be issued related to consultants and board
member stock options and common stock and warrants issued to non-employees. As of September 30, 2018, approximately $118,000
of unrecognized compensation expense related to non-vested share-based awards remains to be recognized over a period of approximately
four years.
Options
and Warrants
The
Company used the Black-Scholes option pricing model to estimate the grant-date fair value of option and warrant awards granted.
The following assumptions were used for warrant awards during the nine months ended September 30, 2018:
|
●
|
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.
|
Options
During
2004, the Board of Directors of the Company adopted a stock option plan (the “Plan”) and authorized up to 4,000,000
shares to be issued under the Plan. In April 2009, the Company’s Board of Directors authorized an increase in the number
of shares to be issued under the Plan to 10,000,000 shares and to include the independent Board Members in the Plan in lieu of
continuing the previous practice of granting warrants each quarter to independent Board Members for services. At September 30,
2018, there were 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 September 30, 2018. The Plan
is intended to permit stock options granted to employees to qualify as incentive stock options under Section 422 of the Internal
Revenue Code of 1986, as amended (“Incentive Stock Options”). All options granted under the Plan that are not intended
to qualify as Incentive Stock Options are deemed to be non-qualified options. Stock options are granted at an exercise price equal
to the fair market value of the Company’s common stock on the date of grant, typically vest over periods up to 4 years and
are typically exercisable up to 10 years.
There
were no options granted during the nine-month period ended September 30, 2018. The following table summarizes all stock option
activity of the Company for the period.
|
|
Number
of Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Contractual Life
(Years)
|
Outstanding, December 31, 2017
|
|
|
7,748,271
|
|
|
|
$
|
0.16
|
|
|
|
|
4.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(250,000
|
)
|
|
|
$
|
0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2018
|
|
|
7,498,271
|
|
|
|
$
|
0.13
|
|
|
|
|
4.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2018
|
|
|
5,383,271
|
|
|
|
$
|
0.19
|
|
|
|
|
5.29
|
|
The
aggregate intrinsic value of the options outstanding at September 30, 2018 was approximately $4,000.
Warrants
Warrants are issued to employees for expenses and for compensation in lieu of cash as well as to third parties as payment
for services and in conjunction with the issuance of convertible notes and common stock. The fair value of each common stock
warrant issued is estimated on the date of grant using the Black-Scholes option pricing model.
The
weighted-average assumptions used in the option pricing model for stock warrant grants were as follows:
|
|
2018
|
Expected Dividend Yield
|
|
|
0.00
|
%
|
|
|
|
|
|
Expected Volatility in Stock Price
|
|
|
309.69
|
%
|
|
|
|
|
|
Risk-Free Interest Rate
|
|
|
3.05
|
%
|
|
|
|
|
|
Expected Life of Awards - Years
|
|
|
6.86
|
|
The
following table represents the Company’s warrant activity for the nine months ended September 30, 2018:
|
|
Number
of Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
Outstanding, December 31, 2017
|
|
|
14,699,582
|
|
|
|
|
|
|
$
|
0.10
|
|
|
|
6.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2017
|
|
|
14,699,582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
411,875
|
|
|
|
0.05
|
|
|
$
|
0.40
|
|
|
|
3.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(155,388
|
)
|
|
|
—
|
|
|
$
|
0.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2018
|
|
|
14,956,069
|
|
|
|
|
|
|
$
|
0.08
|
|
|
|
4.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2018
|
|
|
14,956,069
|
|
|
|
|
|
|
$
|
0.08
|
|
|
|
4.73
|
|
NHS
Holdings, LLC
The
Company issued 27,769,500 shares of its restricted common stock valued at approximately $972,000 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. All shares of
restricted common stock issued in conjunction with this transaction will be held in escrow for a minimum of nine months to secure
certain potential indemnification obligations of NHS. Such shares will be voted by NHS while they are held in escrow.
As
the exclusive global distributor of Vytex® in the home furnishing goods market, NHS worked extensively with NRL producers
to create Vytex® foam products for the bedding industry. NHS was instrumental in introducing these products to manufacturers
for use in mattresses, pillows and other bedding products. In addition, NHS was the non-exclusive, global distributor of products
in other industries utilizing the Vytex® NRL process. Reacquiring the Vytex® distribution rights from NHS is expected
to stimulate sales by lowering the cost of Vytex® to the manufacturer as a result of eliminating the middleman which will
allow the Company to realize the entire gross margin on the sale rather than a 7% royalty on the cost of the product to NHS previously
provided in the distribution agreement.
The
following summarizes the transaction with NHS Holdings, LLC at closing on April 18, 2018:
Cash
|
|
$
|
15,000
|
|
|
|
|
|
|
Inventory
|
|
|
203,591
|
|
|
|
|
|
|
Property and equipment
|
|
|
22,000
|
|
|
|
|
|
|
Intangible assets
|
|
|
731,341
|
|
|
|
|
|
|
Total assets
|
|
$
|
971,932
|
|
|
|
|
|
|
Net purchase (fair value of common stock issued)
|
|
$
|
971,932
|
|
In
determining the fair value of the intangible assets, the Company considered, among other factors, the best use of acquired assets
such as the reacquired distribution rights, customer relationships, analysis of historical financial performance of the products
and estimates of future performance of the products and intellectual properties acquired. The preliminary establishment of the
allocation to identifiable intangible assets required extensive use of financial information and management's best estimate of
fair value. The Company has preliminarily recorded the purchase price of the identified intangible assets and is, if applicable,
amortizing such assets over their estimated useful lives of five years. The Company is in the process of finalizing the purchase
price allocation and this preliminary allocation is subject to adjustment. Accordingly, differences between these preliminary
estimates and the final allocation to the intangible assets may occur and these differences could have a material impact on the
accompanying financial statements.
NHS
Related Parties
NHS’s
largest membership interest owners are also major investors and in some cases affiliates and/or reporting insiders of the Company.
NHS major shareholders include:
|
●
|
Steven
Rotman, President, CEO, and interim CFO of the Company and member of the Company's
|
|
|
Board
of Directors
|
|
|
|
|
●
|
Dr.
Keith Osborn, MD; member of the Company's Board of Directors, orthopedic spine surgeon;
|
|
|
|
|
●
|
Dr.
Bryan Stone, MD; member of the Company's Board of Directors, nephrologists and CEO of Fluid Energy
Conversion.
|
|
|
|
UV
Flu Technologies, Inc.
Effective
May 7, 2018, nine (9) shareholders of the Company, consented to purchase substantially all the assets of UV Flu Technologies,
Inc., a Nevada corporation (“UV Flu”). The consents were submitted pursuant to Rule 14(a)-2(b) (2) promulgated under
the Securities and Exchange Act of 1934, as amended. Such Rule provides that other than certain proxy solicitation rules which
were either complied with or were otherwise not applicable to the consents submitted to the Company, the proxy solicitation rules
set forth in SEC Regulation 14A do not apply to “[any] solicitation made otherwise than on behalf of the registrant where
the total number of persons being solicited is not more than ten.” The Company has been presented with written consents
which include (a) an approved form of Asset Purchase Agreement between the Company and UV Flu with respect to the purchase of
substantially all the assets of UV Flu. The Common Stock held by the consenting shareholders totaled 118,211,379 shares or approximately
52.8% of the total outstanding shares of Common Stock of the Company.
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. Vystar will continue production of UV Flu product lines with Blue Ocean Innovation,
Ltd., a world-class manufacturer. The first container of product will be received into inventory by the end of November. Vystar plans to sell RxAir residential units via online
and retail channels.
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 sales force, distribution and cash flow constraints.
All
shares of restricted common stock issued to UV Flu at closing will be held for a minimum of one year before sale or distribution
of such shares to the UV Flu shareholders and will be voted consistent with the vote of the Company’s other shareholders
until such distribution.
The
following summarizes the transaction with UV Flu at closing on May 7, 2018:
Property and equipment
|
|
$
|
319,000
|
|
|
|
|
|
|
Intangible assets
|
|
|
1,495,670
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,814,670
|
|
|
|
|
|
|
Net purchase (fair value of common stock issued)
|
|
$
|
1,814,670
|
|
In
determining the fair value of the intangible assets, 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. The fair values of the identified intangible assets related to the website,
FDA Certification, tradename and branding and the Company has preliminarily recorded the purchase price of the identified intangible
assets. The Company is in the process of finalizing the purchase price allocation and this preliminary allocation is subject to
adjustment. Accordingly, differences between these preliminary estimates and the final allocation to the intangible assets may
occur and these differences could have a material impact on the accompanying financial statements.
NOTE
11
|
RELATED PARTY TRANSACTIONS
|
This entity is owned by Jamie Rotman, who is the daughter of the Company's CEO, Steven Rotman. Designcenters 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. Compensation of approximately $21,000 was paid in cash during the three months ended September
30, 2018 (see Note 8).
Blue
Oar Consulting, Inc.
This entity is owned by Gregory Rotman, who is the son of the Company's CEO, Steven Rotman. Blue Oar provides business consulting
services to the Company. In exchange for such services, the Company has entered into a consulting agreement with the related
party entity (see Note 8). In addition to stock-based compensation beginning April 2018, Blue Oar received $15,000 monthly
in cash compensation for consulting services.
NOTE
12
|
SUBSEQUENT EVENTS
|
The Company has received an executed written consent from a majority of shareholders of the Company’s
common stock with respect to taking the following actions:
1.
To
approve the Resolutions to amend the Corporation’s Articles of Incorporation to increase the authorized shares of common
stock to 975,000,000;
2.
To
create a Class A Preferred Shares and to (i) set aside 300 shares for such class, (ii) to provide voting approval as a separate
class on all matters, (iii) to provide 40% voting approval when joining with the common stock as of the date of issuance on all
matters, (iv) permit the redemption of all but one share no earlier than two years after the date of issuance, in the Corporation’s
sole discretion, at a redemption price of $75,000 (for 299 shares) per year, each subject to the continuation by holder of a guaranty
on $3 million in debt for the benefit of the Corporation (such guaranty being several but not joint);
3.
To
create a Class B Preferred Shares and (i) to set aside 50 shares for such class, (ii) to provide 20% voting approval when joining
with the common stock as of the date of issuance on all matters, (iii) permit the redemption of all shares no earlier than two
years after the date of issuance, in the Corporation’s sole discretion, at a redemption price of $50,000 (for 50 shares)
per year, each subject to the continuation by holder of a guaranty on $500,000 in debt for the benefit of the Corporation (such
guaranty being several but not joint);
4.
To
create Class C Preferred Shares and (i) to set aside 300 shares for such class, (ii) to provide 10% voting approval when joining
with the common stock as of the date of issuance on all matters, (iii) permit the redemption of all shares no earlier than two
years after the date of issuance, in the Corporation’s sole discretion, at a redemption price of $150,000 (for 300 shares)
per year, each subject to the continuation by holder of a guaranty on $3 million in debt for the benefit of the Corporation (such
guaranty being several but not joint);
5.
To
approve the Resolutions to amend the Corporation’s Articles of Incorporation to change the name of the Corporation to “Vytex
Corporation”;
6.
To
authorize a reverse stock split of the common stock of the Corporation at any time over the next 12 months in the Board’s
discretion, at a range from 5:1 through 50:1;
7.
To
authorize a raise in capital for up to $2 million in convertible notes;
8.
To
approve the Resolutions to acquire from 58% to 100% of the shares of Murida Furniture Co., Inc. dba Rotman’s; and
9.
To
approve the Resolutions to acquire substantially all assets of Fluid Energy Conversion in consideration of a $100,000
convertible note pursuant to the Asset Purchase Agreement.
During the period October 1, 2018 through the date of these statements an additional 24,288,119 shares of common stock were
issued on convertible notes and 15,000,000 shares of common stock for CMA were still being held in escrow.