The accompanying notes are an integral part
of these financial statements.
The accompanying notes are an integral part
of these financial statements.
The accompanying notes are an integral part
of these financial statements.
NOTES TO FINANCIAL STATEMENTS
December 31, 2018 and 2017
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”). In addition, on June 28, 2013, Vystar Corporation
completed the acquisition of Kiron Clinical Sleep Lab, LLC (“Kiron”) a vertically integrated sleep diagnostic practice
located in Durham, NC. We effectively closed Kiron in April 2016 due to changes in the healthcare insurance marketplace. Because
of the closure of Kiron, Vystar Corporation has returned its focus to expanding the licensing and utilization of its proprietary
source natural rubber latex technology. 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. In
fact, 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 financial statements are presented
in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as codified in
the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification.
The Company has evaluated subsequent events
through the date of the filing of its Form 10-K with the Securities and Exchange Commission. Other than those events disclosed
in Note 16, 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.
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.
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.
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.
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.
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.
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.
Loss Per Share
The Company presents
basic and diluted loss per share. Because the Company reported a net loss in 2018 and 2017, 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 29,438,270 and 7,748,270 shares of common
stock for 2018 and 2017, respectively, as their effect would be anti-dilutive. Warrants to purchase 14,888,832 and 14,699,582 shares
of common stock for 2018 and 2017, 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 4,314,537 and 4,037,977 shares of common stock for 2018 and
2017, respectively, were excluded from the computation of diluted loss per share as their effect would be anti-dilutive.
Fair Value of Financial Instruments
The Company’s financial instruments
consist of cash, accounts receivable, accounts payable, accrued expenses, 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 December 31, 2018 and 2017 approximate market interest rates for the respective borrowings.
In specific circumstances, certain assets
and liabilities are reported or disclosed at fair value. Fair value is the exit price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction between market participants at the measurement date in the Company’s
principal market for such transactions. If there is not an established principal market, fair value is derived from the most advantageous
market.
Valuation inputs are classified in the
following hierarchy:
|
●
|
Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
|
|
|
|
|
●
|
Level 2 inputs are directly or indirectly observable valuation inputs for the asset or liability, excluding Level 1 inputs.
|
|
|
|
|
●
|
Level 3 inputs are unobservable inputs for the asset or liability.
|
Highest priority is given to Level 1 inputs
and the lowest priority to Level 3 inputs. Acceptable valuation techniques include the market approach, income approach, and cost
approach. In some cases, more than one valuation technique is used. The derivative liabilities are recognized at fair value on
a recurring basis at December 31, 2018 and are level 3 measurements. There has been no transfers between levels during the year
ended December 31, 2018.
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 years ended December 31, 2018 and 2017. Should they occur, interest and penalties
related to tax positions are recorded as interest expense. No such interest or penalties have been incurred as of December 31,
2018 and 2017. 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.
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 December 31, 2018, and 2017, 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 is 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 December 31, 2018, the net balance of property and
equipment is $291,346 with accumulated depreciation of $31,485. As of December 31, 2017, all property and equipment was fully depreciated
resulting in no net balance being reflected.
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 year ended December 31, 2018, we recognized
an impairment charge of $848,462 related to the increase in value of the Company’s common stock from the time of negotiation
to closing and the fair value of the underlying assets. During the years ended December 31, 2017, we did not recognize any impairment
of our long-lived assets.
Goodwill
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.
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 condensed statements of operations, balance sheet, and
cash flows as of and for the year ended December 31, 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 December 31, 2018, reserves for estimated sales returns totaled $3,000. There was no reserve for 2017.
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.
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 December 31, 2018, Vystar’s research and development costs have been approximately $2.4 million.
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 of the year ended 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 is currently assessing the impact that this guidance will
have on its financial statements.
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 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.
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
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 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 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. As of December 31, 2018, the Company had cash of $50,053 and a deficit in working capital of $1,691,520. For the year
ended December 31, 2018, the Company had a net loss of $5,401,222 and an accumulated deficit of $33,400,345. For the year ended
December 31, 2017, the Company had a net loss of $1,184,474 and an accumulated deficit of $27,999,123. 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 16, 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.
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment, net consists of the following at December
31:
|
|
|
|
|
|
|
|
|
2018
|
|
|
2017
|
|
Tooling and testing equipment
|
|
$
|
319,000
|
|
|
$
|
—
|
|
Warehouse equipment
|
|
|
3,831
|
|
|
|
—
|
|
Furniture and fixtures
|
|
|
—
|
|
|
|
8,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
322,831
|
|
|
|
8,522
|
|
Accumulated depreciation
|
|
|
(31,485
|
)
|
|
|
(8,522
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
291,346
|
|
|
$
|
—
|
|
The Company incurred $31,485 in depreciation expense for the
year ended December 31, 2018. There was no depreciation incurred in 2017.
NOTE 5 – INTANGIBLE ASSETS
Intangible assets
were as follows at December 31:
|
|
2018
|
|
|
2017
|
|
|
Amortization
Period
(in
years)
|
|
Amortized intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
100,000
|
|
|
$
|
—
|
|
|
|
10
|
|
Proprietary technology
|
|
|
610,000
|
|
|
|
—
|
|
|
|
10
|
|
Tradename and brand
|
|
|
610,000
|
|
|
|
—
|
|
|
|
10
|
|
Patents
|
|
|
242,149
|
|
|
|
238,551
|
|
|
|
6 - 20
|
|
Noncompete
|
|
|
50,000
|
|
|
|
—
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,612,149
|
|
|
|
238,551
|
|
|
|
|
|
Accumulated amortization
|
|
|
(237,302
|
)
|
|
|
(123,741
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amortized intangibles
|
|
|
1,374,847
|
|
|
|
114,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
147,092
|
|
|
|
—
|
|
|
|
|
|
Trademarks
|
|
|
9,072
|
|
|
|
9,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
1,531,011
|
|
|
$
|
123,882
|
|
|
|
|
|
Amortization expense
for the years ended December 31, 2018 and 2017 was $113,561 and $15,861, respectively.
Estimated future
amortization expense for finite-lived intangible assets is as follows:
|
|
|
Amount
|
|
2019
|
|
|
$
|
157,684
|
|
2020
|
|
|
|
157,684
|
|
2021
|
|
|
|
157,684
|
|
2022
|
|
|
|
157,684
|
|
2023 & thereafter
|
|
|
|
744,111
|
|
Total
|
|
|
$
|
1,374,847
|
|
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 analysis 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, customer relationships.
The Company originally recorded preliminarily purchase price allocations of the identified intangible assets. The Company has finalized
the purchase price allocation through the use of management assumptions used above. Accordingly, differences between the preliminary
estimates from the financial statements for nine months ended September 30, 2018 and the final allocation noted in Note 13 related
to the intangible assets have incurred differences that had a material impact on the accompanying financial statements. As discussed
in Note 2, an impairment loss was recorded in the amount of $848,462 and is recognized in other income (expense) in the statements
of operations for the year ended December 31, 2018.
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 December
31, 2018) on amounts drawn and fees. The weighted average interest rate in effect on the borrowings for the year ended December
31, 2018 was 7.99%. There are no available borrowings under the CMA note at December 31, 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 interest on the debt though 2019.
|
|
●
|
The Company issued 15 million shares in escrow which CMA could start to sell at the end of the six-month period ending in January 2019, 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 year
ended December 31, 2018, the Company recorded approximately $123,000 of interest expense. See note 16 for subsequent reduction
to the amount owed.
Fidelity Bank 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.
Shareholder,
Convertible and Contingently Convertible Notes Payable
The following
table summarizes shareholder, convertible and contingently convertible notes payable:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Shareholder, convertible and contingently convertible notes
|
|
$
|
542,528
|
|
|
$
|
881,673
|
|
Accrued interest
|
|
|
35,140
|
|
|
|
294,995
|
|
Debt discount
|
|
|
(73,519
|
)
|
|
|
—
|
|
Total notes and accrued interest
|
|
$
|
504,149
|
|
|
$
|
1,176,668
|
|
Shareholder Notes Payable
Included in the table above, there were
shareholder notes payable outstanding as of December 31, 2018 and 2017 totaled $200,695 and $881,673, 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. If the total outstanding balance of the contingent convertible notes
were convertible as of December 31, 2018, they would have been convertible into approximately 343 million shares of the Company’s
common stock. Based on the variable conversion price, the Company recorded initial derivative liabilities of $465,905, debt discount
of $430,579 and interest expense related to the excess fair value of $35,326 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 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.
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.
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 December 31, 2018, only the first tranche had been received
and none of it has 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
|
|
|
$
|
79,348
|
|
Feb 14, 2018 Auctus
|
|
|
80,000
|
|
|
|
12
|
%
|
|
|
Nov 14, 2018
|
|
|
|
72,500
|
|
|
|
70,625
|
|
Feb 13, 2018 FirstFire Global
|
|
|
76,500
|
|
|
|
5
|
%
|
|
|
Nov 13, 2018
|
|
|
|
72,500
|
|
|
|
81,500
|
|
May 2, 2018 Power Up
|
|
|
83,000
|
|
|
|
12
|
%
|
|
|
May 23, 2019
|
|
|
|
80,000
|
|
|
|
83,000
|
|
Jun 20, 2018 Power Up
|
|
|
68,000
|
|
|
|
12
|
%
|
|
|
Jun 25, 2019
|
|
|
|
65,000
|
|
|
|
—
|
|
During
the year ended December 31, 2018 approximately $418,117 of the convertible notes and approximately $28,000 of accrued interest
were exchanged for approximately 203,267,791 shares of common stock. In addition, approximately $75,000 of the notes have been
subsequently converted to approximately 24,288,000 of common stock and 15,000,000 shares of common stock for CMA were still being
held in escrow as of December 31, 2018.
NOTE 7 - DERIVATIVE LIABILITIES
As of December
31, 2018, the Company had a $235,085 derivative liability balance on the balance sheet and recorded a loss from derivative fair
value adjustments of $269,539 during the year ended December 31, 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 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 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 December 31, 2018:
Fair Value of Embedded Derivative and Warrant Liabilities:
|
|
|
|
|
Balance, December 31, 2017
|
|
$
|
—
|
|
|
|
|
|
|
Initial measurement of liabilities
|
|
|
465,905
|
|
|
|
|
|
|
Change in fair value
|
|
|
269,539
|
|
|
|
|
|
|
Reclassification due to conversion
|
|
|
(500,359
|
)
|
|
|
|
|
|
Balance, December 31, 2018
|
|
$
|
235,085
|
|
NOTE 8 – STOCKHOLDERS’ EQUITY
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 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.
As of 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.
Common Stock and Warrants
During the year ended December 31, 2017,
the Company had 1,950,000 cashless common stock warrants exercised at $0.05 per share and issued 1,332,109 common shares.
During the year ended December 31, 2017,
the Company had 1,750,000 cashless common stock options exercised at $0.05 per share and issued 481,884 common shares.
As part of the November 2016 Private Placement
Memorandum, the Company issued 7,690,000 shares of common stock to sixteen (16) accredited investors during the period from January
1, 2017 to September 30, 2017. Total gross proceeds of the issuances were $384,500. No commissions were paid. The shares of common
stock were offered and sold in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities Act of 1933,
as amended, and Regulation D promulgated thereunder.
On March 15, 2017, the Company issued 1,150,000
common shares as compensation under Business Development Agreements.
On April 25, 2017, the Company issued 1,109,406
common shares as a result of a partial conversion of a shareholder note and accrued interest.
On May 22, 2017, the Company signed a sales
and marketing agreement issuing restricted common shares quarterly as goals are achieved and issued 363,985 shares on September
28, 2017 and 368,218 on October 10, 2017.
On July 1, 2017, the Company issued 3,125,000
shares under the Company’s Public Relations Services Agreement through December 2018.
On September 29, 2017, the Company issued
500,000 shares of common stock as part of the existing PPM to its CEO in lieu of salary earned in August and September 2017.
On September 27, 2017, the Company issued
an additional 200,000 common shares as compensation under a Business Development Agreement.
On July 30, 2017, the Company issued 200,000
common shares as compensation under a Business Development Agreement.
On July 25, 2017, the Company issued 1,087,023
shares as part of a prior contract for business development.
On November 1, 2017, the Company issued
250,000 shares of common stock as part of the existing PPM to its CEO in lieu of salary earned in October 2017.
On April 27, 2018,
the Company issued 300,000 common shares as compensation under the Company’s Business Development Agreement with Designcenters.com,
a related party, 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 $171,610, which approximates the fair value of the additional common stock compensation, included
in the terms of the agreement, on the measurement dates (included in accrued stock-based compensation on the 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.
On April 27, 2018,
the Company issued 11,000,000 options 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 $550,000 for these options and accrued stock compensation for shares
amounting to $222,173.
On April 27, 2018,
the Company issued 7,500,000 options as a signing bonus under a consulting agreement with Blue Oar Consulting, Inc. The Company
recorded an expense of $375,000 for these options and accrued stock compensation for shares amounting to $266,608.
On April 27, 2018,
the Company issued 421,408 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 $19,806 for these shares. In addition, the Company
accrued approximately $119,610, 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 third quarter 2018, the majority of Anchor Group’s compensation was paid in
cash in lieu of shares.
In the fourth
quarter of 2018, the following shares issued on April 27, 2018 were cancelled on December 28, 2018; 7,500,000 shares under the
terms of a Consulting Agreement to Blue Oar Consulting, Inc; 11,000,000 shares under the terms of an Employment Agreement to Steven
Rotman; 3,300,000 shares under the terms of a Consulting Agreement to The Anchor Group. Due to an administrative error in the form
of compensation, the stock based compensation was to be options, not shares. Based on the terms of the options, there was no difference
in the fair value from the shares (see note 10).
From January 1, 2018 through December 31,
2018, we issued 1,928,571 shares of our common stock valued at approximately $92,000 for services rendered to the Company in 2018,
54,999,997 shares were to be issued for cash for $165,000 (these shares were issued in January 2019 but included in the issued
and outstanding shares at December 31, 2018, see note 16), 4,166,667 shares were issued to convert payables valued at $12,500,
721,408 shares were issued as a signing bonuses valued at $34,806, and 55,687,500 shares were issued as part of acquisitions valued
at $2,925,450. During the year ended December 31, 2018, 203,267,791 shares of common stock valued at $1,444,320 were issued upon
the conversion of convertible notes.
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.
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 $17,143.
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 $577,708 and $585,556 of stock-based compensation for the years ended December 31, 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.
The Company used the Black-Scholes option
pricing model to estimate the grant-date fair value of awards granted during 2018 and 2017. The following assumptions were used:
|
●
|
Expected Dividend Yield – because the Company does not currently pay dividends, the expected dividend yield is zero;
|
|
|
|
|
●
|
Expected Volatility in Stock Price – Expected volatility calculations were based on the Company’s trading activity which was 263.33% during 2018;
|
|
|
|
|
●
|
Risk-free Interest Rate – reflects the average rate on a United States Treasury bond with maturity equal to the expected term of the option or warrant, 2.25% during 2018; and
|
|
●
|
Expected Life of Awards –
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 years ended December 31,
2018 and 2017, the Company recorded $1,161,132 and $60,795, respectively, of share-based compensation expense related to employee
and Board members’ stock options. The unrecognized compensation expense as of December 31, 2018 was $99,721 for non-vested
share-based awards to be recognized over a period of approximately five years.
Stock 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 December 31, 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 December 31, 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 21,800,000
non-plan options granted during the year ended December 31, 2018. The following table summarizes all stock option activity of the
Company for the period.
The weighted-average assumptions used in
the option pricing model for stock option grants were as follows:
|
|
2018
|
|
|
2017
|
|
Expected Dividend Yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected Volatility in Stock Price
|
|
|
263.33
|
%
|
|
|
149.81
|
%
|
Risk-Free Interest Rate
|
|
|
2.25
|
%
|
|
|
2.35
|
%
|
Expected Life of Stock Awards – Years
|
|
|
10.0
|
|
|
|
10.0
|
|
Weighted Average Fair Value at Grant Date
|
|
$
|
0.05
|
|
|
$
|
0.05
|
|
The following tables summarize all stock option activity of
the Company for the years ended December 31, 2018 and 2017:
|
|
|
Options Number
of Shares
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding, December 31, 2016
|
|
|
|
9,418,271
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
1,500,000
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
(1,750,000
|
)
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
(1,420,000
|
)
|
|
$
|
0.17
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
|
|
7,748,271
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2017
|
|
|
|
5,158,271
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
21,800,000
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
(450,000
|
)
|
|
$
|
0.68
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2018
|
|
|
|
29,098,270
|
|
|
$
|
0.06
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2018
|
|
|
|
27,258,270
|
|
|
$
|
0.06
|
|
Additional details, including the average remaining contractual
life of the options, as well as the range of exercise prices are shown in the table below:
|
|
|
Options -
Number
of Shares
|
|
|
Weighted Average
Remaining
Contractual Life
(Years)
|
|
|
Range of
Exercise
Prices
|
|
Outstanding, December 31, 2016
|
|
|
|
9,418,271
|
|
|
|
4.43
|
|
|
|
$0.05 - $0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
1,500,000
|
|
|
|
9.96
|
|
|
|
$0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
(1,750,000
|
)
|
|
|
|
|
|
|
$0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired/Forfeited
|
|
|
|
(1,420,000
|
)
|
|
|
|
|
|
|
$0.03 - $0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
|
|
7,748,271
|
|
|
|
5.80
|
|
|
|
$0.03 - $0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2017
|
|
|
|
5,158,271
|
|
|
|
9.42
|
|
|
|
$0.03 - $0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
21,800,000
|
|
|
|
5.00
|
|
|
|
$0.0001-$0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired/Forfeited
|
|
|
|
(450,000
|
)
|
|
|
|
|
|
|
$0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2018
|
|
|
|
29,098,270
|
|
|
|
4.91
|
|
|
|
$0.0001 - $0.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2018
|
|
|
|
27,258,270
|
|
|
|
6.48
|
|
|
|
$0.0001 - $0.68
|
|
The Company added three directors on December
17, 2017. Each director was granted 500,000 options with a ten-year term and an exercise price of $0.05, the closing price of the
Company’s common stock on the OTCBB on the grant date. The options vest 25,000 shares quarterly beginning on December 31,
2017 for a period of five years ending December 31, 2022.
As of December 31, 2018 and 2017, the
aggregate intrinsic value of the Company’s outstanding options was $22,000 and $4,000, 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 weighted-average assumptions used in the option pricing
model for stock warrant grants were as follows:
|
|
2018
|
|
2017
|
Expected Dividend Yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected Volatility in Stock Price
|
|
|
295
|
%
|
|
|
152.54
|
%
|
Risk-Free Interest Rate
|
|
|
3.05
|
%
|
|
|
2.01
|
%
|
Expected Life of Stock Awards – Years
|
|
|
8.52
|
|
|
|
7.0
|
|
The following table represents the Company’s warrant activity
for the years ended December 31, 2018 and 2017:
|
|
|
Warrants -
Number
of
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
Outstanding, December 31, 2016
|
|
|
|
16,122,332
|
|
|
|
|
|
|
$
|
0.13
|
|
|
|
5.54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
1,240,250
|
|
|
$
|
0.13
|
|
|
$
|
0.14
|
|
|
|
6.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
(1,950,000
|
)
|
|
|
|
|
|
$
|
0.08
|
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
(713,000
|
)
|
|
|
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
|
|
14,699,582
|
|
|
|
|
|
|
$
|
0.10
|
|
|
|
5.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
411,875
|
|
|
$
|
0.05
|
|
|
$
|
0.40
|
|
|
|
3.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
(222,625)
|
|
|
|
—
|
|
|
$
|
0.90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2018
|
|
|
|
14,888,832
|
|
|
|
|
|
|
$
|
0.08
|
|
|
|
3.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2018
|
|
|
|
14,888,832
|
|
|
|
|
|
|
$
|
0.08
|
|
|
|
3.48
|
|
The stock compensation expense for 2018
and 2017 related to warrants was $18,747 and $159,553, respectively.
NOTE 10 – RELATED PARTY TRANSACTIONS
Officers and Directors
During April 2009, the Company’s
Board of Directors authorized the inclusion of the Board members in the Company’s stock option plan in lieu of continuing
the previous practice of granting warrants each quarter to independent Board members. Each Board member was granted options to
purchase 400,000 shares of the Company’s common stock, valued at approximately $84,346 each with an exercise price of $0.68
per share. Vesting occurred at the end of each complete calendar quarter served as an independent Board member of the Company at
a rate of 20,000 shares each per quarter. The options are exercisable in whole or in part before September 30, 2019.
Beginning in July 2014, each Board member
was granted options to purchase 500,000 shares of the Company’s common stock. The value of each grant ranged from approximately
$14,714 to $53,513 depending on the date of the grant and the exercise price of the option. Exercise prices ranged between $0.03
and $0.11 per share and were equal to the closing price of Company’s common stock on the date of the grant. Vesting occurs
at the end of each complete calendar quarter served as an independent Board member of the Company at a rate of 25,000 shares each
per quarter. The options are exercisable in whole or in part before December 15, 2027.
One board member’s unvested options
of 1,420,000 were forfeited when he resigned from the Board in 2017.
Per Steven Rotman’s Employment agreement,
he is to be paid approximately $1 per year in cash, $20,833 per month to be paid in shares based on a 20-day average at a 0% discount
to market, an option to purchase 11,000,000 shares of common stock at par value as a signing bonus, and $200,000 as a performance
bonus. During the year ended December 31, 2018, the Company expensed approximately $222,000 related to shares issued, $550,000
related to options granted, and a performance bonus in the amount of $200,000 Of the expensed amount, approximately $195,000 was
paid in cash related was related to the performance bonus for the year ended December 31, 2018.
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 Design’s 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, $10,000
quarterly bonus to be paid in shares using the same formula and 300,000 shares of common stock as a one-time signing bonus. During
the year ended December 31, 2018, the Company expensed approximately $222,010. Of the expensed amount, approximately $35,400 was
paid in cash.
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’s consulting agreement,
it is to be paid approximately $15,000 per month in cash for expenses, of which $12,500 per month is to be paid in cash or shares.
If paid in shares, it will be based on a 20-day average at a 50% discount to market, an option to purchase 7,500,000 shares of
common stock at par value as a signing bonus, and $175,000 as a bonus. During the year ended December 31, 2018, the Company expensed
approximately $1,010,000. Of the expensed amount, approximately $212,500 was paid in cash.
Rotmans Furniture
During the year ended December 31, 2018,
the Company had sales of approximately $60,000 to Murida, DBA Rotmans Furniture (“Rotmans”). Steve Rotman, the Company’s
CEO, is the majority owner of Rotmans. At December 31, 2018, the Company had an amount receivable of approximately $75.
During the year ended December 31, 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
$480,000 for the year ended December 31, 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 December 31, 2018.
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 CEO, Steven Rotman. See compensation terms in Note 10.
During
the year ended December 31, 2018, 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. As of December
31, 2018, there was no accurate assumption of liability to be accrued.
The Company filed an opposition to the
motion and at oral argument the motion for injunctive relief was denied. The Court issued a decision permitting a motion for summary
judgment to proceed and permitted the Company the opportunity to supplement its opposition papers together with the plaintiff who
was also provided opportunity to submit reply papers. On April 5, 2019, the Company filed the opposition papers as well as
a motion to dismiss the first and third causes of action in the complaint.
NOTE 12 – MAJOR CUSTOMERS AND
VENDORS
Major customers and vendors are defined
as a customer or vendor from which the Company derives at least 10% of its revenue and cost of revenue, respectively.
During 2018, 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 2018, Vytex Foam revenue came from
three major customers; Jeffco, King Koil, and Rotmans. The receivable for Rotmans was $75 as of December 31, 2018. There was no
receivable for Jeffco and King Koil as of December 31, 2018.
NOTE 13 – ASSET PURCHASES
NHS Holdings, LLC
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. 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 until the shares have been released.
In addition to acquiring the net assets and intangibles of the Company, Vystar recognized goodwill in this transaction. Goodwill
reflects the cost of the acquisition in excess of the fair values assigned to the identifiable net assets acquired in the table
below. 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. The Company does not expect goodwill to be deductible for tax purposes.
The purpose of
the transaction was to increase operations and while reducing costs and the the intention of lowering costs of Vytex by eliminating
the middleman. 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, 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:
Net assets
|
|
$
|
243,688
|
|
|
|
|
|
|
Goodwill
|
|
|
147,092
|
|
|
|
|
|
|
Intangible assets
|
|
|
720,000
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,110,780
|
|
|
|
|
|
|
Net purchase (fair value of common stock issued)
|
|
$
|
1,110,780
|
|
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 Company had originally recorded preliminary purchase
price allocations of the identified intangible assets and was amortizing such assets over their estimated useful lives of five
years. The Company has finalized the purchase price allocation through use of management analysis and certain other factors. The
preliminary allocation was properly adjusted for the finalized figures. Accordingly, differences between these preliminary estimates
and the final allocation to the intangible assets have occurred and these differences have been reflected in the accompanying financial
statements.
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.
The purpose of the transaction was to
acquire
a Company that could no longer continue operations with current resources and Vystar saw an opportunity of continuing production
of UV Flu product lines with
Blue Ocean Innovation, Ltd. (“
BOI”), a world-class
manufacturer. Vystar anticipates it will take 45 days to complete manufacture of the next orders of air purifier units and another
45 days to relaunch sales with a new, more robust distribution model. In addition, Vystar plans to sell RxAir residential units
via online and retail channels and
also is reassembling 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. Pursuant
to the Asset Purchase Agreement, the Company purchased substantially all assets of UV Flu and it 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.
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
|
|
|
650,000
|
|
|
|
|
|
|
Total assets
|
|
|
969,000
|
|
|
|
|
|
|
Impairment loss
|
|
|
845,670
|
|
|
|
|
|
|
Net purchase (fair value of common stock issued)
|
|
$
|
1,814,670
|
|
In determining
the fair value of the UV Flu 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 Company originally recorded preliminarily purchase price allocations
of the identified intangible assets, such as the FDA Certification, tradename and branding. The Company has finalized the purchase
price allocation through the use of management assumptions above and certain other factors. Accordingly, differences between these
preliminary estimates and the final allocation to the intangible assets have incurred differences that had a material impact on
the accompanying financial statements. As discussed in Note 2, an impairment loss was recorded in the amount of $848,462 and is
recognized in other income (expense) in the statements of operations for the year ended December 31, 2018.
The
operating results of UV FLU and NHS from the dates of acquisition to December 31, 2018, were deemed immaterial. Any
revenues and net income have been included in the Company’s statement of operations for the year ended December 31, 2018.
The Company incurred a total of approximately $11,800 in combined transaction and legal costs in connection with the NHS
and UV Flu transaction, which were included in operating expenses within the statement of operations for the year ended December
31, 2018.
NOTE 14 – DISCONTINUED OPERATIONS
Kiron Clinical Sleep Lab’s post acquisition
performance fell far below Vystar’s expectations. As part of the Company’s strategy to focus on realizing the potential
of the Vytex foam business in the pillow and mattress markets as well as part of the Company’s cost reduction plan, the Company
made the decision to discontinue the operations of the Kiron division acquired in June 2013 and the division was closed May of
2016
There was no revenue from the Kiron division
for the year ended December 31, 2018. There was no revenue for the Kiron division for the year ended December 31, 2017. Net gains
from discontinued operations were $0 and $42,056 for the fiscal years ended December 31, 2018 and 2017, respectively. Net gains
recorded were directly related to the write-off of payables determined to be no longer due.
NOTE 15 – INCOME TAXES
The provision (benefit) for income taxes
for the year ended December 31, 2018 and 2017, assumes a 21% and 34% effective tax rate, respectively, for federal income taxes.
A reconciliation of the federal statutory
income tax rate and the effective income tax rate as a percentage of income before income taxes is as follows:
|
|
For the year
ended
December 31, 2018
|
|
|
For the year
ended
December 31, 2017
|
|
Federal statutory income tax rate
|
|
|
(21.0
|
%)
|
|
|
(35.0
|
%)
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance on net operating loss carry-forwards
|
|
|
21.0
|
|
|
|
35.0
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The Company had deferred income tax assets as of December 31,
2018 and 2017 are as follows:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
NOL carry-forwards
|
|
$
|
19,953,984
|
|
|
$
|
18,411,829
|
|
|
|
|
|
|
|
|
|
|
Less valuation allowance
|
|
|
(19,953,984
|
)
|
|
|
(18,411,829
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net of valuation allowance
|
|
$
|
—
|
|
|
$
|
—
|
|
At December 31, 2018, the Company
had approximately $20 million in Federal tax loss carryforwards that can be utilized in future periods to reduce taxable income
and begin to expire in 2038. Pursuant to Internal Revenue Code Section 382, the future utilization of our net operating loss carryforwards
to offset future taxable income may be subject to an annual limitation as a result of ownership changes that may have occurred
previously or that could occur in the future.
The Company did not identify any material
uncertain tax positions on tax returns that will be filed.
The fiscal years ended December 31, 2010
thru 2018 are open for examination.
NOTE 16 – SUBSEQUENT EVENTS
In January 2019, through board approval,
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.
From January 1, 2019 and through the issuance
of these financial statements, the Company has issued certain convertible promissory notes in varying amounts. 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
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. 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
after 6 months from the issue date.
From January 1, 2019 to April 22, 2019,
the Company issued Convertible Promissory Notes (the “Notes”) related to contract work and for an investment and in
lieu of salary 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 at the Company’s option. 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.
From January 1, 2019 to April 22, 2019,
the Company issued 182,167,322 shares under equity purchase agreements for cash proceeds totaling $840,802. Included in this amount
are 12,999,999 of shares purchased for $14,000 from related parties. Approximately 54,999,997 shares, were included in shares issued
and outstanding at December 31, 2018 as the related cash was received prior to year end.
From January 1, 2019 to April 22, 2019,
the Company issued 302,568,542 shares due to the conversion of principal and interest totaling $89,889.64. Included in this amount
are two conversions from Crown Bridge Partners, LLC totaling $5,948 for 32,240,000 shares which are still under review. In addition,
transactions from FirstFire Global Opportunities Fund, LLC totaling approximately $15,000 are under review.
From January 1, 2019 to April 22, 2019,
the Company issued 122,871,542 shares for consulting services valued at approximately $65,000, based on the respective measurement
dates. Approximately 83,000,000 shares, or approximately $807,000, was accrued at December 31, 2018 and 8,333,300 was recorded
as issued and outstanding based on the conversion notice date.
From January 1, 2019 through April 22,
2019, Vystar has reduced the amounts due by approximately $900,000 of the $1.5 million dollar CMA loan through the issuance of
approximately 13,000,000 shares of its common stock, which were issued to escrow at December 31, 2018.
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).