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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

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

 

For the Fiscal Year Ended December 31, 2021

 

OR

 

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

 

Commission File No. 000-53754

 

VYSTAR CORPORATION

(Exact name of registrant as specified in its charter)

 

GEORGIA   20-2027731

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

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

 

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

 

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

 

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

 

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

 

Common Stock, par value $0.0001 per share

 

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

 

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

 

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

 

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

 

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

 

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

 

Large Accelerated Filer ☐   Accelerated Filer ☐   Non-Accelerated Filer   Smaller Reporting Company
             
            Emerging growth Company

 

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

 

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

 

As of June 30, 2021, the aggregate market value of shares held by non-affiliates of the registrant (based upon the closing sale price of such shares on the OTC Market on June 30, 2021) was $24,071,498. See Item 12.

 

As of May 16, 2022, there were 1,294,125,560 shares of the registrant’s common stock outstanding and 8,698 shares of the registrants Series A preferred stock.

 

 

 

 
 

 

Vystar Corporation

Annual Report on Form 10-K

For the Year Ended December 31, 2021

Table of Contents

 

Part I
       
Item 1.   Business 4
Item 1A   Risk Factors 6
Item 1B.   Unresolved Staff Comments 12
Item 2.   Properties 12
Item 3.   Legal Proceedings 12
Item 4.   Mine Safety Disclosures 13
       
Part II
       
Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 13
Item 6.   Selected Financial Data 15
Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
Item 7A.   Quantitative and Qualitative Disclosures about Market Risk 20
Item 8.   Financial Statements and Supplementary Data 20
Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 21
Item 9A.   Controls and Procedures 21
Item 9B.   Other Information 22
       
Part III
       
Item 10.   Directors, Executive Officers and Corporate Governance 22
Item 11.   Executive Compensation 25
Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 27
Item 13.   Certain Relationships and Related Transactions, and Director Independence 28
Item 14.   Principal Accountant Fees and Services 29
       
Part IV
       
Item 15.   Exhibits and Financial Statement Schedules 31
Item 16.   Form 10K Summary 33
Signatures 34

 

2
 

 

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

 

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

 

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

 

3
 

 

PART I

 

ITEM 1. BUSINESS

 

Overview

 

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

 

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

 

Company Background

 

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

 

The RxAir product line includes:

 

  RXair™ Residential Filterless Air Purifier
     
  RX400 ™ U.S. Food and Drug Administration (“FDA”) cleared Class II Filterless Air Purifier
     
  RX3000™ Commercial FDA cleared Class II Air Purifier

 

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

 

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

 

In April of 2018, Vystar acquired the assets of NHS Holdings, LLC (“NHS”) to move into direct product offerings made from Vytex® latex. NHS was the exclusive U.S. distributor of Vystar’s Vytex® natural rubber latex foam to manufacturers for use in over 200 home furnishings products, including mattresses, toppers, pillows and upholstery, sold through multiple channels.

 

4
 

 

In May of 2019, Vystar acquired the assets of Fluid Energy Conversion Inc. (“FEC”), primarily consisting of its patent on the Hughes Reactor, which has the ability to control, enhance, and focus energy in flowing liquids and gases. Vystar intends to use this technology to enhance the effectiveness of Vystar’s RxAir purification system to destroy airborne pathogens while decreasing the cost and size of Vystar’s RxAir units.

 

In July of 2019, Vystar acquired 58% of the outstanding shares of common stock of Murida Furniture Co., Inc. dba Rotmans Furniture (“Rotmans”), one of the largest independent furniture retailers in the U.S. Rotmans sells a broad line of residential furniture and decorative accessories and serves customers throughout the New England region. The acquisition enabled Vystar to capitalize on the infrastructure already in place at Rotmans for accounting, retail sales facilities and staff, customer service, warehousing, and delivery. In addition, Rotmans offers significant marketing and advertising opportunities for all of Vystar’s brands to Rotmans’ thousands of existing customers.

 

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

 

Competition

 

RxAir

 

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

 

Furniture Store

 

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

 

Natural Rubber Latex

 

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

 

Intellectual Property

 

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

 

Government Regulation

 

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

 

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

 

5
 

 

Seasonality

 

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

 

Employees

 

As of December 31, 2021, Vystar had one employee, Steven Rotman, CEO. Rotmans had 43 full-time and 15 part-time employees. None of the employees are represented by a labor organization or a party to any collective bargaining arrangement.

 

Corporate Information

 

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

 

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

 

ITEM 1A. RISK FACTORS

 

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

 

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

 

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

 

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

 

At December 31, 2021 our cash position was $151,175 and we had an accumulated deficit of $51,410,516. We plan to finance our operations for the next twelve (12) months through the use of cash on hand, raising capital through private placement and increased sales from RxAir products by exploring sales partnerships with third-party wholesalers and retailers. The Company is also evaluating adopting a consignment-based sales model at Rotmans. You should consider, among other factors, our prospects for success in light of the risks and uncertainties encountered by companies that, like us, have not generated net earnings on an annual basis. Various factors, such as economic conditions, regulatory and legislative considerations, and competition, may also impede our ability to expand our market presence. We may not successfully address these risks and uncertainties or successfully implement our operating strategies. If we fail to do so, it could materially harm our business and impair the value of our common stock. Even if we accomplish these objectives, we may not generate positive cash flows or profits we anticipate in the future.

 

6
 

 

The following risk factors apply to our RxAir business:

 

We face significant competition from multinational and regional manufacturers.

 

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

 

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

 

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

 

The following risk factors apply to our furniture business:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

7
 

 

The following risk factors apply to our Vytex business:

 

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

 

Our business model is based on experience derived from the marketplace. There are no assurances that this experience will prove to be valid for our future operations or plans.

 

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

 

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

 

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

 

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

 

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

 

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

 

8
 

 

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

 

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

 

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

 

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

 

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

 

While continued interest is strong in a new innovative product in the natural rubber latex industry, pricing and regulatory approvals remain a key selling factor.

 

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

 

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

 

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

 

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

 

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

 

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

 

9
 

 

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

 

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

 

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

 

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

 

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

 

Over the past several years, samples of Vytex NRL have been made available to over 50 natural rubber latex and latex substitute end product manufacturers, 30 of which have been in place since early 2009. Since the completion of the Vytex NRL Standard Operation Procedures (SOPs), Vytex has been produced at Revertex (Malaysia), Occidente (Guatemala), KAPVL (India) and most recently Mardec-Yala (Thailand) and MMG (Thailand). Under the 2020 agreement with CMC Global, that entity is responsible for manufacturing, marketing and selling Vytex exclusively including sampling. Manufacturers that have signed a ‘sampling’ agreement with us have been provided with samples of Vytex NRL for validating its use in their manufacturing processes.

 

Another risk is the validity of the customer as testing completes. Recently Vystar has completed more than three years of a specialized version of Vytex NRL only to have the end product manufacturer fail to upgrade their production line and fulfill their own contract. As part of the Company’s learnings, we have found that in listening closely to customer challenges and needs, our technical team has been able to develop solutions. The Company has come to realize that what we offer is not just a raw material but often a technology solution to a production or product development challenge.

 

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

 

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

 

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

 

The impacts of COVID-19 and measures to prevent its spread across the globe have affected businesses in a number of ways. When we closed our showroom at the end of March 2020, there was significant uncertainty as to when we could resume business. When we re-opened in June 2020, consumer demand was strong but our supply chain was strained and resulted in late arrivals of products. Our inability to deliver products in a timely manner negatively affected our sales. The pandemic has effected our ability to hire and train qualified employees to address temporary labor disruptions or labor shortages. COVID-19 has effected consumer demand for products, workforce availability and our results of operations, financial condition, liquidity and cash flows.

 

10
 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

11
 

 

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

 

Because of net operating losses we have experienced for federal income tax purposes at December 31, 2021, we had federal net operating loss (“NOL”) carry-forwards of approximately $36 million ($32 million for 2020) available to offset future taxable income. Our ability to utilize NOL carry-forwards to reduce future taxable income may be limited under Section 382 of the Internal Revenue Code if certain ownership changes in our Company occur during a rolling three-year period. These ownership changes include purchases of common stock under share repurchase programs, the offering of stock by us, the purchase or sale of our stock by 5% shareholders, as defined in the Treasury regulations, or the issuance or exercise of rights to acquire our stock. If such ownership changes by 5% shareholders result in aggregate increases that exceed 50 percentage points during the three-year period, then Section 382 imposes an annual limitation on the amount of our taxable income that may be offset by our NOL carry-forwards or tax credit carry-forwards at the time of ownership change. The limitation may affect the amount of our deferred income tax asset and, depending on the limitation, a significant portion of our NOL carry-forwards or tax credit carry-forwards could expire before we are able to use them. In such an event, our business, financial condition, results of operations or cash flows could be adversely affected. We believe we have not experienced an ownership change under Section 382 of the Internal Revenue Code as of December 31, 2021; however, the amount by which our ownership may change in the future could be affected by purchases and sales of stock by 5% shareholders and new issuances of stock by us, should we choose to do so.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 2. PROPERTIES

 

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

 

ITEM 3. LEGAL PROCEEDINGS

 

EMA Financial

 

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

 

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

 

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

 

12
 

 

On June 10, 2020, EMA filed a motion for summary judgment as to its remaining claims for relief and a motion to dismiss the Company’s affirmative defenses and counterclaims. The Company opposed the motion on July 10, 2020, and the same was fully submitted to the Court on July 28, 2020. On March 29, 2021, the Court issued a decision granting in part and denying in part the motion. Specifically, the Court granted that part of the motion seeking summary judgment and dismissal on the Company’s affirmative defense and counterclaim regarding Sections 15(a)/29(b) of the Exchange Act. Two weeks later the Company filed a motion for reconsideration as to the dismissal portion of the order, or, for the alternative, a motion for certification for the right to file a petition to the Second Circuit Court of Appeals on the issue. The Court denied the motion for reconsideration and certification. Subsequently, fact discovery has been completed and the parties are now moving forward with preparing summary judgment motions for their respective claims. Motions should be fully submitted to the Court by June 2022.

 

Payment of Wages Action

 

On March 13, 2020, Robert LaChapelle, a former employee of Rotmans Furniture, the Company’s majority owned subsidiary, on behalf of himself and all others similarly situated, filed a class action complaint against Rotmans and two of its prior owners (including Steve Rotman, President of the Company) in the Worcester Superior Court alleging non-payment of overtime pay and Sunday premium pay pursuant to the Massachusetts Blue Laws (Ch. 136), the Massachusetts Overtime Law (Chapter 151, § 1A), and the Massachusetts Payment of Wages Law (Chapter 149 §§148 and 150). Specifically, LaChapelle alleged that Rotmans failed to pay him and other sales people who were paid on a commission-only basis overtime pay at a rate of least 1.5 times the basic minimum wage or premium pay (also at 1.5 times the basic minimum wage) for hours they worked on Sundays. The parties settled with the named Plaintiffs, Robert LaChapelle and certain other employees, each on an individual basis, for a de minimus amount which was paid in March 2021. Plaintiffs’ counsel then filed a Stipulation of Dismissal of the Plaintiffs’ Complaint with prejudice. The settlement is included in the accompanying financial statements for the year ended December 31, 2020. On May 21, 2021, one former and one current employee of Rotmans filed suit in the Worcester District Court on substantially the same allegations as LaChapelle. In January 2022, the parties settled for a similarly immaterial amount. The Stipulation of Dismissal is expected to be in June 2022 after the settlement payment is made. The settlement is included in the accompanying financial statements for the year ended December 31, 2021.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

PART II.

 

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

 

Market Price Information

 

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

 

   High   Low 
December 31, 2020          
           
First Quarter  $0.01   $0.004 
           
Second Quarter  $0.07   $0.005 
           
Third Quarter  $0.10   $0.01 
           
Fourth Quarter  $0.07   $0.02 
           
December 31, 2021          
           
First Quarter  $0.06   $0.03 
           
Second Quarter  $0.03   $0.02 
           
Third Quarter  $0.03   $0.02 
           
Fourth Quarter  $0.02   $0.01 

 

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

 

Holders of Record

 

As of December 31, 2021, there were 212 holders of record of our common stock. Because some of our shares are held by brokers and other institutions on behalf of shareholders, we are unable to estimate the total number of stockholders represented by these record holders.

 

Dividend Policy

 

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

 

Issuer Purchases of Equity Securities

 

None.

 

Securities Authorized for Issuance Under Equity Compensation Plans

 

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

 

Recent Sales of Unregistered Securities

 

Common Stock and Warrant Grants

 

From January 1, 2021 through December 31, 2021, we issued 78,577,773 shares of our common stock valued at $2,110,089 for services rendered to the Company, 2,533,334 shares were issued for cash for $38,000, 11,364,791 shares were issued for settlement of related party payable valued at $335,265 and 1,767,945 shares were issued upon conversion of 5,000 shares of preferred stock.

 

Stock Option Grants

 

There were no stock option grants issued from January 1, 2021 through December 31, 2021.

 

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

 

There were no proceeds from October 1, 2021 through December 31, 2021.

 

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Application of Securities Laws and Other Matters

 

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

 

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

 

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

 

ITEM 6. SELECTED FINANCIAL DATA

 

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

 

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

 

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

 

Overview

 

About RxAir

 

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

 

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

 

The RxAir product line includes:

 

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

 

15
 

 

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

 

About Rotmans

 

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

 

Impact of COVID-19 on Our Business

 

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

 

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

 

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

 

Management Objectives

 

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

 

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

 

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

 

16
 

 

Critical Accounting Policies and Estimates

 

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

 

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

 

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

 

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

 

Inventories

 

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

 

Revenue

 

We recognize revenue when we satisfy a performance obligation in a contract by transferring control over a product to a customer when product is shipped based on fulfillment by the Company. The Company considers fulfillment when it passes all liability at the point of shipping through third party carriers. Consideration is typically paid prior to shipment via credit card or check when our products are sold direct to consumers, which is typically within a 1 to 2 days or approximately 30 days from the time control is transferred when sold to wholesalers, distributors and retailers. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of revenue. We assess our estimates of expected returns at each financial reporting date.

 

Valuation and Impairment of Intangible and Long-Lived Assets

 

We perform an impairment assessment of intangible assets including goodwill annually or more frequently as warranted by events or changes in circumstances. We review long-lived assets such as property and equipment for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. If the total of the estimated undiscounted future cash flows is less than the carrying value of the assets, an impairment loss is recognized for the excess of the carrying value over the fair value of the long-lived assets. The Company recorded a loss on impairment in 2021 and 2020 of $245,050 and $240,350, respectively, related to the discontinuation of NHS proprietary technology and customer relationships in 2021 and the NHS tradename in 2020.

 

Accounting for Derivative Financial Instruments

 

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

 

Leases

 

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

 

17
 

 

RESULTS OF OPERATIONS

 

Year ended December 31, 2021 compared to year ended December 31, 2020

 

   Year Ended December 31, 
   2021   2020   $ Change   % Change 
   CONSOLIDATED 
                 
Revenue  $27,647,879   $20,979,243   $6,668,636    31.8%
                     
Cost of revenue   13,505,600    10,005,075    3,500,525    35.0%
                     
Gross profit   14,142,279    10,974,168    3,168,111    28.9%
                     
Operating expenses:                    
Salaries, wages and benefits   4,491,864    5,105,668    (613,804)   -12.0%
Share-based compensation   822,070    1,031,850    (209,780)   -20.3%
Agent fees   4,273,308    1,388,598    2,884,710    207.7%
Professional fees   588,137    983,764    (395,627)   -40.2%
Advertising   2,174,005    1,808,115    365,890    20.2%
Rent   1,165,978    1,243,949    (77,971)   -6.3%
Service charges   574,669    523,124    51,545    9.9%
Depreciation and amortization   738,083    795,241    (57,158)   -7.2%
Loss on impairment   

245,050

    

240,350

    

4,700

    

2.0

%
Other operating   3,454,410    2,697,090    757,320    28.1%
                     
Total operating expenses   18,527,574    15,817,749    2,709,825    17.1%
                     
Loss from operations   (4,385,295)   (4,843,581)   458,286    -9.5%
                     
Other income (expense):                    
Interest expense   (721,869)   (1,845,916)   1,124,047    -60.9%
Change in fair value of derivative liabilities   53,600    (238,900)   292,500    -122.4%
Gain (loss) on settlement of debt, net   2,688,100    (1,497,061)   4,185,161    -279.6%
Other income, net   724,779    92,764    632,015    681.3%
                     
Total other income (expense), net   2,744,610    (3,489,113)   6,233,723    -178.7%
                     
Net loss   (1,640,685)   (8,332,694)   6,692,009    -80.3%
                     
Net (income) loss attributable to noncontrolling interest   (1,056,647)   724,477    (1,781,124)   -245.8%
                     
Net loss attributable to Vystar  $(2,697,332)  $(7,608,217)  $4,910,885    -64.5%

 

Revenues

 

Consolidated revenues for the year ended December 31, 2021 and 2020 were $27,647,879 and $20,979,243, respectively, for an increase of $6,668,636 or 31.8%. The increase in revenues from operations was principally due to the success of the high impact closing to remodel sale at Rotmans which took place in the first quarter of 2021.

 

Consolidated gross profit for the year ended December 31, 2021 and 2020 was $14,142,279 and $10,974,168, respectively, for an increase of $3,168,111 or 28.9%. Consolidated cost of revenue for year ended December 31, 2021 and 2020 was $13,505,600 and $10,005,075, respectively, an increase of $3,500,525 or 35%. The increase in gross profit and cost of revenue was primarily due to increased revenues, continued change in purchasing and the reduction of special offers. Merchandise is being purchased in large quantities from fewer vendors.

 

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Operating Expenses

 

The Company’s operating expenses consist primarily of compensation and support costs for management, sales and administrative staff, agent fees and for other general and administrative costs, including professional fees related to accounting, finance, and legal services as well as other operating expenses such as advertising and occupancy costs. The Company’s consolidated operating expenses was $18,527,574 and $15,817,749 for the year ended December 31, 2021 and 2020, respectively, for an increase of $2,709,825 or 17.1%. The increase in operating expenses was primarily due to fees incurred under an agreement with a third-party agent to assist the Company with a high-impact sale at Rotmans.

 

Other Income (Expense)

 

Other income (expense) for the year ended December 31, 2021 and 2020 was $2,744,610 and ($3,489,113), respectively, for a net increase of $6,233,723 or a reduction in expense of 178.7%. Increases in other income (expense) in 2021 included reduction of interest expense of $1,124,047, gain (loss) on settlement of debt of $4,185,161, an increase in change in value of derivative liabilities of $292,500 and an increase in other income of $632,015.

 

Net Loss

 

Net loss for the year ended December 31, 2021 and 2020 was $1,640,685 and $8,332,694, respectively, for a decrease in net loss of $6,692,009 or 80.3%. Net loss in 2021 and 2020 includes net (income) loss attributable to noncontrolling interest of ($1,056,647) and $724,477, respectively. The smaller net loss the Company experienced in the year ended December 31, 2021 versus the same period in 2020 was attributable to increased operating efficiencies and COVID-19 programs mainly the Paycheck Protection Program loans forgiven of $2,805,800 and Employee Retention Credits of $771,287.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. However, we have incurred significant losses and experienced negative cash flow since inception. At December 31, 2021, the Company had cash of $151,175 and a deficit in working capital of $8,306,611. For the year ended December 31, 2021, the Company had a net loss of $1,640,685 and an accumulated deficit of $51,410,516. For the year ended December 31, 2020, the Company had a net loss of $8,332,694 and the accumulated deficit amounted to $48,713,184. We use working capital to finance our ongoing operations, and since those operations do not currently cover all of our operating costs, managing working capital is essential to our Company’s future success. Because of this history of losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.

 

Net cash used in operating activities was $2,864,142 for the year ended December 31, 2021 as compared to $2,262,940 for the year ended December 31, 2020. During the year ended December 31, 2021, cash used in operations was primarily due to the net loss for the year of $1,640,685 net of non-cash related add-back of share-based compensation, depreciation and amortization.

 

The Company had $371,431 cash provided by investing activities during the year ended December 31, 2021 as compared to $133,878 cash used in investing activities for the year ended December 31, 2020. During the year ended December 31, 2021, cash provided by investing activities was related to the sales of property and equipment and investments.

 

Net cash provided by financing activities was $2,023,347 during the year ended December 31, 2021, as compared to cash provided of $2,945,002 during the year ended December 31, 2020. During 2021, cash was provided from the proceeds in notes payable in the amount of $2,225,939 net of repayments of finance leases in the amount of $202,592. During 2020, cash was provided from the proceeds in notes payable in the amount of $3,309,400, repayments on notes payable and finance leases in the amount of $967,938, net repayments on line of credit of $210,200, $456,490 in proceeds from common stock issuances, advances from stock subscription payable of $308,000 and proceeds from stock subscription receivable of $49,250.

 

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

 

There can be no assurances that we will be able to achieve projected levels of revenue in 2022 and beyond. If we are not able to achieve projected revenue and obtain alternate additional financing of equity or debt, we would need to significantly curtail or reorient operations during 2022, which could have a material adverse effect on our ability to achieve our business objectives and as a result, may require the Company to file for bankruptcy or cease operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities that might be necessary should the Company be forced to take any such actions.

 

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

 

Off-Balance Sheet Arrangements

 

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

 

Certain Relationships and Related Transactions

 

Per Steven Rotman’s Employment agreement dated July 22, 2019, as amended, he is to be paid $125,000 per year in cash, $10,417 per month in shares based on a 20-day average price at a 50% discount to market, $5,000 per month in cash for expenses as well as access to a Company provided vehicle and health and life insurance. During the year ended December 31, 2021, the Company expensed approximately $422,000 related to this employment agreement and issued 29,205,927 shares of common stock for past services. As of December 31, 2021, the Company had a stock subscription payable balance of $286,625, or approximately 14,797,000 shares to be issued in the future, $123,155 of reimbursable expenses payable and $116,403 of unpaid salary.

 

Blue Oar Consulting, Inc. (“Blue Oar”) provides business consulting services to the Company. This entity is owned by Gregory Rotman, who is the son of the Company’s CEO, Steven Rotman. Blue Oar Consulting, Inc. (“Blue Oar”) provides business consulting services to the Company. In exchange for such services, the Company has entered into a consulting agreement with the related party entity. Per the consulting agreement, Blue Oar is to be paid $15,000 per month in cash for expenses, and $12,500 per month to be paid in shares based on a 20-day average at a 50% discount to market. During the year ended December 31, 2021, the Company expensed approximately $461,000 related to the consulting agreement and issued 30,038,513 shares of common stock for past services. In addition, the Company issued 11,364,791 shares of common stock to settle its accounts payable balance of $180,000 in February 2021. In connection with the settlement, a loss of $155,265 was incurred. As of December 31, 2021, the Company had a stock subscription payable balance of approximately $281,000 or approximately 15,603,000 shares and a balance of $180,000 in accounts payable related to this related party.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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

 

ITEM 8. INDEX TO FINANCIAL STATEMENTS

 

Report of Independent Registered Public Accounting Firm (PCAOB ID:324) F-1
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders’ Deficit F-5
Consolidated Statements of Cash Flows F-6

 

20
 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of Vystar Corporation

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Vystar Corporation (the “Company”) as of December 31, 2021 and 2020, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year then ended, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of Vystar Corporation as of December 31, 2021 and 2020, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Going Concern

 

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

 

Basis for Opinion

 

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

 

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

 

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

 

Critical Audit Matters

 

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

 

F-1
 

 

 

Impairment Analysis of Goodwill and Intangible Assets

 

As of December 31, 2021, the Company’s goodwill and intangible assets were $1,669,171. Goodwill and intangible assets are tested for impairment at least annually at the reporting unit level and asset level, respectively. During the year ended December 31, 2021, the Company recorded a $245,050 impairment loss.

 

Auditing management’s annual goodwill and intangible assets impairment test is complex and highly judgmental due to the significant estimation required in determining the fair value of the reporting units and intangible assets. In particular, the fair value estimates are sensitive to significant assumptions such as the weighted average cost of capital, revenue growth rate, operating margin, working capital requirements, terminal value and market multiples, which are affected by expectations about future market or economic conditions.

 

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the financial statements. These procedures included obtaining an understanding of the Company’s review process related to assessing the Company’s goodwill and intangible assets for impairment, such as management’s review of the valuation models, the underlying assumptions used in the model and the related accounting conclusions. To test the estimated fair value of the Company’s reporting units and intangible assets, we performed audit procedures that include, among others, assessing methodologies and testing the significant assumptions discussed above and the underlying data used by the Company in its analysis. We compared the significant assumptions used by management to current industry and economic trends and performed procedures to identify information that might contradict the Company’s selected methodologies and associated significant assumptions. We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting units and intangible assets that would result from changes in the assumptions. In addition, we tested the reconciliation of the fair value of the reporting units to the market capitalization of the Company. Lastly, we also evaluated the Company’s financial statement disclosures related to these matters.

 

Fair Value of Derivative Liability

 

As of December 31, 2021, the Company had significant derivative liabilities totaling $1,778,100 and recorded a $53,600 gain from change in fair value of derivative liabilities during the year ended December 31, 2021. The derivative liability activity relates to embedded conversion features within convertible notes payable. The Company analyzed the conversion features of the various note agreements for derivative accounting consideration under Accounting Standards Codification (“ASC”) 815-15 “Derivatives and Hedging” and determined that the embedded conversion features should be classified as derivatives because the conversion prices of these convertible notes payable are subject to a variable conversion rate. The Company has determined that the conversion feature is not considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment. In accordance with ASC 815, the Company has bifurcated the conversion feature of the notes and recorded a derivative liability.

 

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

 

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

 

/s/ Macias Gini & O’Connell LLP

 

We have served as Vystar Corporation auditor since 2020.

Irvine, CA

May 16, 2022

 

F-2
 

 

VYSTAR CORPORATION

CONSOLIDATED BALANCE SHEETS

 

     2021     2020 
   December 31, 
   2021   2020 
ASSETS          
Current assets:          
Cash  $151,175   $620,539 
Accounts receivable, net   68,541    236,106 
Other receivables   875,362    - 
Inventories   3,784,420    6,546,481 
Investments - equity securities, at fair value   -    127,910 
Prepaid expenses and other   337,013    565,550 
Deferred commission costs   73,625    106,954 
           
Total current assets   5,290,136    8,203,540 
           
Property and equipment, net   832,099    1,631,651 
           
Operating lease right-of-use assets   7,776,978    9,199,730 
           
Finance lease right-of-use assets, net   551,037    730,761 
           
Other assets:          
Intangible assets, net   1,208,870    1,835,987 
Goodwill   460,301    460,301 
Inventories, long-term   657,177    438,161 
Deferred commission costs, net of current portion   60,586    134,213 
Other   20,274    26,253 
           
Total other assets   2,407,208    2,894,915 
           
Total assets  $16,857,458   $22,660,597 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
           
Current liabilities:          
Accounts payable  $5,149,570   $4,830,143 
Accrued expenses   897,420    3,422,796 
Stock subscription payable   1,247,549    2,589,556 
Operating lease liabilities - current maturities   634,000    1,095,500 
Finance lease liabilities - current maturities   134,000    172,900 
Shareholder, convertible and contingently convertible notes payable and accrued interest - current maturities   1,388,904    1,046,059 
Related party debt - current maturities   1,487,000    1,537,000 
Unearned revenue   880,204    1,904,256 
Derivative liabilities   1,778,100    1,766,700 
           
Total current liabilities   13,596,747    18,364,910 
           
Long-term liabilities:          
Term notes, net of current maturities   -    1,402,900 
Operating lease liabilities, net of current maturities   5,683,736    6,515,103 
Finance lease liabilities, net of current maturities   443,882    577,192 
Unearned revenue, net of current maturities   241,991    523,515 
Related party debt, net of current maturities and debt discount   2,791,401    2,035,934 
           
Total long-term liabilities   9,161,010    11,054,644 
           
Total liabilities   22,757,757    29,419,554 
           
Stockholders’ deficit:          
Convertible preferred stock, $0.0001 par value 15,000,000 shares authorized;8,698 and 13,698 shares issued and outstanding at December 31, 2021 and December 31, 2020, respectively (liquidation preference of $74,531 and $100,698 at December 31, 2021 and December 31, 2020, respectively)   1    1 
Common stock, $0.0001 par value, 1,500,000,000 shares authorized; 1,294,175,560 and 1,119,931,717 shares issued at December 31, 2021 and December 31, 2020, respectively, and 1,294,145,560 and 1,119,901,717 shares outstanding at December 31, 2021 and December 31, 2020, respectively   129,415    119,990 
Additional paid-in capital   43,723,389    41,233,471 
Accumulated deficit   (51,410,516)   (48,713,184)
Common stock in treasury, at cost; 30,000 shares   (30)   (30)
           
Total Vystar stockholders’ deficit   (7,557,741)   (7,359,752)
           
Noncontrolling interest   1,657,442    600,795 
           
Total stockholders’ deficit   (5,900,299)   (6,758,957)
           
Total liabilities and stockholders’ deficit  $16,857,458   $22,660,597 

 

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

 

F-3
 

 

VYSTAR CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     2021     2020 
   Year Ended 
   December 31, 
   2021   2020 
         
Revenue  $27,647,879   $20,979,243 
           
Cost of revenue   13,505,600    10,005,075 
           
Gross profit   14,142,279    10,974,168 
           
Operating expenses:          
Salaries, wages and benefits   4,491,864    5,105,668 
Share-based compensation   822,070    1,031,850 
Agent fees   4,273,308    1,388,598 
Professional fees   588,137    983,764 
Advertising   2,174,005    1,808,115 
Rent   1,165,978    1,243,949 
Service charges   574,669    523,124 
Depreciation and amortization   738,083    795,241 
Loss on impairment   

245,050

    

240,350

 
Other operating   3,454,410    2,697,090 
           
Total operating expenses   18,527,574    15,817,749 
           
Loss from operations   (4,385,295)   (4,843,581)
           
Other income (expense):          
Interest expense   (721,869)   (1,845,916)
Change in fair value of derivative liabilities   53,600    (238,900)
Gain (loss) on settlement of debt, net   2,688,100    (1,497,061)
Other income, net   724,779    92,764 
           
Total other income (expense), net   2,744,610    (3,489,113)
           
Net loss   (1,640,685)   (8,332,694)
           
Net (income) loss attributable to noncontrolling interest   (1,056,647)   724,477 
           
Net loss attributable to Vystar  $(2,697,332)  $(7,608,217)
           
Basic and diluted loss per share:          
Net loss per share  $(0.00)  $(0.01)
           
Basic and diluted weighted average number of common shares outstanding   1,270,471,877    1,123,842,260 

 

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

 

F-4
 

 

VYSTAR CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2021 AND 2020

 

                                                        
   Attributable to Vystar         
   Number       Number               Number       Total         
   of       of       Additional       of       Vystar       Total 
   Preferred   Preferred   Common   Common   Paid-in   Accumulated   Treasury   Treasury   Stockholders’   Noncontrolling   Stockholders’ 
   Shares   Stock   Shares   Stock   Capital   Deficit   Shares   Stock   Deficit   Interest   Deficit 
Ending balance December 31, 2019   13,828   $1    1,105,762,080   $110,573   $38,436,607   $(41,104,967)   (30,000)  $(30)  $(2,557,816)  $1,325,272   $(1,232,544)
                                                        
Common stock issued for services             22,441,878    2,245    551,924                   554,169         554,169 
                                                        
Share based compensation - options                       21,872                   21,872         21,872 
                                                        
Common stock issued for settlement of warrants             -    -    -                   -         - 
                                                        
Common stock issued for cash received, net             30,433,402    3,043    453,447                   456,490         456,490 
                                                        
Common stock issued for conversion of loan             41,250,000    4,125    1,769,625                   1,773,750         1,773,750 
                                                        
Preferred stock conversion   (130)        44,357    4    (4)                  -         - 
                                                        
Net loss   -    -    -    -    -    (7,608,217)   -    -    (7,608,217)   (724,477)   (8,332,694)
                                                        
Ending balance December 31, 2020   13,698   $1    1,199,931,717   $119,990   $41,233,471   $(48,713,184)   (30,000)  $(30)  $(7,359,752)  $600,795   $(6,758,957)
                                                        
Common stock issued for services             78,577,773    7,858    2,102,231                   2,110,089         2,110,089 
                                                        
Share based compensation - options                       15,989                   15,989         15,989 
                                                        
Common stock issued for settlement of related party payable             11,364,791    1,136    334,129                   335,265         335,265 
                                                        
Common stock issued for cash received in prior period             2,533,334    254    37,746                   38,000         38,000 
                                                        
Preferred stock conversion   (5,000)        1,767,945    177    (177)                  -         - 
                                                        
Net loss   -    -    -    -    -    (2,697,332)   -    -    (2,697,332)   1,056,647    (1,640,685)
                                                        
Ending balance December 31, 2021   8,698   $1    1,294,175,560   $129,415   $43,723,389   $(51,410,516)   (30,000)  $(30)  $(7,557,741)  $1,657,442   $(5,900,299)

 

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

 

F-5
 

 

VYSTAR CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

           
   Year Ended 
   December 31, 
   2021   2020 
Cash flows from operating activities:          
Net loss  $(1,640,685)  $(8,332,694)
Adjustments to reconcile net loss to net cash used in operating activities:          
Share-based compensation   822,070    1,031,850 
Depreciation   353,833    378,282 
Bad debts   278,377    15,130 
Amortization of intangible assets   384,250    416,959 
Noncash lease expense   345,355    423,035 
Amortization of debt discount   42,585    746,207 
Impairment loss   245,050    240,350 
Change in fair value of derivative liabilities   (53,600)   238,900 
Interest paid by issuance of common stock   -    160,000 
Unamortized term debt issuance costs   -    16,500 
Loss on sale of property and equipment   210,951    - 
Loss on sale of investments   4,180    - 
Net unrealized (gain) loss on available-for-sale investments   (20,480)   21,607 
(Gain) loss on settlement of debt, net   (2,688,100)   1,497,061 
(Increase) decrease in assets:          
Accounts receivable   (110,812)   (212,710)
Other receivables   (875,362)   - 
Inventories   2,543,045    (1,934,544)
Prepaid expenses and other   234,514    45,554 
Deferred commission costs   106,956    104,980 
Increase (decrease) in liabilities:          
Accounts payable   536,991    28,522 
Accrued expenses and interest payable   (2,277,684)   2,924,872 
Unearned revenue   (1,305,576)   (72,801)
           
Net cash used in operating activities   (2,864,142)   (2,262,940)
           
Cash flows from investing activities:          
Acquisition of property and equipment   (115,396)   (130,195)
Proceeds from the sale of property and equipment   344,800    - 
Proceeds from the sale of investments   144,210    - 
Patents and trademark fees   (2,183)   (3,683)
           
Net cash provided by (used in) investing activities   371,431    (133,878)
           
Cash flows from financing activities:          
Net borrowings (repayments) on line of credit   -    (210,200)
Proceeds from issuance of term debt   1,692,900    2,211,400 
Repayment of term debt   -    (797,084)
Repayment of finance lease obligations   (202,592)   (170,854)
Proceeds from the issuance of notes - related parties   533,039    1,098,000 
Advances from stock subscription payable   -    308,000 
Proceeds from stock subscription receivable   -    49,250 
Proceeds from issuance of common stock, net of costs   -    456,490 
           
Net cash provided by financing activities   2,023,347    2,945,002 
           
Net increase (decrease) in cash   (469,364)   548,184 
           
Cash - beginning of year   620,539    72,355 
           
Cash - end of year  $151,175   $620,539 
           
Cash paid during the year for:          
Interest  $431,689   $728,002 
           
Non-cash transactions:          
Common stock issued for accrued compensation  $2,110,089   $201,200 
Derivatives issued as a debt discount   65,000    28,000 
Common stock issued for settlement of related party payable   335,265    - 
Common stock issued for cash received in prior year   38,000    - 
Common stock issued for preferred stock   177    - 
Reduction of third-party vendor payable with transfer of inventories   2,886,497    - 
Acquisition of inventories with third-party vendor payable at commencement of second sale agreement   2,886,497    - 
Lease liabilities arising from obtaining right-of-use assets   24,603    - 
Third-party settlement of the Company’s line of credit   -    2,203,339 
Common stock issued for settlement of term debt and accrued interest   -    660,000 
Term debt issuance costs   -    16,500 

 

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

 

F-6
 

 

VYSTAR CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2021 and 2020

 

NOTE 1 - DESCRIPTION OF BUSINESS

 

Nature of Business

 

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

 

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

 

Basis of Presentation

 

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

 

The Company has evaluated subsequent events through the date of the filing of its Form 10-K with the Securities and Exchange Commission. Other than those events disclosed in Note 18, the Company is not aware of any other significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on the Company’s financial statements.

 

Basis of Consolidation

 

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

 

Reclassifications

 

Loss on impairment balance from the 2020 consolidated financial statements has been reclassified to conform to the 2021 financial statement presentation. Previously included in other income (expense), loss on impairment is included in operating expenses for 2021 and 2020. Such reclassification had no effect on the previously reported net loss for the year ended December 31, 2020.

 

COVID-19

 

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

 

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

 

The pandemic continues to cause economic disruption. Although our showroom has reopened, some business segments remain closed or are operating on a reduced scale. The COVID-19 pandemic is complex and continues to evolve with the emergence and spread of variants. We cannot reasonably estimate the duration of COVID-19 and its impact on Vystar. Accordingly, the estimates and assumptions made as of December 31, 2021 could change in subsequent interim reports, and it is reasonably possible that such changes could be significant (although the potential effects cannot be measured at this time).

 

F-7
 

 

Segment Reporting

 

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

 

Estimates

 

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

 

Fair Value of Financial Instruments

 

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

 

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

 

Valuation inputs are classified in the following hierarchy:

 

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

 

Highest priority is given to Level 1 inputs and the lowest priority to Level 3 inputs. Acceptable valuation techniques include the market approach, income approach, and cost approach. In some cases, more than one valuation technique is used. The derivative liabilities were recognized at fair value on a recurring basis through the date of the settlement and December 31, 2021 and are level 3 measurements. There have been no transfers between levels during the year ended December 31, 2021.

 

Acquisitions

 

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

 

F-8
 

 

Cash, Cash Equivalents and Restricted Cash

 

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

 

Accounts Receivable, Net

 

Accounts receivable, net are stated at the amount management expects to collect from outstanding balances. The Company routinely sells, without recourse, trade receivables resulting from retail furniture sales to two financial institutions at an average service charge of 1.3% in 2021. Amounts sold during the year ending December 31, 2021 were approximately $5,603,000. Retail furniture receivables retained by the Company are generally collateralized by the merchandise sold, represent valid claims against debtors for sales arising on or before the balance sheet date and are reduced to their estimated net realizable value. In addition, the Company grants credit to Vystar customers without requiring collateral. The amount of accounting loss for which Vystar is at risk in these unsecured accounts receivable is limited to their carrying value. Management provides for uncollectible amounts through a charge to earnings and a credit to an allowance for doubtful accounts based upon its assessment of the current status of individual accounts. Balances that are still outstanding after management has performed reasonable collection efforts are written off through a charge to the allowance and a credit to accounts receivable. As of December 31, 2021, the Company has recorded an allowance for doubtful accounts of $273,000. Before 2021, the Company considered accounts receivable to be fully collectible and no allowance for doubtful accounts was recorded.

 

Other Receivables

 

Under the provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) signed into law on March 27, 2020 and the subsequent extension of the CARES Act, the Company was eligible for a refundable employee retention credit subject to certain criteria. The Company recognized employee retention credits of $771,287 during the year ended December 31, 2021 which has been included in other income, net in the consolidated statements of operations. The Company has filed for refunds of the employee retention credits and as of the date of this Annual Report on Form 10-K has subsequently received $154,468 and estimates receiving the remaining refunds by the end of 2022.

 

Rotmans terminated its agreement with a supplier in 2021 and will receive $100,000 in consideration. As of December 31, 2021, the remaining account balance of $104,075 represents funds due from this termination.

 

Inventories

 

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

 

Prepaid Expenses and Other

 

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

 

Investments - Equity Securities

 

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

 

F-9
 

 

Property and Equipment

 

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

 

Expenditures for major renewals and betterments are capitalized, while routine repairs and maintenance are expensed as incurred. When property items are retired or otherwise disposed of, the asset and related reserve accounts are relieved of the cost and accumulated depreciation, respectively, and the resultant gain or loss is reflected in earnings. As of December 31, 2021, the net balance of property and equipment is $832,099 with accumulated depreciation of $643,984. As of December 31, 2020, the net balance of property and equipment is $1,631,651 with accumulated depreciation of $587,081.

 

Intangible Assets

 

Patents represent legal and other fees associated with the registration of patents. The Company has five issued patents with the United States Patent and Trade Office (“USPTO”), as well as five issued international Patent Cooperation Treaty (“PCT”) patents. Patents are carried at cost and are being amortized on a straight-line basis over their estimated useful lives, typically ranging from 9 to 20 years.

 

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

 

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

 

Our intangible assets are reviewed for impairment annually or more frequently as warranted by events of changes in circumstances. During the year ended December 31, 2021, we recognized an impairment charge of $245,050 related to the proprietary technology and customer relationships involving NHS. During the year ended December 31, 2020, we recognized an impairment charge of $240,350 related to our tradename and brand due to the discontinuation of the NHS tradename.

 

Long-Lived Assets

 

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

 

Goodwill

 

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

 

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

 

F-10
 

 

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. We did not recognize any impairment of our goodwill during the years ended December 31, 2021 and 2020.

 

Convertible Notes Payable

 

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

 

Derivatives

 

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

 

The Company applies the accounting standard that provides guidance for determining whether an equity-linked financial instrument, or embedded feature, is indexed to an entity’s own stock. The standard applies to any freestanding financial instrument or embedded features that have the characteristics of a derivative, and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. From time to time, the Company has issued notes with embedded conversion features. Certain of the embedded conversion features contain price protection or anti-dilution features that result in these instruments being treated as derivatives for accounting purposes. Accordingly, as of December 31, 2021, the Company has classified all conversion features as derivative liabilities and has estimated the fair value of these embedded conversion features using a Monte Carlo simulation model.

 

Unearned Revenue

 

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

 

F-11
 

 

Changes to unearned revenue during the years ended December 31, 2021 and 2020 are summarized as follows:

  

   2021   2020 
         
Balance, beginning of the year  $2,427,771   $2,500,572 
           
Customer deposits received   24,522,061    19,080,557 
           
Warranty coverage purchased   -    118,151 
           
Gift cards purchased   15,860    10,225 
           
Revenue earned   (25,843,497)   (19,281,734)
           
Balance, end of the year  $1,122,195   $2,427,771 

 

Loss Per Share

 

The Company presents basic and diluted loss per share. Because the Company reported a net loss for 2021 and 2020, 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 26,874,938 and 27,124,938 shares of common stock for 2021 and 2020, respectively, as their effect would be anti-dilutive. Warrants to purchase 10,174,259 and 14,205,912 shares of common stock for 2021 and 2020, 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 3,230,220 and 4,801,840 shares of common stock for 2021 and 2020, respectively, were excluded from the computation of diluted loss per share as their effect would be anti-dilutive. Both shareholder and Rotman Family contingently convertible notes payable convertible to 764,790,568 and 198,441,652 shares of common stock for 2021 and 2020, respectively, were also excluded from the computation of diluted loss per share as their effect would be anti-dilutive.

 

Revenue

 

Our principal activities from which we generate our revenue are product sales. Revenue is measured based on considerations specified in a contract with a customer. A contract exists when it becomes a legally enforceable agreement with a customer. The contract is based on either the acceptance of standard terms and conditions at the retail store and on the websites for e-commerce customers, or the execution of terms and conditions contracts with retailers and wholesalers. These contracts define each party’s rights, payment terms and other contractual terms and conditions of the sale.

 

Consideration is typically paid prior to shipment via credit card or check when our products are sold direct to consumers, which is typically within 1 to 2 days or approximately 30 days from the time control is transferred when sold to wholesalers, distributors and retailers. We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience and, in some circumstances, published credit and financial information pertaining to the customer.

 

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

 

F-12
 

 

The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation. The transaction price is determined based on the consideration to which we will be entitled to receive in exchange for transferring goods to the customer. We issue refunds to retail, e-commerce and print media customers, upon request, within 30 days of delivery. We estimate the amount of potential refunds at each reporting period using a portfolio approach of historical data, adjusted for changes in expected customer experience, including seasonality and changes in economic factors. For retailers, distributors and wholesalers, we do not offer a right of return or refund and revenue is recognized at the time products are shipped to customers. In all cases, judgment is required in estimating these reserves. Actual claims for returns could be materially different from the estimates. As of December 31, 2021, and 2020, reserves for estimated sales returns totaled $337,000 and $55,000, respectively, and are included in the accompanying consolidated balance sheets as accrued expenses.

 

We recognize revenue when we satisfy a performance obligation in a contract by transferring control over a product to a customer when product is shipped based on fulfillment by the Company. The Company considers fulfillment when it passes all liability at the point of shipping through third party carriers or in-house delivery services. Delivery fees are charged to customers and are included in revenue in the accompanying consolidated statements of operations and the costs associated with these deliveries are included in operating expenses in the accompanying consolidated statements of operations through January 20, 2020. All subsequent delivery costs are included in revenues as a third-party delivery service was engaged beginning January 21, 2020. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of revenue in the accompanying consolidated statements of operations.

 

The Company also defers revenues for separately-priced stain protection warranty coverage for which it is ultimately self-insured. Revenue is recognized from the extended warranty sales on a straight-line basis over the respective contract term. The extended warranty terms primarily range from three to five years from the date of delivery. The Company ended this warranty program during 2020 but continues to amortize the previously contracted warranties over their original terms. The Company switched to a separately-priced stain protection warranty serviced by a third-party when the store reopened in June 2020. At December 31, 2021, and 2020, deferred warranty revenue was approximately $524,000 and $920,000, respectively, and is included in unearned revenue in the accompanying consolidated balance sheets. During 2021, the Company recognized total revenues of approximately $388,000 related to deferred warranty revenue arrangements. During 2020, the Company recorded total proceeds of approximately $118,000 and recognized total revenues of approximately $506,000 related to deferred warranty revenue arrangements. Commission costs in obtaining extended warranty contracts are capitalized and recognized as expense on a straight-line basis over the period of the warranty contract. At December 31, 2021, and 2020, deferred commission costs were approximately $134,000 and $241,000, respectively, and are included in the accompanying consolidated balance sheets. All other costs, such as costs of services performed under the contract, general and administrative expenses, and advertising costs are expensed as incurred.

 

Cost of Revenue

 

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

 

Research and Development

 

Research and development costs are expensed when incurred. Research and development costs include all costs incurred related to the research, development and testing. For the years ended December 31, 2021 and 2020, Vystar’s research and development costs were not significant.

 

Advertising Costs

 

Advertising costs, which include television, radio, newspaper, digital and other media advertising, are expensed upon first showing. Advertising costs included in general and administrative expenses in the accompanying consolidated statements of operations were approximately $2,174,000 and $1,808,000 for the years ended December 31, 2021 and 2020, respectively.

 

F-13
 

 

Share-Based Compensation

 

The fair value of stock options is estimated on the grant date using the Black-Scholes option pricing model, based on weighted average assumptions. Expected volatility is based on historical volatility of our common stock. The Company has elected to use the simplified method described in the Securities and Exchange Commission Staff Accounting Bulletin Topic 14C to estimate the expected term of employee stock options. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The value of restricted stock awards is determined using the fair value of the Company’s common stock on the date of grant. The Company accounts for forfeitures as they occur. Compensation expense is recognized on a straight-line basis over the requisite service period of the award.

 

Income Taxes

 

Vystar recognizes income taxes on an accrual basis based on a tax position taken or expected to be taken in its tax returns. A tax position is defined as a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets or liabilities. Tax positions are recognized only when it is more likely than not (i.e., likelihood of greater than 50%), based on technical merits, that the position would be sustained upon examination by taxing authorities. Tax positions that meet the more likely than not threshold will be measured using a probability-weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. A valuation allowance is established to reduce deferred tax assets if all, or some portion, of such assets will more likely than not be realized. Should they occur, interest and penalties related to tax positions are recorded as interest expense. No such interest or penalties have been incurred for the years ended December 31, 2021 and 2020.

 

The Company remains subject to income tax examinations from Federal and state taxing jurisdictions for 2018 through 2021.

 

Concentration of Credit Risk

 

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

 

Other Risks and Uncertainties

 

The Company is exposed to risks pertinent to the operations of a retailer, including, but not limited to, the ability to acquire new customers and maintain a strong brand as well as broader economic factors such as interest rates and changes in customer spending patterns.

 

Recent Accounting Pronouncements

 

In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40), which addresses issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options. This amendment is effective for all entities, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the effects, if any, of the adoption of ASU 2021-04 guidance on the Company’s financial position, results of operations and cash flows.

 

F-14
 

 

In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). The new ASU eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. The amendments in the ASU are effective for public business entities that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The FASB also specified that an entity should adopt the guidance as of the beginning of its annual fiscal year and is not permitted to adopt the guidance in an interim period. The Company is still evaluating the effect the adoption will have on its financial statements.

 

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, as part as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. ASU 02019-12 removes certain exceptions to the general principle of ASC 740 in order to reduce the cost and complexity of its application. ASU 2019-12 is effective for public business entities for annual reporting periods beginning after December 15, 2020, and interim periods within those reporting periods. The Company adopted ASC 740 in 2021 with no material impact on its financial statements.

 

NOTE 3 - LIQUIDITY AND GOING CONCERN

 

The Company’s financial statements are prepared using the accrual method of accounting in accordance with U.S. GAAP and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. However, the Company has incurred significant losses and experienced negative cash flow since inception. At December 31, 2021, the Company had cash of $151,175 and a deficit in working capital of approximately $8.3 million. Further, at December 31, 2021 the accumulated deficit amounted to approximately $51.4 million. We use working capital to finance our ongoing operations, and since those operations do not currently cover all our operating costs, managing working capital is essential to our Company’s future success. Because of this history of losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.

 

A successful transition to attaining profitable operations is dependent upon obtaining sufficient financing to fund the Company’s planned expenses and achieving a level of revenue adequate to support the Company’s cost structure. Management plans to finance future operations using cash on hand, increased revenue from RxAir air purification units,Vytex license fees, proceeds received from the second round of financing under the Paycheck Protection Program and stock issuances to new and existing shareholders. The Company has also focused the efforts of key internal employees on the goal of creating efficiencies in each department in our retail furniture business, including purchasing, marketing, inventory control, advertising, accounting, warehousing and customer service.

 

There can be no assurances the Company will be able to achieve projected levels of revenue in 2022 and beyond. If the Company is not able to achieve projected revenue and obtain alternate additional financing of equity or debt, the Company would need to significantly curtail or reorient operations during 2022, which could have a material adverse effect on the ability to achieve the business objectives, and as a result, may require the Company to file bankruptcy or cease operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities that might be necessary should the Company be forced to take any such actions.

 

The Company’s future expenditures will depend on numerous factors, including: the rate at which the Company can introduce RxAir air purification units and license Vytex NRL raw materials to manufacturers, and subsequently retailers; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; market acceptance of the Company’s products, services and competing technological developments; the Company’s ability to successfully realize synergies through the integration of the merged companies, acquire new customers and maintain a strong brand; the success of our efforts to reduce expenses in our retail furniture business; and broader economic factors such as interest rates and changes in customer spending patterns. As the Company expands its activities and operations, cash requirements are expected to increase at a rate consistent with revenue growth after the Company has achieved sustained revenue generation.

 

F-15
 

 

NOTE 4 - INVESTMENTS – EQUITY SECURITIES

 

Cost and fair value of investments - equity securities are as follows:

 

        Gross   Gross   Fair 
    Cost   Unrealized Losses   Unrealized Gains   Value 
December 31, 2020   $141,225   $(13,315)  $        -   $127,910 

 

Investments, which represented equity securities in a publicly traded company, were sold during 2021 at a gain of approximately $16,000 which is included in other income (expense). Unrealized holding (gains) losses on available-for-sale securities were approximately ($20,000) and $13,000 in 2021 and 2020, respectively, and have been included in other income (expense) in the accompanying statements of operations. The Company recognized a loss of approximately $4,000 upon liquidation of the investments.

 

NOTE 5 - PROPERTY AND EQUIPMENT

 

Property and equipment, net consists of the following:

 

   2021   2020 
         
Furniture, fixtures and equipment  $588,624   $1,385,430 
Tooling and testing equipment   338,572    338,572 
Parking lots   365,707    365,707 
Leasehold improvements   134,014    79,857 
Motor vehicles   49,166    49,166 
           
Property and equipment, gross   1,476,083    2,218,732 
Accumulated depreciation   (643,984)   (587,081)
           
Property and equipment, net  $832,099   $1,631,651 

 

Depreciation expense for the years ended December 31, 2021 and 2020 was $353,833 and $378,282, respectively.

 

F-16
 

 

NOTE 6 - INTANGIBLE ASSETS

 

Intangible assets consist of the following:

 

           Amortization 
           Period 
   2021   2020   (in Years) 
Amortized intangible assets:               
Customer relationships  $150,000   $210,000    6 - 10  
Proprietary technology   280,000    610,000    10 
Tradename and brand   1,050,000    1,050,000    5 - 10  
Marketing related   380,000    380,000    5 
Patents   361,284    359,101    6 - 20  
Noncompete   50,000    50,000    5 
                
Total   2,271,284    2,659,101      
Accumulated amortization   (1,071,486)   (832,186)     
                
Intangible assets, net   1,199,798    1,826,915      
Indefinite-lived intangible assets:               
Trademarks   9,072    9,072      
                
Total intangible assets  $1,208,870   $1,835,987      

 

Amortization expense for the years ended December 31, 2021 and 2020 was $384,250 and $416,959, respectively. During the year ended December 31, 2021, we recognized an impairment charge of $245,050 related to customer relationships and proprietary technology acquired from NHS. During the year ended December 31, 2020, we recognized an impairment charge of $240,350 related to our tradename and brand due to the discontinuance of the NHS tradename.

 

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

 

   Amount 
     
2022  $345,249 
2023   338,638 
2024   239,411 
2025   90,550 
2026   71,232 
Thereafter   114,718 
Total  $1,199,798 

 

NOTE 7 - LEASES

 

The Company leases equipment, a showroom, offices and warehouse facilities. These leases expire at various dates through 2024 with options to extend to 2031. In September 2021, the Company entered into a lease termination agreement involving one of its warehouses effective September 30, 2021. Included in other income (expense), net is a gain on the derecognition of the lease of approximately $5,000.

 

F-17
 

 

The table below presents the lease costs for years ended December 31, 2021 and 2020:

    1    2 
   Year Ended 
   December 31, 
   2021   2020 
         
Operating lease cost  $1,479,444   $1,579,919 
           
Finance lease cost:          
           
Amortization of right-of-use assets   182,204    188,047 
Interest on lease liabilities   34,601    43,454 
           
Total lease cost  $1,696,249   $1,811,420 

 

During the year ended December 31, 2021, the Company recognized sublease income of approximately $145,000, which in included in other income (expense), net in the accompanying consolidated statements of operations. During the year ended December 31, 2020, the Company recognized sublease income of approximately $112,000, which in included in other income (expense), net in the accompanying consolidated statements of operations.

 

Our leases generally do not provide an implicit rate, and therefore we use our incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease. We used incremental borrowing rates as of the implementation date for operating leases that commenced prior to that date.

 

The following table presents other information related to leases:

 

    1    2 
   Year Ended 
   December 31, 
   2021   2020 
         
Cash paid for amounts included in the measurement of lease liabilities:          
           
Operating cash flows used for operating leases  $1,394,135   $1,500,616 
Financing cash flows used for financing leases   231,414    214,308 
           
Assets obtained in exchange for operating lease liabilities   -    - 
           
Assets obtained in exchange for finance lease liabilities   24,603    75,739 
           
Weighted average remaining lease term:          
Operating leases   8.9 years    8.9 years 
Finance leases   4.3 years    5 years 
           
Weighted average discount rate:          
Operating leases   5.59%   5.55%
Finance leases   5.16%   5.16%

 

F-18
 

 

The future minimum lease payments required under operating and financing lease obligations as of December 31, 2021 having initial or remaining non-cancelable lease terms in excess of one year are summarized as follows:

 

   Operating Leases   Finance Leases   Total 
             
2022  $969,427   $160,692   $1,130,119 
2023   878,807    139,080    1,017,887 
2024   870,000    139,080    1,009,080 
2025   870,000    139,080    1,009,080 
2026   870,000    68,395    938,395 
Thereafter   3,552,500    -    3,552,500 
                
Total undiscounted lease liabilities   8,010,734    646,327    8,657,061 
Less: imputed interest   (1,692,998)   (68,445)   (1,761,443)
                
Net lease liabilities  $6,317,736   $577,882   $6,895,618 

 

As of December 31, 2021, the Company does not have additional operating and finance leases that have not yet commenced.

 

NOTE 8 - NOTES PAYABLE AND LOAN FACILITY

 

Letter of Credit

 

The Company entered into a $125,000 letter of credit agreement with Fidelity Co-operative Bank in November 2020. The pledged collateral of a $125,000 cash deposit account is included in prepaid expenses and other. The letter of credit was required pursuant to an agreement with a third-party financial institution for customer financing.

 

Advances

 

On May 29, 2020, Rotmans entered into a sale promotion consulting agreement with a national furniture sales event company. Under the agreement, Rotmans appointed the third-party as its exclusive agent to assist with a high-impact sale. Before the sale, the agent advanced the Company funds of approximately $2,300,000 to pay off the Fidelity line of credit and certain other vendors. The agent will be reimbursed for the advance from the proceeds of the sale. The initial sales agreement with the agent ended in May 2021. A new agreement was entered into with the agent in June 2021. The remaining inventories on hand were used to pay off the liability of the first sale and then simultaneously purchased back for the next sale. The agreement has been amended numerous times and is scheduled to end in August 2022. The agent has a senior first priority security interest and lien in Rotmans inventories and other assets until all obligations and liabilities are satisfied. The outstanding balance of the advance is approximately $2,082,000 and $2,159,000 as of December 31, 2021 and 2020, respectively, and is included in accounts payable in the accompanying consolidated balance sheet.

 

Term Notes

 

On February 24, 2020, the Company entered into an agreement with Libertas Funding LLC (“Libertas”) to sell future sale receipts totaling $1,089,000 for a purchase price of $825,000. The sold amount of future sales receipts were to be delivered weekly to Libertas at predetermined amounts over a period of nine months. Pursuant to a settlement agreement dated August 25, 2020, the amount owed to Libertas has been fully settled with the payment of $525,000 on September 4, 2020. Included in gain (loss) on settlement of debt, net in the accompanying statements of operations for the year ended December 31, 2020 is a gain of approximately $44,000 realized on the Libertas settlement.

 

On April 16, 2020, Rotmans received $1,402,900 in loan funding from the Paycheck Protection Program (the “PPP”), established pursuant to the CARES Act and administered by the U.S. Small Business Administration (“SBA”). The unsecured loan (the “PPP Loan”) is evidenced by a promissory note of the Company dated April 16, 2020 (the “Note”) in the principal amount of $1,402,900 with United Community Bank (the “Bank”), the lender. Under the terms of the Note and the PPP Loan, interest accrues on the outstanding principal at the rate of 1.0% per annum. The term of the Note is two years, though it may be payable sooner in connection with an event of default under the Note. On January 24, 2021, the PPP loan was fully forgiven by the SBA.

 

F-19
 

 

On February 2, 2021, Rotmans received a second PPP loan of $1,402,900 from the SBA. The terms of the Note are the same of the original PPP loan. On June 25, 2021, the PPP loan was fully forgiven by the SBA. Included in gain (loss) on settlement of debt, net for the year ended December 31, 2021 is $2,805,800 related to the forgiveness of both PPP loans.

 

Certain investors guaranteed $100,000 each with Ameris Bank (formerly Fidelity Bank) to establish a $500,000 revolving line of credit, the proceeds of which were loaned to the Company. Since the inception of the loan, the Company has paid interest at a rate of 4.5% per annum to Ameris Bank on behalf of the investors. Concurrently, interest payable to the investors has accrued at a rate of 10% per annum. Pursuant to an agreement dated September 3, 2020, the balance of $500,000 plus accrued interest of $160,000 was deemed to be paid in full through the issuance of 41,250,000 shares of the Company’s common stock. Included in gain (loss) on settlement of debt, net for the year ended December 31, 2020 is a loss of approximately $1,114,000 realized on the Ameris settlement.

 

Shareholder, Convertible and Contingently Convertible Notes Payable

 

The following table summarizes shareholder, convertible and contingently convertible notes payable:

 

    1    2 
   December 31, 
   2021   2020 
         
Shareholder, convertible and contingently convertible notes  $1,241,895   $951,895 
Accrued interest   147,009    94,164 
           
Total shareholder notes and accrued interest   1,388,904    1,046,059 
           
Less: current maturities   (1,388,904)   (1,046,059)
           
Total long-term debt  $-   $- 

 

Shareholder Convertible Notes Payable

 

During the year ended December 31, 2018, the Company issued shareholder contingently convertible notes payable, some of which were for contract work performed by other entities in lieu of compensation and expense reimbursement, totaling approximately $338,000. The notes are (i) unsecured, (ii) bear interest at an annual rate of five percent (5%) from date of issuance, and (iii) are convertible at the Company’s option post April 19, 2018. The notes mature one year from issuance but may be extended one (1) additional year by the Company. If converted, the notes plus accrued interest are convertible into shares of the Company’s common stock at the prior twenty (20) day average closing price with a 50% discount. The outstanding balance of all of these notes of as December 31, 2021 and 2020 is $338,195. The notes matured in January 2020 and continue to accrue interest until settlement. They are in default as of December 31, 2021. The unpaid balance on the notes bears interest at an annual rate of eight percent (8%) in arrears.

 

During the year ended December 31, 2019, the Company issued certain contingently convertible promissory notes in varying amounts to existing shareholders which totaled $613,700. The face amount of the note represents the amount due at maturity along with the accrued interest at an annual rate of five percent (5%). The notes mature one year from issuance but may be extended one (1) additional year by the Company. The face amount can be converted into shares of the Company’s stock, at the option of the Company, based on the average closing price for the trailing 20 days prior to conversion and carrying a 35% to 50% discount. These notes can be converted only after an acceleration event which involves a symbol change, uplisting, or reverse stock split and such conversion is in the control of the Company. All of these notes are outstanding and in default as of December 31, 2021. The unpaid balance on the notes bears interest at an annual rate of eight percent (8%) in arrears.

 

F-20
 

 

During the year ended December 31, 2021, the Company issued certain contingently convertible promissory notes in varying amounts to existing shareholders which totaled $290,000. The notes are unsecured and bear interest at an annual rate of five percent (5%) from date of issuance. The face amount of the notes represents the amount due at maturity along with the accrued interest. In the event that the spin-off of RxAir does not occur within 2022, the Company will convert these notes into common stock at a conversion price of $0.016. If the spin-off does occur, these notes will convert into RxAir common stock with two conversion prices of $0.15 and $2, which equates to a blended conversion price of $0.18. All of these notes are outstanding as of December 31, 2021. At the issuance date of these notes, it was determined they contain a beneficial conversion feature amounting to approximately $90,000. As these notes are contingently convertible, the beneficial conversion feature will not be recorded on the consolidated financial statements until the actual conversion occurs.

 

Based on the variable conversion price of the notes issued prior to 2021, the Company recorded the embedded conversion features as derivative liabilities, which amounted to $647,100 and $491,700 at December 31, 2021 and 2020, respectively.

 

Related Party Debt

 

The following table summarizes related party debt:

 SCHEDULE OF RELATED PARTY DEBT

    1    2 
   December 31, 
   2021   2020 
         
Rotman Family convertible notes  $1,967,737   $1,832,707 
Rotman Family nonconvertible notes   1,953,509    1,555,500 
Accrued interest   384,238    189,394 
Debt discount   (27,083)   (4,667)
           
Long term debt, current   4,278,401    3,572,934 
Less: current maturities   (1,487,000)   (1,537,000)
           
Long term debt  $2,791,401   $2,035,934 

 

Rotman Family Convertible Notes

 

On September 30, 2019, the Company issued contingently convertible promissory notes totaling $180,000 to Steven Rotman ($105,000) and Greg Rotman ($75,000). These notes are (i) unsecured, (ii) bear interest at an annual rate of eight percent (8%) from date of issuance, (iii) are convertible at the Company’s option after December 31, 2019, and (iv) mature five years from issuance. If converted, the notes plus accrued interest are convertible into shares of the Company’s common stock at the average of the five lowest closing prices in the 90-day period prior to conversion with a 50% discount. The balance of the notes payable including accrued interest to Steven and Greg Rotman is approximately $126,000 and $66,000, respectively, at December 31, 2021 and approximately $118,000 and $62,000, respectively, at December 31, 2020.

 

On July 18, 2019, the Company issued contingently convertible notes totaling $1,522,500 to Steven Rotman ($1,102,500) and Bernard Rotman ($420,000) as partial consideration for the acquisition of 58% of Rotmans. These notes are (i) unsecured, and (ii) bear interest at an annual rate of five percent (5%) from date of issuance. These notes can be converted only after an acceleration event which involves a symbol change, or reverse stock split and such conversion is in the control of the Company. Steven Rotman’s note matures eight years from issuance and Bernard Rotman’s note matures four years from issuance. If converted, the notes plus accrued interest are convertible into shares of the Company’s common stock at a 20-day average closing price at a 50% discount. The balance of the notes payable including accrued interest to Steven and Bernard Rotman were approximately $1,238,000 and $472,000, respectively, at December 31, 2021 and approximately $1,183,000 and $451,000, respectively, at December 31, 2020.

 

F-21
 

 

On December 19, 2019, the Company issued a contingently convertible promissory note totaling $100,000 to Steven Rotman. The face amount of the note represents the amount due at maturity along with the accrued interest at 5%. The amount can be converted into shares of the Company’s stock, at the option of the Company, based on the average closing price for the trailing 20 days prior to conversion and carrying 50% discount. The note can be converted only after an acceleration event which involves a symbol change, uplisting, or reverse stock split and such conversion is in the control of the Company. The note was extended to mature two years from issuance. The balance of the note payable including accrued interest to Steven Rotman is approximately $110,000 and $105,000 at December 31, 2021 and 2020, respectively.

 

On February 20, 2020, the Company issued a contingently convertible promissory note totaling $50,000 to Steven Rotman. The face amount of the note represents the amount due at maturity along with the accrued interest at 5%. The amount can be converted into shares of the Company’s stock, at the option of the Company, based on the average closing price for the trailing 20 days prior to conversion and carrying 50% discount. The note can be converted only after an acceleration event which involves a symbol change, uplisting, or reverse stock split and such conversion is in the control of the Company. The note matures two years from issuance. The balance of the note payable including accrued interest to Steven Rotman is approximately $55,000 and $52,000, at December 31, 2021 and 2020, respectively.

 

On June 3, 2021, the Company issued a contingently convertible promissory note totaling $130,030 to Gregory Rotman. The face amount of the note represents the amount due at maturity along with the accrued interest at 5%. The amount can be converted into shares of the Company’s stock, at the holder’s option, based on the average closing price for the trailing 20 days prior to conversion and carrying 50% discount or $0.165 per share whichever is lower. The holder may elect to accelerate conversion in the event of a spin-out or reverse split. The note matures two years from issuance. The balance of the note payable including accrued interest to Gregory Rotman is approximately $134,000 at December 31, 2021.

 

On August 17, 2021, the Company issued a contingently convertible promissory note totaling $5,000 to Jamie Rotman. The note is unsecured and bears interest at an annual rate of five percent (5%) from date of issuance. The face amount of the note represents the amount due at maturity along with the accrued interest. In the event that the spin-off of RxAir does not occur within one year, the Company will convert the note into common stock at a conversion price of $0.016. If the spin-off does occur, the note will convert into RxAir common stock with two conversion prices of $0.15 and $2, which equates to a blended conversion price of $0.18. At the issuance date of this note, it was determined to contain a beneficial conversion feature amounting to approximately $2,000. As this note is contingently convertible, the beneficial conversion feature will not be recorded on the consolidated financial statements until the actual conversion occurs. The balance of the note payable including accrued interest to Jamie Rotman is aprroximately $5,000 at December 31, 2021.

 

The following table summarizes the Rotman Family Convertible Notes:

 

            Carrying Amount      
       Principal    December 31,    December 31, 
   Issue Date    Amount    2021    2020 
Steven Rotman 8.00% note due July 2024  07/18/19  $105,000   $126,000   $117,600 
Steven Rotman 8.00% note due July 2024  07/18/19  $105,000   $126,000   $117,600 
Gregory Rotman 8.00% note due July 2024  07/18/19   55,207    66,264    61,847 
Steven Rotman 5.00% note due July 2027  07/18/19   1,102,500    1,238,016    1,182,890 
Bernard Rotman 5.00% note due July 2023  07/18/19   420,000    471,625    450,625 
Steven Rotman 5.00% note due December 2021  12/19/19   100,000    110,208    105,207 
Steven Rotman 5.00% note due February 2022  02/02/20   50,000    54,583    52,083 
Gregory Rotman 5.00% note due June 2023  06/03/21   130,030    133,822    - 
Jamie Rotman 5.00% note due August 2022  08/17/21   5,000    5,094    - 
                   
      $1,967,737    2,205,612    1,970,252 
                   
Debt Discount           (27,083)   (4,667)
                   
           $2,178,529   $1,965,585 

 

Based on the variable conversion price for all of these convertible notes, the Company recorded the embedded conversion features as derivative liabilities, which amounted to $1,131,000 and $1,275,000 at December 31, 2021 and 2020, respectively.

 

F-22
 

 

Rotman Family Nonconvertible Notes

 

In connection with the acquisition of 58% of Rotmans, Steven and Bernard Rotman were issued related party notes payable in the amounts of $367,500 and $140,000, respectively. The notes bear interest at an annual rate of five percent (5%). Steven Rotman’s note matures eight years from issuance and Bernard Rotman’s note matures four years from issuance. Payments of $3,828 and $2,917 to Steven and Bernard Rotman, respectively, per month were scheduled to begin six months from issuance until maturity in December 2027 and 2023, respectively. The balance of these notes payable including accrued interest to Steven and Bernard Rotman is approximately $413,000 and $157,000, respectively, at December 31, 2021 and approximately $394,000 and $150,000, respectively, at December 31, 2020. No payments have been made by the Company as of December 31, 2021.

 

During the six months ended December 31, 2020, Steven Rotman advanced the Company funds totaling $1,048,000. In December 2020, the Company formalized the advances and issued a promissory note to Steven Rotman. The note bears interest at an annual rate of five percent (5%) and was due one year from issuance. The maturity date has been extended to December 2022. The face amount of the note represents the amount due at maturity along with accrued interest. The balance of the note payable including accrued interest to Steven Rotman is approximately $1,115,000 and $1,063,000, at December 31, 2021 and 2020, respectively.

 

During 2021, Steven Rotman advanced the Company funds totaling $398,009. The Company formalized the advances and issued promissory notes to Steven Rotman. The notes bear interest at an annual rate of five percent (5%) and are due no later than two years from the issuance date. The face amount of the notes represents the amount due at maturity along with accrued interest. The balance of the notes payable including accrued interest to Steven Rotman is approximately $415,000 at December 31, 2021.

 

The following table summarizes the Rotman Family Nonconvertible Notes:

  

          Carrying Amount 
      Principal   December 31,   December 31, 
   Issue Date  Amount   2021   2020 
Steven Rotman 5.00% note due July 2027  07/18/19  $367,500   $412,672   $394,297 
Steven Rotman 5.00% note due July 2027  07/18/19  $367,500   $412,672   $394,297 
Bernard Rotman 5.00% note due July 2023  07/18/19   140,000    157,208    150,208 
Steven Rotman 5.00% note due December 2022  12/22/20   1,048,000    1,115,243    1,062,844 
Steven Rotman 5.00% note due March 2023  03/31/21   395,000    411,652    - 
Steven Rotman 5.00% note due June 2023  06/02/21   3,009    3,097    - 
                   
      $1,953,509   $2,099,872   $1,607,349 

 

F-23
 

 

Approximate maturities for the succeeding years are as follows:

 

      
2022  $1,487,000 
2023   1,105,000 
2024   226,000 
2025   36,000 
2026   38,000 
Thereafter   1,386,401 
      
Long term debt  $4,278,401 

 

NOTE 9 - DERIVATIVE LIABILITIES

 

As of December 31, 2021 and 2020 the Company had a $1,778,100 and $1,766,700, respectively, derivative liability balance on the consolidated balance sheet and recorded a (gain) loss from change in fair value of derivative liabilities of $(53,600) and $238,900 for the years ended December 31, 2021 and 2020, respectively. The derivative liability activity comes from the convertible notes payable. The Company analyzed the conversion features and warrants of the various note agreements for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the embedded conversion features should be classified as a derivative because the exercise price of these convertible notes are subject to a variable conversion rate. The Company has determined that the conversion feature is not considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment. In accordance with ASC 815, the Company has bifurcated the conversion feature of the notes and recorded a derivative liability.

 

The embedded derivatives for the notes are carried on the Company’s consolidated balance sheet at fair value. The derivative liability is marked-to-market each measurement period and any unrealized change in fair value is recorded as a component of the consolidated statement of operations and the associated fair value carrying amount on the consolidated balance sheet is adjusted by the change. The Company fair values the embedded derivative using a lattice-based valuation model or Monte Carlo simulation.

 

The following table summarizes the derivative liabilities included in the consolidated balance sheet at December 31, 2021 and 2020:

 

Fair Value of Embedded Derivative Liabilities:

 

   2021   2020 
         
Balance, beginning of the year  $1,766,700   $1,499,800 
           
Initial measurement of liabilities   65,000    28,000 
           
Change in fair value   (53,600)   238,900 
           
Balance, end of the year  $1,778,100   $1,766,700 

 

NOTE 10 - STOCKHOLDERS’ DEFICIT

 

Cumulative Convertible Preferred Stock

 

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

 

F-24
 

 

As of December 31, 2021, the 8,698 shares of outstanding preferred stock had undeclared dividends of approximately $75,000 and could be converted into 3,230,220 shares of common stock, at the option of the holder.

 

As of December 31, 2020, the 13,698 shares of outstanding preferred stock had undeclared dividends of approximately $103,000 and could be converted into 4,801,840 shares of common stock, at the option of the holder.

 

Common Stock and Warrants

 

During the year ended December 31, 2021, the Company issued 2,533,334 shares under equity purchase agreements for cash proceeds received in 2020 totaling $38,000. The Company issued 78,577,773 shares for services and 11,364,791 shares for settlement of a related party payable. See Note 13 for related party details. Included in stock subscription payable at December 31, 2021, is $270,000 received under common stock subscription agreements for 18,000,001 shares during the year ended December 31, 2020.

 

During the year ended December 31, 2021, 1,767,945 shares of common stock were issued for the conversion of 5,000 shares of preferred stock.

 

NOTE 11 - REVENUES

 

The following table presents our revenues disaggregated by each major product category and service for the last two years:

   Year Ended December 31, 
   2021   2020 
       % of       % of 
   Net Sales   Net Sales   Net Sales   Net Sales 
Merchandise:                    
Case Goods                    
Bedroom Furniture  $2,276,316    8.2   $2,546,691    12.1 
Dining Room Furniture   1,641,966    5.9    1,639,621    7.8 
Occasional   3,800,158    13.8    3,482,484    16.6 
    7,718,440    27.9    7,668,796    36.5 
Upholstery   10,162,377    36.8    6,458,173    30.8 
Mattresses and Toppers   4,562,374    16.5    3,598,515    17.2 
Broadloom, Flooring and Rugs   2,213,054    8.0    1,447,979    6.9 
Warranty   740,864    2.7    700,193    3.3 
Air Purification Units   1,519,529    5.5    675,354    3.2 
Accessories and Other   731,241    2.6    430,233    2.1 
   $27,647,879    100.0   $20,979,243    100.0 

 

NOTE 12 - SHARE-BASED COMPENSATION

 

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

 

In total, the Company recorded $822,070 and $1,031,850 of stock-based compensation for the years ended December 31, 2021 and 2020, respectively, including shares to be issued related to consultants and board member stock options and common stock and warrants issued to non-employees. Included in stock subscription payable is accrued stock-based compensation of $873,799 and $2,177,806 at December 31, 2021 and 2020, respectively.

 

F-25
 

 

The Company used the Black-Scholes option pricing model to estimate the grant-date fair value of option and warrant awards:

 

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

 

In total for the years ending December 31, 2021 and 2020, the Company recorded $15,989 and $21,872, respectively, of share-based compensation expense related to employee and board members’ stock options. The unrecognized compensation expense as of December 31, 2021 was $11,070 for non-vested share-based awards to be recognized over a period of approximately one year.

 

Options

 

During 2004, the Board of Directors of the Company adopted a stock option plan (the “Plan”) and authorized up to 4,000,000 shares to be issued under the Plan. In April 2009, the Company’s Board of Directors authorized an increase in the number of shares to be issued under the Plan to 10,000,000 shares and to include the independent Board Members in the Plan in lieu of continuing the previous practice of granting warrants each quarter to independent Board Members for services. At December 31, 2021, there are 2,251,729 shares of common stock available for issuance under the Plan. In 2014, the Board of Directors adopted an additional stock option plan which provides for an additional 5,000,000 shares, which are all available as of December 31, 2021. In 2019, the Board of Directors adopted an additional stock option plan which provides for an additional 50,000,000 shares, which are all available as of December 31, 2021. 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 years ended December 31, 2021 and 2020, respectively.

 

F-26
 

 

The following table summarizes all stock option activity of the Company for the years ended December 31, 2021 and 2020:

           Weighted 
       Weighted   Average 
       Average   Remaining 
   Number   Exercise   Contractual 
   of Shares   Price   Life (Years) 
             
Outstanding, December 31, 2019   27,983,271   $0.20    3.45 
                
Granted   -    -    - 
                
Exercised   -    -    - 
                
Forfeited   (108,333)  $0.68    - 
                
Outstanding, December 31, 2020   27,874,938   $0.19    2.47 
                
Granted   -    -    - 
                
Exercised   -    -    - 
                
Forfeited   (700,000)  $0.57    - 
                
Outstanding, December 31, 2021   27,174,938   $0.19    1.53 
                
Exercisable, December 31, 2021   26,874,938   $0.20    1.48 
                
Exercisable, December 31, 2020   27,124,938   $0.19    2.59 

 

As of December 31, 2021 and 2020, there was no aggregate intrinsic value on the Company’s outstanding options. 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.

 

F-27
 

 

The following table represents the Company’s warrant activity for the years ended December 31, 2021 and 2020:

                      Weighted  
                      Average  
          Weighted     Weighted     Remaining  
    Number     Average     Average     Contractual  
    of Shares     Fair Value     Exercise Price     Life (Years)  
                         
Outstanding, December 31, 2019     14,237,646       -     $ 0.07       3.58  
                                 
Granted     -       -       -       -  
                                 
Exercised     -       -       -       -  
                                 
Forfeited     (31,734 )     -     $ 1.29       -  
                                 
Expired     -       -       -       -  
                                 
Outstanding, December 31, 2020     14,205,912       -     $ 0.08       2.53  
                                 
Granted     -       -       -       -  
                                 
Exercised     -       -       -       -  
                                 
Forfeited     (4,031,653 )     -     $ 0.22       -  
                                 
Expired     -       -       -       -  
                                 
Outstanding, December 31, 2021     10,174,259       -     $ 0.08       2.36  
                                 
Exercisable, December 31, 2021     10,174,259       -     $ 0.08       2.36  
                                 
Exercisable, December 31, 2020     14,205,912       -     $ 0.08       2.53  

 

NOTE 13 - RELATED PARTY TRANSACTIONS

 

Officers and Directors

 

Per Steven Rotman’s Employment agreement dated July 22, 2019, as amended, he is to be paid $125,000 per year in cash, $10,417 per month in shares based on a 20-day average price at a 50% discount to market, $5,000 per month in cash for expenses, as well as access to a Company provided vehicle and health and life insurance. During the year ended December 31, 2021, the Company expensed approximately $422,000 related to this employment agreement and issued 29,205,927 shares of common stock for past services. As of December 31, 2021, the Company had a stock subscription payable balance of $286,625 or approximately 14,797,000 shares to be issued in the future, $123,155 of reimbursable expenses payable and $116,403 of unpaid salary payable related to this party. In addition, 6,666,667 shares are owed to this party under a stock subscription agreement dated in July 2020 for $100,000. On August 9, 2021, the Company issued 29,205,927 shares to Steven Rotman for past services.

 

The Board of Directors authorized their board fees for 2021 be paid in common stock of the Company. Included in stock subscription payable is 10 million shares valued at $291,000, of which 2 million shares valued at $58,200 is included in Steven Rotman’s balance above.

 

F-28
 

 

Designcenters.com

 

This entity is owned by Jamie Rotman, who is the daughter of the Company’s CEO, Steven Rotman. Designcenters.com (“Design”) provided bookkeeping and management services to the Company through July 2019. In exchange for such services, the Company had entered into a consulting agreement with the related party entity. As of December 31, 2021, the Company had a stock subscription payable balance of approximately $42,000, for approximately 850,000 shares related to this party for services incurred and expensed in 2019.

 

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, Inc. (“Blue Oar”) provides business consulting services to the Company. In exchange for such services, the Company has entered into a consulting agreement with the related party entity.

 

Per the consulting agreement, Blue Oar is to be paid $15,000 per month in cash for expenses, and $12,500 per month to be paid in shares based on a 20-day average at a 50% discount to market. During the year ended December 31, 2021, the Company expensed approximately $461,000 related to the consulting agreement and issued 30,038,513 shares of common stock for past services. In addition, the Company issued 11,364,791 shares of common stock to settle its accounts payable balance of $180,000 in February 2021. In connection with the settlement, a loss of $155,265 was incurred.

 

As of December 31, 2021, the Company had a stock subscription payable balance of approximately $281,000 or approximately 15,603,000 shares, and a balance of $180,000 in accounts payable related to this related party. In addition, 4,666,667 shares are owed to this party under a stock subscription agreement dated in July 2020 for $70,000.

 

Fluid Energy Conversion Inc.

 

In May of 2019, the Company acquired the assets of Fluid Energy Conversion, Inc. (“FEC”) for 2,500,000 shares of common stock. FEC is owned by Dr. Bryan Stone, one of the Company’s directors. The assets consist of a patent on the Hughes Reactor, which has the ability to control, enhance and focus energy in flowing liquids and gases. Included in subscription stock payable at December 31, 2021 is $103,750 representing the value of the 2,500,000 shares on the purchase date.

 

NOTE 14 - COMMITMENTS

 

Employment and Consulting Agreements

 

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

 

There is currently one employment agreement in place with the CEO, Steven Rotman. See compensation terms in Note 13.

 

During the year ended December 31, 2021 and 2020, the Company entered into various service agreements with consultants for financial reporting, advisory, and compliance services.

 

Litigation

 

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

 

EMA Financial

 

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

 

F-29
 

 

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

 

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

 

On June 10, 2020, EMA filed a motion for summary judgment as to its remaining claims for relief and a motion to dismiss the Company’s affirmative defenses and counterclaims. The Company opposed the motion on July 10, 2020, and the same was fully submitted to the Court on July 28, 2020. On March 29, 2021, the Court issued a decision granting in part and denying in part the motion. Specifically, the Court granted that part of the motion seeking summary judgment and dismissal on the Company’s affirmative defense and counterclaim regarding Sections 15(a)/29(b) of the Exchange Act. Two weeks later the Company filed a motion for reconsideration as to the dismissal portion of the order, or, for the alternative, a motion for certification for the right to file a petition to the Second Circuit Court of Appeals on the issue. The Court denied the motion for reconsideration and certification. Subsequently, fact discovery has been completed and the parties are now moving forward with preparing summary judgment motions for their respective claims. Motions should be fully submitted to the Court by June 2022.

 

Payment of Wages Action

 

On March 13, 2020, Robert LaChapelle, a former employee of Rotmans Furniture, the Company’s majority owned subsidiary, on behalf of himself and all others similarly situated, filed a class action complaint against Rotmans and two of its prior owners (including Steve Rotman, President of the Company) in the Worcester Superior Court alleging non-payment of overtime pay and Sunday premium pay pursuant to the Massachusetts Blue Laws (Ch. 136), the Massachusetts Overtime Law (Chapter 151, § 1A), and the Massachusetts Payment of Wages Law (Chapter 149 §§148 and 150). Specifically, LaChapelle has alleged that Rotmans failed to pay him and other sales people who were paid on a commission-only basis overtime pay at a rate of least 1.5 times the basic minimum wage or premium pay (also at 1.5 times the basic minimum wage) for hours they worked on Sundays. The parties settled with the named Plaintiffs, Robert LaChapelle and certain other employees, each on an individual basis, for a de minimus amount which was paid in March 2021. Plaintiffs’ counsel then filed a Stipulation of Dismissal of the Plaintiffs’ Complaint with prejudice. The settlement is included in operating expenses in the accompanying financial statements for the year ended December 31, 2020. On May 21, 2021, one former and one current employee of Rotmans filed suit in the Worcester District Court on substantially the same allegations as LaChapelle. In January 2022, the parties settled for a similarly immaterial amount. The Stipulation of Dismissal is expected to be in June 2022 after the settlement payment is made. The settlement is included in the accompanying financial statements for the year ended December 31, 2021.

 

F-30
 

 

Stock Subscription Payable

 

At December 31, 2021 and December 31, 2020, the Company recorded $1,247,549 and $2,589,556, respectively, of stock subscription payable related to common stock to be issued. The following summarizes the activity of stock subscription payable during the year ended December 31, 2021 and December 31, 2020:

 

   Amount   Shares 
         
Balance, January 1, 2020  $1,150,125    31,439,401 
Additions, net   1,640,631    71,991,955 
Issuances, net   (201,200)   (4,000,000)
           
Balance, December 31, 2020   2,589,556    99,431,356 
Additions, net   806,082    42,185,365 
Issuances, net   (2,148,089)   (81,110,994)
           
Balance, December 31, 2021  $1,247,549    60,505,727 

 

NOTE 15 - MAJOR CUSTOMERS AND VENDORS

 

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

 

During the year ended December 31, 2021 and 2020 the Company made approximately 14% and 12%, respectively, of its purchases from one major vendor. The Company owed its major vendor approximately $167,000 and $476,000 at December 31, 2021 and 2020, respectively.

 

NOTE 16 - INCOME TAXES

 

The provision (benefit) for income taxes for the years ended December 31, 2021 and 2020 assumes a 21% effective tax rate for federal income taxes. A reconciliation of the federal statutory income tax rate and the effective income tax rate as a percentage of income before income taxes is as follows:

 

               
   Year Ended 
   December 31, 
   2021   2020 
         
Federal statutory income tax rate   (21.0)%   (21.0)%
           
Change in valuation allowance on net operating loss carryforwards   21.0    21.0 
           
Effective income tax rate   0.0%   0.0%


 

F-31
 

 

Deferred tax assets as of December 31, 2021 and 2020 are as follows:

 

   2021   2020 
         
NOL carryforwards  $7,500,000   $6,715,000 
           
Less valuation allowance   (7,500,000)   (6,715,000)
           
Deferred tax assets  $-   $- 

 

Deferred taxes are caused primarily by net operating loss carryforwards. U.S. Tax Legislation enacted in 2017 (the “TCJA”) has significantly changed certain aspects of U.S. federal income taxation. Net Operating Losses (“NOLs”) generated in 2017 and prior years can be carried forward for 20 years. NOLs generated in 2018 – 2020, as enacted by the CARES Act, can be carried forward indefinitely. However, NOLs generated in 2021 is also carried forward indefinitely but limited to 80% of taxable income.

 

For federal income tax purposes, the Company has a net operating loss carryforward of approximately $35,900,000 as of December 31, 2021, of which approximately $18,400,000 expires beginning in 2024 and $17,500,000 which can be carried forward indefinitely. For state income tax purposes, the Company has a net operating loss carryforward of approximately $18,400,000 and $17,200,000 as of December 31, 2021 in Georgia and Massachusetts, respectively, which expires beginning in 2023.

 

In addition, as of December 31, 2021, Rotmans has a net operating loss carryforward of approximately $3,800,000 for federal income tax purposes of which $1,500,000 expires beginning in 2029 and $2,300,000 can be carried forward indefinitely. Rotmans has a state operating loss carryforward of approximately $2,800,000 which expires beginning in 2022.

 

Pursuant to Internal Revenue Code Section 382, the future realization of our net operating loss carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that may have occurred previously or that could occur in the future.

 

NOTE 17 - PROFIT SHARING PLAN

 

The Company sponsors a qualified 401(k) profit sharing plan covering all eligible employees. The plan permits participants to make tax-deferred contributions to the plan by salary reduction. Company contributions are discretionary and are determined annually by the Board of Directors.

 

There were no Company contributions in 2021 and 2020. Participant and Company contributions are limited to amounts allowed under the Internal Revenue Code.

 

The Company offers no post-retirement benefits other than the plan discussed above and no significant post-employment benefits.

 

NOTE 18 - SUBSEQUENT EVENTS

 

The Board voted to create a new class of preferred stock named Class A. The stock will convert 1,000 to 1 into common shares, have a liquidation preference and earn 10% annual dividends. Class A stock will be available to all debt holders including Board members.

 

On January 5, 2022, the Board approved the repurchase of 20,000 shares of common stock at par value.

 

Blue Oar has advanced Rotmans $500,000 under a promissory note agreement dated April 28, 2022. The note bears interest at a rate of six percent (6%) and requires weekly principal payments of $12,500 beginning on May 25, 2022 and continuing until interest is paid in full. Blue Oar has also advanced the Company funds totaling $40,000. The Company has not formalized an agreement with repayment terms as of this date.

 

Steven Rotman has advanced the Company funds totaling $19,087. The advances bear interest at an annual rate of five percent (5%). The Company has not formalized an agreement with repayment terms as of this date.

 

Pursuant to a settlement agreement with a vendor in May 2022, Steven Rotman personally guaranteed an obligation of the Company totaling $96,681. Weekly payments of $7,437 began on May 9, 2022 and will continue until August 1, 2022. The Company has not formalized an agreement with repayment terms as of this date.

 

F-32
 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

None.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

The Company’s Chief Executive Officer and Chief Financial Officer (the Certifying Officer) is responsible for establishing and maintaining disclosure controls and procedures for the Company. Although the Certifying Officer has designed such disclosure controls and procedures to ensure that material information is made known to them, particularly during the period in which this report was prepared, certain material weaknesses occurred during the year ended December 31, 2021 and subsequent to year end. The Certifying Officer has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e) (the Rules) under the Securities Exchange Act of 1934 (or Exchange Act) as of the end of the period covered by this Annual Report and is working on improving controls with an outside CPA firm and a more dedicated internal resources.

 

Management’s Report on Internal Control Over Financial Reporting

 

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

 

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

 

Management, under the supervision and with the participation of our Chief Executive Officer and our acting Chief Financial Officer, conducted an evaluation of our internal control over financial reporting as of December 31, 2021 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) 2013. Based on our evaluation under the COSO framework, management concluded that our internal control over financial reporting was not effective as of December 31, 2021. Such conclusion was reached based on the following material weaknesses noted by management:

 

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

 

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

 

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

 

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

 

21

 

 

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

 

Management expects to strengthen internal control during 2022 by developing stronger business and financial processes for accounting for transactions such as warrant/stock issuances, which will enhance internal control for the Company.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Board of Directors

 

The following tables set forth the name and information of each director of Vystar as of December 31, 2021. Each director is elected to serve until the next Annual Meeting of Stockholders.

 

Name   Principal Occupation During Last Five Years   Age   Director
Since
             
Joseph C. Allegra, Jr., PhD   Joseph Allegra, PhD was elected Chairman of the Board on February 14, 2018 and has followed Vystar’s progress for numerous years and has assisted as an investment advisor and investor, providing insight into positioning the company to attract investors, particularly in the healthcare sector. He currently is an Instructor of Epidemiology and Biostatistics at the University of Georgia and an Investment Advisor at Lincoln Lee Investments in Atlanta. Previously he was a Senior Drug Safety Associate at Genentech. Dr. Allegra received his BA in Psychology from Boston University, and his Master of Public Health and Doctor of Philosophy degrees from the University of Georgia.   42   2017
             
Steven Rotman   Steven Rotman was elected Chief Executive Officer and a Director of Vystar Corporation. Mr. Rotman has been President and CEO of Rotmans, one of the oldest and largest, furniture and carpet retailers in New England, for more than 40 years. In addition, he is the founder and managing partner of NHS Holdings, a company that in 2015 became the exclusive distributor of Vytex™ natural rubber latex foam in the U.S. and laid the groundwork for Vytex’s entrance to the home furnishings industry. Mr. Rotman received a BBA degree from Clark University and an MS from New York University.   83   2017

 

22

 

 

Ranjit K. Matthan, PhD   Ranjit K. Matthan, Ph.D., an internationally renowned latex and rubber expert, joined the Company’s Board of Directors in 2015. Dr. Matthan has been a consultant to Vystar Corporation since 2008 and has played a significant role in the manufacturing scale up of reduced-protein Vytex® natural rubber latex (NRL) in Malaysia and refining the research and development of manufacturing processes for applications using Vytex NRL, such as latex foam, condoms, adhesives, medical devices, etc. Dr. Matthan has been associated with the development of natural rubber and rubber-based industries manufacturing in South Asia since the 1970s and introduced technically specified natural rubber into India. He has advised national and international companies and research bodies including the Government of India, the Malaysian Rubber Research and Development Board, Asian Development Bank, Industrial Development Bank of India, Revertex (Malaysia) as well as many private companies engaged in latex production and manufacturing. A founding Director of the Bangkok-based Asia Pacific Elastomer Science and Technology (APEST), he has played a key role in sustainability initiatives for natural rubber. He has also been associated with the development and commercial introduction of several eco-friendly natural rubber grades, including Vytex NRL.   77   2015
             
   

Dr. Matthan has received numerous industry awards, including: the prestigious 2014 Institute of Materials, Minerals and Mining, U.K.’s Hancock Medal for his contributions to the development of the environmentally friendly sustainable growth of the global natural rubber industry, and the 2006 KMPhilip Award from the All India Rubber Industries Association for significant contributions toward the development of the Indian Rubber Industry. Dr. Matthan has published over 50 scientific and technical papers on natural rubber and lattices and is an invited speaker at several international conferences including the International Latex Conference.

 

Dr. Matthan holds an undergraduate degree from St. Stephens College, Delhi University, India and he earned his Ph.D. in Polymer Chemistry from the National College of Rubber Technology, London, England, where he was the first Ph.D. student of Dr. D.C. Blackley whose books and high polymer lattices and emulsion polymerization are the industry standard references.

       
             
Bryan Stone, MD   Bryan Stone, M.D, has advised Vystar over the past years relating to product development for the healthcare industry and brings to the Board an understanding of the challenges of new product development for start-up companies. He is the Chairman of Medicine at Desert Regional Medical Center in Palm Springs, California, and is the Medical Director at multiple DaVita Dialysis Centers. He is also an entrepreneur, serving as the Interim CEO of Fluid Energy Conversion, Inc., a firm specializing in molecular fluid mechanics, specifically high efficiency mass producible energy conversion technologies.   54   2017
             
Byron L. Novosad, DDS  

Byron L. Novosad, DDS was appointed to the Board on January 25, 2021. Dr. Novosad received a BA in Chemistry from Baylor University and graduated from the University of Texas Dental School in Houston and later received his Certificate in Periodontics in 1982. Dr. Novosad brings experience to the Board in the medical and health care field, and served previously as a consultant to UV Flu Technologies from 2011 to 2015 and a consultant to Vystar Corporation from 2013 to 2015. He has operated a private periodontal practice in the Houston, Texas area for 30 years and has been a Clinical Assistant Professor of Periodontics at the Periodontic Graduate Clinic for the University of Texas Dental branch in Houston since 2007. He was on the Advisory Board of Wharton County Jr. College School of Dental Hygiene for 37 years.

  66   2021

 

23

 

 

Director Independence

 

Under Rule 5605(b)(1) of the Nasdaq Marketplace Rules, independent directors must comprise a majority of a listed company’s board of directors within one year of listing. In addition, Nasdaq Marketplace Rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and governance committees be independent. While Vystar does not currently qualify for listing on Nasdaq and will likely not qualify for some time after the date of this proxy statement, it does intend to seek such listing as soon as possible and complies with its Marketplace Rules. Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended. Under Nasdaq Marketplace Rule 5605(a)(2), a director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In order to be considered to be independent for purposes of Rule 10A-3, a member of an audit committee of a public company may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee: (1) accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the public company or any of its subsidiaries; or (2) be an affiliated person of the listed company or any of its subsidiaries.

 

In March of 2013, our Board undertook a review of its composition, the composition of its committees and the independence of each director. Based upon information requested from and provided by each director concerning his or her background, employment and affiliations, including family relationships, our Board has determined none of the directors has a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is “independent” as that term is defined under Nasdaq Marketplace Rule 5605(a)(2).

 

Audit Committee

 

The Board member serving on our Audit Committee was Dr. Stone. Our Board has determined that Dr. Stone satisfies the requirements for financial literacy under the current requirements of the Nasdaq Marketplace Rules. He is an “audit committee financial expert,” as defined by SEC rules and satisfy the financial sophistication requirements of The NASDAQ Global Market. Our Audit Committee assists our Board in its oversight of our accounting and financial reporting process and the audits of our financial statements. The Audit Committee’s responsibilities include:

 

  appointing, approving the compensation of, and assessing the independence of our independent registered public accounting firm;
     
  overseeing the work of our independent registered public accounting firm, including through the receipt and consideration of reports from such firm;
     
  reviewing and discussing with management and the independent registered public accounting firm our annual and quarterly financial statements and related disclosures;
     
  monitoring our internal control over financial reporting, disclosure controls and procedures and code of business conduct and ethics;
     
  discussing our risk management policies;
     
  establishing policies regarding hiring employees from the independent registered public accounting firm and procedures for the receipt and resolution of accounting related complaints and concerns;
     
  meeting independently with our independent registered public accounting firm and management;
     
  reviewing and approving or ratifying any related person transactions; and
     
  preparing the audit committee report required by SEC rules.

 

All audit and non-audit services, other than de minimus non-audit services, to be provided to us by our independent registered public accounting firm must be approved in advance by our Audit Committee.

 

24

 

 

Audit Committee Charter

 

We have adopted an Audit Committee Charter which sets out the duties and responsibilities of our Audit Committee. The Audit Committee Charter is available on our website at www.vystarcorp.com. Any amendments to the Charter, or any waivers of its requirements, will be disclosed on our website.

 

Meetings of the Board and Committees

 

During fiscal year 2021, our Board held one meeting, and its Audit Committee held one meeting. Each director attended the meeting in fiscal year 2021. Members of our Board are encouraged to attend our annual meetings of shareholders.

 

CORPORATE GOVERNANCE

 

Corporate Governance Guidelines

 

We believe in sound corporate governance practices and have adopted formal Corporate Governance Guidelines to enhance our effectiveness. Our Board adopted these Corporate Governance Guidelines in order to ensure that it has the necessary practices in place to review and evaluate our business operations as needed and to make decisions that are independent of our management. The Corporate Governance Guidelines are also intended to align the interests of directors and management with those of our shareholders. The Corporate Governance Guidelines set forth the practices our Board follows with respect to Board and committee composition and selection, Board meetings, chief executive officer performance evaluation and management development and succession planning for senior management, including the chief executive officer position. A copy of our Corporate Governance Guidelines is available on our website at www.vystarcorp.com.

 

Code of Business Conduct and Ethics

 

We adopted a Code of Business Conduct and Ethics applicable to all officers, directors and employees of Vystar that comply with NASDAQ listing standards. The Code of Business Conduct and Ethics includes an enforcement mechanism, and any waivers for directors or executive officers must be approved by our Board and disclosed in a current report on Form 8-K with the SEC. This Code of Business Conduct is publicly available on our website at www.vystarcorp.com. There were no waivers of the Code of Business Conduct and Ethics for any of our directors or executive officers during fiscal year 2021.

 

ITEM 11. EXECUTIVE COMPENSATION

 

Overview

 

EXECUTIVE COMPENSATION

 

Summary Compensation Table

 

The following table sets forth information regarding compensation earned by our, Chief Executive Officer and President for 2021 and 2020.

 

Name and Principal Position  Salary   Option
Awards(1)
   Total 
Steven Rotman - 2021  $185,000   $292,329   $477,329 
Chief Executive Officer, Chief Financial Officer and President               
                
Steven Rotman - 2020  $185,000   $263,269   $448,269 
Chief Executive Officer, Chief Financial Officer and President               

 

(1) These amounts do not reflect the actual economic value realized by the executive officers. In accordance with SEC rules, the amounts in this column for 2021 and 2020 represent the dollar amount recognized as compensation expense by Vystar for financial statement reporting purposes for fiscal years 2021 and 2020 for stock and options granted to each of the executive officers in each such fiscal year in accordance with applicable accounting guidance related to stock-based compensation. Pursuant to SEC rules, the amounts shown disregard the impact of estimated forfeitures related to service-based vesting conditions.

 

25

 

 

DIRECTOR COMPENSATION

 

The following table sets forth certain information with respect to compensation awarded to, paid to or earned by each of Vystar’s non-employee directors during fiscal year 2021.

 

   Fees             
   Earned or   Stock   Option     
   Paid in   Awards   Awards   Total 
Name    Cash ($)   ($)(3)   ($) (1)   ($)(2) 
Joseph C. Allegra, Jr., PhD    58,200    -    4,921    63,121 
Bryan Stone, M.D.    58,200    -    4,921    63,121 
Ranjit K. Matthan, PhD    58,200    -    -    58,200 
Byron L. Novosad, DDS    58,200    -    -    58,200 

 

(1) On December 15, 2017, Dr. Stone and Dr. Allegra as non-employee directors were granted 500,000 options at $0.05 per share which vest 25,000 options at the end of each fiscal quarter for five (5) years beginning December 31, 2017.
 
  The amounts included represent the portion of the original total grant date fair value of options that vested in 2021 together with the dollar amount recognized as compensation expense by Vystar for financial statement reporting purposes for fiscal year 2021 in accordance with applicable accounting guidance related to stock-based compensation.
   
(2) These amounts do not reflect the actual economic value realized by the directors. In accordance with SEC rules, this column represents the dollar amount recognized as compensation expense by Vystar for financial statement reporting purposes for fiscal year 2021 for stock options granted to each of the non-employee directors during fiscal years 2016 through 2021 in accordance with applicable accounting guidance related to stock-based compensation. Pursuant to SEC rules, the amounts shown disregard the impact of estimated forfeitures related to service-based vesting conditions.

 

26

 

 

Compensation Philosophy

 

The current policy of our Board is that compensation for non-employee directors should be equity-based compensation to reward directors for quarterly periods of service in fulfilling their oversight responsibilities.

 

Expenses

 

We reimburse our directors for their travel and related expenses in connection with attending Board and committee meetings, as well as costs and expenses incurred in attending director education programs and other Vystar-related seminars and conferences.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth the beneficial ownership of our common stock as of December 31, 2021 by each entity or person who is known to beneficially own 5% or more of our common stock, each of our directors, each Executive Officer identified in “Executive Compensation—Summary Compensation Table” contained in this proxy statement and all of our directors and current executive officers as a group. This table is based upon information supplied by executive officers, directors and principal shareholders. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, each of the shareholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned. None of the shares beneficially owned by our executive officers and directors are pledged as security. Applicable percentages are based on shares outstanding on December 31, 2021, adjusted as required by rules promulgated by the SEC.

 

Officers and Directors          
           
Steven Rotman          
Worcester, MA   20,530,464    1.586%
           
Bryan Stone, M.D.          
Palm Springs, CA   9,895,579    0.765%
           
Joseph Carmen Allegra, Jr., PhD          
Atlanta, GA   1,500,000    0.116%
           
Ranjit K. Matthan, PhD          
India   1,165,000    0.090%
           
Byron L. Novosad, DDS          
Houston, TX   766,667    0.059%
           
All Directors and Executive Officers as a Group   33,857,710    2.616%
           
Total Shares Outstanding   1,294,145,560      

 

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Section 16(a) of the Exchange Act requires our executive officers and directors, and any person or entity who owns more than ten percent of a registered class of our common stock or other equity securities, to file with the SEC certain reports of ownership and changes in ownership of our securities. Executive officers, directors and shareholders who hold more than ten percent of our outstanding common stock are required by the SEC to furnish us with copies of all required forms filed under Section 16(a). We prepare Section 16(a) forms on behalf of our executive officers and directors based on the information provided by them.

 

27

 

 

Based solely on review of this information and written representations by our executive officers and directors that no other reports were required, we believe that, during fiscal year 2021 each director filed the forms required by Section 16(a) of the Exchange Act on a timely basis with respect to the repricing of option and warrants.

 

EQUITY COMPENSATION PLAN INFORMATION

 

The following table shows information related to our common stock which may be issued under our compensation plans, as amended, as of December 31, 2021:

 

Plan Category 

Number of securities

to be issued
upon

exercise of

outstanding options

   Weighted Average Exercise price of outstanding options  

Number of

securities

remaining

available

for future

issuance

under equity
compensation
plans

(excluding

securities

reflected

in first column)

 
2004 Long-Term Incentive Compensation Plan, as amended, approved by shareholders   7,748,271   $5.80    2,251,729 
2014 Long-Term Incentive Compensation Plan   0    0    5,000,000 
2019 Equity Incentive Plan   0    0    50,000,000 
Total   7,748,271   $5.80    57,251,729 

 

Our 2004 Long-Term Incentive Compensation Plan, as amended, which we refer to as the 2004 Plan, was adopted by our Board in 2004, and amended and approved by our shareholders in 2009. A maximum of 10,000,000 shares of common stock were authorized for issuance under the 2004 Plan.

 

The 2004 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock and other stock-based awards. Our officers, employees, consultants and directors are eligible to receive awards under the 2004 Plan; however, incentive stock options may only be granted to our employees. In accordance with the terms of the 2004 Plan, our Board administers the 2004 Plan and, subject to any limitations in the 2004 Plan, selects the recipients of awards and determines:

 

  the number of shares of common stock covered by options and the dates upon which those options become exercisable;
     
  the exercise prices of options;
     
  the duration of options;
     
  the methods of payment of the exercise price; and
     
  the number of shares of common stock subject to any restricted stock or other stock-based awards and the terms and conditions of those awards, including the conditions for repurchase, issue price and repurchase price.

 

Pursuant to the terms of the 2004 Plan, in the event of a change in control of our company, each outstanding option under the 2004 Plan will vest, but the holders shall have the right, assuming the holder still maintains a continuous service relationship with us, immediately prior to such dissolution or liquidation, to exercise the option to the extent exercisable on the date of such dissolution or liquidation.

 

In the event of a merger or other reorganization event, our Board shall have the discretion to provide for any or all of the following: (a) the acceleration of vesting or the termination of our repurchase rights of any or all of the outstanding awards, (b) the assumption or substitution of all options by the acquitting or succeeding entity or (c) the termination of all options that remain outstanding at the time of the merger or other reorganization event.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

Review, Approval or Ratification of Transactions with Related Persons

 

Vystar’s Code of Business Conduct requires that all employees and directors avoid conflicts of interests that interfere with the performance of their duties or are not in the best interests of Vystar.

 

In addition, pursuant to its written charter, the Audit Committee considers and approves or disapproves any related person transaction as defined under Item 404 of Regulation S-K promulgated by the SEC, after examining each such transaction for potential conflicts of interest and other improprieties. The Audit Committee has not adopted any specific written procedures for conducting such reviews and considers each transaction in light of the specific facts and circumstances presented.

 

Transactions with Related Persons

 

Per Steven Rotman’s Employment agreement dated July 22, 2019, as amended, he is to be paid $125,000 per year in cash, $10,417 per month in shares based on a 20-day average price at a 50% discount to market, $5,000 per month in cash for expenses, as well as access to a Company provided vehicle and health and life insurance. During the year ended December 31, 2021, the Company expensed approximately $422,000 related to this employment agreement. As of December 31, 2021, the Company had a stock subscription payable balance of $286,625, or approximately 14,797,000 shares to be issued in the future, $123,155 of reimbursable expenses payable and $116,403 of unpaid salary payable related to this party. In addition, 6,666,667 shares are owed to this party under a stock subscription agreement dated in July 2020 for $100,000. On August 9, 2021, the Company issued 29,205,927 shares to Steven Rotman for past services.

 

Steven Rotman advanced the Company $398,009 in 2021 for working capital purposes. The Company issued him promissory notes. The notes are unsecured and bear interest at 5% and are due no later than two years from the issuance date.

 

Blue Oar Consulting, Inc. (“Blue Oar”) is owned by Gregory Rotman, who is the son of the Company’s CEO, Steven Rotman. Blue Oar provides business consulting services to the Company. In exchange for such services, the Company has entered into a consulting agreement with the related party entity. Per Blue Oar’s consulting agreement, it is to be paid approximately $15,000 per month in cash for expenses and $12,500 per month to be paid in shares based on a 20-day average at a 50% discount to market. During the year ended December 31, 2021, the Company expensed approximately $461,000 related to the consulting agreement and issued 30,038,513 shares of common stock for past services. In addition, the Company issued 11,364,791 shares of common stock to settle its accounts payable balance of $180,000 in February 2021. In connection with the settlement, a loss of $155,265 was incurred. As of December 31, 2021, the Company had a stock subscription payable balance of approximately $281,000, or approximately 15,603,000 shares and a balance of $180,000 in accounts payable related to this related party. In addition, 4,666,667 shares are owed to this party under a stock subscription agreement dated in July 2020 for $70,000.

 

Gregory Rotman advanced the Company $130,030 in 2021 for working capital purposes. The Company issued him a contingently convertible promissory note. The note is unsecured and bears interest at 5% and matures two years from the issuance date.

 

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Director Independence

 

Under Rule 5605(b)(1) of the Nasdaq Marketplace Rules, independent directors must comprise a majority of a listed company’s board of directors within one year of listing. In addition, Nasdaq Marketplace Rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and governance committees be independent. While Vystar does not currently qualify for listing on Nasdaq and will likely not qualify for some time after the date of this proxy statement, it does intend to seek such listing as soon as possible and complies with its Marketplace Rules. Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended. Under Nasdaq Marketplace Rule 5605(a)(2), a director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In order to be considered to be independent for purposes of Rule 10A-3, a member of an audit committee of a public company may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee: (1) accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the public company or any of its subsidiaries; or (2) be an affiliated person of the listed company or any of its subsidiaries.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

During fiscal year 2021, we retained the firm of Macias Gini & O’Connell (“MGO”) to provide audit services. Prior to 2021, we retained the firm of Hall and Company (“Hall”) to provide such services. On January 1, 2021, the audit practice of Hall was combined with MGO in a transaction pursuant to which Hall combined its operations with MGO, and certain members of Hall joined MGO either as employees or partners of MGO. Below is a table of fees incurred in the following categories and amounts:

 

Fee Category  2021($)  2020($)
Audit Fees   190,000    160,000 
Audit-Related Fees        
Tax Fees        
All Other Fees        
Total   190,000    160,000 

 

Audit fees include the audit of Vystar’s annual financial statements, review of financial statements included in each of our Quarterly Reports on Form 10-Q, and services that are normally provided in connection with statutory and regulatory filings or engagements for those fiscal years.

 

Audit-related fees consist of fees for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements.

 

Tax fees consist of fees for professional services for tax compliance, tax advice and tax planning. This category includes fees primarily related to the preparation and review of federal, state and assistance with tax audits. No tax fees were incurred for the current or previous period.

 

All other fees include assurance services not related to the audit or review of our financial statements. No other fees were incurred for the current or previous period.

 

There were no non-audit services provided by either MGO or Hall for the current or previous period.

 

29

 

 

AUDIT COMMITTEE PRE-APPROVAL OF SERVICES PERFORMED BY OUR

INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS

 

It is the policy of our Audit Committee to pre-approve all audit and permissible non-audit services to be performed by MGO and Hall. Our Audit Committee pre-approves services by authorizing specific projects within the categories outlined above, subject to a budget for each category. Our Audit Committee’s charter delegates to one or more members of the Audit Committee the authority to address any requests for pre-approval of services between Audit Committee meetings, and the subcommittee or such member or members must report any pre-approval decisions to our Audit Committee at its next scheduled meeting.

 

All services related to audit fees provided by MGO and Hall during fiscal year 2021 and 2020 were pre-approved by the Audit Committee in accordance with the pre-approval policy described above.

 

REPORT OF THE AUDIT COMMITTEE

 

The Audit Committee’s role includes the oversight of our financial, accounting and reporting processes; our system of internal accounting and financial controls; our enterprise risk management program; and our compliance with related legal, regulatory and ethical requirements. The Audit Committee oversees the appointment, compensation, engagement, retention, termination and services of our independent registered public accounting firm, including conducting a review of its independence; reviewing and approving the planned scope of our annual audit; overseeing our independent registered public accounting firm’s audit work; reviewing and pre-approving any audit and non-audit services that may be performed by it; reviewing with management and our independent registered public accounting firm the adequacy of our internal financial and disclosure controls; reviewing our critical accounting policies and the application of accounting principles; and monitoring the rotation of partners of our independent registered public accounting firm on our audit engagement team as required by regulation. The Audit Committee establishes procedures, as required under applicable regulation, for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or auditing matters and the submission by employees of concerns regarding questionable accounting or auditing matters. The Audit Committee’s role also includes meeting to review our annual audited financial statements and quarterly financial statements with management and our independent registered public accounting firm. The Audit Committee held one meeting during fiscal year 2021.

 

The member of the Audit Committee met the independence criteria prescribed by applicable regulation and the rules of the SEC for audit committee membership and are “independent director” within the meaning of NASDAQ listing standards. The Audit Committee member meets NASDAQ’s financial literacy requirements, and the Board further determined that the member is an “audit committee financial expert” “as such term is defined in Item 407(d) of Regulation S-K promulgated by the SEC also meets NASDAQ’s financial sophistication requirements. The Audit Committee acts pursuant to a written charter, which complies with the applicable provisions of the Sarbanes-Oxley Act of 2002 and related rules of the SEC and NASDAQ, a copy of which can be found on our website at www.vystarcorp.com.

 

I have reviewed and discussed with management and MGO Vystar’s audited financial statements. I discussed with MGO and Vystar’s Chief Financial Officer the overall scope and plans of MGO’s audit. I met with MGO, with and without management present, to discuss results of its examinations, its evaluation of Vystar’s internal controls, and the overall quality of Vystar’s financial reporting.

 

I have reviewed and discussed with MGO matters required to be discussed pursuant to Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards, Vol. 1. AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T. I have received from MGO the written disclosures and letter required by the applicable requirements of the Public Company Accounting Oversight Board regarding MGO’s communications with the Audit Committee concerning independence. I have discussed with MGO matters relating to its independence.

 

Based on the reviews and discussions referred to above and my review of Vystar’s audited financial statements for fiscal year 2021, I recommended to the Board that Vystar’s audited financial statements be included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2021, for filing with the SEC.

 

Respectfully submitted,

 

AUDIT COMMITTEE

 

Bryan Stone, M.D., Chair

 

30

 

 

PART IV

 

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

1. FINANCIAL STATEMENTS

 

The following financial statements and notes thereto of Vystar Corporation, and the related Report of Independent Registered Public Accounting Firm are set forth in Item 8.

 

Report of Independent Registered Public Accounting Firm F-1
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Stockholders’ Deficit F-5
Consolidated Statements of Cash Flows F-6

 

2. FINANCIAL STATEMENT SCHEDULES

 

All schedules for which provision is made in the applicable accounting regulations of the SEC have been omitted because they are not applicable, or the required information is included in the financial statements or notes thereto.

 

3. EXHIBITS

 

Exhibit Index *

 

* Some Exhibits have certain confidential information redacted pursuant to a request for confidential treatment

 

Number   Description
3.1   Articles of Incorporation of Vystar Acquisition Corporation (now named Vystar Corporation) dated December 17, 2003 (as amended) (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)
     
3.2   Articles of Amendment to the Articles of Incorporation of Vystar Corporation (incorporated by reference to Vystar Corporation’s Annual Report on Form 10-K for the year ended December 31, 2015 filed on April 14, 2016.)
     
3.3   Bylaws of Vystar Corporation (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)
     
4.1   Specimen Certificate evidencing shares of Vystar common stock (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)
     
4.2   Form of Share Subscription Agreements and Investment Letter (First Private Placement) (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)
     
4.3   Form of Share Subscription Agreement and Investment Letter (Second Private Placement) (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)
     
4.4   Form of Vystar Corporation Investor Questionnaire and Subscription Agreement (Third Private Placement) (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)
     
4.5   Warrant to Purchase Shares of Common Stock of Vystar Corporation dated March 11, 2011 issued to Topping Lift Capital LLC (incorporated by reference to Vystar’s Current Report on Form 8-K dated March 11, 2011 and filed on March 15, 2011)
     
4.6   Form of Warrant issued to Investor note holders (incorporated by reference to Vystar’s Current Report on Form 8-K dated March 11, 2011 and filed on March 15, 2011)

 

31

 

 

4.7   Form of Series A-1 Warrant (incorporated by reference to Vystar’s Current Report on Form 8-K filed on June 11, 2012)
     
10.1*   Manufacturing Agreement between Vystar Corporation and Revertex (Malaysia) Sdn. Bhd. effective April 1, 2008 (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)
     
10.2   Executive Employment Agreement between Vystar Corporation and William R. Doyle, dated November 11, 2008 (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)
     
10.3   Management Agreement dated January 31, 2008 between Universal Capital Management, Inc. and Vystar Corporation (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)
     
10.4   Letter Agreement dated August 15, 2008 between Universal Capital Management, Inc. and Vystar Corporation (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)
     
10.5   Addendum to Management Agreement dated February 29, 2008 between Universal Capital Management, Inc. and Vystar Corporation (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)
     
10.6   Warrant Purchase Agreement dated January 31, 2008 between Universal Capital Management, Inc. and Vystar Corporation (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)
     
10.7   Management Agreement dated April 30, 2008 between Universal Capital Management, Inc. and Vystar Corporation (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)
     
10.8   Warrant Purchase Agreement dated April 30, 2008 between Universal Capital Management, Inc. and Vystar Corporation (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)
     
10.9   Vystar Corporation 2004 Long-Term Compensation Plan, as amended (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)
     
10.10   Employment Agreement between Vystar Corporation and Sandra Parker dated April 1, 2008 (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)
     
10.10*   Distributor Agreement among Vystar Corporation, Centrotrade Minerals & Metals, Inc. and Centrotrade Deutschland, GmbH dated January 6, 2009 (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)
     
10.11   Note agreement between Vystar Corporation and Climax Global Energy, Inc. dated August 15, 2008 (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)

 

32

 

 

10.12   Form of Investor Note (incorporated by reference to Vystar’s Current Report on Form 8-K dated March 11, 2011 and filed on March 15, 2011)
     
10.13   Promissory Grid Note dated April 29, 2011, in a principal amount of $800,000 from Vystar Corporation to CMA Investments, LLC (incorporated by reference to Vystar’s Current Report on Form 8-K dated April 29, 2011 and filed on May 2, 2011)
     
10.14   First Amendment to Agreement dated September 9, 2011, between Vystar Corporation, CMA Investments, LLC and Italia-Eire, LP, a Georgia limited partnership (incorporated by reference from Exhibit 10.14 to Vystar Corporation’s Annual Report on Form 10-K for the year ended December 31, 2011 filed on March 30, 2012)
     
10.15   Form of Securities Purchase Agreement dated May 2012 between Vystar and investors (incorporated by reference to Vystar’s Quarterly Report on Form 10-Q filed on August 10, 2012)
     
10.16   LLC Ownership Interest Purchase Agreement dated September 13, 2012, between Vystar and Mary Ailene Miller (incorporated by reference to Vystar’s Current Report on Form 8-K filed on September 19, 2012)
     
10.17   Second Amendment to Agreement dated November 2, 2012, among Vystar, CMA Investments, LLC and Italia – Eire LP (incorporated by reference to Vystar’s Quarterly Report on Form 10-Q filed on November 11, 2012)
     
10.18   LLC Ownership Interest Purchase Agreement dated June 28, 2013, between the Company and Michal Soo, M.D. (incorporated by reference to the Company’s Current Report on Form 8-K filed on July 2, 2013)
     
10.19   Note Subscription Agreement dated June 28, 2013 between the Company and the Investors (incorporated by reference to the Company’s Current Report on Form 8-K filed on July 2, 2013)
     
10.20   Form of Senior Secured Convertible Promissory Note dated June 30, 2013 (incorporated by reference to the Company’s Current Report on Form 8-K filed on July 2, 2013)
     
10.21   Form of Security Agreement dated July 1, 2013 (incorporated by reference to the Company’s Current Report on Form 8-K filed on July 2, 2013)
     
31***   Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32***   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

101.INS***   Inline XBRL Instance Document
     
101.SCH***   Inline XBRL Taxonomy Extension Schema Document
     
101.CAL***   Inline XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF***   Inline XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB***   Inline XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE***   Inline XBRL Taxonomy Extension Presentation Linkbase Document
     
104   Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit)

 

  * Some Exhibits have certain confidential information redacted pursuant to a request for confidential treatment.

 

  ** Exhibits and schedules to this exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company will furnish copies of the omitted exhibits and schedules to the Securities and Exchange Commission upon its request. Confidential treatment has been requested as to a portion of this exhibit, which portion has been omitted and filed separately with the Securities and Exchange Commission.
     
  *** Filed herewith.

 

ITEM 16. FORM 10-K SUMMARY

 

Not applicable.

 

33

 

 

SIGNATURES

 

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

 

  VYSTAR CORPORATION
     
Date: May 16, 2022 By:  /s/ Steven Rotman
    Steven Rotman
    Chairman, President, Chief Executive Officer (Principal Executive Officer), Chief Financial Officer (Principal Financial and Accounting Officer) and Director

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on May 16, 2022.

 

Signature   Title
     
/s/ Steven Rotman   President, Chief Executive Officer, and Chief Financial Officer
Steven Rotman    
     
/s/ Joseph Allegra   Chairman of the Board of Directors
Joseph Allegra, PhD    
     
/s/ Ranjit Matthan   Director
Ranjit Matthan, PhD    
     
/s/ Bryan Stone   Director
Bryan Stone, MD    
     
/s/ Byron Novosad   Director
Byron Novosad, DDS    

 

34
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