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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2022

 

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

 

For the transition period from _______________ to ________________

 

Commission File Number 000-53754

 

VYSTAR CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

Georgia   20-2027731

(State or other jurisdiction of

incorporation or organization)

 

(IRS Employer

Identification No.)

 

725 Southbridge St

Worcester, MA 01610

(Address of Principal Executive Offices, Zip Code)

 

(508) 791-9114

(Registrant’s telephone number including area code)

 

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

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES ☒ NO ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐

 

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

 

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

 

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

 

Class   Outstanding as of June 8, 2022
Preferred Stock, $0.0001 par value per share   8,698 shares
Common Stock, $0.0001 par value per share   1,294,125,560 shares

 

 

 

 
 

 

INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS

 

In addition to historical information, this Form 10-Q contains statements relating to our future results (including certain projections and business trends) that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are subject to the “safe harbor” created by those sections. The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the financial statements and the related notes thereto included in this Quarterly Report on Form 10-Q (this “Report”). This Report contains certain forward-looking statements and the Company’s future operating results could differ materially from those discussed herein. Our disclosure and analysis included in this Report concerning our operations, cash flows and financial position, including, in particular, the likelihood of our success in expanding our business and raising debt and capital securities include forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expect”, “anticipate”, “intend”, “plan”, “believe”, “estimate”, “may”, “project”, “will likely result”, and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to certain risks, uncertainties, and assumptions, including prevailing market conditions and are more fully described under “Part I, Item 1A - Risk Factors” of our Form 10-K for the year ended December 31, 2021. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. In any event, these and other crucial factors, including those set forth in Item 1A - “Risk Factors” of our Form 10-K for the year ended December 31, 2021 may cause actual results to differ materially from those indicated by our forward-looking statements.

 

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

 

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

 

2
 

 

VYSTAR CORPORATION

 

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2022

 

INDEX

 

Part I. Financial Information  
     
Item 1. Financial Statements:  
     
  Condensed Consolidated Balance Sheets at March 31, 2022 (unaudited) and December 31, 2021 4
     
  Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2022 (unaudited) and 2021 (unaudited) 5
     
  Condensed Consolidated Statements of Stockholders’ Deficit for the Three Months Ended March 31, 2022 (unaudited) and 2021 (unaudited) 6-7
     
  Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 (unaudited) and 2021 (unaudited) 8
     
  Notes to Condensed Consolidated Financial Statements (unaudited) 9
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 33
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 37
     
Item 4. Controls and Procedures 37
     
Part II. Other Information  
   
Item 1. Legal Proceedings 39
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 39
     
Item 3. Defaults Upon Senior Securities 39
     
Item 4. Mine Safety Disclosures 39
     
Item 5. Other Information 39
     
Item 6. Exhibits 39
     
SIGNATURES 40

 

3
 

 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

    March 31,     December 31,  
    2022     2021  
    (Unaudited)        
ASSETS                
Current assets:                
Cash   $ 172,340     $ 151,175  
Accounts receivable, net     51,485       68,541  
Other receivables     837,954       875,362  
Inventories     3,726,933       3,784,420  
Prepaid expenses and other     301,426       337,013  
Deferred commission costs     65,186       73,625  
                 
Total current assets     5,155,324       5,290,136  
                 
Property and equipment, net     767,831       832,099  
                 
Operating lease right-of-use assets     7,565,589       7,776,978  
                 
Finance lease right-of-use assets, net     511,659       551,037  
                 
Other assets:                
Intangible assets, net     1,122,558       1,208,870  
Goodwill     460,301       460,301  
Inventories, long-term     466,012       657,177  
Deferred commission costs, net of current portion     47,432       60,586  
Other     5,274       20,274  
                 
Total other assets     2,101,577       2,407,208  
                 
Total assets   $ 16,101,980     $ 16,857,458  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
Current liabilities:                
Accounts payable   $ 5,302,645     $ 5,149,570  
Accrued expenses     931,114       897,420  
Stock subscription payable     1,381,806       1,247,549  
Operating lease liabilities - current maturities     630,000       634,000  
Finance lease liabilities - current maturities     126,000       134,000  
Shareholder, convertible and contingently convertible notes payable and accrued interest - current maturities     1,404,427       1,388,904  
Related party debt - current maturities     1,958,000       1,487,000  
Unearned revenue     955,884       880,204  
Derivative liabilities     1,721,100       1,778,100  
Related party advances    

40,000

     

-

 
Total current liabilities     14,450,976       13,596,747  
                 
Long-term liabilities:                
Operating lease liabilities, net of current maturities     5,510,718       5,683,736  
Finance lease liabilities, net of current maturities     414,272       443,882  
Unearned revenue, net of current maturities     189,720       241,991  
Related party debt, net of current maturities and debt discount     2,386,868       2,791,401  
                 
Total long-term liabilities     8,501,578       9,161,010  
                 
Total liabilities     22,952,554       22,757,757  
                 
Stockholders’ deficit:                
Convertible preferred stock, $0.0001 par value 15,000,000 shares authorized; 8,698 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively (liquidation preference of $76,706 and $74,531 at March 31, 2022 and December 31, 2021 , respectively)     1       1  
Common stock, $0.0001 par value, 1,500,000,000 shares authorized; 1,294,175,560 shares issued at March 31, 2022 and December 31, 2021, and 1,294,125,560 and 1,294,145,560 shares outstanding at March 31, 2022 and December 31, 2021, respectively     129,415       129,415  
Additional paid-in capital     43,727,082       43,723,389  
Accumulated deficit     (52,184,870 )     (51,410,516 )
Common stock in treasury, at cost; 50,000 and 30,000 shares at March 31, 2022 and December 31, 2021, respectively     (32 )     (30 )
                 
Total Vystar stockholders’ deficit     (8,328,404 )     (7,557,741 )
                 
Noncontrolling interest     1,477,830       1,657,442  
                 
Total stockholders’ deficit     (6,850,574 )     (5,900,299 )
                 
Total liabilities and stockholders’ deficit   $ 16,101,980     $ 16,857,458  

 

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

 

4
 

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

    2022     2021  
    Three Months Ended  
    March 31,  
    2022     2021  
             
Revenue   $ 3,839,258     $ 12,868,119  
                 
Cost of revenue     1,660,274       6,076,840  
                 
Gross profit     2,178,984       6,791,279  
                 
Operating expenses:                
Salaries, wages and benefits     908,482       1,949,139  
Share-based compensation     137,948       204,696  
Agent fees     418,179       1,251,873  
Professional fees     189,403       20,183  
Advertising     293,488       865,178  
Rent     183,727       316,615  
Service charges     107,172       224,516  
Depreciation and amortization     150,580       192,009  
Other operating     655,614       796,413  
                 
Total operating expenses     3,044,593       5,820,622  
                 
Operating income (loss)     (865,609 )     970,657  
                 
Other income (expense):                
Interest expense     (179,309 )     (175,847 )
Change in fair value of derivative liabilities     57,000       (129,000 )
Gain on settlement of debt, net     -       1,247,635  
Other income, net     33,952       57,747  
                 
Total other income (expense), net     (88,357 )     1,000,535  
                 
Net income (loss)     (953,966 )     1,971,192  
                 
Net (income) loss attributable to noncontrolling interest     179,612       (1,053,065 )
                 
Net income (loss) attributable to Vystar   $ (774,354 )   $ 918,127  
                 
Income (loss) per share:                
Basic   $ (0.00 )   $ 0.00  
Diluted   $ (0.00 )   $ 0.00  
                 
Weighted average number of common shares outstanding:                
Basic     1,294,132,449       1,241,705,734  
Diluted     1,294,132,449       1,241,905,734  

 

5
 

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE THREE MONTHS ENDED MARCH 31, 2022

(Unaudited)

 

    Shares   Stock     Shares     Stock     Capital     Deficit     Shares     Stock     Deficit     Interest     Deficit  
    Attributable to Vystar            
    Number of         Number of           Additional           Number of           Total 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, 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 )
                                                                                     
Share-based compensation - options                                 3,691                               3,691               3,691  
                                                                                     
Retirement of treasury stock                                 2               (20,000 )     (2 )                     -  
                                                                                     
Net loss   -     -       -       -       -       (774,354 )     -       -       (774,354 )     (179,612 )     (953,966 )
                                                                                     
Ending balance March 31, 2022   8,698   $ 1     $ 1,294,175,560     $ 129,415     $ 43,727,082     $ (52,184,870 )   $ (50,000 )   $ (32 )   $ (8,328,404 )   $ 1,477,830     $ (6,850,574 )

 

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

 

6
 

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE THREE MONTHS ENDED MARCH 31, 2021

(Unaudited)

 

    Attributable to Vystar            
    Number of         Number of           Additional           Number of           Total 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, 2020           13,698   $ 1       1,199,931,717     $ 119,990     $ 41,233,471     $ (48,713,184 )          (30,000 )   $ (30 )   $ (7,359,752 )   $ 421,183     $ (6,758,957 )
                                                                                     
Common stock issued for services                 49,371,733       4,938       1,399,154                               1,404,092               1,404,092  
                                                                                     
Share-based compensation - options                                 4,916                               4,916               4,916  
                                                                                     
Common stock issued for settlement of related party payable                 11,364,904       1,136       334,129                               335,265               335,265  
                                                                                     
Common stock issued for cash received in prior period                 1,666,667       167       24,833                               25,000               25,000  
                                                                                     
Preferred stock conversion   (5,000)             1,767,945       177       (177 )                             -               -  
                                                                                     
Net income   -     -       -       -       -       918,127       -       -       918,127       1,053,065       1,971,192  
                                                                                     
Ending balance March 31, 2021   8,698   $ 1     $ 1,264,102,966     $ 126,408     $ 42,996,326     $ (47,795,057 )   $ (30,000 )   $ (30 )   $ (4,672,352 )   $ 1,474,248     $ (3,018,492 )

 

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

 

7
 

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    2022     2021  
    Three Months Ended  
    March 31,  
    2022     2021  
Cash flows from operating activities:                
Net income (loss)   $ (953,966 )   $ 1,971,192  
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:                
Share-based compensation     137,948       204,696  
Depreciation     64,268       96,019  
Bad debts (recovery)     (4,342 )     3,245  
Amortization of intangible assets     86,312       95,990  
Noncash lease expense     78,488       78,151  
Amortization of debt discount     16,250       4,667  
Change in fair value of derivative liabilities     (57,000 )     129,000  
Loss on sale of property and equipment     -       (112 )
Net unrealized (gain) loss on available-for-sale investments     -       (13,719 )
Gain on settlement of debt, net     -       (1,247,635 )
(Increase) decrease in assets:                
Accounts receivable     21,399       (199,249 )
Other receivables     37,408       -  
Inventories     248,652       819,038  
Prepaid expenses and other     50,587       98,596  
Deferred commission costs     21,593       29,830  
Increase (decrease) in liabilities:                
Accounts payable     153,077       (1,399,233 )
Accrued expenses and interest payable     99,432       (1,143,166 )
Unearned revenue     23,408       (689,635 )
                 
Net cash provided by (used in) operating activities     23,514       (1,162,325 )
                 
Cash flows from investing activities:                
Acquisition of property and equipment     -       (16,434 )
Proceeds from the sale of property and equipment     -       1,300  
Patents and trademark fees     -       (2,183 )
                 
Net cash used in investing activities     -       (17,317 )
                 
Cash flows from financing activities:                
Proceeds from issuance of term debt     -       1,402,900  
Proceeds from the issuance of notes - related parties     -       395,000  

Proceeds from related party advances

   

40,000

      -  
Repayment of finance lease obligations     (42,349 )     (42,938 )
                 
Net cash provided by (used in) financing activities     (2,349 )     1,754,962  
                 
Net increase in cash     21,165       575,320  
                 
Cash - beginning of period     151,175       620,539  
                 
Cash - end of period   $ 172,340     $ 1,195,859  
                 
Cash paid during the period for:                
Interest   $ 97,340     $ 113,912  
                 
Non-cash transactions:                
Common stock issued for accrued compensation   $ -     $ 1,404,092  
Common stock issued for settlement of related party payable     -       335,265  
Common stock issued for cash received in prior year     -       25,000  
Common stock issued for preferred stock     -       177  
Prepaid expenses with common stock     -       291,000  
Treasury stock acquired at par value     2       -  

 

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

 

8
 

 

VYSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 - DESCRIPTION OF BUSINESS

 

Nature of Business

 

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

 

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

 

Basis of Presentation

 

The condensed consolidated financial statements of the Company and the accompanying notes included in this Quarterly Report on Form 10-Q are unaudited. In the opinion of management, all adjustments necessary for the fair presentation of the condensed consolidated financial statements have been included. Such adjustments are of a normal, recurring nature. The condensed consolidated financial statements, and the accompanying notes, are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and do not contain certain information included in the Company’s Annual Report and Form 10-K for the year ended December 31, 2021. Therefore, the interim condensed consolidated financial statements should be read in conjunction with that Annual Report on Form 10-K.

 

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

 

Basis of Consolidation

 

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

 

COVID-19

 

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 March 31, 2022 could change in subsequent interim reports, and it is reasonably possible that such changes could be significant (although the potential effects cannot be measured at this time).

 

9
 

 

Segment Reporting

 

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

 

Estimates

 

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

 

Fair Value of Financial Instruments

 

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

 

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

 

Valuation inputs are classified in the following hierarchy:

 

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

 

Highest priority is given to Level 1 inputs and the lowest priority to Level 3 inputs. Acceptable valuation techniques include the market approach, income approach, and cost approach. In some cases, more than one valuation technique is used. The derivative liabilities were recognized at fair value on a recurring basis through the date of the settlement and March 31, 2022 and are level 3 measurements. There have been no transfers between levels during the three months ended March 31, 2022.

 

Acquisitions

 

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

 

10
 

 

Cash, Cash Equivalents and Restricted Cash

 

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

 

Accounts Receivable, Net

 

Accounts receivable, net are stated at the amount management expects to collect from outstanding balances. The Company routinely sells, without recourse, trade receivables resulting from retail furniture sales to two financial institutions at an average service charge of 3% in 2022. Amounts sold during the first quarter of 2022 were approximately $840,000. 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 March 31, 2022 and December 31, 2021, the Company has recorded an allowance for doubtful accounts of $273,000.

 

Other Receivables

 

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

 

Rotmans terminated its agreement with a supplier in 2021 and will receive $100,000 in consideration. As of December 31, 2021, the remaining account balance of $104,075 represents funds due from this termination. The Company has received $37,408 during the three months ended March 31, 2022.

 

Inventories

 

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

 

Prepaid Expenses and Other

 

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

 

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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 March 31, 2022, the net balance of property and equipment is $767,831 with accumulated depreciation of $708,252. As of December 31, 2021, the net balance of property and equipment is $832,099 with accumulated depreciation of $643,984.

 

Intangible Assets

 

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

 

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

 

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

 

Our intangible assets are reviewed for impairment annually or more frequently as warranted by events of changes in circumstances.

 

Long-Lived Assets

 

We review our long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be fully recoverable. We evaluate assets for potential impairment by comparing estimated future undiscounted net cash flows to the carrying amount of the assets. If the carrying amount of the assets exceeds the estimated future undiscounted cash flows, impairment is measured based on the difference between the carrying amount of the assets and fair value. Assets to be disposed of would be separately presented in the condensed consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale would be presented separately in the appropriate asset and liability sections of the condensed consolidated balance sheet, if material. During the three months ended March 31, 2022 and 2021, we did not recognize any impairment of our long-lived assets.

 

Goodwill

 

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

 

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

 

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The impairment model permits, and we utilize, a simplified approach for determining goodwill impairment. In the first step, we evaluate the recoverability of goodwill by estimating the fair value of our reporting unit using multiple techniques, including an income approach using a discounted cash flow model and a market approach. Based on an equal weighting of the results of these two approaches, a conclusion of fair value is estimated. The fair value is then compared to the carrying value of our reporting unit. If the fair value of a reporting unit is less than its carrying value, the Company recognizes this amount as an impairment loss. Impairment losses, limited to the carrying value of goodwill, represent the excess of the carrying amount of goodwill over its implied fair value.

 

Convertible Notes Payable

 

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

 

Derivatives

 

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

 

The Company applies the accounting standard that provides guidance for determining whether an equity-linked financial instrument, or embedded feature, is indexed to an entity’s own stock. The standard applies to any freestanding financial instrument or embedded features that have the characteristics of a derivative, and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. From time to time, the Company has issued notes with embedded conversion features. Certain of the embedded conversion features contain price protection or anti-dilution features that result in these instruments being treated as derivatives for accounting purposes. Accordingly, as of March 31, 2022, the Company has classified all conversion features as derivative liabilities and has estimated the fair value of these embedded conversion features using a Monte Carlo simulation model.

 

Unearned Revenue

 

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

 

13
 

 

Changes to unearned revenue during the three months ended March 31, 2022 and 2021 are summarized as follows:

  

    2022     2021  
             
Balance, beginning of the period   $ 1,122,195     $ 2,427,771  
                 
Customer deposits received     3,560,713       10,953,412  
                 
Gift cards purchased     800       -  
                 
Revenue earned     (3,538,104 )     (11,643,047 )
                 
Balance, end of the period   $ 1,145,604     $ 1,738,136  

 

Income (Loss) Per Share

 

The Company presents basic and diluted income (loss) per share. Even though the Company reported a net loss in the first quarter of 2022 (net income for the first quarter of 2021), common stock equivalents, including stock options and warrants, were anti-dilutive; therefore, the amounts reported for basic and dilutive income (loss) per share were the same. Excluded from the computation of diluted income (loss) per share were options to purchase 26,949,938 and 27,224,938 shares of common stock for the three months ended March 31, 2022 and 2021, respectively, as their effect would be anti-dilutive. Warrants to purchase 9,048,320 and 13,749,571 shares of common stock for the three months ended March 31, 2022 and 2021, respectively, were also excluded from the computation of diluted income (loss) per share as their effect would be anti-dilutive. Warrants to purchase 200,000 shares of common stock for the three months ended March 31, 2021 were included in the computation of diluted income per share. In addition, preferred stock convertible to 3,273,710 and 3,099,750 shares of common stock for the three months ended March 31, 2022 and 2021, respectively, were excluded from the computation of diluted income (loss) per share as their effect would be anti-dilutive. Both shareholder and Rotman Family contingently convertible notes payable convertible to 1,101,769,005 and 164,103,328 shares of common stock for 2022 and 2021, respectively, were also excluded from the computation of diluted income (loss) per share as their effect would be anti-dilutive.

 

Revenue

 

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

 

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

 

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

 

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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 March 31, 2022 and December 31, 2021, reserves for estimated sales returns totaled $291,000 and $337,000, respectively, and are included in the accompanying condensed consolidated balance sheets as accrued expenses.

 

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

 

The Company also defers revenues for separately-priced stain protection warranty coverage for which it is ultimately self-insured. Revenue is recognized from the extended warranty sales on a straight-line basis over the respective contract term. The extended warranty terms primarily range from three to five years from the date of delivery. The Company ended this warranty program during 2020 but continues to amortize the previously contracted warranties over their original terms. The Company switched to a separately-priced stain protection warranty serviced by a third-party when the store reopened in June 2020. At March 31, 2022 and December 31, 2021, deferred warranty revenue was approximately $442,000 and $524,000, respectively, and is included in unearned revenue in the accompanying consolidated balance sheets. During the three months ended March 31, 2022, recognized total revenues of approximately $82,000 related to deferred warranty revenue arrangements. During the three months ended March 31, 2021, the Company recorded total proceeds of approximately $110,000. 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 March 31, 2022 and December 31, 2021, deferred commission costs were approximately $113,000 and $134,000, respectively, and are included in the accompanying condensed consolidated balance sheets. All other costs, such as costs of services performed under the contract, general and administrative expenses, and advertising costs are expensed as incurred.

 

Cost of Revenue

 

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

 

Research and Development

 

Research and development costs are expensed when incurred. Research and development costs include all costs incurred related to the research, development and testing. For the three months ended March 31, 2022 and 2021, Vystar’s research and development costs were not significant.

 

Advertising Costs

 

Advertising costs, which include television, radio, newspaper, digital and other media advertising, are expensed upon first showing. Advertising costs were approximately $293,000 and $865,000 for the three months ended March 31, 2022 and 2021, respectively.

 

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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 three months ended March 31, 2022 and 2021.

 

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

 

Concentration of Credit Risk

 

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

 

Other Risks and Uncertainties

 

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

 

Recent Accounting Pronouncements

 

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

 

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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 March 31, 2022, the Company had cash of $172,340 and a deficit in working capital of approximately $9.3 million. Further, at March 31, 2022 the accumulated deficit amounted to approximately $52.2 million. We use working capital to finance our ongoing operations, and since those operations do not currently cover all our operating costs, managing working capital is essential to our Company’s future success. Because of this history of losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.

 

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

 

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

 

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

 

NOTE 4 - INVESTMENTS – EQUITY SECURITIES

 

Investments, which represented equity securities in a publicly traded company, were sold during the three months ended September 30, 2021. Unrealized holding gains on available-for-sale securities were approximately $14,000 in the first quarter of 2021, and have been included in other income (expense) in the accompanying condensed statements of operations.

 

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NOTE 5 - PROPERTY AND EQUIPMENT

 

Property and equipment, net consists of the following:

 

    March 31,     December 31,  
    2022     2021  
             
Furniture, fixtures and equipment   $ 588,624     $ 588,624  
Tooling and testing equipment     338,572       338,572  
Parking lots     365,707       365,707  
Leasehold improvements     134,014       134,014  
Motor vehicles     49,166       49,166  
                 
Property and equipment, gross     1,476,083       1,476,083  
Accumulated depreciation     (708,252 )     (643,984 )
                 
Property and equipment, net   $ 767,831     $ 832,099  

 

Depreciation expense for the three months ended March 31, 2022 and 2021 was $64,268 and $96,019, respectively.

 

NOTE 6 - INTANGIBLE ASSETS

 

Intangible assets consist of the following:

 

    March 31,     December 31,     Amortization Period
    2022     2021     (in Years)
Amortized intangible assets:                    
Customer relationships   $ 150,000     $ 150,000     6 - 10
Proprietary technology     280,000       280,000     10
Tradename and brand     1,050,000       1,050,000     5 - 10
Marketing related     380,000       380,000     5
Patents     361,284       361,284     6 - 20
Noncompete     50,000       50,000     5
                     
Total     2,271,284       2,271,284      
Accumulated amortization     (1,157,798 )     (1,071,486 )    
                     
Intangible assets, net     1,113,486       1,199,798      
Indefinite-lived intangible assets:                    
Trademarks     9,072       9,072      
                     
Total intangible assets   $ 1,122,558     $ 1,208,870      

 

Amortization expense for the three months ended March 31, 2022 and 2021 was $86,312 and $95,990, respectively.

 

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

 

    Amount  
       
Remaining in 2022   $ 258,937  
2023     338,638  
2024     239,411  
2025     90,550  
2026     71,232  
Thereafter     114,718  
         
Total   $ 1,113,486  

 

NOTE 7 - LEASES

 

The Company leases equipment, a showroom, offices and warehouse facilities. These leases expire at various dates through 2024 with options to extend to 2031.

 

The table below presents the lease costs for the three months ended March 31, 2022 and 2021:

 

      1       2  
    Three Months Ended  
    March 31,  
    2022     2021  
             
Operating lease cost   $ 287,670     $ 396,052  
                 
Finance lease cost:                
                 
Amortization of right-of-use assets     44,468       45,912  
Interest on lease liabilities     7,312       9,488  
                 
Total lease cost   $ 339,450     $ 451,452  

 

During the three months ended March 31, 2022 and 2021, the Company recognized sublease income of approximately $34,000 and $42,000, respectively, which in included in other income (expense), net in the accompanying condensed consolidated statements of operations.

 

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

 

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The following table presents other information related to leases:

 

      1       2  
    Three Months Ended  
    March 31,  
    2022     2021  
             
Cash paid for amounts included in the measurement of lease liabilities:                
                 
Operating cash flows used for operating leases   $ 263,616     $ 375,911  
Financing cash flows used for financing leases     49,661       52,427  
                 
Assets obtained in exchange for operating lease liabilities     -       -  
                 
Assets obtained in exchange for finance lease liabilities     4,739       -  
                 
Weighted average remaining lease term:                
Operating leases     8.8 years       8.7 years  
Finance leases     4.1 years       4.8 years  
                 
Weighted average discount rate:                
Operating leases     5.60 %     5.55 %
Finance leases     5.16 %     5.16 %

 

The future minimum lease payments required under operating and financing lease obligations as of March 31, 2022 having initial or remaining non-cancelable lease terms in excess of one year are summarized as follows:

 

    Operating Leases     Finance Leases     Total  
                   
Remainder of 2022   $ 705,811     $ 115,841     $ 821,652  
2023     878,807       139,080       1,017,887  
2024     870,000       139,080       1,009,080  
2025     870,000       139,080       1,009,080  
2026     870,000       68,395       938,395  
Thereafter     3,552,500       -       3,552,500  
                         
Total undiscounted lease liabilities     7,747,118       601,476       8,348,594  
Less: imputed interest     (1,606,400 )     (61,204 )     (1,667,604 )
                         
Net lease liabilities   $ 6,140,718     $ 540,272     $ 6,680,990  

 

As of March 31, 2022, 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.

 

20
 

 

Advances

 

On May 29, 2020, Rotmans entered into a sale promotion consulting agreement with a national furniture sales event company. Under the agreement, Rotmans appointed the third-party as its exclusive agent to assist with a high-impact sale. Before the sale, the agent advanced the Company funds of approximately $2,300,000 to pay off a bank line of credit and certain other vendors. The agent will be reimbursed for the advance from the proceeds of the sale. The initial sales agreement with the agent ended in May 2021. A new agreement was entered into with the agent in June 2021. The remaining inventories on hand were used to pay off the liability of the first sale and then simultaneously purchased back for the next sale. The agreement has been amended numerous times and is scheduled to end in 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 $2,432,000 and $2,082,000 as of March 31, 2022 and December 31, 2021, respectively, and is included in accounts payable in the accompanying condensed consolidated balance sheet.

 

Term Notes

 

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

 

On February 2, 2021, Rotmans received an additional $1,402,900 in PPP loan funding from the SBA. The terms of the Note are the same as the original PPP Loan. On June 25, 2021, the PPP loan was fully forgiven by the SBA.

 

Shareholder, Convertible and Contingently Convertible Notes Payable

 

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

 

    March 31,     December 31,  
    2022     2021  
             
Shareholder, convertible and contingently convertible notes   $ 1,241,895     $ 1,241,895  
Accrued interest     162,532       147,009  
                 
Total shareholder notes and accrued interest     1,404,427       1,388,904  
                 
Less: current maturities     (1,404,427 )     (1,388,904 )
                 
Total long-term debt   $ -     $ -  

 

Shareholder Convertible Notes Payable

 

During the year ended December 31, 2018, the Company issued shareholder contingently convertible notes payable, some of which were for contract work performed by other entities in lieu of compensation and expense reimbursement, totaling approximately $335,000. The notes are (i) unsecured, (ii) bear interest at an annual rate of five percent (5%) from date of issuance, and (iii) are convertible at the Company’s option post April 19, 2018. The notes mature one year from issuance but may be extended one (1) additional year by the Company. If converted, the notes plus accrued interest are convertible into shares of the Company’s common stock at the prior twenty (20) day average closing price with a 50% discount. The outstanding balance of all of these notes of as March 31, 2022 and December 31, 2021 is $338,195. The notes matured in January 2020 and continue to accrue interest until settlement. They are in default as of March 31, 2022. The unpaid balance on the notes bears interest at an annual rate of eight percent (8%) in arrears.

 

21
 

 

During the year ended December 31, 2019, the Company issued certain contingently convertible promissory notes in varying amounts to existing shareholders which totaled $613,700. The face amount of the note represents the amount due at maturity along with the accrued interest at an annual rate of five percent (5%). The amount can be converted into shares of the Company’s stock, at the option of the Company, based on the average closing price for the trailing 20 days prior to conversion and carrying a 35% to 50% discount. These notes can be converted only after an acceleration event which involves a symbol change, uplisting, or reverse stock split and such conversion is in the control of the Company. All of these notes are outstanding and in default as of March 31, 2022. The unpaid balance on the notes bears interest at an annual rate of eight percent (8%) in arrears.

 

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 March 31, 2022. At the issuance date of these notes, it was determined they contain a beneficial conversion feature amounting to approximately $90,000. As these notes are contingently convertible, the beneficial conversion feature will not be recorded on the consolidated financial statements until the actual conversion occurs.

 

Based on the variable conversion price of these notes issued prior to 2021, the Company recorded the embedded conversion features as derivative liabilities, which amounted to $627,100 and $647,100 at March 31, 2022 and December 31, 2021, respectively.

 

Related Party Debt

 

The following table summarizes related party debt:

 SCHEDULE OF RELATED PARTY DEBT

    March 31,     December 31,  
    2022     2021  
             
Rotman Family convertible notes   $ 1,967,737     $ 1,967,737  
Rotman Family nonconvertible notes     1,953,509       1,953,509  
Accrued interest     434,455       384,238  
Debt discount     (10,833 )     (27,083 )
                 
Long term debt, current     4,344,868       4,278,401  
Less: current maturities     (1,958,000 )     (1,487,000 )
                 
Long term debt   $ 2,386,868     $ 2,791,401  

 

Rotman Family Convertible Notes

 

On September 30, 2019, the Company issued contingently convertible promissory notes totaling $180,000 to Steven Rotman ($105,000) and Greg Rotman ($75,000). These notes are (i) unsecured, (ii) bear interest at an annual rate of eight percent (8%) from date of issuance, (iii) are convertible at the Company’s option after December 31, 2019, and (iv) mature five years from issuance. If converted, the notes plus accrued interest are convertible into shares of the Company’s common stock at the average of the five lowest closing prices in the 90-day period prior to conversion with a 50% discount. The balance of the notes payable including accrued interest to Steven and Greg Rotman is approximately $128,000 and $67,000, respectively, at March 31, 2022 and approximately $126,000 and $66,000, respectively, at December 31, 2021.

 

22
 

 

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 $1,252,000 and $477,000, respectively, at March 31, 2022 and approximately $1,238,000 and $472,000, respectively, at December 31, 2021.

 

On December 19, 2019, the Company issued a contingently convertible promissory note totaling $100,000 to Steven Rotman. The face amount of the note represents the amount due at maturity along with the accrued interest at 5%. The amount can be converted into shares of the Company’s stock, at the option of the Company, based on the average closing price for the trailing 20 days prior to conversion and carrying 50% discount. The note can be converted only after an acceleration event which involves a symbol change, uplisting, or reverse stock split and such conversion is in the control of the Company. The note was extended to mature two years from issuance. The balance of the note payable including accrued interest to Steven Rotman is approximately $111,000 and $110,000 at March 31, 2022 and December 31, 2021, respectively.

 

On February 20, 2020, the Company issued a contingently convertible promissory note totaling $50,000 to Steven Rotman. The face amount of the note represents the amount due at maturity along with the accrued interest at 5%. The amount can be converted into shares of the Company’s stock, at the option of the Company, based on the average closing price for the trailing 20 days prior to conversion and carrying 50% discount. The note can be converted only after an acceleration event which involves a symbol change, uplisting, or reverse stock split and such conversion is in the control of the Company. The note matures two years from issuance. The balance of the note payable including accrued interest to Steven Rotman is approximately $55,000 at March 31, 2022 and December 31, 2021.

 

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 $135,000 and $134,000 at March 31, 2022 and December 31, 2021, respectively.

 

On August 17, 2021, the Company issued a contingently convertible promissory note totaling $5,000 to Jamie Rotman. The note is unsecured and bears interest at an annual rate of five percent (5%) from date of issuance. The face amount of the note represents the amount due at maturity along with the accrued interest. In the event that the spin-off of RxAir does not occur within one year, the Company will convert the note into common stock at a conversion price of $0.016. If the spin-off does occur, the note will convert into RxAir common stock with two conversion prices of $0.15 and $2, which equates to a blended conversion price of $0.18. At the issuance date of this note, it was determined to contain a beneficial conversion feature amounting to approximately $2,000. As this note is contingently convertible, the beneficial conversion feature will not be recorded on the consolidated financial statements until the actual conversion occurs. The balance of the note payable including accrued interest to Jamie Rotman is approximately $5,000 at March 31, 2022 and December 31, 2021.

 

23
 

 

  The following table summarizes the Rotman Family Convertible Notes:

 

              Carrying Amount  
        Principal     March 31,     December 31,  
    Issue Date   Amount     2022     2021  
Steven Rotman 8.00% note due July 2024   07/18/19   $ 105,000     $ 128,100     $ 126,000  
Steven Rotman 8.00% note due July 2024   07/18/19   $ 105,000     $ 128,100     $ 126,000  
Gregory Rotman 8.00% note due July 2024   07/18/19     55,207       67,368       66,264  
Steven Rotman 5.00% note due July 2027   07/18/19     1,102,500       1,251,797       1,238,016  
Bernard Rotman 5.00% note due July 2023   07/18/19     420,000       476,875       471,625  
Steven Rotman 5.00% note due December 2021   12/19/19     100,000       111,458       110,208  
Steven Rotman 5.00% note due February 2022   02/02/20     50,000       55,208       54,583  
Gregory Rotman 5.00% note due June 2023   06/03/21     130,030       135,448       133,822  
Jamie Rotman 5.00% note due August 2022   08/17/21     5,000       5,156       5,094  
                             
        $ 1,967,737       2,231,410       2,205,612  
                             
Debt Discount                 (10,833 )     (27,083 )
                             
                $ 2,220,577     $ 2,178,529  

 

Based on the variable conversion price for these convertible notes excluding the one issued in August 2021, the Company recorded the embedded conversion features as derivative liabilities, which amounted to $1,094,000 and $1,131,000 at March 31, 2022 and December 31, 2021, respectively.

 

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 $417,000 and $159,000, respectively, at March 31, 2022 and approximately $413,000 and $157,000, respectively, at December 31, 2021. No payments have been made by the Company as of March 31, 2022.

 

During the six months ended December 31, 2020, Steven Rotman advanced the Company funds totaling $1,048,000. In December 2020, the Company formalized the advances and issued a promissory note to Steven Rotman. The note bears interest at an annual rate of five percent (5%) and was due one year from issuance. The maturity date has been extended to December 2022. The face amount of the note represents the amount due at maturity along with accrued interest. The balance of the note payable including accrued interest to Steven Rotman is approximately $1,128,000 and $1,115,000, at March 31, 2022 and December 31, 2021, respectively.

 

During 2021, Steven Rotman advanced the Company funds totaling $398,009. The Company formalized the advances and issued promissory notes to Steven Rotman. The notes bear interest at an annual rate of five percent (5%) and are due no later than two years from the issuance date. The face amount of the notes represents the amount due at maturity along with accrued interest. The balance of the notes payable including accrued interest to Steven Rotman is approximately $420,000 and $415,000 at March 31, 2022 and December 31, 2021, respectively.

 

24
 

 

The following table summarizes the Rotman Family Nonconvertible Notes:

 

              Carrying Amount  
        Principal     March 31,     December 31,  
    Issue Date   Amount     2022     2021  
Steven Rotman 5.00% note due July 2027   07/18/19   $ 367,500     $ 417,266     $ 412,672  
Steven Rotman 5.00% note due July 2027   07/18/19   $ 367,500     $ 417,266     $ 412,672  
Bernard Rotman 5.00% note due July 2023   07/18/19     140,000       158,958       157,208  
Steven Rotman 5.00% note due December 2022   12/22/20     1,048,000       1,128,342       1,115,243  
Steven Rotman 5.00% note due March 2023   03/31/21     395,000       416,590       411,652  
Steven Rotman 5.00% note due June 2023   06/02/21     3,009       3,135       3,097  
                             
        $ 1,953,509     $ 2,124,291     $ 2,099,872  

 

Approximate maturities for the succeeding years are as follows:

 

         
Remainder of 2022   $ 1,525,000  
2023     1,117,000  
2024     229,000  
2025     36,000  
2026     38,000  
Thereafter     1,399,868  
         
Long term debt   $ 4,344,868  

 

NOTE 9 - DERIVATIVE LIABILITIES

 

As of March 31, 2022 and December 31, 2021, the Company had a $1,721,100 and $1,778,100, respectively, derivative liability balance on the condensed consolidated balance sheet and recorded a gain from change in fair value of derivative liabilities of $57,000 for the three months ended March 31, 2022, respectively. The derivative liability activity comes from the convertible notes payable. The Company analyzed the conversion features and warrants of the various note agreements for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the embedded conversion features should be classified as a derivative because the exercise price of these Convertible notes are subject to a variable conversion rate. The Company has determined that the conversion feature is not considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment. In accordance with ASC 815, the Company has bifurcated the conversion feature of the notes and recorded a derivative liability.

 

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

 

The following table summarizes the derivative liabilities included in the condensed consolidated balance sheet at March 31, 2022 and December 31, 2021:

 

Fair Value of Embedded Derivative Liabilities:

 

    2022     2021  
             
Balance, beginning of the period   $ 1,778,100     $ 1,766,700  
                 
Initial measurement of liabilities     -       65,000  
                 
Change in fair value     (57,000 )     (53,600 )
                 
Balance, end of the period   $ 1,721,100     $ 1,778,100  

 

NOTE 10 - STOCKHOLDERS’ DEFICIT

 

Cumulative Convertible Preferred Stock

 

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

 

As of March 31, 2022, the 8,698 shares of outstanding preferred stock had undeclared dividends of approximately $77,000 and could be converted into 3,273,710 shares of common stock, at the option of the holder.

 

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

 

Common Stock and Warrants

 

During the three months ended March 31, 2022, the Company retired 20,000 shares of previously issued common stock at par value. Included in stock subscription payable at March 31, 2022, is $270,000 received under common stock subscription agreements for 18,000,001 shares during the year ended December 31, 2020.

 

25
 

 

NOTE 11 - REVENUES

 

The following table presents our revenues disaggregated by each major product category and service for the three months ended March 31, 2022 and 2021:

 

    Three Months Ended March 31,  
    2022     2021  
          % of           % of  
    Net Sales     Net Sales     Net Sales     Net Sales  
Merchandise:                                
Case Goods                                
Bedroom Furniture   $ 368,050       9.6     $ 780,233       6.0  
Dining Room Furniture     177,898       4.6       768,548       6.0  
Occasional     503,681       13.1       1,952,829       15.2  
      1,049,629       27.3       3,501,610       27.2  
Upholstery     1,554,639       40.5       4,400,170       34.2  
Mattresses and Toppers     844,435       22.0       1,789,456       13.9  
Broadloom, Flooring and Rugs     152,677       4.0       1,320,223       10.3  
Warranty     132,156       3.4       265,772       2.1  
Air Purification Units     103,290       2.7       1,159,286       9.0  
Accessories and Other     2,432       0.1       431,602       3.3  
    $ 3,839,258       100.0     $ 12,868,119       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 $137,948 and $204,696 of stock-based compensation for the three months ended March 31, 2022 and 2021, respectively, including shares to be issued related to consultants and board member stock options and common stock and warrants issued to non-employees. Included in stock subscription payable is accrued stock-based compensation of $1,008,056 and $873,799 at March 31, 2022 and December 31, 2021, respectively.

 

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

 

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

 

In total for the three months ended March 31, 2022 and 2021, the Company recorded $3,691 and $4,916, respectively, of share-based compensation expense related to employee and Board Members’ stock options. The unrecognized compensation expense as of March 31, 2022 was $7,379 for non-vested share-based awards to be recognized over a period of less than one year.

 

26
 

 

Options

 

During 2004, the Board of Directors of the Company adopted a stock option plan (the “Plan”) and authorized up to 4,000,000 shares to be issued under the Plan. In April 2009, the Company’s Board of Directors authorized an increase in the number of shares to be issued under the Plan to 10,000,000 shares and to include the independent Board Members in the Plan in lieu of continuing the previous practice of granting warrants each quarter to independent Board Members for services. At March 31, 2022, there are 2,251,729 shares of common stock available for issuance under the Plan. In 2014, the Board of Directors adopted an additional stock option plan which provides for an additional 5,000,000 shares which are all available as of March 31, 2022. In 2019, the Board of Directors adopted an additional stock option plan with provides for 50,000,000 shares which are all available as of March 31, 2022. The Plan is intended to permit stock options granted to employees to qualify as incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended (“Incentive Stock Options”). All options granted under the Plan that are not intended to qualify as Incentive Stock Options are deemed to be non-qualified options. Stock options are granted at an exercise price equal to the fair market value of the Company’s common stock on the date of grant, typically vest over periods up to 4 years and are typically exercisable up to 10 years.

 

There were no options granted during the three months ended March 31, 2022 and 2021, respectively.

 

The following table summarizes all stock option activity of the Company for the three months ended March 31, 2022:

   

Number

of Shares

   

Weighted

Average

Exercise

Price

   

Weighted

Average

Remaining

Contractual

Life (Years)

 
                   
Outstanding, December 31, 2021     27,174,938     $ 0.19       1.53  
                         
Granted     -       -       -  
                         
Exercised     -       -       -  
                         
Forfeited     -     $ -       -  
                         
Outstanding, March 31, 2022     27,174,938     $ 0.19       1.28  
                         
Exercisable, March 31, 2022     26,949,938     $ 0.19       1.24  

 

 

As of March 31, 2022 and 2021, the aggregate intrinsic value of the Company’s outstanding options was minimal. The aggregate intrinsic value will change based on the fair market value of the Company’s common stock.

 

Warrants

 

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

 

27
 

 

The following table represents the Company’s warrant activity for the three months ended March 31, 2022:

   

Number

of Shares

   

Weighted

Average

Fair Value

   

Weighted

Average

Exercise Price

   

Weighted

Average

Remaining

Contractual

Life (Years)

 
                         
                         
Outstanding, December 31, 2021     10,174,259       -     $ 0.08       2.36  
                                 
Granted     -       -       -       -  
                                 
Exercised     -       -       -       -  
                                 
Forfeited     -       -       -       -  
                                 
Expired     (1,125,939 )     -     $ 0.15       -  
                                 
Outstanding, March 31, 2022     9,048,320       -     $ 0.07       2.39  
                                 
Exercisable, March 31, 2022     9,048,320        -     $ 0.07       2.39  

 

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 three months ended March 31, 2022, the Company expensed approximately $107,000 related to this employment agreement. As of March 31, 2022, the Company had a stock subscription payable balance of $348,000, or approximately 23,295,000 shares to be issued in the future and $138,155 of reimbursable expenses payable and $116,403 of unpaid salary related to this party. In addition, 6,666,667 shares are owed to this party under a stock subscription agreement dated in July 2020 for $100,000.

 

The Board of Directors authorized their board fees for 2021 be paid in common stock of the Company. Included in stock subscription payable at March 31, 2022 and December 31, 2021 is 10 million shares valued at $291,000, of which 2 million shares valued at $58,200 is included in Steven Rotman’s balance above.

 

Related Party Advances

 

During the three months ended March 31, 2022, Gregory Rotman and Steven Rotman advanced the Company funds totaling $35,000 and $5,000, respectively. The advances are due on demand as repayment terms have not been finalized.

 

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 March 31, 2022, the Company had a stock subscription payable balance of $42,000, for approximately 850,000 shares related to this party for services incurred and expensed in 2019.

 

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.

 

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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 three months ended March 31, 2022, the Company expensed approximately $118,000 related to the consulting agreement. As of March 31, 2022, the Company had a stock subscription payable balance of $354,000, or approximately 25,800,000 shares and a balance of $225,000 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 March 31, 2022 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 three months ended March 31, 2022, the Company entered into various service agreements with consultants for financial reporting, advisory, and compliance services.

 

Litigation

 

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

 

EMA Financial

 

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

 

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

 

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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 the end of June 2022.

 

Payment of Wages Actions

 

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

 

Stock Subscription Payable

 

At March 31, 2022 and December 31, 2021, the Company recorded $1,381,806 and $1,247,549, respectively, of stock subscription payable related to common stock to be issued. The following summarizes the activity of stock subscription payable during the period ended March 31, 2022 and December 31, 2021:

 

    Amount     Shares  
             
Balance, January 1, 2021   $ 2,589,556       99,431,356  
Additions, net     806,082       42,185,365  
Issuances, net     (2,148,089 )     (81,110,994 )
                 
Balance, December 31, 2021     1,247,549       60,505,727  
Additions, net     134,257       18,695,017  
                 
Balance, March 31, 2022   $ 1,381,806       79,200,744  

 

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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 three months ended March 31, 2022, the Company made approximately 16% of its purchases from one major vendor. The Company owed its major vendor approximately $111,000 at March 31, 2022.

 

During the three months ended March 31, 2021, the Company made approximately 22% of its purchases from one major vendor. The Company owed its major vendor approximately $415,000 at March 31, 2021.

 

NOTE 16 - INCOME TAXES

 

The provision (benefit) for income taxes for the three months ended March 31, 2022 and 2021 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:

 

    2022     2021  
    Three Months Ended  
    March 31,  
    2022     2021  
             
Federal statutory income tax rate     (21.0 %)     (21.0 %)
                 
Change in valuation allowance on net operating loss carryforwards     21.0       21.0  
                 
Effective income tax rate     0.0 %     0.0 %

 

Deferred tax assets as of March 31, 2022 and December 31, 2021 are as follows:

 

    2022     2021  
             
NOL carryforwards   $ 7,600,000     $ 7,500,000  
                 
Less valuation allowance     (7,600,000 )     (7,500,000 )
                 
Deferred tax assets   $ -     $ -  

 

 

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

 

For federal income tax purposes, the Company has a net operating loss carryforward of approximately $36,400,000 as of March 31, 2022, of which approximately $18,400,000 expires beginning in 2024 and $18,000,000 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 $17,700,000 as of March 31, 2022 in Georgia and Massachusetts, respectively, which expires beginning in 2023.

 

In addition, as of March 31, 2022, Rotmans has a net operating loss carryforward of approximately $4,100,000 for federal income tax purposes of which $1,500,000 expires beginning in 2029 and $2,600,000 can be carried forward indefinitely. Rotmans has a state operating loss carryforward of approximately $3,200,000 which expires beginning in 2022.

 

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

 

NOTE 17 - PROFIT SHARING PLAN

 

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

 

There were no Company contributions in 2022 and 2021. Participant and Company contributions are limited to amounts allowed under the Internal Revenue Code.

 

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

 

NOTE 18 - SUBSEQUENT EVENTS

 

Blue Oar has advanced Rotmans $500,000 and paid bills totaling approximately $100,000 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.

 

Steven Rotman has advanced the Company funds totaling $14,087. 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.

 

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

 

OVERVIEW

 

This analysis of our results of operations should be read in conjunction with the accompanying financial statements. 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.

 

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 the U.S. Environmental Protection Agency (“EPA”) and U.S. Food and Drug Administration (“FDA”) certified laboratories, the RxAir has been proven to destroy greater than 99% of bacteria and viruses and reduce concentrations of odors and volatile organic compounds (“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

 

Vystar produces the RxAir product line with a new world-class manufacturer and an expert U.S. engineer with a full understanding of the RxAir technology. Vystar sells RxAir residential and commercial units through multiple distributors and the Company’s website. Once distribution channels are firmly established, Vystar expects the air purification products will produce margins of approximately 70%.

 

Vystar’s Board of Directors have approved preliminary plans to spin off the Air Purification product lines into a separate legal entity which Vystar intends to take public. Vystar anticipates retaining approximately 20% of the shares in the new entity and will distribute the remaining ownership percentage to Vystar shareholders. This plan is expected to be executed in 2022.

 

About Rotmans

 

Rotmans, 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 is expected to add 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.

 

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About Vytex

 

Vytex is a multi-patented latex raw material in which the allergy causing proteins are reduced to a level that falls at or below detection based on ASTM approved test methods. Vytex has been available as a raw material commercially for ten years and through that time has a dedicated group of manufacturers who use it in end products such as electrical gloves, condoms, adhesives, etc. Ironically, most use Vytex as it’s better for their manufacturing process as an easier to use raw material and not for protein properties. As of mid-2020 Vystar and the Indian Rubber Manufacturers Research Association’s (IRMRA) have been 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. Additionally, this research, while slowed by the COVID-19 pandemic, has also shown attributes with extra low ammonia offerings that are desired and now sampled.

 

Towards the end of 2020, Vystar entered into a Market Development and Distribution Agreement with Corrie MacColl, Ltd. (CMC Global) 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 and has garnered much attention across a broad range of industries including liquid Vytex as well as the newly developed dry rubber Vytex. As of the date of this report, CMC Global has provided numerous opportunities that are in a trial basis or moving towards manufacturing trials in industries that use a significant amount of natural rubber latex, hence Vytex. Additionally Vystar now has a testing supply of Vytex dry rubber for larger trials. The success of early trials and the shipping crisis has led to broader spectrum of manufacturers combining the potential of Cameroon production with strategically placed contract manufactures based on geographical needs. Also Vystar research has shown great strides in specializing liquid Vytex to meet the immediate needs of customers such as low or no nitrosamine and others (discussed below) and additional patents have been proposed.

 

Vytex researcher Dr. Ranjit Matthan and CMC Global Director John Heath presented at The International Latex Conference which was held virtually July 20 to 22, 2021 and offered a plenary session entitled “Innovations and Sustainability in Natural Rubber Latex - The New Paradigm.” The presentation discussed the dramatic effect the COVID-19 pandemic has had on the natural rubber supply chain, and how the industry is reacting the new economic circumstances; including strategy and policy shifts in supply chain management and restoring greater geographic diversification of latex processing and product manufacturing. The R&D association with IRMRA promises quicker laboratory and field-based testing and evaluations downstream. At Vystar, the recalibrated sustainability programme (FSC, nitrosamines & ammonia free, ultralow proteins, no SVHC and green carbon neutrality) emphasize certifications with Corrie MacColl market reach facilitating faster rollouts. Nontraditional/non Hevea brasiliensis based production efforts are likely to continue to face new penetration and high cost-benefit acceptance challenges in this decade. A PDF of the full presentation is available on vytex.com.

 

Additionally, in August 2021, Dr. Matthan presented new data to the Automotive Tyre Manufacturers’ Association including Vytex dry rubber.

 

In Halcyon Agri (owner of CMC Global), 2020 Corporate Report: “Our group-wide innovation capabilities have enabled us to engage in innovative commercial partnerships. Corrie MacColl is collaborating with Vystar Corporation to transform our Cameroon plantation output into ultra-pure latex with stronger molecular bond that offers enhanced strength, durability and flexibility in the end products. This is achieved by removing non-rubber components and 99.85% of the proteins.”

 

About FEC

 

Vystar is looking to Fluid Energy as it moves forward in its quest for a cleaner and safer environment. The Company is planning to improve its air purifying by using the ultrasonic technology of Fluid Energy and combining it with its leading UV-C technology. The designs and prototypes are in development. This ultrasonic technology is applied into water products with the same goal. We have working prototypes for our water product targets that have tested beyond expectation for bacterial killing and flow metering. We will begin soon evaluating our ability to eradicate hard water pollution that fouls pools, fountains, and pumps. These products will move us toward living more safely and cleanly in our environment.

 

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.

 

It has caused, among other things, interruptions in our supply chains and suppliers, including potential problems with inventory availability and the potential result of the volatility or higher cost of product and international freight due to the high demand of products and low supply for an unpredictable period of time.

 

The COVID-19 pandemic is complex and continues to evolve with the emergence and spread of variants. At this time, we cannot reasonably estimate the duration of the pandemic and its influence on consumers and our business.

 

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RESULTS OF OPERATIONS

 

Comparison of the Three Months Ended March 31, 2022 with the Three Months Ended March 31, 2021

 

    Three Months Ended March 31,  
    2022     2021     $ Change     % Change  
                         
    CONSOLIDATED  
                         
Revenue   $ 3,839,258     $ 12,868,119     $ (9,028,861 )     -70.2 %
                                 
Cost of revenue     1,660,274       6,076,840       (4,416,566 )     -72.7 %
                                 
Gross profit     2,178,984       6,791,279       (4,612,295 )     -67.9 %
                                 
Operating expenses:                                
Salaries, wages and benefits     908,482       1,949,139       (1,040,657 )     -53.4 %
Share-based compensation     137,948       204,696       (66,748 )     -32.6 %
Agent fees     418,179       1,251,873       (833,694 )     -66.6 %
Professional fees     189,403       20,183       169,220       838.4 %
Advertising     293,488       865,178       (571,690 )     -66.1 %
Rent     183,727       316,615       (132,888 )     -42.0 %
Service charges     107,172       224,516       (117,344 )     -52.3 %
Depreciation and amortization     150,580       192,009       (41,429 )     -21.6 %
Other operating     655,614       796,413       (140,799 )     -17.7 %
                                 
Total operating expenses     3,044,593       5,820,622       (2,776,029 )     -47.7 %
                                 
Loss from operations     (865,609 )     970,657       (1,836,266 )     -189.2 %
                                 
Other income (expense):                                
Interest expense     (179,309 )     (175,847 )     (3,462 )     2.0 %
Change in fair value of derivative liabilities     57,000       (129,000 )     186,000       -144.2 %
Gain on settlement of debt, net     -       1,247,635       (1,247,635 )     -100.0 %
Other income, net     33,952       57,747       (23,795 )     -41.2 %
                                 
Total other income (expense), net     (88,357 )     1,000,535       (1,088,892 )     -108.8 %
                                 
Net income (loss)     (953,966 )     1,971,192       (2,925,158 )     -148.4 %
                                 
Net (income) loss attributable to noncontrolling interest     179,612       (1,053,065 )     1,232,677       -117.1 %
                                 
Net loss attributable to Vystar   $ (774,354 )   $ 918,127     $ (1,692,481 )     -184.3 %

 

Revenues

 

Revenues for the three months ended March 31, 2022 and 2021 were $3,839,258 and $12,868,119, respectively, for an decrease of $9,028,861 or 70.2%. The decrease in revenues was due to the success of the high impact closing to remodel sale at Rotmans in 2021.

 

The Company reported a significant decrease in gross profit to $2,178,984 for the three-month period ended March 31, 2022 compared to gross profit of $6,791,279 for the three-month period ended March 31, 2021, a decrease of $4,612,295 or 67.9%. The decrease in gross profit is consistent with the decrease in revenues.

 

The cost of revenue for the three months ended March 31, 2022 and 2021 was $1,660,274 and $6,076,840, respectively, a decrease of $4,416,566 or 72.7%.

 

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Operating Expenses

 

The Company’s operating expenses consist primarily of compensation and support costs for management and administrative staff, and for other general and administrative costs, including professional fees related to accounting, finance, and legal services as well as advertising, rent and other operating expenses. The Company’s operating expenses were $3,044,593 and $5,820,622 for the three months ended March 31, 2022 and 2021, respectively, a decrease of $2,776,029 or 47.7%. The decrease was due in part to reduced revenues and the closing of a second warehouse occupied by Rotmans until October 2021.

 

Other Income (Expense)

 

Other income (expense) for the three months ended March 31, 2022 was ($88,357) which consisted of interest expense of ($179,309), change in fair value of derivative liabilities of $57,000 and other income, net of $33,952. This compares to other income (expense) of $1,000,535 for the three months ended March 31, 2021, which consisted of interest expense of $175,847, change in fair value of derivative liabilities of ($129,000), gain on settlement of debt, net of $1,247,635 and other income, net of $57,747. Included in gain on settlement of debt, net is PPP loan forgiveness of $1,402,900.

 

Net Income (Loss)

 

Net income (loss) was ($953,966) and $1,971,192 for the three months ended March 31, 2022 and 2021, respectively, a decrease of $2,925,158 or 148.4%. Net loss in the quarter ended March 31, 2022 versus net income in the same period in 2021 was due to PPP loan forgiveness of $1,402,900 and increased sales and margins from the operations of a high impact closing to remodel sale at Rotmans in 2021.

 

LIQUIDITY AND CAPITAL RESOURCES

 

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, we have incurred significant losses and experienced negative cash flow since inception. At March 31, 2022, the Company had cash of $172,340 and a deficit in working capital of approximately $9.3 million. Further, at March 31, 2022, the accumulated deficit amounted to approximately $52.2 million. We use working capital to finance our ongoing operations, and since those operations do not currently cover all of our operating costs, managing working capital is essential to our Company’s future success. Because of this history of losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.

 

A successful transition to profitable operations is dependent upon obtaining sufficient financing to fund the Company’s planned expenses and achieving a level of revenue adequate to support the Company’s cost structure.

 

Management plans to finance future operations using cash on hand, as well as increased revenue from RxAir air purifier sales and Vytex license fees. The Company will also raise capital with common stock subscription issuances. The current agreement with a national sales event company has allowed Rotmans to meet its financial obligations and provided the Company flexibility and time needed to develop a new retail furniture sale model.

 

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 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.

 

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Sources and Uses of Cash

 

Net cash provided by operating activities was $23,514 for the three months ended March 31, 2022 as compared to net cash used in operating activities of $1,162,325 for the three months ended March 31, 2021. During the three months ended March 31, 2022, cash provided by operations was primarily due to the decrease of inventories and the increase of accounts payable and accrued expenses, and non-cash related add-back of share-based compensation expense, depreciation, amortization and change in fair value of derivative liabilities.

 

The Company had no cash used in investing activities during the three months ended March 31, 2022 as compared to $17,317 for the three months ended March 31, 2021.

 

Net cash used in financing activities was $2,349 during the three months ended March 31, 2022, as compared to cash provided of $1,754,962 during the three months ended March 31, 2021. During the three months ended March 31, 2022, cash was provided by related party advances of $40,000 which was offset by the repayment of finance lease obligations of $42,349. During the three months ended March 31, 2021, cash was provided by PPP loan proceeds of $1,402,900, related party term debt in the amount of $395,000 offset by the repayment of finance lease obligations of $42,938.

 

Off-Balance Sheet Arrangements

 

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

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

None

 

ITEM 4. CONTROLS AND PROCEDURES

 

The Company’s Chief Executive Officer and Chief Financial Officer (the “Certifying Officer”) is responsible for establishing and maintaining disclosure controls and procedures for the Company. Although the Certifying Officer has designed such disclosure controls and procedures to ensure that material information is made known to them, particularly during the period in which this report was prepared, certain material weaknesses occurred during the period ended March 31, 2022 and subsequent to period end. The Certifying Officer has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e) (the “Rules”) under the Securities Exchange Act of 1934 (or “Exchange Act”) as of the end of the period covered by this Quarterly Report and is working on improving controls with an outside CPA firm and dedicated internal resources.

 

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Management’s Report on Internal Control Over Financial Reporting

 

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

 

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

 

Management, under the supervision and with the participation of our Chief Executive Officer and our acting Chief Financial Officer, conducted an evaluation of our internal control over financial reporting as of March 31, 2022, based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) 2013. Based on our evaluation under the COSO framework, management concluded that our internal control over financial reporting was not effective as of March 31, 2022. Such conclusion was reached based on the following material weaknesses noted by management:

 

  a) We have a lack of segregation of duties due to the small size of the Company.
     
  b) The Company did not maintain reasonable control over records underlying transactions necessary to permit preparation of the Company’s financial statements.
     
  c) Lack of controls that provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposal of the Company’s assets that could have a material effect on the financial statements.
     
  d) Lack of a formal CFO position who can devote significant attention to financial reporting resulted in multiple audit adjustments.
     
  e) Lack of a functioning audit committee, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures. Management believes the lack of a functioning audit committee results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future period.

 

Management expects to strengthen internal control during 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.

 

38
 

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

The Company is subject to legal proceedings and claims that have not been fully resolved and have arisen in the ordinary course of business. See the discussion of pending legal proceedings in Note 14 of the Notes to Condensed Consolidated Financial Statements.

 

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

 

None

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable

 

ITEM 5. OTHER INFORMATION

 

None

 

ITEM 6. EXHIBITS

 

Exhibit Index

 

Number   Description
     
31.1 *   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
     
32.1 *   Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
101.INS  

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)

 

* Filed herewith

 

39
 

 

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: June 8, 2022 By: /s/ Steven Rotman
    Steven Rotman
    President, Chief Executive Officer, Chief Financial Officer and Director

 

40

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