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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 June 30, 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 September 26, 2022
Preferred Stock, $0.0001 par value per share   2,265,073 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 JUNE 30, 2022

 

INDEX

 

Part I. Financial Information  
     
Item 1. Financial Statements:  
     
  Condensed Consolidated Balance Sheets at June 30, 2022 (unaudited) and December 31, 2021 4
     
  Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2022 (unaudited) and 2021 (unaudited) 5
     
  Condensed Consolidated Statements of Stockholders’ Deficit for the Three and Six Months Ended June 30, 2022 (unaudited) and 2021 (unaudited) 6-7
     
  Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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 39
     
Item 4. Controls and Procedures 39
     
Part II. Other Information  
   
Item 1. Legal Proceedings 41
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 41
     
Item 3. Defaults Upon Senior Securities 41
     
Item 4. Mine Safety Disclosures 41
     
Item 5. Other Information 41
     
Item 6. Exhibits 41
     
SIGNATURES 42

 

3
 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

 

      1       2  
    June 30, 2022     December 31, 2021  
    (Unaudited)      
ASSETS                
Current assets:                
Cash   $ 70,023     $ 151,175  
Accounts receivable, net     49,221       68,541  
Other receivables     684,775       875,362  
Inventories     3,399,424       3,784,420  
Prepaid expenses and other     249,714       337,013  
Deferred commission costs     56,967       73,625  
                 
Total current assets     4,510,124       5,290,136  
                 
Property and equipment, net     703,563       832,099  
                 
Operating lease right-of-use assets     7,353,321       7,776,978  
                 
Finance lease right-of-use assets, net     471,602       551,037  
                 
Other assets:                
Intangible assets, net     1,036,246       1,208,870  
Goodwill     460,301       460,301  
Inventories, long-term     466,628       657,177  
Deferred commission costs, net of current portion     36,059       60,586  
Other     5,274       20,274  
                 
Total other assets     2,004,508       2,407,208  
                 
Total assets   $ 15,043,118     $ 16,857,458  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
Current liabilities:                
Accounts payable   $ 5,076,055     $ 5,149,570  
Accrued expenses     764,973       897,420  
Stock subscription payable     2,610,589       1,247,549  
Operating lease liabilities - current maturities     570,000       634,000  
Finance lease liabilities - current maturities     117,000       134,000  
Shareholder, convertible and contingently convertible notes payable and accrued interest - current maturities     328,233       1,388,904  
Related party debt - current maturities     2,694,000       1,487,000  
Unearned revenue     796,156       880,204  
Derivative liabilities     258,100       1,778,100  
Related party advances     69,820       -  
                 
Total current liabilities     13,284,926       13,596,747  
                 
Long-term liabilities:                
Operating lease liabilities, net of current maturities     5,392,920       5,683,736  
Finance lease liabilities, net of current maturities     384,558       443,882  
Unearned revenue, net of current maturities     144,234       241,991  
Related party debt, net of current maturities and debt discount     2,254,768       2,791,401  
                 
Total long-term liabilities     8,176,480       9,161,010  
                 
Total liabilities     21,461,406       22,757,757  
                 
Stockholders’ deficit:                
Convertible preferred stock, $0.0001 par value 15,000,000 shares authorized; 8,698 shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively (liquidation preference of $78,880 and $74,531 at June 30, 2022 and December 31, 2021, respectively)     1       1  
Common stock, $0.0001 par value, 1,500,000,000 shares authorized; 1,294,155,560 and 1,294,175,560 shares issued at June 30, 2022 and December 31, 2021, respectively and 1,294,125,560 and 1,294,145,560 shares outstanding at June 30, 2022 and December 31, 2021, respectively     129,415       129,415  
Additional paid-in capital     43,730,771       43,723,389  
Accumulated deficit     (51,518,191 )     (51,410,516 )
Common stock in treasury, at cost; 30,000 shares at June 30, 2022 and December 31, 2021     (30 )     (30 )
                 
Total Vystar stockholders’ deficit     (7,658,034 )     (7,557,741 )
                 
Noncontrolling interest     1,239,746       1,657,442  
                 
Total stockholders’ deficit     (6,418,288 )     (5,900,299 )
                 
Total liabilities and stockholders’ deficit   $ 15,043,118     $ 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)

 

      1        2        3        4   
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2022     2021     2022     2021  
                         
Revenue   $ 3,196,033     $ 6,216,004     $ 7,035,291     $ 19,084,123  
                                 
Cost of revenue     1,467,964       2,567,075       3,128,238       8,643,915  
                                 
Gross profit     1,728,069       3,648,929       3,907,053       10,440,208  
                                 
Operating expenses:                                
Salaries, wages and benefits     785,931       1,575,649       1,694,413       3,524,788  
Share-based compensation     338,857       211,423       476,805       416,119  
Agent fees     327,007       1,077,567       745,186       2,329,440  
Professional fees     133,472       198,778       322,875       218,961  
Advertising     314,084       543,475       607,572       1,408,653  
Rent     177,184       319,616       360,911       636,231  
Service charges     85,072       84,499       192,244       309,015  
Depreciation and amortization     150,580       192,372       301,160       384,381  
Other operating     507,682       881,072       1,163,296       1,677,485  
                                 
Total operating expenses     2,819,869       5,084,451       5,864,462       10,905,073  
                                 
Loss from operations     (1,091,800 )     (1,435,522 )     (1,957,409 )     (464,865 )
                                 
Other income (expense):                                
Interest expense     (207,177 )     (177,483 )     (386,486 )     (353,330 )
Change in fair value of derivative liabilities     1,463,000       215,800       1,520,000       86,800  
Gain on settlement of debt, net     230,820       1,428,291       230,820       2,675,926  
Other income, net     33,752       42,177       67,704       99,924  
                                 
Total other income, net     1,520,395       1,508,785       1,432,038       2,509,320  
                                 
Net income (loss)     428,595       73,263       (525,371 )     2,044,455  
                                 
Net (income) loss attributable to noncontrolling interest     238,084       (209,810 )     417,696       (1,262,875 )
                                 
Net income (loss) attributable to Vystar   $ 666,679     $ (136,547 )   $ (107,675 )   $ 781,580  
                                 
Income (loss) per share:                                
Basic and diluted   $ 0.00     $ (0.00 )   $ 0.00     $ 0.00  
                                 
Weighted average number of common shares outstanding:                                
Basic and diluted     1,294,125,560       1,264,072,966       1,294,128,985       1,253,245,857  

 

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

 

5
 

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE SIX MONTHS ENDED JUNE 30, 2022

(Unaudited)

 

              1                2        3        4                5        6        7        8   
    Attributable to Vystar              
    Number           Number                       Number           Total              
    of           of           Additional           of           Vystar           Total  
    Preferred     Preferred     Common     Common     Paid-in     Accumulated     Treasury     Treasury     Stockholders’     Noncontrolling     Stockholders’  
    Shares     Stock     Shares     Stock     Capital     Deficit     Shares     Stock     Deficit     Interest     Deficit  
                                                                   
Ending balance December 31, 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 common stock                     (20,000                                                    
                                                                                         
Net loss     -       -       -       -       -       (774,354 )     -       -       (774,354 )     (179,612 )     (953,966 )
                                                                                         
Ending balance March 31, 2022     8,698       1       1,294,155,560       129,415       43,727,080       (52,184,870 )     (30,000 )     (30 )     (8,328,404 )     1,477,830       (6,850,574 )
                                                                                         
Share-based compensation - options                                     3,691                               3,691               3,691  
                                                                                         
Net income (loss)     -       -       -       -       -       666,679       -       -       666,679       (238,084 )     428,595  
                                                                                         
Ending balance June 30, 2022     8,698     $ 1       1,294,155,560     $ 129,415     $ 43,730,771     $ (51,518,191 )     (30,000 )   $ (30 )   $ (7,658,034 )   $ 1,239,746     $ (6,418,288 )

 

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

 

6
 

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE SIX MONTHS ENDED JUNE 30, 2021

(Unaudited)

 

    Attributable to Vystar              
    Number           Number                       Number           Total              
    of           of           Additional           of           Vystar           Total  
    Preferred     Preferred     Common     Common     Paid-in     Accumulated     Treasury     Treasury     Stockholders’     Noncontrolling     Stockholders’  
    Shares     Stock     Shares     Stock     Capital     Deficit     Shares     Stock     Deficit     Interest     Deficit  
                                                                   
Ending balance December 31, 2020     13,698     $ 1       1,199,931,717     $ 119,990     $ 41,233,471     $ (48,713,184 )     (30,000 )   $ (30 )   $ (7,359,752 )   $ 600,795     $ (6,758,957 )
                                                                                         
Common stock issued for services                     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 )     1,653,860       (3,018,492 )
                                                                                         
Share-based compensation - options                                     3,691                               3,691               3,691  
                                                                                         
Net income (loss)     -       -       -       -       -       (136,547 )     -       -       (136,547 )     209,810       73,263  
                                                                                         
Ending balance June 30, 2021     3,698     $ 1       1,264,102,966     $ 126,408     $ 43,000,017     $ (47,931,604 )     (30,000 )   $ (30 )   $ (4,805,208 )   $ 1,863,670     $ (2,941,538 )

 

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

 

7
 

 

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

      1       2  
    Six Months Ended  
    June 30,  
    2022     2021  
Cash flows from operating activities:                
Net income (loss)   $ (525,371 )   $ 2,044,455  
Adjustments to reconcile net income (loss) to net cash used in operating activities:                
Share-based compensation     476,805       416,119  
Depreciation     128,536       192,401  
Bad debts (recovery)     (4,039 )     1,841  
Amortization of intangible assets     172,624       191,980  
Noncash lease expense     153,016       156,305  
Amortization of debt discount     27,083       10,085  
Change in fair value of derivative liabilities     (1,520,000 )     (86,800 )
Loss on sale of property and equipment     -       (112 )
Net unrealized (gain) loss on available-for-sale investments     -       (20,480 )
Gain on settlement of debt, net     (230,820 )     (2,675,926 )
(Increase) decrease in assets:                
Accounts receivable     23,360       (215,475 )
Other receivables     190,587       -  
Inventories     575,545       379,090  
Prepaid expenses and other     102,299       210,780  
Deferred commission costs     41,185       57,459  
Increase (decrease) in liabilities:                
Accounts payable     26,486       34,947  
Accrued expenses and interest payable     37,101       (1,552,585 )
Unearned revenue     (181,806 )     (1,425,505 )
                 
Net cash used in operating activities     (507,409 )     (2,281,421 )
                 
Cash flows from investing activities:                
Acquisition of property and equipment     -       (54,157 )
Proceeds from the sale of property and equipment     -       1,300  
Patents and trademark fees     -       (2,183 )
                 
Net cash used in investing activities     -       (55,040 )
                 
Cash flows from financing activities:                
Proceeds from issuance of term debt     -       1,402,900  
Proceeds from the issuance of notes - related parties     500,000       528,039  
Proceeds from related party advances     69,820       -  
Repayment of related party debt     (62,500 )     -  
Repayment of finance lease obligations     (81,063 )     (86,432 )
                 
Net cash provided by financing activities     426,257       1,844,507  
                 
Net decrease in cash     (81,152 )     (491,954 )
                 
Cash - beginning of period     151,175       620,539  
                 
Cash - end of period   $ 70,023     $ 128,585  
                 
Cash paid during the period for:                
Interest   $ 191,183     $ 225,055  
                 
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  
Vendor payables paid directly by related party     100,000       -  
Stock subscription payable recorded for consulting and exercise of outstanding options and warrants     58,500       -  
Reduction of third-party vendor payable with transfer of inventories     -       2,886,497  
Acquisition of inventories with third-party vendor payable at commencement of second sale agreement     -       2,886,497  

 

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

 

The novel coronavirus (“COVID-19”) pandemic continues to cause economic disruption and impact to our business and results of operations. During the six months ended June 30, 2022, we experienced rising product prices, volatile transportation costs and supply chain disruptions. In addition, discretionary consumer spending has been adversely impacted by rising inflation, including fuel costs and interest rates. We cannot reasonably estimate the duration of COVID-19 and its impact on Vystar. Accordingly, the estimates and assumptions made as of June 30, 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).

 

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.

 

9
 

 

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 June 30, 2022 and are level 3 measurements. There have been no transfers between levels during the six months ended June 30, 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.

 

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.

 

10
 

 

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 six months ending June 30, 2022 were approximately $1,574,000. 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 June 30, 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 six months ended June 30, 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.

 

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 June 30, 2022, the net balance of property and equipment is $703,563 with accumulated depreciation of $772,520. As of December 31, 2021, the net balance of property and equipment is $832,099 with accumulated depreciation of $643,984.

 

11
 

 

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 six months ended June 30, 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.

 

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.

 

12
 

 

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 June 30, 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.

 

Changes to unearned revenue during the six months ended June 30, 2022 and 2021 are summarized as follows:

 

    2022     2021  
             
Balance, beginning of the period   $ 1,122,195     $ 2,427,771  
                 
Customer deposits received     6,273,932       15,819,352  
                 
Gift cards purchased     1,200       260  
                 
Revenue earned     (6,456,937 )     (17,245,116 )
                 
Balance, end of the period   $ 940,390     $ 1,002,267  

 

Income (Loss) Per Share

 

The Company presents basic and diluted income (loss) per share. For the three and six months ended June 30, 2022 and 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 26,524,938 and 27,124,938 shares of common stock for the six months ended June 30, 2022 and 2021, respectively, as their effect would be anti-dilutive. Warrants to purchase 3,885,823 and 11,641,566 shares of common stock for the six months ended June 30, 2022 and 2021, respectively, were also excluded from the computation of diluted income (loss) per share as their effect would be anti-dilutive. In addition, preferred stock convertible to 3,317,200 and 3,143,240 shares of common stock for the six months ended June 30, 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 1,034,176,791 and 300,832,047 shares of common stock for the six months ended June 30, 2022 and 2021, respectively, were also excluded from the computation of diluted income (loss) per share as their effect would be anti-dilutive.

 

13
 

 

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.

 

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 June 30, 2022 and December 31, 2021, reserves for estimated sales returns totaled $283,000 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 currently offers a separately-priced stain protection warranty serviced by a third-party. At June 30, 2022 and December 31, 2021, deferred warranty revenue was approximately $368,000 and $524,000, respectively, and is included in unearned revenue in the accompanying consolidated balance sheets. During the six months ended June 30, 2022 and 2021, the Company recognized total revenues of approximately $152,000 and $207,000, respectively, related to deferred warranty revenue arrangements. Commission costs in obtaining extended warranty contracts are capitalized and recognized as expense on a straight-line basis over the period of the warranty contract. At June 30, 2022 and December 31, 2021, deferred commission costs were approximately $93,000 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.

 

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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 six months ended June 30, 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 $608,000 and $1,409,000 for the six months ended June 30, 2022 and 2021, respectively.

 

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 six months ended June 30, 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.

 

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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.

 

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 June 30, 2022, the Company had cash of $70,023 and a deficit in working capital of approximately $8.8 million. Further, at June 30, 2022 the accumulated deficit amounted to approximately $51.5 million. We use working capital to finance our ongoing operations, and since those operations do not currently cover all our operating costs, managing working capital is essential to our Company’s future success. 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.

 

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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 $21,000 in the first six months of 2021, and have been included in other income (expense) in the accompanying condensed statements of operations.

 

NOTE 5 - PROPERTY AND EQUIPMENT

 

Property and equipment, net consists of the following:

 

    June 30,     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     (772,520 )     (643,984 )
                 
Property and equipment, net   $ 703,563     $ 832,099  

 

Depreciation expense for the six months ended June 30, 2022 and 2021 was $128,536 and $192,401, respectively.

 

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NOTE 6 - INTANGIBLE ASSETS

 

Intangible assets consist of the following:

 

                 
                Amortization
    June 30,     December 31,     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     (1,244,110 )     (1,071,486 )    
                     
Intangible assets, net     1,027,174       1,199,798      
Indefinite-lived intangible assets:                    
Trademarks     9,072       9,072      
                     
Total intangible assets   $ 1,036,246     $ 1,208,870      

 

Amortization expense for the six months ended June 30, 2022 and 2021 was $172,624 and $191,980, respectively.

 

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

 

    Amount  
       
Remaining in 2022   $ 172,625  
2023     338,638  
2024     239,411  
2025     90,550  
2026     71,232  
Thereafter     114,718  
         
Total   $ 1,027,174  

 

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 and six months ended June 30, 2022 and 2021:

 

                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2022     2021     2022     2021  
                         
Operating lease cost   $ 288,134     $ 396,492     $ 575,804     $ 792,544  
                                 
Finance lease cost:                                
                                 
Amortization of right-of-use assets     39,706       45,912       84,174       91,824  
Interest on lease liabilities     6,785       8,933       14,097       18,421  
                                 
Total lease cost   $ 334,625     $ 451,337     $ 674,075