UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-Q
[X] |
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 |
For
the quarterly period ended March 31, 2020
[ ] |
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 [X]
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 [X] 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 [X] |
(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 [X]
Class |
|
Outstanding
as of July 6, 2020 |
Preferred
Stock, $0.0001 par value per share |
|
13,698 |
|
shares |
Common
Stock, $0.0001 par value per share |
|
1,105,776,437 |
|
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, 2019. 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, 2019 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.
VYSTAR
CORPORATION
FORM
10-Q FOR THE QUARTER ENDED MARCH 31, 2020
INDEX
PART I. FINANCIAL
INFORMATION
ITEM 1. FINANCIAL
STATEMENTS
VYSTAR CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
March
31, |
|
|
December
31, |
|
|
|
2020 |
|
|
2019 |
|
|
|
(Unaudited) |
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current
assets: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
403,091 |
|
|
$ |
72,355 |
|
Accounts
receivable |
|
|
40,155 |
|
|
|
38,526 |
|
Stock
subscription receivable |
|
|
49,250 |
|
|
|
49,250 |
|
Inventories |
|
|
3,916,997 |
|
|
|
4,114,977 |
|
Investments
- equity securities, at fair value |
|
|
99,095 |
|
|
|
149,517 |
|
Prepaid
expenses and other |
|
|
311,476 |
|
|
|
602,980 |
|
Deferred
commission costs |
|
|
124,725 |
|
|
|
129,123 |
|
|
|
|
|
|
|
|
|
|
Total
current assets |
|
|
4,944,789 |
|
|
|
5,156,728 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net |
|
|
1,787,616 |
|
|
|
1,879,739 |
|
Operating
lease right-of-use assets |
|
|
10,094,497 |
|
|
|
10,379,685 |
|
Finance
lease right-of-use assets, net |
|
|
871,246 |
|
|
|
849,209 |
|
|
|
|
|
|
|
|
|
|
Other
assets: |
|
|
|
|
|
|
|
|
Intangible
assets, net |
|
|
2,389,056 |
|
|
|
2,489,612 |
|
Goodwill |
|
|
460,301 |
|
|
|
460,301 |
|
Inventories,
long-term |
|
|
890,130 |
|
|
|
935,121 |
|
Deferred
commission costs, net of current portion |
|
|
211,335 |
|
|
|
217,024 |
|
Other |
|
|
34,377 |
|
|
|
34,377 |
|
|
|
|
|
|
|
|
|
|
Total
other assets |
|
|
3,985,199 |
|
|
|
4,136,435 |
|
|
|
|
|
|
|
|
|
|
Total
assets |
|
$ |
21,683,347 |
|
|
$ |
22,401,796 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ DEFICIT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities: |
|
|
|
|
|
|
|
|
Line
of credit |
|
$ |
2,163,562 |
|
|
$ |
2,413,539 |
|
Term
notes - current maturities |
|
|
769,814 |
|
|
|
16,374 |
|
Accounts
payable |
|
|
3,124,371 |
|
|
|
2,846,306 |
|
Accrued
expenses |
|
|
350,117 |
|
|
|
681,758 |
|
Stock
subscription payable |
|
|
1,298,931 |
|
|
|
1,150,125 |
|
Operating
lease liabilities - current maturities |
|
|
1,071,000 |
|
|
|
1,055,000 |
|
Finance
lease liabilities - current maturities |
|
|
171,000 |
|
|
|
167,000 |
|
Shareholder,
convertible and contingently convertible notes payable and accrued
interest - current maturities |
|
|
611,281 |
|
|
|
366,326 |
|
Related
party debt - current maturities |
|
|
46,000 |
|
|
|
46,000 |
|
Unearned
revenue |
|
|
1,662,716 |
|
|
|
1,677,171 |
|
Derivative
liabilities |
|
|
1,499,800 |
|
|
|
1,499,800 |
|
|
|
|
|
|
|
|
|
|
Total
current liabilities |
|
|
12,768,592 |
|
|
|
11,919,399 |
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities: |
|
|
|
|
|
|
|
|
Term
notes, net of current maturities |
|
|
500,000 |
|
|
|
500,000 |
|
Operating
lease liabilities, net of current maturities |
|
|
7,231,508 |
|
|
|
7,490,431 |
|
Finance
lease liabilities, net of current maturities |
|
|
707,524 |
|
|
|
694,487 |
|
Unearned
revenue, net of current maturities |
|
|
811,550 |
|
|
|
823,401 |
|
Shareholder,
convertible and contingently convertible notes payable and accrued
interest, net of current maturities and debt discount |
|
|
319,681 |
|
|
|
494,363 |
|
Related
party debt, net of current maturities and debt discount |
|
|
2,049,797 |
|
|
|
1,712,259 |
|
|
|
|
|
|
|
|
|
|
Total
long-term liabilities |
|
|
11,620,060 |
|
|
|
11,714,941 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities |
|
|
24,388,652 |
|
|
|
23,634,340 |
|
|
|
|
|
|
|
|
|
|
Stockholders’
deficit: |
|
|
|
|
|
|
|
|
Convertible
preferred stock, $0.0001 par value 15,000,000 shares authorized;
13,828 issued and outstanding (liquidation preference of $94,779
and $91,275 at March 31, 2020 and December 31, 2019 ,
respectively) |
|
|
1 |
|
|
|
1 |
|
Common
stock, $0.0001 par value, 1,500,000,000 shares authorized;
1,105,762,080 shares issued and 1,105,732,080 shares
outstanding |
|
|
110,573 |
|
|
|
110,573 |
|
Additional
paid-in capital |
|
|
38,442,169 |
|
|
|
38,436,607 |
|
Accumulated
deficit |
|
|
(42,472,344 |
) |
|
|
(41,104,967 |
) |
Common
stock in treasury, at cost; 30,000 shares |
|
|
(30 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
Total
Vystar stockholders’ deficit |
|
|
(3,919,631 |
) |
|
|
(2,557,816 |
) |
|
|
|
|
|
|
|
|
|
Noncontrolling
interest |
|
|
1,214,326 |
|
|
|
1,325,272 |
|
|
|
|
|
|
|
|
|
|
Total
stockholders’ deficit |
|
|
(2,705,305 |
) |
|
|
(1,232,544 |
) |
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ deficit |
|
$ |
21,683,347 |
|
|
$ |
22,401,796 |
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
VYSTAR CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
|
Three
Months Ended |
|
|
|
March
31, |
|
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
Revenue |
|
$ |
5,932,238 |
|
|
$ |
191,667 |
|
|
|
|
|
|
|
|
|
|
Cost of
revenue |
|
|
2,932,614 |
|
|
|
199,842 |
|
|
|
|
|
|
|
|
|
|
Gross
profit (loss) |
|
|
2,999,624 |
|
|
|
(8,175 |
) |
|
|
|
|
|
|
|
|
|
Operating
expenses: |
|
|
|
|
|
|
|
|
Salaries,
wages and benefits |
|
|
1,454,074 |
|
|
|
- |
|
Share-based
compensation |
|
|
154,368 |
|
|
|
1,612,286 |
|
Professional
fees |
|
|
292,696 |
|
|
|
192,029 |
|
Advertising |
|
|
446,695 |
|
|
|
20,483 |
|
Rent |
|
|
293,171 |
|
|
|
- |
|
Service
charges |
|
|
183,577 |
|
|
|
1,126 |
|
Depreciation and
amortization |
|
|
243,923 |
|
|
|
49,653 |
|
Other
operating |
|
|
781,673 |
|
|
|
120,303 |
|
|
|
|
|
|
|
|
|
|
Total
operating expenses |
|
|
3,850,177 |
|
|
|
1,995,880 |
|
|
|
|
|
|
|
|
|
|
Loss from
operations |
|
|
(850,553 |
) |
|
|
(2,004,055 |
) |
|
|
|
|
|
|
|
|
|
Other
income (expense): |
|
|
|
|
|
|
|
|
Gain on
settlement of debt, net |
|
|
- |
|
|
|
14,945 |
|
Interest
expense |
|
|
(604,714 |
) |
|
|
(99,663 |
) |
Change in
fair value of derivative liabilities |
|
|
- |
|
|
|
(1,044,250 |
) |
Other
income (expense), net |
|
|
(23,056 |
) |
|
|
(151 |
) |
|
|
|
|
|
|
|
|
|
Total
other expense, net |
|
|
(627,770 |
) |
|
|
(1,129,119 |
) |
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
(1,478,323 |
) |
|
|
(3,133,174 |
) |
|
|
|
|
|
|
|
|
|
Net loss
attributable to noncontrolling interest |
|
|
110,946 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Net loss
attributable to Vystar |
|
$ |
(1,367,377 |
) |
|
$ |
(3,133,174 |
) |
|
|
|
|
|
|
|
|
|
Basic and
diluted loss per share: |
|
|
|
|
|
|
|
|
Net loss
per share |
|
$ |
(0.00 |
) |
|
$ |
(0.00 |
) |
|
|
|
|
|
|
|
|
|
Basic and
diluted weighted average number of common shares
outstanding |
|
|
1,105,732,080 |
|
|
|
770,752,984 |
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
VYSTAR CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR
THE THREE MONTHS ENDED MARCH 31, 2020
|
|
Attributable
to Vystar |
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
Number |
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
of |
|
|
|
|
|
of |
|
|
|
|
|
Additional |
|
|
|
|
|
of |
|
|
|
|
|
Vystar |
|
|
|
|
|
Total |
|
|
|
Preferred |
|
|
Preferred |
|
|
Common |
|
|
Common |
|
|
Paid-in |
|
|
Accumulated |
|
|
Treasury |
|
|
Treasury |
|
|
Stockholders’ |
|
|
Noncontrolling |
|
|
Stockholders’ |
|
|
|
Shares |
|
|
Stock |
|
|
Shares |
|
|
Stock |
|
|
Capital |
|
|
Deficit |
|
|
Shares |
|
|
Stock |
|
|
Deficit |
|
|
Interest |
|
|
Deficit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance December 31, 2019 |
|
|
13,828 |
|
|
$ |
1 |
|
|
|
1,105,762,080 |
|
|
$ |
110,573 |
|
|
$ |
38,436,607 |
|
|
$ |
(41,104,967 |
) |
|
|
(30,000 |
) |
|
$ |
(30 |
) |
|
$ |
(2,557,816 |
) |
|
$ |
1,325,272 |
|
|
$ |
(1,232,544 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock and warrants issued for services |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,562 |
|
|
|
|
|
|
|
5,562 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,367,377 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1,367,377 |
) |
|
|
(110,946 |
) |
|
|
(1,478,323 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance March 31, 2020 |
|
|
13,828 |
|
|
$ |
1 |
|
|
|
1,105,762,080 |
|
|
$ |
110,573 |
|
|
$ |
38,442,169 |
|
|
$ |
(42,472,344 |
) |
|
|
(30,000 |
) |
|
$ |
(30 |
) |
|
$ |
(3,919,631 |
) |
|
$ |
1,214,326 |
|
|
$ |
(2,705,305 |
) |
The
accompanying notes are an integral part of these condensed
financial statements
VYSTAR
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR
THE THREE MONTHS ENDED MARCH 31, 2019
|
|
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, 2018 |
|
|
13,828 |
|
|
$ |
1 |
|
|
|
457,747,818 |
|
|
$ |
45,774 |
|
|
$ |
31,485,532 |
|
|
$ |
(33,400,345 |
) |
|
|
- |
|
|
$ |
- |
|
|
$ |
(1,869,038 |
) |
|
$ |
- |
|
|
$ |
(1,869,038 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for services |
|
|
|
|
|
|
|
|
|
|
147,704,875 |
|
|
|
14,771 |
|
|
|
2,017,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,032,236 |
|
|
|
|
|
|
|
2,032,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share
based compensation - options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,783 |
|
|
|
|
|
|
|
17,783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for settlement of warrants |
|
|
|
|
|
|
|
|
|
|
77,246,324 |
|
|
|
7,725 |
|
|
|
324,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
332,442 |
|
|
|
|
|
|
|
332,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for cash received, net |
|
|
|
|
|
|
|
|
|
|
144,933,992 |
|
|
|
14,493 |
|
|
|
420,307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
434,800 |
|
|
|
|
|
|
|
434,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for conversion of related party line of
credit |
|
|
|
|
|
|
|
|
|
|
2,512,900 |
|
|
|
251 |
|
|
|
143,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143,529 |
|
|
|
|
|
|
|
143,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued upon conversion of convertible notes and settlement of
derivatives |
|
|
|
|
|
|
|
|
|
|
227,336,218 |
|
|
|
22,732 |
|
|
|
1,320,931 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,343,663 |
|
|
|
|
|
|
|
1,343,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury
stock repurchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,000 |
) |
|
|
(30 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(3,133,174 |
) |
|
|
- |
|
|
|
- |
|
|
|
(3,133,174 |
) |
|
|
- |
|
|
|
(3,133,174 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending
balance March 31, 2019 |
|
|
13,828 |
|
|
|
1 |
|
|
|
1,057,482,127 |
|
|
$ |
105,746 |
|
|
$ |
35,730,013 |
|
|
$ |
(36,533,519 |
) |
|
|
(30,000 |
) |
|
$ |
(30 |
) |
|
$ |
(697,789 |
) |
|
|
- |
|
|
$ |
(697,789 |
) |
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
VYSTAR CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
Three
Months Ended |
|
|
|
March
31, |
|
|
|
2020 |
|
|
2019 |
|
Cash flows
from operating activities: |
|
|
|
|
|
|
|
|
Net
loss |
|
$ |
(1,478,323 |
) |
|
$ |
(3,133,174 |
) |
Adjustments to
reconcile net loss to cash used in operating
activities: |
|
|
|
|
|
|
|
|
Gain on
settlement of debt |
|
|
- |
|
|
|
(14,945 |
) |
Share-based
compensation |
|
|
154,368 |
|
|
|
1,612,286 |
|
Depreciation |
|
|
139,684 |
|
|
|
10,232 |
|
Bad
debts |
|
|
5,317 |
|
|
|
- |
|
Amortization of
intangible assets |
|
|
104,239 |
|
|
|
39,421 |
|
Noncash
lease expense |
|
|
32,166
|
|
|
|
- |
|
Unamortized term debt
issuance costs |
|
|
(14,208 |
) |
|
|
- |
|
Amortization of debt
discount |
|
|
315,875 |
|
|
|
73,519 |
|
Change in
fair value of derivative liabilities |
|
|
- |
|
|
|
1,044,250 |
|
Net
unrealized loss on available-for-sale investments |
|
|
50,422 |
|
|
|
- |
|
(Increase)
decrease in assets: |
|
|
|
|
|
|
|
|
Accounts
receivable |
|
|
(6,946 |
) |
|
|
(513 |
) |
Inventories |
|
|
242,971 |
|
|
|
(25,093 |
) |
Prepaid
expenses and other assets |
|
|
291,504 |
|
|
|
6,235 |
|
Deferred
commission costs |
|
|
10,087 |
|
|
|
- |
|
Increase
(decrease) in liabilities: |
|
|
|
|
|
|
|
|
Accounts
payable |
|
|
278,065 |
|
|
|
(23,746 |
) |
Accrued
expenses and interest payable |
|
|
(
289,705 |
) |
|
|
1,164 |
|
Unearned
revenue |
|
|
(26,306 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
Net cash
used in operating activities |
|
|
(190,790 |
) |
|
|
(410,364 |
) |
|
|
|
|
|
|
|
|
|
Cash flows
from investing activities: |
|
|
|
|
|
|
|
|
Patents
and trademark fees |
|
|
(3,683
|
) |
|
|
(2,839 |
) |
Website
development costs |
|
|
- |
|
|
|
(500 |
) |
|
|
|
|
|
|
|
|
|
Net cash
used in investing activities |
|
|
(3,683
|
) |
|
|
(3,339 |
) |
|
|
|
|
|
|
|
|
|
Cash flows
from financing activities: |
|
|
|
|
|
|
|
|
Net
repayments on line of credit |
|
|
(249,977 |
) |
|
|
- |
|
Proceeds
from the issuance of term debt
|
|
|
808,500 |
|
|
|
(146,176 |
) |
Repayment
of term debt |
|
|
(40,852 |
) |
|
|
- |
|
Repayment
of finance lease obligations |
|
|
(42,462 |
) |
|
|
- |
|
Proceeds
from the issuance of notes - related parties |
|
|
50,000 |
|
|
|
217,000 |
|
Issuance
of common stock, net of costs |
|
|
- |
|
|
|
731,020 |
|
Treasury
stock repurchases |
|
|
- |
|
|
|
(30 |
) |
|
|
|
|
|
|
|
|
|
Net cash
provided by financing activities |
|
|
525,209 |
|
|
|
801,814 |
|
|
|
|
|
|
|
|
|
|
Net
increase in cash |
|
|
330,736 |
|
|
|
388,111 |
|
|
|
|
|
|
|
|
|
|
Cash -
beginning of period |
|
|
72,355 |
|
|
|
50,053 |
|
|
|
|
|
|
|
|
|
|
Cash - end
of period |
|
$ |
403,091 |
|
|
$ |
438,164 |
|
|
|
|
|
|
|
|
|
|
Cash paid
during the period for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
224,433
|
|
|
$ |
16,209 |
|
|
|
|
|
|
|
|
|
|
Non-cash
transactions: |
|
|
|
|
|
|
|
|
Shareholder and
convertible notes and accrued interest payable converted to common
stock |
|
$ |
- |
|
|
$ |
1,487,192 |
|
Common
stock issued for accrued compensation |
|
|
- |
|
|
|
771,203 |
|
Common
stock issued for settlement of warrant exercises |
|
|
- |
|
|
|
32,442 |
|
Settlement
of derivative liabilities |
|
|
- |
|
|
|
1,279,335 |
|
The
accompanying notes are an integral part of these condensed
consolidated financial statements.
VYSTAR CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - |
DESCRIPTION
OF BUSINESS |
History
and Nature of Business
Vystar
Corporation (“Vystar”, the “Company”, “we,” “us,” or “our”) is
based in Worcester, Massachusetts. The Company uses patented
technology to produce a line of innovative air purifiers, which
destroy viruses and bacteria through the use of ultraviolet light.
Vystar also manufactures and sells reduced allergen natural rubber
latex used primarily in various bedding products. In addition,
Vystar has a majority ownership in Murida Furniture Co., Inc. dba
Rotmans Furniture (“Rotmans”), the largest furniture and flooring
store in New England and one of the largest independent furniture
retailers in the U.S.
Vystar
is the creator and exclusive owner of the innovative technology to
produce Vytex® Natural Rubber Latex (“NRL”). Vytex NRL
uses a global multi-patented technology and proprietary formulation
to reduce non-rubber particles including the antigenic proteins
associated with latex allergies, resulting in a cleaner form of
latex. The antigenic protein levels are reduced to virtually
undetectable levels.
In
May of 2018, Vystar acquired substantially all of the assets of UV
Flu Technologies, Inc., formerly traded on the OTC under the ticker
UVFT, whose patented ViraTech™ UV light air purification technology
destroys greater than 99% of airborne bacteria, viruses and other
microorganisms and virtually eliminates concentrations of odors and
volatile organic compounds (“VOCs”).
As
part of Vystar’s mission to offer eco-friendly, sustainable
materials and products that create a better environment for
consumers and workers throughout the product lifecycle, UV Flu
Technologies is an excellent counterpart to our Vytex materials and
Vytex bedding products. Vystar products will help create a perfect
natural sleep environment starting with Vytex bedding made from the
purest latex in the world and UV Flu Technologies’ RxAir™ air
purifier ensuring every breath is free of harmful pathogens, VOCs
and odors.
In
May of 2019, Vystar acquired the assets of Fluid Energy Conversion
Inc. (“FEC”), primarily consisting of its patent on the Hughes
Reactor, which has the ability to control, enhance, and focus
energy in flowing liquids and gases. Vystar intends to use this
technology to enhance the effectiveness of Vystar’s RxAir
purification system to destroy airborne pathogens while decreasing
the cost and size of Vystar’s RxAir units.
In
July of 2019, Vystar acquired 58% of the outstanding shares of
common stock of Rotmans. Rotmans sells a broad line of residential
furniture and decorative accessories and serves customers
throughout the New England region. The acquisition is expected to
add approximately $30 million in top line revenue and enable Vystar
to capitalize on the infrastructure already in place at Rotmans for
accounting, retail sales facilities and staff, customer service,
warehousing, and delivery. In addition, Rotmans will offer
significant marketing and advertising opportunities for all of
Vystar’s brands to Rotmans’ thousands of existing customers. The
Company and Rotmans are exploring a number of initiatives relating
to environmentally friendly product development and distribution
that will utilize the access to the capital markets afforded by
this combination.
NOTE
2 - |
BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES |
Basis
of Presentation
The
consolidated financial statements are presented in accordance with
accounting principles generally accepted in the United States of
America (“U.S. GAAP”) as codified in the Financial Accounting
Standards Board’s (“FASB”) Accounting Standards
Codification.
The
Company has evaluated subsequent events through the date of the
filing of its Form 10-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 has
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 re-opened on June 10, 2020 and continues to
monitor developments, including government requirements and
recommendations.
The
results of operations for the three months ended March 31, 2020 are
not necessarily indicative of results for the entire year. The
pandemic has resulted in significant economic disruption. Although
our showroom has reopened, we cannot reasonably estimate the impact
on Vystar should the pandemic persist or worsen. Accordingly, the
estimates and assumptions made as of March 31, 2020 could change in
subsequent interim reports and upon final determination at
year-end, 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.
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 allocation of
purchase price related to acquisitions, the recoverability of
long-lived assets, fair values of right of use assets and lease
liabilities, valuation of derivative liabilities, share-based
compensation and other equity issuances. Although these estimates
are based on management’s best knowledge of current events and
actions the Company may undertake in the future, actual results
could differ from these estimates.
Fair
Value of Financial Instruments
The
Company’s financial instruments consist principally of cash,
accounts receivable, investments - equity securities, accounts
payable, accrued expenses and interest payable, lines of credit,
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, 2020 and are level 3 measurements.
There have been no transfers between levels during the three months
ended March 31, 2020.
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
and Cash Equivalents
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.
Accounts
Receivable
Accounts
receivable 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 various financial institutions at an average service charge of
5.9% in 2020. Amounts sold during the first quarter of 2020 were
approximately $1,691,000. There were no sales of trade receivables
in the first quarter of 2019. 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
Vytex 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,
2020 and December 31, 2019, the Company considers accounts
receivable to be fully collectible and no allowance for doubtful
accounts was recorded.
Inventories
Inventories
include those costs directly attributable to the product before
sale. Inventories consist primarily of finished goods of foam
toppers, furniture, mattresses 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 Assets
Prepaid
expenses and other assets include amounts related to prepaid
insurance policies, which are expensed on a straight-line basis
over the life of the underlying policy, and other
expenses.
Investments
- Equity Securities
Marketable
equity securities have been categorized as available-for-sale and,
as a result, are stated at fair value. Unrealized gains and losses
are reflected in the statement of operations. The Company
periodically reviews the available-for-sale securities for other
than temporary declines in fair value below cost and more
frequently when events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. As of March
31, 2020, the Company believes that the carrying value of the
available-for-sale securities was recoverable in all material
respects.
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, 2020, the net balance of
property and equipment is $1,787,616 with accumulated depreciation
of $300,922. As of December 31, 2019, the net balance of property
and equipment is $1,879,739 with accumulated depreciation of
$208,799.
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.
Long-Lived
Assets
We
review our long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of the
assets may not be fully recoverable. We evaluate assets for
potential impairment by comparing estimated future undiscounted net
cash flows to the carrying amount of the assets. If the carrying
amount of the assets exceeds the estimated future undiscounted cash
flows, impairment is measured based on the difference between the
carrying amount of the assets and fair value. Assets to be disposed
of would be separately presented in the consolidated balance sheet
and reported at the lower of the carrying amount or fair value less
costs to sell and are no longer depreciated. The assets and
liabilities of a disposal group classified as held-for-sale would
be presented separately in the appropriate asset and liability
sections of the consolidated balance sheet, if material. During the
three months ended March 31, 2020 and 2019, 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.
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, during
the three months ended March 31, 2020 and 2019, 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. There was no
unearned revenue during the three months ended March 31,
2019.
Changes to
unearned revenue during the three months ended March 31, 2020 are
summarized as follows:
Balance,
December 31, 2019 |
|
$ |
2,500,572 |
|
|
|
|
|
|
Customer
deposits received |
|
|
4,930,536 |
|
|
|
|
|
|
Warranty
coverage purchased |
|
|
98,309 |
|
|
|
|
|
|
Gift cards
purchased |
|
|
2,500 |
|
|
|
|
|
|
Revenue
earned |
|
|
(5,057,651 |
) |
|
|
|
|
|
Balance,
March 31, 2020 |
|
$ |
2,474,266 |
|
Loss
Per Share
The
Company presents basic and diluted loss per share. Because the
Company reported a net loss in the first quarter of 2020 and 2019,
common stock equivalents, including stock options and warrants,
were anti-dilutive; therefore, the amounts reported for basic and
dilutive loss per share were the same. Excluded from the
computation of diluted loss per share were options to purchase
27,983,271 and 29,098,270 shares of common stock for the three
months ended March 31, 2020 and 2019, respectively, as their effect
would be anti-dilutive. Warrants to purchase 14,237,315 and
14,382,380 shares of common stock for the three months ended March
31, 2020 and 2019, respectively, were also excluded from the
computation of diluted loss per share as their effect would be
anti-dilutive. In addition, preferred stock convertible to
4,661,180 and 4,382,730 shares of common stock three months ended
March 31, 2020 and 2019, respectively, were excluded from the
computation of diluted loss per share as their effect would be
anti-dilutive.
Revenue
Our
principal activities from which we generate our revenue are product
sales. Revenue is measured based on considerations specified in a
contract with a customer. A contract exists when it becomes a
legally enforceable agreement with a customer. The contract is
based on either the acceptance of standard terms and conditions at
the retail store, on the websites for e-commerce customers and via
telephone with our third-party call center for our print media and
direct mail customers, or the execution of terms and conditions
contracts with retailers and wholesalers. These contracts define
each party’s rights, payment terms and other contractual terms and
conditions of the sale.
Consideration
is typically paid prior to shipment via credit card or check when
our products are sold direct to consumers, which is typically
within 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 March 31, 2020 and December 31, 2019, reserves for
estimated sales returns totaled $3,000, respectively, and are
included in the accompanying consolidated balance sheets as accrued
expenses.
We
recognize revenue when we satisfy a performance obligation in a
contract by transferring control over a product to a customer when
product is shipped based on fulfillment by the Company. The Company
considers fulfillment when it passes all liability at the point of
shipping through third party carriers or in-house delivery
services. Delivery fees are charged to customers and are included
in revenue in the accompanying consolidated statements of
operations and the costs associated with these deliveries are
included in operating expenses in the accompanying consolidated
statements of operations. Taxes assessed by a governmental
authority that are both imposed on and concurrent with a specific
revenue-producing transaction, that are collected by us from a
customer, are excluded from revenue. Shipping and handling costs
associated with outbound freight after control over a product has
transferred to a customer are accounted for as a fulfillment cost
and are included in cost of revenue in the accompanying
consolidated statements of operations.
The
Company also defers revenues for separately-priced stain protection
warranty coverage for which it is ultimately self-insured. Revenue
is recognized from the extended warranty sales on a straight-line
basis over the respective contract term. The extended warranty
terms primarily range from three to five years from the date of
delivery. At March 31, 2020, deferred warranty revenue was
approximately $812,000 and is included in unearned revenue in the
accompanying consolidated balance sheets. During the three months
ended March 31, 2020, the Company recorded total proceeds of
approximately $98,000 and recognized total revenues of
approximately $134,000 related to deferred warranty revenue
arrangements. Commission costs in obtaining extended warranty
contracts are capitalized and recognized as expense on a
straight-line basis over the period of the warranty contract. At
March 31, 2020, deferred commission costs are approximately
$336,000 and included in the accompanying consolidated balance
sheets. All other costs, such as costs of services performed under
the contract, general and administrative expenses, and advertising
costs are expensed as incurred.
Cost
of Revenue
Cost
of revenue consists primarily of product and freight costs and fees
paid to online retailers.
Research
and Development
Research
and development costs are expensed when incurred. Research and
development costs include all costs incurred related to the
research, development and testing of the Company’s process to
produce Vytex NRL.
Vytex
NRL has produced protein test results on finished products that are
both “below detection” and “not detectable” in terms of the amount
of proteins remaining in these finished goods made with Vytex NRL.
These results have been reproduced in many subsequent tests. For
the three months ended March 31, 2020 and 2019, Vystar’s research
and development costs were not significant.
Advertising
Costs
Advertising
costs, which include television, radio, newspaper and other media
advertising, are expensed upon first showing. Advertising costs
included in general and administrative expenses in the accompanying
consolidated statements of operations were approximately $447,000
and $20,000 for the three months ended March 31, 2020 and 2019,
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 three months ended March 31,
2020 and 2019.
The
Company remains subject to income tax examinations from Federal and
state taxing jurisdictions for 2016 through 2019.
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 and accounts
receivable consists of a high number of relatively small
balances.
Other
Risks and Uncertainties
The
Company is exposed to commodity price risk, mainly associated with
variations in the market price for NRL as well as wintering of the
Hevea trees, which differs for each country. The timing and
magnitude of industry cycles are difficult to predict and are
impacted by general economic conditions including the buying
climate in China. The Company responds to changes in NRL prices by
adjusting sales prices on a weekly basis and by turning rather than
holding inventory in anticipation of higher prices. The Company
actively manages its exposure to commodity price risk and monitors
the actual and expected spread between forward selling prices and
purchase costs and processing and shipping expense. The Company
also currently spreads the processing of Vytex NRL among three
continents. Sales contracts are based on forward market prices, and
generally orders are placed 30 to 90 days ahead of shipment date
due to these fluctuations. However, financial results may be
negatively impacted where selling prices fall more quickly than
purchase price adjustments can be made or when levels of inventory
have an anticipated net realizable value that is below cost. The
Company is also 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 2018, the FASB issued ASU 2018-13, Fair Value Measurement
(Topic 820), Disclosure Framework - Changes to the Disclosure
Requirements for Fair Value Measurement, which eliminates, adds
and modifies certain disclosure requirements for fair value
measurements, including eliminating the requirement to disclose the
amount of and reasons for transfers between Level 1 and Level 2 of
the fair value hierarchy, and requiring the range and weighted
average used to develop significant unobservable inputs for Level 3
fair value measurements. The new guidance is effective for fiscal
years beginning after December 15, 2019, including interim periods
within those fiscal years. Early adoption, either of the entire
standard or only the provisions that eliminate or modify
requirements, is permitted. The Company has evaluated the
disclosure requirements of this standard and does not expect it to
have a material impact on the Company’s financial
statements.
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, 2020, the Company had cash of $403,091 and
a deficit in working capital of approximately $7.8 million.
Further, at March 31, 2020 the accumulated deficit amounted to
approximately $42.5 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 and Vytex license fees that now also include
the Company’s association with foam cores made from Vytex used in
mattresses, mattress toppers and pillows, and stock warrant
exercises from 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. In addition, the
Company has invested in new accounting and operations software,
which will improve our ability to control inventory levels and
monitor the financial performance of our operations.
There
can be no assurances that the Company will be able to achieve
projected levels of revenue in 2020 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 2020, 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 and 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; 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 |
Cost
and fair value of investments - equity securities are as follows as
of March 31, 2020:
|
|
|
Gross |
|
|
Fair |
|
Cost |
|
|
Unrealized
Losses |
|
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
141,225 |
|
|
$ |
(42,130 |
) |
|
$ |
99,095 |
|
Net
unrealized holding losses on available-for-sale securities were
approximately $50,000 in the first quarter of 2020 and have been
included in other income (expenses) in the accompanying statements
of operations. There were no investments – equity securities prior
to the Rotmans acquisition in July 2019. Investments represent
equity securities in a publicly traded company.
NOTE
5 - |
PROPERTY
AND EQUIPMENT |
Property
and equipment, net consists of the following:
|
|
March
31, |
|
|
December
31, |
|
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
Furniture,
fixtures and equipment |
|
$ |
1,354,665 |
|
|
$ |
1,354,665 |
|
Tooling
and testing equipment |
|
|
319,000 |
|
|
|
319,000 |
|
Parking
lots |
|
|
365,707 |
|
|
|
365,707 |
|
Motor
vehicles |
|
|
49,166 |
|
|
|
49,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
2,088,538 |
|
|
|
2,088,538 |
|
Accumulated
depreciation |
|
|
(300,922 |
) |
|
|
(208,799 |
) |
|
|
|
|
|
|
|
|
|
Property
and equipment, net |
|
$ |
1,787,616 |
|
|
$ |
1,879,739 |
|
Depreciation
expense for the three months ended March 31, 2020 and 2019 was
$139,684 and $10,232, respectively.
NOTE
6 - |
INTANGIBLE
ASSETS |
Intangible
assets consist of the following:
|
|
|
|
|
|
|
|
Amortization |
|
|
|
March
31, |
|
|
December
31, |
|
|
Period |
|
|
|
2020 |
|
|
2019 |
|
|
(in
Years) |
|
Amortized
intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships |
|
$ |
210,000 |
|
|
$ |
210,000 |
|
|
|
6 -
10 |
|
Proprietary
technology |
|
|
610,000 |
|
|
|
610,000 |
|
|
|
10 |
|
Tradename
and brand |
|
|
1,380,000 |
|
|
|
1,380,000 |
|
|
|
5 -
10 |
|
Marketing
related |
|
|
380,000 |
|
|
|
380,000 |
|
|
|
5 |
|
Patents |
|
|
359,101 |
|
|
|
355,418 |
|
|
|
6 -
20 |
|
Noncompete |
|
|
50,000 |
|
|
|
50,000 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,989,101 |
|
|
|
2,985,418 |
|
|
|
|
|
Accumulated
amortization |
|
|
(609,117 |
) |
|
|
(504,878 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets, net |
|
|
2,379,984 |
|
|
|
2,480,540 |
|
|
|
|
|
Indefinite-lived
intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
9,072 |
|
|
|
9,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
intangible assets |
|
$ |
2,389,056 |
|
|
$ |
2,489,612 |
|
|
|
|
|
Amortization
expense for the three months ended March 31, 2020 and 2019 was
$104,239 and $39,421, respectively. Estimated future amortization
expense for finite-lived intangible assets is as
follows:
|
|
Amount |
|
|
|
|
|
Remaining
in 2020 |
|
$ |
312,716 |
|
2021 |
|
|
416,956 |
|
2022 |
|
|
417,140 |
|
2023 |
|
|
410,529 |
|
2024 |
|
|
311,306 |
|
Thereafter |
|
|
511,337 |
|
|
|
|
|
|
Total |
|
$ |
2,379,984 |
|
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, 2020:
|
|
March 31,
2020 |
|
|
|
|
|
Operating
lease cost |
|
$ |
394,348 |
|
|
|
|
|
|
Finance
lease cost: |
|
|
|
|
|
|
|
|
|
Amortization of
right-of-use assets |
|
|
47,561 |
|
Interest
on lease liabilities |
|
|
11,690 |
|
|
|
|
|
|
Total
lease cost |
|
$ |
453,599 |
|
During the
three months ended March 31, 2020, the Company recognized sublease
income of approximately $27,000 which is included in other income
(expense), net in the accompanying condensed consolidated
statements of operations.
There were
no lease costs for the three months ended March 31,
2019.
Our
leases generally do not provide an implicit rate, and therefore we
use our incremental borrowing rate as the discount rate when
measuring operating lease liabilities. The incremental borrowing
rate represents an estimate of the interest rate we would incur at
lease commencement to borrow an amount equal to the lease payments
on a collateralized basis over the term of the lease. We used
incremental borrowing rates as of the implementation date for
operating leases that commenced prior to that date.
The
following table presents other information related to
leases:
|
|
Three
months ended
March 31, 2020 |
|
|
|
|
|
Cash paid
for amounts included in the measurement of lease
liabilities: |
|
|
|
|
|
|
|
|
|
Operating
cash flows used for operating leases |
|
$ |
372,884 |
|
Financing
cash flows used for financing leases |
|
|
54,152 |
|
|
|
|
|
|
Assets
obtained in exchange for operating lease liabilities |
|
|
- |
|
|
|
|
|
|
Assets
obtained in exchange for finance lease liabilities |
|
|
75,739 |
|
|
|
|
|
|
Weighted average
remaining lease term: |
|
|
|
|
Operating
leases |
|
|
9
years |
|
Finance
leases |
|
|
6
years |
|
|
|
|
|
|
Weighted average
discount rate: |
|
|
|
|
Operating
leases |
|
|
5.53 |
% |
Finance
leases |
|
|
5.16 |
% |
The
future minimum lease payments required under operating and
financing lease obligations as of March 31, 2020 having initial or
remaining non-cancelable lease terms in excess of one year are
summarized as follows:
|
|
Operating
Leases |
|
|
Finance
Leases |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
Remainder
of 2020 |
|
$ |
1,127,733 |
|
|
$ |
160,156 |
|
|
$ |
1,287,889 |
|
2021 |
|
|
1,503,643 |
|
|
|
205,545 |
|
|
|
1,709,188 |
|
2022 |
|
|
1,110,794 |
|
|
|
150,943 |
|
|
|
1,261,737 |
|
2023 |
|
|
880,275 |
|
|
|
150,142 |
|
|
|
1,030,417 |
|
2024 |
|
|
870,000 |
|
|
|
140,002 |
|
|
|
1,010,002 |
|
Thereafter |
|
|
5,220,000 |
|
|
|
207,475 |
|
|
|
5,427,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
undiscounted lease liabilities |
|
|
10,712,445 |
|
|
|
1,014,263 |
|
|
|
11,726,708 |
|
Less:
imputed interest |
|
|
(
2,409,937 |
) |
|
|
(135,739 |
) |
|
|
(
2,545,676 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net lease
liabilities |
|
$ |
8.302,508 |
|
|
$ |
878,524 |
|
|
$ |
9,181,032 |
|
As of
March 31, 2020, the Company does not have additional operating and
finance leases that have not yet commenced.
NOTE
8 - |
NOTES
PAYABLE AND LOAN FACILITY |
Line of Credit
At
March 31, 2020, the Company had a $2,500,000 revolving line of
credit with Fidelity Co-operative Bank. Advances were limited to
50% of eligible inventory and bore interest at the prime rate plus
0.50% with a floor of 3.75%. The interest rate was 3.75% at March
31, 2020. The line of credit was due upon demand and subject to
renewal annually. It was secured by all assets of the Company and
subject to certain financial and non-financial covenants. The
Company was not in compliance with certain covenants and was in
default at March 31, 2020. The credit line was subsequently
paid-off on May 29, 2020. Indebtedness to existing and future
Rotman Family notes were subordinated to the bank debt. The line
was also secured with a mortgage on a property of a wholly-owned
entity of Steven Rotman.
Borrowings
under this agreement at March 31, 2020 were approximately
$2,164,000.
Related Party
Line of Credit (CMA Note Payable)
On
November 2, 2012, the Company executed a $1,500,000 unsecured line
of credit agreement with CMA Investments, LLC (“CMA”), a related
party and a Georgia limited liability company (the “CMA Note”).
Three of the directors the Company (“CMA directors”) were initially
the members of CMA Investments, LLC. Pursuant to the term of the
CMA Note, interest is computed at LIBOR plus 5.25% on amounts drawn
and fees. The CMA Note was settled in July 2019.
Term Notes
Certain
investors guaranteed $100,000 each with Fidelity Bank to establish
a $500,000 revolving line of credit. At the present time, the
Company is paying interest only at a rate of 4.5% per annum, with a
balloon payment of $500,000 due in 2033. The balance is $500,000 as
of March 31, 2020 and December 31, 2019.
Other term
debt totaling $13,397 and $16,374 at March 31, 2020 and December
31, 2019, respectively, represents three 0% loans on motor
vehicles, requiring cumulative monthly payments of $1,488 through
maturity in November 2020.
On
February 24, 2020, the Company entered into an agreement with
Libertas Funding LLC (“Libertas”) to sell future sale receipts
totaling $1,089,000 for a purchase price of $825,000. The sold
amount of future sales receipts are delivered weekly to Libertas at
predetermined amounts over a period of nine months. The agreement
contains an early delivery discount fee for delivering the future
revenues before the end of the contract term and an origination fee
of $16,500, which has been capitalized and is being amortized over
the term of the agreement. The implicit borrowing rate of the
agreement is approximately 75%. The agreement is personally
guaranteed by Steven Rotman. As of March 31, 2020, current
maturities of term notes include $756,417 related to this
agreement.
Shareholder, Convertible and Contingently Convertible Notes
Payable
The
following table summarizes shareholder, convertible and
contingently convertible notes payable:
|
|
March
31, |
|
|
December
31, |
|
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
Shareholder,
convertible and contingently convertible notes |
|
$ |
951,895 |
|
|
$ |
951,895 |
|
Accrued
interest |
|
|
58,467 |
|
|
|
46,569 |
|
Debt
discount |
|
|
(79,400 |
) |
|
|
(137,775 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
930,962 |
|
|
|
860,689 |
|
Less:
current maturities |
|
|
(611,281 |
) |
|
|
(366,326 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
319,681 |
|
|
$ |
494,363 |
|
Shareholder Convertible Notes Payable
During the
year ended December 31, 2018, the Company issued shareholder
contingently convertible notes payable (the “Notes”), 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%) per annum from date of issuance,
and (iii) are convertible at the Company’s option post April 19,
2018. The Notes mature one year from issuance but may be extended
one (1) additional year by the Company. If converted, the Notes
plus accrued interest are convertible into shares of the Company’s
common stock at the prior twenty (20) day average closing price
with a 50% discount. The outstanding balance of all of these Notes
of as March 31, 2020 and December 31, 2019 is $338,195. The Notes
matured in January 2020.
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. 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 as of
March 31, 2020.
Based on
the variable conversion price of these notes, the Company recorded
the embedded conversion features as derivative liabilities, which
amounted to $442,934 at December 31, 2019. There were no
significant changes to this measurement at March 31,
2020.
Convertible and
Contingently Convertible Notes Payable
From
January 1, 2018 and through 2019, the Company had issued certain
convertible and contingently convertible notes payable in varying
amounts, in the aggregate of $710,000. The face amount of the notes
represented the amount due at maturity along with the accrued
interest, at which time that amount may be converted into shares of
the Company stock based on the lowest 2 day closing price for the
trailing 20 days prior to conversion and carrying a 35% discount.
The convertible and contingently convertible notes provided for
interest to accrue at an interest rate equal to 12% per annum or
the maximum rate permitted under applicable law after the
occurrence of any event of default as provided in the notes. At any
time after 180 days from the issue date, the holder, at its option,
may convert the outstanding principal balance and accrued interest
into shares of common stock of the Company. The initial conversion
price for the principal and interest in connection with voluntary
conversions by a holder of the convertible and contingently
convertible notes ranges from $0.05 to $0.10 per share, subject to
adjustment as provided therein. The total outstanding balance of
the convertible and contingently convertible notes was converted as
of December 31, 2019 into approximately 303 million shares of the
Company’s common stock. Based on the variable conversion price, the
Company recorded initial derivative liabilities of $465,905. The
remaining balance of $235,085, net of discount, as of December 31,
2018 was reduced to zero in 2019 after a change in fair value of
$1,044,250 and a settlement of $1,279,335 to the balance of the
derivative liabilities upon the date all notes were
converted.
In
connection with the issuance of the convertible and contingently
convertible notes, the Company issued warrants to purchase 411,875
shares of the Company’s common stock. The exercise term of the
warrants ranges from issuance to any time on or after the six (6)
month anniversary or prior to the maturity of the related note. The
exercise price of the warrants is $0.40 per share of the Company’s
common stock, as may be adjusted from time to time pursuant to the
antidilution provisions of the related warrant. Pursuant to ASU
2017-11, such antidilution features do not subject the Company to
derivative accounting pursuant to ASC 815. All warrants were
forfeited during the year ended December 31, 2019 upon negotiation
and conversion of the remaining outstanding balances.
Related Party Debt
The
following table summarizes related party debt:
|
|
March
31, |
|
|
December
31, |
|
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
|
|
Rotman
Family convertible notes |
|
$ |
1,832,707 |
|
|
$ |
1,782,707 |
|
Rotman
Family nonconvertible notes |
|
|
507,500 |
|
|
|
507,500 |
|
Accrued
interest |
|
|
83,190 |
|
|
|
53,153 |
|
Debt
Discount |
|
|
(327,600 |
) |
|
|
(585,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
2,095,797 |
|
|
|
1,758,260 |
|
Less:
current maturities |
|
|
(46,000 |
) |
|
|
(46,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
$ |
2,049,797 |
|
|
$ |
1,712,260 |
|
Rotman Family Convertible Notes
On
June 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%) per annum 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 $111,000 and
$59,000, respectively, at March 31, 2020 and approximately $109,000
and $57,000, respectively, at December 31, 2019.
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 (see Note 18). These notes are (i) unsecured, and
(ii) bear interest at an annual rate of eight percent (8%) per
annum 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
$1,142,000 and $435,000, respectively, at March 31, 2020 and
approximately $1,128,000 and $430,000, respectively, at December
31, 2019.
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. 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 $101,000 and $100,000 at March 31, 2020 and December
31, 2019, 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. 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 $50,000, at March 31, 2020.
Based on
the variable conversion price for all of these convertible notes,
the Company recorded the embedded conversion features as derivative
liabilities, which amounted to $1,056,866 at December 31, 2019.
There were no significant changes to this measurement at March 31,
2020.
Rotman Family Nonconvertible Notes
In
connection with the acquisition of 58% of Rotmans (see Note 18),
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
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
$381,000 and $145,000, respectively, at March 31, 2020 and
approximately $376,000 and $143,000, respectively, at December 31,
2019.
Approximate
maturities for the succeeding years are as follows:
Remainder
of 2020 |
|
$ |
46,000 |
|
2021 |
|
|
59,000 |
|
2022 |
|
|
62,000 |
|
2023 |
|
|
85,000 |
|
2024 |
|
|
34,000 |
|
Thereafter |
|
|
221,500 |
|
|
|
|
|
|
|
|
$ |
507,500 |
|
NOTE
9 - |
DERIVATIVE
LIABILITIES |
As of
March 31, 2020, the Company had a $1,499,800 derivative liability
balance on the consolidated balance sheet and recorded a loss from
change in fair value of derivative liabilities of $1,079,450 for
the year ended December 31, 2019. The derivative liability activity
comes from the Convertible notes payable (and any related
warrants). The Company analyzed the conversion features and
warrants of the various note agreements for derivative accounting
consideration under ASC 815-15 “Derivatives and Hedging” and
determined that the embedded conversion features should be
classified as a derivative because the exercise price of these
Convertible notes are subject to a variable conversion rate. The
Company has determined that the conversion feature is not
considered to be solely indexed to the Company’s own stock and is
therefore not afforded equity treatment. In accordance with ASC
815, the Company has bifurcated the conversion feature of the notes
and recorded a derivative liability.
The
embedded derivatives for the notes are carried on the Company’s
consolidated balance sheet at fair value. The derivative liability
is marked-to-market each measurement period and any unrealized
change in fair value is recorded as a component of the consolidated
statement of operations and the associated fair value carrying
amount on the consolidated balance sheet is adjusted by the change.
The Company fair values the embedded derivative using a
lattice-based valuation model or Monte Carlo simulation.
The
following table summarizes the derivative liabilities included in
the consolidated balance sheet at March 31, 2020:
Fair
Value of Embedded Derivative and Warrant
Liabilities:
Balance,
December 31, 2018 |
|
$ |
235,085 |
|
Initial
measurement of liabilities |
|
|
1,464,600 |
|
Change in
fair value |
|
|
1,079,450 |
|
Settlement
due to conversion |
|
|
(1,279,335 |
) |
|
|
|
|
|
Balance, December 31,
2019 |
|
|
1,499,800 |
|
Change in
fair value |
|
|
- |
|
Settlement
due to conversion |
|
|
- |
|
|
|
|
|
|
Balance,
March 31, 2020 |
|
$ |
1,499,800 |
|
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, 2020, the 13,828 shares of outstanding preferred stock
had undeclared dividends of approximately $95,000 and could be
converted into 4,661,180 shares of common stock, at the option of
the holder.
As of
December 31, 2019, the 13,828 shares of outstanding preferred stock
had undeclared dividends of approximately $91,000 and could be
converted into 4,591,100 shares of common stock, at the option of
the holder.
Common
Stock and Warrants
During
the three months ended March 31, 2020, no shares were issued under
equity purchase agreements.
During
the three months ended March 31, 2020, no shares were issued for
the conversion of principal and interest.
The
following table presents our revenues disaggregated by each major
product category and service for the three months ended March 31,
2020 and 2019:
|
|
Three
Months Ended March 31, |
|
|
|
2020 |
|
|
2019 |
|
|
|
|
|
|
%
of |
|
|
|
|
|
%
of |
|
|
|
Net
Sales |
|
|
Net
Sales |
|
|
Net
Sales |
|
|
Net
Sales |
|
Merchandise: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Case
Goods |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bedroom
Furniture |
|
$ |
861,123 |
|
|
|
14.5 |
|
|
$ |
- |
|
|
|
- |
|
Dining
Room Furniture |
|
|
522,114 |
|
|
|
8.8 |
|
|
|
- |
|
|
|
- |
|
Occasional |
|
|
960,379 |
|
|
|
16.2 |
|
|
|
- |
|
|
|
- |
|
|
|
|
2,343,616 |
|
|
|
39.5 |
|
|
|
- |
|
|
|
- |
|
Upholstery |
|
|
1,617,547 |
|
|
|
27.3 |
|
|
|
- |
|
|
|
- |
|
Mattresses
and Toppers |
|
|
1,071,327 |
|
|
|
18.1 |
|
|
|
179,017 |
|
|
|
93.4 |
|
Broadloom,
Flooring and Rugs |
|
|
406,879 |
|
|
|
6.9 |
|
|
|
- |
|
|
|
- |
|
Warranty |
|
|
98,309 |
|
|
|
1.7 |
|
|
|
- |
|
|
|
- |
|
Accessories and
Other |
|
|
394,560 |
|
|
|
6.7 |
|
|
|
12,650 |
|
|
|
6.6 |
|
|
|
$ |
5,932,238 |
|
|
|
100.0 |
|
|
$ |
191,667 |
|
|
|
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 $154,368 and $1,612,286 of stock-based
compensation for the three months ended March 31, 2020 and 2019,
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 $993,981 and $845,175 at March 31, 2020
and December 31, 2019, respectively.
The
Company used the Black-Scholes option pricing model to estimate the
grant-date fair value of option and warrant awards granted. The
following assumptions were used for warrant awards during the three
months ended March 31, 2020:
|
● |
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, 2020 and 2019, the
Company recorded $5,562 and $17,783, respectively, of share-based
compensation expense related to employee and Board Members’ stock
options. The unrecognized compensation expense as of March 31, 2020
was $43,371 for non-vested share-based awards to be recognized over
a period of approximately three years.
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, 2020, 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, 2020. 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, 2020. 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,
2020.
The
following table summarizes all stock option activity of the Company
for the three months ended March 31, 2020:
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
Average |
|
|
|
|
|
|
Average |
|
|
Remaining |
|
|
|
Number |
|
|
Exercise |
|
|
Contractual |
|
|
|
of
Shares |
|
|
Price |
|
|
Life
(Years) |
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December
31, 2019 |
|
|
27,983,271 |
|
|
$ |
0.20 |
|
|
|
3.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31,
2020 |
|
|
27,983,271 |
|
|
$ |
0.20 |
|
|
|
3.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, March 31,
2020 |
|
|
26,783,271 |
|
|
$ |
0.21 |
|
|
|
3.42 |
|
As of
March 31, 2020, and 2019, the aggregate intrinsic value of the
Company’s outstanding options was approximately $1,000 and $52,000,
respectively. The aggregate intrinsic value will change based on
the fair market value of the Company’s common stock.
Warrants
Warrants
are issued to third parties as payment for services, debt financing
compensation and conversion and in conjunction with the issuance of
common stock. The fair value of each common stock warrant issued
for services is estimated on the date of grant using the
Black-Scholes option pricing model.
The
following table represents the Company’s warrant activity for the
three months ended March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
|
Remaining |
|
|
|
Number |
|
|
Average |
|
|
Average |
|
|
Contractual |
|
|
|
of
Shares |
|
|
Fair
Value |
|
|
Exercise
Price |
|
|
Life
(Years) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December
31, 2019 |
|
|
14,237,646 |
|
|
|
|
|
|
$ |
0.07 |
|
|
|
3.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired |
|
|