NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
December
31, 2020 and 2019
NOTE
1 - DESCRIPTION OF BUSINESS
Nature
of Business
Vystar
Corporation (“Vystar”, the “Company”, “we,” “us,” or “our”) is based
in Worcester, Massachusetts and produces a line of innovative air purifiers, which destroy viruses and bacteria through the use
of ultraviolet light. Vystar is also the creator and exclusive owner of the innovative technology to produce Vytex®
Natural Rubber Latex (“NRL”). Vystar manufactures and sells NRL used primarily in various bedding products. In addition,
Vystar has a majority ownership in Murida Furniture Co., Inc. dba Rotmans Furniture (“Rotmans”), one of the largest
independent furniture retailers in the U.S.
NOTE
2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States
of America (“U.S. GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting
Standards Codification.
The
Company has evaluated subsequent events through the date of the filing of its Form 10-K with the Securities and Exchange Commission.
Other than those events disclosed in Note 19, the Company is not aware of any other significant events that occurred subsequent
to the balance sheet date but prior to the filing of this report that would have a material impact on the Company’s financial
statements.
Basis
of Consolidation
The
condensed consolidated financial statements include the accounts of the Company and its wholly-owned or controlled operating subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
COVID-19
In
December 2019, a novel coronavirus (“COVID-19”) emerged and has subsequently spread worldwide. The World Health Organization
declared COVID-19 a pandemic resulting in federal, state, and local governments mandating various restrictions, including travel
restrictions, restrictions on public gatherings, stay at home orders and advisories and quarantining of people who may have been
exposed to the virus. On March 24, 2020, Massachusetts required all non-essential businesses to close their physical workplaces.
As a result, the Rotmans showroom, offices and warehouse temporarily closed. During that time, associates worked remotely where
possible. The Company re-opened on June 10, 2020 and continues to monitor developments, including government requirements and
recommendations.
The
COVID-19 pandemic has caused, among other things, interruptions to our supply chains and suppliers, including problems with inventory
availability with price volatility and higher cost of products and international freight due to the high demand of products and
low supply for an unpredictable period of time.
The
pandemic continues to cause economic disruption. Although our showroom has reopened, some business segments remain closed or are
operating on a reduced scale. The COVID-19 pandemic is complex and continues to evolve with sporadic resurgences, new virus variants
and the vaccine rollout. We cannot reasonably estimate the duration of COVID-19 and its impact on Vystar. Accordingly, the estimates
and assumptions made as of December 31, 2020 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.
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, valuation and impairment of intangible assets, fair values of right of use assets and lease liabilities, valuation
of derivative liabilities, share-based compensation and other equity issuances. Although these estimates are based on management’s
best knowledge of current events and actions the Company may undertake in the future, actual results could differ from these estimates.
Fair
Value of Financial Instruments
The
Company’s financial instruments consist principally of cash, accounts receivable, investments - equity securities, accounts
payable, accrued expenses and interest payable, shareholder notes payable, long-term debt and unearned revenue. The carrying values
of all the Company’s financial instruments approximate or equal fair value because of their short maturities and market
interest rates or, in the case of equity securities, being stated at fair value.
In
specific circumstances, certain assets and liabilities are reported or disclosed at fair value. Fair value is the exit price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date in the Company’s principal market for such transactions. If there is not an established principal market,
fair value is derived from the most advantageous market.
Valuation
inputs are classified in the following hierarchy:
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●
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Level
1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
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●
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Level
2 inputs are directly or indirectly observable valuation inputs for the asset or liability, excluding Level 1 inputs.
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●
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Level
3 inputs are unobservable inputs for the asset or liability.
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Highest
priority is given to Level 1 inputs and the lowest priority to Level 3 inputs. Acceptable valuation techniques include the market
approach, income approach, and cost approach. In some cases, more than one valuation technique is used. The derivative liabilities
were recognized at fair value on a recurring basis through the date of the settlement and December 31, 2020 and are level 3 measurements.
There have been no transfers between levels during the year ended December 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,
Cash Equivalents and Restricted Cash
Cash
and cash equivalents include all liquid investments with a maturity date of less than three months when purchased. Cash equivalents
also include amounts due from third-party financial institutions for credit and debit card transactions which typically settle
within five days. Restricted cash represents cash balances restricted as to withdrawal or use and are included in prepaid expenses
and other on the consolidated balance sheets.
Accounts
Receivable
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 two financial institutions at an average service charge of
3.7% in 2020. Amounts sold during the year ended December 31, 2020 were approximately $4,420,000. Retail furniture receivables
retained by the Company are generally collateralized by the merchandise sold, represent valid claims against debtors for sales
arising on or before the balance sheet date and are reduced to their estimated net realizable value. In addition, the Company
grants credit to Vystar customers without requiring collateral. The amount of accounting loss for which Vystar is at risk in these
unsecured accounts receivable is limited to their carrying value. Management provides for uncollectible amounts through a charge
to earnings and a credit to an allowance for doubtful accounts based upon its assessment of the current status of individual accounts.
Balances that are still outstanding after management has performed reasonable collection efforts are written off through a charge
to the allowance and a credit to accounts receivable. As of December 31, 2020 and 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 furniture,
mattresses, RxAir purifier units, foam toppers and pillows and are carried at net realizable value, which is defined as selling
price less cost of completion, disposal and transportation. The Company evaluates the need to record write-downs for inventory
on a regular basis. Appropriate consideration is given to obsolescence, slow-moving and other factors in evaluating net realizable
values. Inventories not expected to be sold within 12 months are classified as long-term.
Prepaid
Expenses and Other
Prepaid
expenses and other include restricted cash, amounts related to prepaid insurance policies, which are expensed on a straight-line
basis over the life of the underlying policy, and other expenses.
Investments
- Equity Securities
Marketable
equity securities have been categorized as available-for-sale and, as a result, are stated at fair value. Unrealized gains and
losses are reflected in the statement of operations. The Company periodically reviews the available-for-sale securities for other
than temporary declines in fair value below cost and more frequently when events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. As of December 31, 2020, the Company believes the cost 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 December 31, 2020, the net balance of property and
equipment is $1,631,651 with accumulated depreciation of $587,081. 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.
Our
intangible assets are reviewed for impairment annually or more frequently as warranted by events of changes in circumstances.
During the year ended December 31, 2020, we recognized an impairment charge of $240,350 related to the NHS tradename due to its
discontinuation in the product line.
Long-Lived
Assets
We
review our long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of the assets
may not be fully recoverable. We evaluate assets for potential impairment by comparing estimated future undiscounted net cash
flows to the carrying amount of the assets. If the carrying amount of the assets exceeds the estimated future undiscounted cash
flows, impairment is measured based on the difference between the carrying amount of the assets and fair value. Assets to be disposed
of would be separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value
less costs to sell and are no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale would
be presented separately in the appropriate asset and liability sections of the consolidated balance sheet, if material. During
the years ended December 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, as of December 31, 2020, 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 years ended December 31, 2020 and 2019 are summarized as follows:
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2020
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2019
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Balance,
beginning of the year
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$
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2,500,572
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$
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-
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Initial
acquisition of Murida on July 17
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-
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|
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2,508,623
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|
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|
|
|
|
|
|
|
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Customer
deposits received
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19,080,557
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11,392,251
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|
|
|
|
|
|
|
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|
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Warranty
coverage purchased
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118,151
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|
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229,646
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|
|
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|
|
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|
|
|
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Gift
cards purchased
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10,225
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|
|
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17,750
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|
|
|
|
|
|
|
|
|
|
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Revenue
earned
|
|
|
(19,281,734
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)
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(11,647,698
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)
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|
|
|
|
|
|
|
|
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Balance,
end of the year
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|
$
|
2,427,771
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|
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$
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2,500,572
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|
Loss
Per Share
The
Company presents basic and diluted loss per share. Because the Company reported a net loss for 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 27,874,938 and 27,983,271 shares of common
stock for 2020 and 2019, respectively, as their effect would be anti-dilutive. Warrants to purchase 14,205,912 and 14,237,646 shares
of common stock for 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 4,822,612 and 4,591,100 shares of common stock for 2020 and 2019,
respectively, were excluded from the computation of diluted loss per share as their effect would be anti-dilutive. Both shareholder
and Rotman Family contingently convertible notes payable convertible to 198,441,652 and 434,260,526 shares of common stock for 2020 and
2019, respectively, were also excluded from the computation of diluted loss per share as their effect would be anti-dilutive.
Revenue
Our
principal activities from which we generate our revenue are product sales. Revenue is measured based on considerations specified
in a contract with a customer. A contract exists when it becomes a legally enforceable agreement with a customer. The contract
is based on either the acceptance of standard terms and conditions at the retail store and on the websites for e-commerce customers,
or the execution of terms and conditions contracts with retailers and wholesalers. These contracts define each party’s rights,
payment terms and other contractual terms and conditions of the sale.
Consideration
is typically paid prior to shipment via credit card or check when our products are sold direct to consumers, which is typically
within 1 to 2 days or approximately 30 days from the time control is transferred when sold to wholesalers, distributors and retailers.
We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including
the customer’s historical payment experience and, in some circumstances, published credit and financial information pertaining
to the customer.
A
performance obligation is a promise in a contract to transfer a distinct product to the customer, which for us is transfer of
finished goods to our customers. Performance obligations promised in a contract are identified based on the goods that will be
transferred to the customer that are both capable of being distinct and are distinct in the context of the contract, whereby the
transfer of the goods is separately identifiable from other promises in the contract. We have concluded the sale of finished goods
and related shipping and handling are accounted for as the single performance obligation.
The
transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the
customer receives the benefit of the performance obligation. The transaction price is determined based on the consideration to
which we will be entitled to receive in exchange for transferring goods to the customer. We issue refunds to retail, e-commerce
and print media customers, upon request, within 30 days of delivery. We estimate the amount of potential refunds at each reporting
period using a portfolio approach of historical data, adjusted for changes in expected customer experience, including seasonality
and changes in economic factors. For retailers, distributors and wholesalers, we do not offer a right of return or refund and
revenue is recognized at the time products are shipped to customers. In all cases, judgment is required in estimating these reserves.
Actual claims for returns could be materially different from the estimates. As of December 31, 2020, and 2019, reserves for estimated
sales returns totaled $55,000 and $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 through January 20, 2020. All subsequent delivery costs totaling approximately
$779,000 are included in revenues as a third-party delivery service was engaged beginning January 21, 2020. Taxes assessed by a governmental
authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer,
are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred
to a customer are accounted for as a fulfillment cost and are included in cost of revenue in the accompanying consolidated statements
of operations.
The
Company also defers revenues for separately-priced stain protection warranty coverage for which it is ultimately self-insured. Revenue
is recognized from the extended warranty sales on a straight-line basis over the respective contract term. The extended warranty terms
primarily range from three to five years from the date of delivery. The Company ended this warranty program during 2020 but continues
to amortize the previously contracted warranties over their original terms. The Company switched to a separately-priced stain
protection warranty serviced by a third-party when the store reopened in June. Related costs of the warranties of approximately $32,000
are included in sales for 2020. At December 31, 2020, and 2019, deferred warranty revenue was approximately $920,000 and $1,309,000,
respectively, and is included in unearned revenue in the accompanying consolidated balance sheets. During 2020, the Company recorded
total proceeds of approximately $118,000 and recognized total revenues of approximately $506,000 related to deferred warranty revenue
arrangements. During the period from July 18, 2019 through December 31, 2019, the Company recorded total proceeds of approximately $230,000
and recognized total revenues of approximately $245,000 related to deferred warranty revenue arrangements. Commission costs in obtaining
extended warranty contracts are capitalized and recognized as expense on a straight-line basis over the period of the warranty contract.
At December 31, 2020, and 2019, deferred commission costs were approximately $241,000 and $346,000, respectively, and are included in
the accompanying consolidated balance sheets. All other costs, such as costs of services performed under the contract, general and administrative
expenses, and advertising costs are expensed as incurred.
Cost
of Revenue
Cost
of revenue consists primarily of product and freight costs and fees paid to online retailers.
Research
and Development
Research
and development costs are expensed when incurred. Research and development costs include all costs incurred related to the research,
development and testing. For the years ended December 31, 2020 and 2019, Vystar’s research and development costs were not
significant.
Advertising
Costs
Advertising
costs, which include television, radio, newspaper, digital and other media advertising, are expensed upon first showing. Advertising
costs included in general and administrative expenses in the accompanying consolidated statements of operations were approximately
$1,808,000 and $1,050,000 for the years ended December 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 years ended December 31, 2020 and 2019.
The
Company remains subject to income tax examinations from Federal and state taxing jurisdictions for 2017 through 2020.
Concentration
of Credit Risk
Certain
financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily
of cash and accounts receivable. Cash held in operating accounts may exceed the Federal Deposit Insurance Corporation, or FDIC,
insurance limits. While the Company monitors cash balances in our operating accounts on a regular basis and adjust the balances
as appropriate, these balances could be impacted if the underlying financial institutions fail. To date, the Company has experienced
no loss or lack of access to our cash; however, the Company can provide no assurances that access to our cash will not be impacted
by adverse conditions in the financial markets. Credit concentration risk related to accounts receivable is mitigated as customer
credit is checked prior to the sales.
Other
Risks and Uncertainties
The
Company is exposed to risks pertinent to the operations of a retailer, including, but not limited to, the ability to acquire new
customers and maintain a strong brand as well as broader economic factors such as interest rates and changes in customer spending
patterns.
Recent
Accounting Pronouncements
In
August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). The new ASU eliminates the beneficial conversion
and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s
own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance
modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted
EPS computation. The amendments in the ASU are effective for public business entities that meet the definition of an SEC filer,
excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December
15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal
years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but
no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Board
also specified that an entity should adopt the guidance as of the beginning of its annual fiscal year and is not permitted to
adopt the guidance in an interim period. The Company is still evaluating the effect the adoption will have on its financial statements.
In
December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, as part
as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining
or improving the usefulness of the information provided to users of financial statements. ASU 02019-12 removes certain exceptions
to the general principle of ASC 740 in order to reduce the cost and complexity of its application. ASU 2019-12 is effective for
public business entities for annual reporting periods beginning after December 15, 2020, and interim periods within those reporting
periods. Early adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the
fiscal year of adoption. The Company does not believe adoption will have a material impact on its financial statements.
NOTE
3 - LIQUIDITY AND GOING CONCERN
The
Company’s financial statements are prepared using the accrual method of accounting in accordance with U.S. GAAP and have been prepared
on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business.
However, the Company has incurred significant losses and experienced negative cash flow since inception. At December 31, 2020, the Company
had cash of $620,539 and a deficit in working capital of approximately $10.1 million. Further, at December 31, 2020 the accumulated
deficit amounted to approximately $48.7 million. We use working capital to finance our ongoing operations, and since those operations
do not currently cover all our operating costs, managing working capital is essential to our Company’s future success. Because
of this history of losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going
concern.
A
successful transition to attaining profitable operations is dependent upon obtaining sufficient financing to fund the Company’s
planned expenses and achieving a level of revenue adequate to support the Company’s cost structure. Management plans to
finance future operations using cash on hand, increased revenue from RxAir air purification units,Vytex license fees, proceeds
received from the second round of financing under the Paycheck Protection Program and stock issuances to new and existing shareholders.
The Company has also focused the efforts of key internal employees on the goal of creating efficiencies in each department in
our retail furniture business, including purchasing, marketing, inventory control, advertising, accounting, warehousing and customer
service.
There
can be no assurances the Company will be able to achieve projected levels of revenue in 2021 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 2021, which could have a material adverse effect on the ability to achieve the business
objectives, and as a result, may require the Company to file bankruptcy or cease operations. The financial statements do not include
any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities
that might be necessary should the Company be forced to take any such actions.
The
Company’s future expenditures will depend on numerous factors, including: the rate at which the Company can introduce RxAir
air purification units and license Vytex NRL raw materials to manufacturers, and subsequently retailers; the costs of filing,
prosecuting, defending and enforcing any patent claims and other intellectual property rights; market acceptance of the Company’s
products, services and competing technological developments; the Company’s ability to successfully realize synergies through
the integration of the merged companies, acquire new customers and maintain a strong brand; the success of our efforts to reduce
expenses in our retail furniture business; and broader economic factors such as interest rates and changes in customer spending
patterns. As the Company expands its activities and operations, cash requirements are expected to increase at a rate consistent
with revenue growth after the Company has achieved sustained revenue generation.
NOTE
4 - INVESTMENTS – EQUITY SECURITIES
Cost
and fair value of investments - equity securities are as follows:
|
|
|
|
|
Gross
|
|
Gross
|
|
|
|
|
|
Cost
|
|
Unrealized
Losses
|
|
Unrealized
Gains
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2020
|
|
$
|
141,225
|
|
|
$
|
(13,315
|
)
|
|
$
|
-
|
|
|
$
|
127,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2019
|
|
$
|
141,225
|
|
|
$
|
-
|
|
|
$
|
8,292
|
|
|
$
|
149,517
|
|
Unrealized
holding gains (losses) on available-for-sale securities were approximately $(13,000) and $8,000 in 2020 and 2019, respectively,
and have been included in other income (expenses) in the accompanying statements of operations. Investments represent equity securities
in a publicly traded company.
NOTE
5 - PROPERTY AND EQUIPMENT
Property
and equipment, net consists of the following:
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
Furniture,
fixtures and equipment
|
|
$
|
1,385,430
|
|
|
$
|
1,354,665
|
|
|
Tooling
and testing equipment
|
|
|
338,572
|
|
|
|
319,000
|
|
|
Parking
lots
|
|
|
365,707
|
|
|
|
365,707
|
|
|
Leasehold
improvements
|
|
|
79,857
|
|
|
|
-
|
|
|
Motor
vehicles
|
|
|
49,166
|
|
|
|
49,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,218,732
|
|
|
|
2,088,538
|
|
|
Accumulated
depreciation
|
|
|
(587,081
|
)
|
|
|
(208,799
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
1,631,651
|
|
|
$
|
1,879,739
|
|
Depreciation
expense for the years ended December 31, 2020 and 2019 was $378,282 and $177,314, respectively.
NOTE
6 - INTANGIBLE ASSETS
Intangible
assets consist of the following:
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
|
|
|
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
|
|
|
1,050,000
|
|
|
|
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
|
|
|
2,659,101
|
|
|
|
2,985,418
|
|
|
|
|
|
|
Accumulated
amortization
|
|
|
(832,186
|
)
|
|
|
(504,878
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets, net
|
|
|
1,826,915
|
|
|
|
2,480,540
|
|
|
|
|
|
|
Indefinite-lived
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
9,072
|
|
|
|
9,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
intangible assets
|
|
$
|
1,835,987
|
|
|
$
|
2,489,612
|
|
|
|
|
|
Amortization
expense for the years ended December 31, 2020 and 2019 was $416,959 and $267,576, respectively. During the year ended December
31, 2020, we recognized an impairment charge of $240,350 related to our tradename and brand due to the discontinuance of the NHS
tradename.
Estimated
future amortization expense for finite-lived intangible assets is as follows:
|
|
|
Amount
|
|
|
|
|
|
2021
|
|
$
|
383,955
|
|
|
2022
|
|
|
383,955
|
|
|
2023
|
|
|
377,530
|
|
|
2024
|
|
|
278,304
|
|
|
2025
|
|
|
129,439
|
|
|
Thereafter
|
|
|
273,732
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,826,915
|
|
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 years ended December 31, 2020 and 2019:
|
|
|
Year
Ended
|
|
|
|
December
31,
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
Operating
lease cost
|
|
$
|
1,579,919
|
|
|
$
|
724,609
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
lease cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of right-of-use assets
|
|
|
188,047
|
|
|
|
37,121
|
|
|
Interest
on lease liabilities
|
|
|
43,454
|
|
|
|
4,826
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
lease cost
|
|
$
|
1,811,420
|
|
|
$
|
766,556
|
|
During
the year ended December 31, 2020, the Company recognized sublease income of approximately $112,000, which in included in other
income (expense), net in the accompanying condensed consolidated statements of operations. There was no sublease income in 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:
|
|
|
Year
Ended
|
|
|
|
December
31,
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
Cash
paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
cash flows used for operating leases
|
|
$
|
1,500,616
|
|
|
$
|
635,377
|
|
|
Financing
cash flows used for financing leases
|
|
|
214,308
|
|
|
|
32,921
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
obtained in exchange for operating lease liabilities
|
|
|
-
|
|
|
|
10,215,153
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
obtained in exchange for finance lease liabilities
|
|
|
75,739
|
|
|
|
880,189
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average remaining lease term:
|
|
|
|
|
|
|
|
|
|
Operating
leases
|
|
|
8.9
years
|
|
|
|
9.5
years
|
|
|
Finance
leases
|
|
|
5
years
|
|
|
|
5.7
years
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average discount rate:
|
|
|
|
|
|
|
|
|
|
Operating
leases
|
|
|
5.55
|
%
|
|
|
5.53
|
%
|
|
Finance
leases
|
|
|
5.16
|
%
|
|
|
5.16
|
%
|
The
future minimum lease payments required under operating and financing lease obligations as of December 31, 2020 having initial
or remaining non-cancelable lease terms in excess of one year are summarized as follows:
|
|
|
Operating
Leases
|
|
Finance
Leases
|
|
Total
|
|
|
|
|
|
|
|
|
|
2021
|
|
$
|
1,609,780
|
|
|
$
|
205,545
|
|
|
$
|
1,815,325
|
|
|
2022
|
|
|
1,117,377
|
|
|
|
150,943
|
|
|
|
1,268,320
|
|
|
2023
|
|
|
878,807
|
|
|
|
150,142
|
|
|
|
1,028,949
|
|
|
2024
|
|
|
870,000
|
|
|
|
140,002
|
|
|
|
1,010,002
|
|
|
2025
|
|
|
870,000
|
|
|
|
139,080
|
|
|
|
1,009,080
|
|
|
Thereafter
|
|
|
4,350,000
|
|
|
|
68,395
|
|
|
|
4,418,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
undiscounted lease liabilities
|
|
|
9,695,964
|
|
|
|
854,107
|
|
|
|
10,550,071
|
|
|
Less:
imputed interest
|
|
|
(2,085,361
|
)
|
|
|
(104,015
|
)
|
|
|
(2,189,376
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
lease liabilities
|
|
$
|
7,610,603
|
|
|
$
|
750,092
|
|
|
$
|
8,360,695
|
|
As
of December 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
The
Company formerly 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 line was paid in full with proceeds from advances
noted below and closed in May 2020.
Letter
of Credit
The
Company entered into a $125,000 letter of credit agreement with Fidelity Co-operative Bank in November 2020. The pledged collateral
of a $125,000 cash deposit account is included in prepaid expenses and other. The letter of credit was required pursuant to an
agreement with a third-party financial institution for customer financing.
Advances
On
May 29, 2020, Rotmans entered into a sale promotion consulting agreement with a national furniture sales event company. Under the agreement,
Rotmans appointed the third-party as its exclusive agent to assist with a high-impact sale. Before the sale, the agent advanced the Company
funds of approximately $2,300,000 to pay off the Fidelity line of credit and certain other vendors. The agent will be reimbursed for
the advance from the proceeds of the sale. In addition, the agent has a senior first priority security interest and lien in Rotmans inventories
and other assets until all obligations and liabilities are satisfied. Profits of the sale will be distributed according to the specific
terms of the agreement which has been tentatively extended through May 2021. The net outstanding balance of the advance is approximately
$2,159,000 as of December 31, 2020 and is included in accounts payable in the accompanying consolidated balance sheet.
Term
Notes
On
February 24, 2020, the Company entered into an agreement with Libertas Funding LLC (“Libertas”) to sell future sale
receipts totaling $1,089,000 for a purchase price of $825,000. The sold amount of future sales receipts were to be delivered weekly
to Libertas at predetermined amounts over a period of nine months. Pursuant to a settlement agreement dated August 25, 2020, the
amount owed to Libertas has been fully settled with the payment of $525,000 on September 4, 2020. Included in loss on settlement
of debt, net in the accompanying statements of operations is a gain of approximately $44,000 realized on the Libertas settlement.
Other
term debt totaling $16,374 at December 31, 2019, respectively, represents three 0% loans on motor vehicles, requiring cumulative
monthly payments of $1,488 through maturity in November 2020.
On
April 16, 2020, Rotmans received $1,402,900 in loan funding from the Paycheck Protection Program (the “PPP”), established
pursuant to the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and administered
by the U.S. Small Business Administration (“SBA”). The unsecured loan (the “PPP Loan”) is evidenced by
a promissory note of the Company dated April 16, 2020 (the “Note”) in the principal amount of $1,402,900 with United
Community Bank (the “Bank”), the lender. Under the terms of the Note and the PPP Loan, interest accrues on the outstanding
principal at the rate of 1.0% per annum. The term of the Note is two years, though it may be payable sooner in connection with
an event of default under the Note. Subsequent to December 31, 2020, the Company applied for and has been notified the entire
loan amount in eligible expenditures for payroll and other expenses has been forgiven.
Certain
investors guaranteed $100,000 each with Ameris Bank (formerly Fidelity Bank) to establish a $500,000 revolving line of credit,
the proceeds of which were loaned to the Company. Since the inception of the loan, the Company has paid interest at a rate of
4.5% per annum to Ameris Bank on behalf of the investors. Concurrently, interest payable to the investors has accrued at a rate
of 10.0% per annum. Pursuant to an agreement dated September 3, 2020, the balance of $500,000 plus accrued interest of $160,000
was deemed to be paid in full through the issuance of 41,562,000 shares of the Company’s common stock. Included in loss
on settlement of debt, net in the accompanying statements of operations is a loss of approximately $1,114,000 realized on the
Ameris settlement.
Shareholder,
Convertible and Contingently Convertible Notes Payable
The
following table summarizes shareholder, convertible and contingently convertible notes payable:
|
|
|
December
31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Shareholder,
convertible and contingently convertible notes
|
|
$
|
951,895
|
|
|
$
|
951,895
|
|
|
Accrued
interest
|
|
|
94,164
|
|
|
|
46,569
|
|
|
Debt
discount
|
|
|
-
|
|
|
|
(137,775
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,046,059
|
|
|
|
860,689
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
current maturities
|
|
|
(1,046,059
|
)
|
|
|
(366,326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
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 December 31, 2020 and 2019 is $338,195. The Notes matured in January 2020 and continue to accrue interest
until settlement.
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 December 31, 2020.
Based
on the variable conversion price of these notes, the Company recorded the embedded conversion features as derivative liabilities,
which amounted to $491,700 and $442,934 at December 31, 2020 and 2019, respectively.
Related
Party Debt
The
following table summarizes related party debt:
|
|
|
December
31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Rotman
Family convertible notes
|
|
$
|
1,832,707
|
|
|
$
|
1,782,707
|
|
|
Rotman
Family nonconvertible notes
|
|
|
1,555,500
|
|
|
|
507,500
|
|
|
Accrued
interest
|
|
|
189,394
|
|
|
|
53,152
|
|
|
Debt
discount
|
|
|
(4,667
|
)
|
|
|
(585,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,572,934
|
|
|
|
1,758,259
|
|
|
Less:
current maturities
|
|
|
(1,537,000
|
)
|
|
|
(46,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,035,934
|
|
|
$
|
1,712,259
|
|
Rotman
Family Convertible Notes
On
September 30, 2019, the Company issued contingently convertible promissory notes totaling $180,000, to Steven Rotman ($105,000)
and Greg Rotman ($75,000). These notes are (i) unsecured, (ii) bear interest at an annual rate of eight percent (8%) 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 $118,000 and $62,000, respectively, at December
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 $1,183,000 and $451,000, respectively, at December 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 at 5%. The amount can be converted into
shares of the Company’s stock, at the option of the Company, based on the average closing price for the trailing 20 days
prior to conversion and carrying 50% discount. The note can be converted only after an acceleration event which involves a symbol
change, uplisting, or reverse stock split and such conversion is in the control of the Company. The note matures two years from
issuance. The balance of the note payable including accrued interest to Steven Rotman is approximately $105,000 and $100,000 at
December 31, 2020 and 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 at 5%. The amount can be converted into
shares of the Company’s stock, at the option of the Company, based on the average closing price for the trailing 20 days
prior to conversion and carrying 50% discount. The note can be converted only after an acceleration event which involves a symbol
change, uplisting, or reverse stock split and such conversion is in the control of the Company. The note matures two years from
issuance. The balance of the note payable including accrued interest to Steven Rotman is approximately $52,000, at December 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 $1,275,000 and $1,056,866 at December 31, 2020 and 2019, respectively.
Rotman
Family Nonconvertible Notes
In
connection with the acquisition of 58% of Rotmans, Steven and Bernard Rotman were issued related party notes payable in the amounts
of $367,500 and $140,000, respectively. The notes bear interest at an annual rate of five percent (5%). Steven Rotman’s
note matures eight years from issuance and Bernard Rotman’s note matures four years from issuance. Payments of $3,828 and
$2,917 to Steven and Bernard Rotman, respectively, per month were scheduled to begin six months from issuance until maturity in
December 2027 and 2023, respectively. The balance of these notes payable including accrued interest to Steven and Bernard Rotman
is approximately $394,000 and $150,000, respectively, at December 31, 2020 and approximately $376,000 and $143,000, respectively,
at December 31, 2019. No payments have been made by the Company as of December 31, 2020.
During
the three months ended September 30, 2020, Steven Rotman advanced the Company funds totaling $595,000. In October 2020, the Company
formalized the advances and issued a promissory note to Steven Rotman. The note bears interest at an annual rate of five percent
(5%) and is due no later than July 1, 2021. The face amount of the notes represents the amount due at maturity along with accrued
interest. The balance of the notes payable including accrued interest to Steven Rotman is approximately $604,000, at December
31, 2020.
During
the three months ended December 31, 2020, Steven Rotman advanced the Company funds totaling $453,000. The Company formalized the
advances and issued a promissory note to Steven Rotman. The note bears interest at an annual rate of five percent (5%) and is
due no later than July 1, 2021. The face amount of the notes represents the amount due at maturity along with accrued interest.
The balance of the notes payable including accrued interest to Steven Rotman is approximately $459,000, at December 31, 2020.
Approximate
maturities for the succeeding years are as follows:
|
2021
|
|
$
|
1,537,000
|
|
|
2022
|
|
|
62,000
|
|
|
2023
|
|
|
536,000
|
|
|
2024
|
|
|
34,000
|
|
|
2025
|
|
|
36,000
|
|
|
Thereafter
|
|
|
1,367,934
|
|
|
|
|
|
|
|
|
|
|
$
|
3,572,934
|
|
NOTE
9 - DERIVATIVE LIABILITIES
As
of December 31, 2020 and 2019, the Company had a $1,766,700 and $1,499,800, respectively, derivative liability balance on the
consolidated balance sheet and recorded a loss from change in fair value of derivative liabilities of $238,900 and $1,079,450
for the years ended December 31, 2020 and 2019, respectively. The derivative liability activity comes from the convertible notes
payable. The Company analyzed the conversion features and warrants of the various note agreements for derivative accounting consideration
under ASC 815-15 “Derivatives and Hedging” and determined that the embedded conversion features should be classified
as a derivative because the exercise price of these Convertible notes are subject to a variable conversion rate. The Company has
determined that the conversion feature is not considered to be solely indexed to the Company’s own stock and is therefore
not afforded equity treatment. In accordance with ASC 815, the Company has bifurcated the conversion feature of the notes and
recorded a derivative liability.
The
embedded derivatives for the notes are carried on the Company’s consolidated balance sheet at fair value. The derivative
liability is marked-to-market each measurement period and any unrealized change in fair value is recorded as a component of the
consolidated statement of operations and the associated fair value carrying amount on the consolidated balance sheet is adjusted
by the change. The Company fair values the embedded derivative using a lattice-based valuation model or Monte Carlo simulation.
The
following table summarizes the derivative liabilities included in the consolidated balance sheet at December 31, 2020 and 2019:
Fair
Value of Embedded Derivative Liabilities:
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of the year
|
|
$
|
1,499,800
|
|
|
$
|
235,085
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial
measurement of liabilities
|
|
|
28,000
|
|
|
|
1,464,600
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value
|
|
|
238,900
|
|
|
|
1,079,450
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement
due to conversion
|
|
|
-
|
|
|
|
(1,279,335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
end of the year
|
|
$
|
1,766,700
|
|
|
$
|
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 December 31, 2020, the 13,698 shares of outstanding preferred stock had undeclared dividends of approximately $101,000
and could be converted into 4,801,840 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 year ended December 31, 2020, the Company issued 30,433,402 shares under equity purchase agreements for cash proceeds totaling
$456,490. Included in stock subscription payable at December 31, 2020, is $308,000 received under common stock subscription agreements
for 20,533,335 shares during the year ended December 31, 2020.
During
the year ended December 31, 2020, 44,357 shares of common stock were issued for the conversion of 130 shares of preferred stock
for principal and interest totaling $2,218.
NOTE
11 - REVENUES
The
following table presents our revenues disaggregated by each major product category and service for the last two years:
|
|
|
Year
Ended December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
Net
Sales
|
|
|
Net
Sales
|
|
|
Net
Sales
|
|
|
Net
Sales
|
|
|
Merchandise:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Case
Goods
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bedroom
Furniture
|
|
$
|
2,546,691
|
|
|
|
12.1
|
|
|
$
|
1,812,867
|
|
|
|
13.2
|
|
|
Dining
Room Furniture
|
|
|
1,639,621
|
|
|
|
7.8
|
|
|
|
1,135,807
|
|
|
|
8.3
|
|
|
Occasional
|
|
|
3,482,484
|
|
|
|
16.6
|
|
|
|
2,239,769
|
|
|
|
16.4
|
|
|
|
|
|
7,668,796
|
|
|
|
36.5
|
|
|
|
5,188,443
|
|
|
|
37.9
|
|
|
Upholstery
|
|
|
6,458,173
|
|
|
|
30.8
|
|
|
|
3,523,817
|
|
|
|
25.7
|
|
|
Mattresses
and Toppers
|
|
|
3,598,515
|
|
|
|
17.2
|
|
|
|
3,038,471
|
|
|
|
22.2
|
|
|
Broadloom,
Flooring and Rugs
|
|
|
1,447,979
|
|
|
|
6.9
|
|
|
|
1,172,318
|
|
|
|
8.6
|
|
|
Warranty
|
|
|
700,193
|
|
|
|
3.3
|
|
|
|
245,002
|
|
|
|
1.8
|
|
|
Air
Purification Units
|
|
|
675,354
|
|
|
|
3.2
|
|
|
|
6,202
|
|
|
|
0.1
|
|
|
Accessories
and Other
|
|
|
430,233
|
|
|
|
2.1
|
|
|
|
511,619
|
|
|
|
3.7
|
|
|
|
|
$
|
20,979,243
|
|
|
|
100.0
|
|
|
$
|
13,685,872
|
|
|
|
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 $1,031,850 and $2,968,898 of stock-based compensation for the years ended December 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 $2,177,806 and $845,175
at December 31, 2020 and 2019, respectively.
The
Company used the Black-Scholes option pricing model to estimate the grant-date fair value of option and warrant awards:
|
|
●
|
Expected
Dividend Yield - because the Company does not currently pay dividends, the expected dividend yield is zero;
|
|
|
|
|
|
|
●
|
Expected
Volatility in Stock Price - volatility based on the Company’s trading activity was used to determine expected volatility;
|
|
|
|
|
|
|
●
|
Risk-free
Interest Rate - reflects the average rate on a United States Treasury Bond with a maturity equal to the expected term of the
option; and
|
|
|
|
|
|
|
●
|
Expected
Life of Award - because we have minimal experience with the exercise of options or warrants for use in determining the expected
life of each award, we used the option or warrant’s contractual term as the expected life.
|
In
total for the years ending December 31, 2020 and 2019, the Company recorded $21,872 and $50,789, respectively, of share-based
compensation expense related to employee and Board Members’ stock options. The unrecognized compensation expense as of December
31, 2020 was $27,059 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 December 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 December 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 December 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 years ended December 31, 2020 and 2019, respectively.
The
following table summarizes all stock option activity of the Company for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
|
of
Shares
|
|
|
Price
|
|
|
Life
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2018
|
|
|
29,098,271
|
|
|
$
|
0.06
|
|
|
|
4.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,115,000
|
)
|
|
|
0.21
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2019
|
|
|
27,983,271
|
|
|
$
|
0.20
|
|
|
|
3.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
December 31, 2019
|
|
|
26,783,271
|
|
|
$
|
0.21
|
|
|
|
3.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(108,333
|
)
|
|
|
0.68
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2020
|
|
|
27,874,938
|
|
|
$
|
0.19
|
|
|
|
2.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
December 31, 2020
|
|
|
27,124,938
|
|
|
$
|
0.19
|
|
|
|
2.59
|
|
As
of December 31, 2020, the was no aggregate intrinsic value on the Company’s outstanding. As of December 31, 2019, the aggregate
intrinsic value of the Company’s outstanding options was approximately $2,000. 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 year ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
of
Shares
|
|
|
Fair
Value
|
|
|
Exercise
Price
|
|
|
Life
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2018
|
|
|
15,488,832
|
|
|
|
|
|
|
$
|
0.12
|
|
|
|
4.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,251,186
|
)
|
|
|
-
|
|
|
|
0.48
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2019
|
|
|
14,237,646
|
|
|
|
|
|
|
$
|
0.07
|
|
|
|
3.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(31,734
|
)
|
|
|
-
|
|
|
|
1.29
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2020
|
|
|
14,205,912
|
|
|
|
|
|
|
$
|
0.08
|
|
|
|
2.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
December 31, 2020
|
|
|
14,205,912
|
|
|
|
|
|
|
$
|
0.08
|
|
|
|
2.53
|
|
NOTE
13 - RELATED PARTY TRANSACTIONS
Officers
and Directors
Per
Steven Rotman’s Employment agreement dated July 22, 2019, as amended, he is to be paid $125,000 per year in cash,
$10,417 per month in shares based on a 20-day average price at a 50% discount to market, $5,000 per month in cash for expenses
as well as access to a Company provided vehicle and health and life insurance. During the year ended December 31, 2020, the Company
expensed approximately $443,000 related to this employment agreement. As of December 31, 2020, the Company had a stock subscription
payable balance of $700,000, or approximately 25,420,000 shares to be issued in the future and $60,000 of reimbursable expenses
payable related to this party. In addition, 6,666,667 shares are owed to this party under a stock subscription agreement dated
in July 2020 for $100,000.
Designcenters.com
This
entity is owned by Jamie Rotman, who is the daughter of the Company’s CEO, Steven Rotman. Designcenters.com (“Design”)
provided bookkeeping and management services to the Company through July 2019. In exchange for such services, the Company had
entered into a consulting agreement with the related party entity. As of December 31, 2020, the Company had a stock subscription
payable balance of $42,000, for approximately 850,000 shares related to this party for services incurred and expensed in 2019.
Blue
Oar Consulting, Inc.
This
entity is owned by Gregory Rotman, who is the son of the Company’s CEO, Steven Rotman. Blue Oar Consulting, Inc. (“Blue
Oar”) provides business consulting services to the Company. In exchange for such services, the Company has entered into
a consulting agreement with the related party entity.
Per
the consulting agreement, Blue Oar is to be paid $15,000 per month in cash for expenses, and $12,500 per month to be paid in shares
based on a 20-day average at a 50% discount to market. During the year ended December 31, 2020, the Company expensed approximately
$490,000 related to the consulting agreement. As of December 31, 2020, the Company had a stock subscription payable balance of
$640,000, or approximately 30,038,000 shares and a balance of $180,000 in accounts payable related to this related party. In addition,
4,666,667 shares are owed to this party under a stock subscription agreement dated in July 2020 for $70,000.
In
connection with litigation matters involving both Blue Oar and the Company, legal invoices totaling approximately $27,000 have
been paid on Blue Oar’s behalf during the year ended December 31, 2020 and expensed as consulting services.
Fluid
Energy Conversion Inc.
In
May of 2019, the Company acquired the assets of Fluid Energy Conversion Inc. (“FEC”) for 2,500,000 shares of common
stock. FEC is owned by Dr. Bryan Stone, one of the Company’s directors. The assets consist of a patent on the Hughes Reactor,
which has the ability to control, enhance and focus energy in flowing liquids and gases. Included in subscription stock payable
at December 31, 2020 is $103,750 representing the value of the 2,500,000 shares on the purchase date.
NOTE
14 - COMMITMENTS
Employment
and Consulting Agreements
The
Company has entered into employment and consulting agreements with certain of our officers, employees, and affiliates. For employees,
payment and benefits would become payable in the event of termination by us for any reason other than cause, or upon change in
control of our Company, or by the employee for good reason.
There
is currently one employment agreement in place with the CEO, Steven Rotman. See compensation terms in Note 13.
During
the year ended December 31, 2020 and 2019, the Company entered into various service agreements with consultants for financial
reporting, advisory, and compliance services.
Litigation
From
time to time, the Company is party to certain legal proceedings that arise in the ordinary course and are incidental to our business.
Future events or circumstances, currently unknown to management, will determine whether the resolution of pending or threatened
litigation or claims will ultimately have a material effect on our consolidated financial position, liquidity or results of operations
in any future reporting periods.
EMA
Financial
On
February 19, 2019, EMA Financial, Inc. filed a lawsuit in the Southern District of New York against the Company. The lawsuit alleged
various breaches of an underlying convertible promissory note and stock purchase agreement and sought four claims for relief:
(i) specific performance to enforce a stock conversion and contractual obligations; (ii) breach of contract; (iii) permanent injunction
to enforce the stock conversion and contractual obligations; and (iv) legal fees and costs of the litigation. The complaint was
filed with a motion seeking: (i) a preliminary injunction seeking an immediate resolution of the case through the stock conversion;
(ii) a consolidation of the trial with the preliminary injunctive hearing; and (iii) summary judgment on the first and third claims
for relief.
The
Company filed an opposition to the motion and upon oral argument the motion for injunctive relief was denied. The Court issued
a decision permitting a motion for summary judgment to proceed and permitted the Company the opportunity to supplement its opposition
papers together with the plaintiff who was also provided opportunity to submit reply papers. On April 5, 2019, the Company filed
the opposition papers as well as a motion to dismiss the first and third causes of action in the complaint. On March 13, 2020,
the Court granted the Company’s motion dismissing the first and third claims for relief and denied the motion for summary
judgment as moot.
The
Company subsequently filed an amended answer with counterclaims. The affirmative defenses if granted collectively preclude the
relief sought. In addition, Vystar filed counterclaims asserting: (a) violation of 10(b)(5) of the Securities and Exchange Act;
(b) violation of Section 15(a)(1) of the Exchange Act (failure to register as a broker-dealer); (c) pursuant to the Uniform Declaratory
Judgment Act, 28 U.S.C. §§ 2201, the Company requests the Court to declare: (i) pursuant to Delaware law, the underlying
agreements are unconscionable; (ii) the underlying agreements are unenforceable and/or portions are unenforceable, such as the
liquidated damages sections; (iii) to the extent the agreement is enforceable, Vystar in good faith requests the Court to declare
the legal fee provisions of the agreements be mutual (d) unjust enrichment; (e) breach of contract (in the alternative); and (f)
attorneys’ fees.
On
June 10, 2020, EMA filed a motion for summary judgment as to its remaining claims for relief and a motion to dismiss the Company’s
affirmative defenses and counterclaims. The Company opposed the motion on July 10, 2020, and the same was fully submitted to the
Court on July 28, 2020; the parties await the Court’s decision on the motions.
Payment of Wages Actions
On
March 13, 2020, Robert LaChapelle, a former employee of Rotmans Furniture, the Company’s majority owned subsidiary, on behalf of
himself and all others similarly situated, filed a class action complaint against Rotmans and two of its prior owners (including Steve
Rotman, President of the Company) in the Worcester Superior Court alleging non-payment of overtime pay and Sunday premium pay pursuant
to the Massachusetts Blue Laws (Ch. 136), the Massachusetts Overtime Law (Chapter 151, § 1A), and the Massachusetts Payment of Wages
Law (Chapter 149 §§148 and 150). Specifically, LaChapelle has alleged that Rotmans failed to pay him and other sales people
who were paid on a commission-only basis overtime pay at a rate of least 1.5 times the basic minimum wage or premium pay (also at 1.5
times the basic minimum wage) for hours they worked on Sundays. The parties settled with the named Plaintiffs, Robert LaChapelle and
certain other employees, each on an individual basis, for a de minimus amount which was paid in March 2021. Plaintiffs’ counsel
then filed a Stipulation of Dismissal of the Plaintiffs’ Complaint with prejudice. The settlement is included in operating expenses
in the accompanying financial statements for the year ended December 31, 2020. However, after settlement, three additional former
employees made similar claims and the Company is reviewing the matter.
Eric
Maas Lawsuit
The
Company and members of its Board of Directors, and certain employees and consultants, were added as defendants in the case Maas
v. Zymbe, LLC, et al. The complaint was removed from Superior Court of the State of California to Federal District Court in California.
The amended complaint alleged various employment, contract, and tort claims, including defamation, arising out of a dispute over
the quality and utility of consulting and other services provided by Mr. Eric Maas, including through his dealings with Mr. Jason
Leaf and Mr. Gregory Rotman. The original litigation was filed in 2017. After mediation, this matter was settled during the third
quarter of 2020, and the case has been dismissed with prejudice.
Stock Subscription Payable
At December
31, 2020 and 2019, the Company recorded $2,589,556 and $1,150,125, respectively, of stock subscription payable related to common
stock to be issued. The following summarizes the activity of stock subscription payable during the years ended December
31, 2020 and 2019:
|
|
|
Amount
|
|
|
Shares
|
|
|
|
|
|
|
|
|
|
|
Beginning balance - January 1, 2019
|
|
$
|
771,203
|
|
|
|
107,204,876
|
|
|
Additions, net
|
|
|
1,150,125
|
|
|
|
31,439,401
|
|
|
Issuances, net
|
|
|
(771,203
|
)
|
|
|
(107,204,876
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance - December 31, 2019
|
|
|
1,150,125
|
|
|
|
31,439,401
|
|
|
Additions, net
|
|
|
1,640,631
|
|
|
|
71,991,955
|
|
|
Issuances, net
|
|
|
(201,200
|
)
|
|
|
(4,000,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance - December 31, 2020
|
|
$
|
2,589,556
|
|
|
|
99,431,356
|
|
NOTE
15 - MAJOR CUSTOMERS AND VENDORS
Major
customers and vendors are defined as a customer or vendor from which the Company derives at least 10% of its revenue and cost
of revenue, respectively.
During
the year ended December 31, 2020 and 2019 the Company made approximately 12% and 15%, respectively, of its purchases from one
major vendor. The Company owed its major vendors approximately $476,000 and $219,000 at December 31, 2020 and 2019, respectively.
NOTE
16 - INCOME TAXES
The
provision (benefit) for income taxes for the years ended December 31, 2020 and 2019 assumes a 21% effective tax rate for federal
income taxes. A reconciliation of the federal statutory income tax rate and the effective income tax rate as a percentage of income
before income taxes is as follows:
|
|
|
Year
Ended
|
|
|
|
|
December
31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Federal
statutory income tax rate
|
|
|
(21.0
|
%)
|
|
|
(21.0
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
Change
in valuation allowance on net operating loss carryforwards
|
|
|
21.0
|
|
|
|
21.0
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
income tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Deferred
tax assets as of December 31, 2020 and 2019 are as follows:
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
NOL
carryforwards
|
|
$
|
6,715,000
|
|
|
$
|
5,490,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
valuation allowance
|
|
|
(6,715,000
|
)
|
|
|
(5,490,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
taxes are caused primarily by net operating loss carryforwards. For federal income tax purposes, the Company has a net operating
loss carryforward of approximately $31,900,000 as of December 31, 2020, of which approximately $18,400,000 expires beginning in
2024 and $13,500,000 which can be carried forward indefinitely. For state income tax purposes, the Company has a net operating
loss carryforward of approximately $18,300,000 and $13,300,000 as of December 31, 2020 in Georgia and Massachusetts, respectively,
which expires beginning in 2023.
In
addition, as of December 31, 2020, Rotmans has a net operating loss carryforward of approximately $4,200,000 for federal income
tax purposes of which $1,810,000 expires beginning in 2029 and $2,390,000 can be carried forward indefinitely. Rotmans has a state
operating loss carryforward of approximately $3,300,000 which expires beginning in 2022.
Pursuant
to Internal Revenue Code Section 382, the future realization of our net operating loss carryforwards to offset future taxable
income may be subject to an annual limitation as a result of ownership changes that may have occurred previously or that could
occur in the future.
NOTE
17 - PROFIT SHARING PLAN
The
Company sponsors a qualified 401(k) profit sharing plan covering all eligible employees. The plan permits participants to make
tax-deferred contributions to the plan by salary reduction. Company contributions are discretionary and are determined annually
by the Board of Directors.
There
were no Company contributions in 2020 and 2019. Participant and Company contributions are limited to amounts allowed under the
Internal Revenue Code.
The
Company offers no post-retirement benefits other than the plan discussed above and no significant post-employment benefits.
NOTE
18 - ACQUISITION OF ROTMANS
On
July 18, 2019, the Company acquired 58% of the outstanding shares of common stock of Rotmans, the largest furniture and flooring
store in New England for an aggregate purchase price of $2,030,000. The consideration is to be paid in 25% in term notes payable
over 4 to 8 years and 75% in notes convertible to common stock (see Note 8). 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.
The
transaction has been accounted for using the acquisition method of accounting which requires, among other things, the assets acquired
and liabilities assumed to be recognized at their fair values at the date of acquisition. The following table summarizes the estimated
fair values of the assets acquired and liabilities assumed at the date of acquisition:
|
Consideration
Paid:
|
|
|
|
|
Notes
payable
|
|
$
|
507,500
|
|
|
Convertible
notes payable
|
|
|
1,522,500
|
|
|
|
|
|
|
|
|
Total
consideration
|
|
$
|
2,030,000
|
|
|
|
|
|
|
|
|
Purchase
Price Allocation:
|
|
|
|
|
|
Accounts
receivable
|
|
$
|
15,847
|
|
|
Inventories
|
|
|
4,904,499
|
|
|
Other
current assets
|
|
|
471,532
|
|
|
Operating
lease right-of-use assets
|
|
|
10,848,241
|
|
|
Finance
lease right-of-use assets, net
|
|
|
173,596
|
|
|
Property
and equipment
|
|
|
1,765,707
|
|
|
Other
assets
|
|
|
274,366
|
|
|
Customer
relationships
|
|
|
110,000
|
|
|
Trade
name
|
|
|
770,000
|
|
|
Marketing
related intangibles
|
|
|
380,000
|
|
|
Goodwill
|
|
|
313,210
|
|
|
|
|
|
|
|
|
Total
identifiable assets
|
|
|
20,026,998
|
|
|
Line
of credit
|
|
|
(2,374,090
|
)
|
|
Notes
payable
|
|
|
(25,305
|
)
|
|
Accounts
payable
|
|
|
(2,000,146
|
)
|
|
Accrued
expenses
|
|
|
(544,971
|
)
|
|
Operating
lease liabilities
|
|
|
(9,008,241
|
)
|
|
Finance
lease liabilities
|
|
|
(189,421
|
)
|
|
Unearned
revenue
|
|
|
(2,508,623
|
)
|
|
Noncontrolling
interest in net assets
|
|
|
(1,346,201
|
)
|
|
|
|
|
|
|
|
Net
assets acquired
|
|
$
|
2,030,000
|
|
Goodwill
of $313,210 was recognized in the acquisition of Rotmans which represents the value derived from the combined capabilities of
our two organizations, including improved infrastructure in support of purchasing, marketing, inventory control, advertising,
accounting, warehousing and customer service create an opportunity to grow our brands and accelerate long term growth and value
for our people, customers, and suppliers. The addition of Rotmans to Vystar’s platform, positions the Company as an authority
in our customers’ homes and also creates a showcase for Vystar’s products. This partnership represents a key opportunity
to drive long-term growth and value creation for our shareholders. The Company has invested approximately $400,000 in the completion
of the merger and has committed a considerable amount of staff resources, most of which is a one-time cost.
In
determining the fair value of the intangible assets, the Company considered, among other factors, the best use of the acquired
assets such as the customer relationships, trade name and marketing related intangibles. The Company finalized the purchase price
allocation through the use of management analysis and certain other factors.
Unaudited
pro forma financial information
The
following unaudited pro forma information presents a summary of the Company’s combined operating results for the year ended
December 31, 2019, as if the acquisition and the related financing transactions had occurred on January 1, 2019. The following
pro forma financial information is not necessarily indicative of the Company’s operating results as they would have been
had the acquisition been effected on the assumed date, nor is it necessarily an indication of trends in future results for a number
of reasons, including, but not limited to, differences between the assumptions used to prepare the pro forma information, basic
shares outstanding and dilutive equivalents, cost savings from operating efficiencies, potential synergies, and the impact of
incremental costs incurred in integrating the businesses.
|
|
|
Year
Ended December 31.
|
|
|
|
|
2019
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
28,534,224
|
|
|
Loss
from operations
|
|
$
|
5,941,018
|
|
|
Net
loss
|
|
$
|
8,820,318
|
|
|
Net
loss attributable to Vystar
|
|
$
|
8,363,371
|
|
|
Basic
and dilated loss per share
|
|
$
|
0.01
|
|
NOTE
19 - SUBSEQUENT EVENTS
In
January, the Company issued a total of 19,333,333 shares to two third-party consultants for legal and professional services pursuant
to the terms of the agreements signed in 2020. The Company also issued 1,666,667 shares to an investor pursuant to a stock subscription
agreement dated in July 2020. These liabilities were included in stock subscription payable at December 31, 2020.
On
January 24, 2021, the PPP loan received by Murida Furniture Co. Inc. has been fully forgiven by the SBA in the amount of $1,402,900.
On
January 25, 2021, 5,000 preferred shares were converted into 1,767,945 shares of common stock.
On
February 2, 2021, Murida Furniture received a second PPP loan from the SBA in the amount of $1,402,900.
On February 5, 2021, the Company issued 41,403,304
for services related to Blue Oar’s consulting contract, which were included in stock subscription payable at December
31, 2020.
The Board voted unanimously to issue 10
million shares to compensate board members for their service in 2021. Each member will receive 2 million shares of restricted
stock in 2021. Similar to other issuances of our unregistered securities, trading is restricted for six months.
Subsequent to year-end, Steven Rotman has advanced
the Company funds totaling $395,000. The advances bear interest at an annual rate of five percent (5%). The Company has not formalized
an agreement with repayment terms as of this date.