The accompanying notes are an integral part
of these condensed financial statements.
The accompanying notes are an integral part
of these condensed financial statements.
The accompanying notes are an integral part
of these condensed financial statements.
The accompanying notes are an integral part
of these condensed financial statements.
The accompanying notes are an integral part
of these condensed financial statements.
NOTES
TO FINANCIAL STATEMENTS
NOTE 1
|
DESCRIPTION OF BUSINESS
|
History
and Nature of Business
Vystar Corporation (“Vystar”, the
“Company”, “we”, “us”, or “our”) 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. On January 22, 2015, Vystar
announced the signing of an exclusive domestic distribution agreement with Worcester, MA based Nature’s Home Solutions (NHS)
who sources eco-friendly materials and technologies for use in furnishings and other markets. On March 4, 2015, the Company announced
that Hartford, CT based Gold Bond formed a strategic alliance with NHS to produce and market the world’s first Vytex NRL
based mattress. In June 2015, the first mattresses made with Vytex (hybrid and pure Vytex) were placed on the sales floor at Rotmans
Furniture and Carpet Store in Worcester, MA using the “Evaya” brand and Gold Bond had shipped four versions of their
“Brilliance” inner coil and pure foam mattresses (Emerald, Ruby, Sapphire Plush and Sapphire Firm) to over 30 stores
from Maine to Florida.
In
April of 2018, Vystar acquired the assets of NHS Holdings, LLC (NHS) executing on the first part of the Company’s vision
to move into direct product offerings made from
Vytex
® latex. NHS was the exclusive U.S. distributor of Vystar’s
Vytex® natural rubber latex foam to manufacturers for use in over 200 home furnishings products, including mattresses, toppers,
pillows and upholstery, sold through multiple channels. This acquisition provides Vystar with roll packing and cutting equipment
to support our bedding manufacturing partners, while lowering the cost of Vytex to the manufacturer by eliminating the middleman.
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’s
RxAir
™ air purifier ensuring every breath is free of
harmful pathogens, VOCs and odors.”
NOTE 2
|
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
|
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with accounting
principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and
pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated by the Securities and Exchange Commission
(“SEC”). Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete
financial statement presentation. However, the Company believes that the disclosures are adequate to make the information presented
not misleading. In the opinion of management, all adjustments (consisting primarily of normal recurring accruals) considered necessary
for a fair presentation have been included.
Operating
results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year
ending December 31, 2019. The unaudited condensed consolidated financial statements should be read in conjunction with the audited
consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2018.
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 13, 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.
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 GAAP requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying disclosures. 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.
Examples include valuation allowances for deferred tax assets, provisions for bad debts, valuation of derivative liabilities,
and fair values of share-based compensation and other equity issuances.
Fair
Value of Financial Instruments
The
Company’s financial instruments consist of cash, accounts receivable, accounts payable, accrued expenses and interest payable,
lines of credit, shareholder notes payable, and long-term debt. The carrying values of all the Company’s financial instruments
approximate fair value because of their short maturities. In addition to the short maturities, the carrying amounts of our line
of credit and shareholder notes payable approximate fair value because the interest rates at March 31, 2019 and December 31, 2018
approximate market interest rates for the respective borrowings.
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
are recognized at fair value on a recurring basis at March 31, 2019 and December 31, 2018 and are level 3 measurements. There
has been no transfers between levels during the three months ended March 31, 2019.
Acquisition
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.
Accounts
Receivable
Accounts
receivable are stated at the amount management expects to collect from outstanding balances. 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, 2019 and December 31, 2018,
the Company determined there were no amounts deemed uncollectible. The Company grants credit to 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. Vytex customers are located in both the United States and internationally.
Inventories
Inventory
cost includes those costs directly attributable to the product before sale. Inventory consists primarily of finished goods of
foam toppers, mattresses and pillows and is carried at the lower of cost or market (net realizable value), using first-in, first-out
method.
Property
and Equipment
Property
and equipment are stated at cost. Depreciation is provided by the use of the straight-line and accelerated methods for financial
and tax reporting purposes, respectively, over the estimated useful lives of the assets, generally 5 to 10 years. As of March
31, 2019, the net balance of property and equipment is $281,614 with accumulated depreciation of $41,717. As of December 31, 2018,
the net balance of property and equipment is $291,346 with accumulated depreciation of $31,485.
Intangible
Assets
Patents
represent legal and other fees associated with the registration of patents. The Company has four issued patents with the United
States Patent and Trade Office (USPTO) as well as four issued international PCT (Patent Cooperation Treaty) patents. Patents are
carried at cost and are being amortized on a straight-line basis over their estimated useful lives, typically 20 years.
The
Company has trademark protection for “Vystar”, “Vytex”, and “Created by Nature. Recreated by Science.”
Trademarks are carried at cost and since their estimated life is indeterminable, no amortization is recognized. Instead, they
are evaluated annually for impairment.
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, 2019 and 2018, 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 that 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
operation over the period of the borrowings using the effective interest method.
Derivatives
The
Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives
depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship
and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting.
Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm
commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated
and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions,
are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition
on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable
to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The
Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting
does not apply or the Company elects not to apply hedge accounting.
In
accordance with the FASB’s fair value measurement guidance (ASU 2011-04), the Company made an accounting policy election
to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis
by counterparty portfolio.
Loss
Per Share
The
Company presents basic and diluted loss per share. Because the Company reported a net loss for three months ended March 31, 2019
and 2018, 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
29,098,270 and 7,498,271 shares of common stock for three months ended March 31, 2019 and 2018, respectively, as their effect
would be anti-dilutive. Warrants to purchase 14,382,380 and 14,831,069 shares of common stock for three months ended March 31,
2019 and 2018, 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 4,382,730 and 4,106,170 shares of common stock for three months ended March 31, 2019
and 2018, respectively, were excluded from the computation of diluted loss per share as their effect would be anti-dilutive.
Revenue
On
January 1, 2018, we adopted FASB Accounting Standards Codification (“ASC”) Topic 606,
Revenue from Contracts with
Customers
(“ASC 606”)
.
The new guidance sets forth a new five-step revenue recognition model which replaces
the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue
recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business
or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects what it expects to receive in exchange for the goods or services. The standard also requires more detailed disclosures
and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance.
We reviewed all contracts at the date of initial
application and elected to use the modified retrospective transition method, where the cumulative effect of the initial application
is recognized as an adjustment to opening retained earnings at January 1, 2018. Therefore, comparative prior periods have not been
adjusted and continue to be reported under FASB ASC Topic 605,
Revenue Recognition
, (“ASC 605”). The adoption
of the new revenue recognition guidance was immaterial to our balance sheets as of March 31, 2019 and December 31, 2018 and to
our statements of operations and cash flows for the three months ended March 31, 2019 and 2018.
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 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 a 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 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, 2019 and December 31, 2018, reserves for estimated sales returns totaled $3,000, respectively and are
included in accompanying financial statements as accrued expenses in the balance sheets
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. 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 product sales.
Cost
of Revenue
Cost
of revenue consists primarily of product and freight costs and fees paid to online retailers for costs of material.
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. From inception through March 31, 2019, Vystar’s research and development costs have been approximately
$2.4 million.
Advertising
Costs
Advertising
costs are expensed as incurred. Included in general and administrative expenses is approximately $20,483 for the three months
ended March 31, 2019. There were no advertising costs for the three months ended March 31, 2018.
Stock-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 are determined using the fair value of the Company’s common stock on the date of grant. The fair
value of performance share awards are estimated using a Monte-Carlo simulation model utilizing several key assumptions including
expected peer group share price volatility, correlation coefficients between peers, the risk-free rate of return, the expected
dividend yield and other award design features. 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 is 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. A
valuation allowance for the full amount of the net deferred tax asset was recorded for the three months ended March 31, 2018 and
for the year ended December 31, 2018. 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, 2019 and 2018. The Company is no
longer subject to federal examination for years prior to 2015.
On
December 22, 2017, the Tax Cuts and Jobs Act was signed into law impacting corporations by reducing the maximum tax rate from
35% to 21%, as well as various other provisions relating to the deductibility of certain items. The Act is not expected to have
an immediate impact on the Company due to the large net operating loss carryforward as well as the full valuation allowance.
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.
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.
Recent
Accounting Pronouncements
In
May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09,
Revenue from Contracts with Customers
,
a new standard on revenue recognition. The new standard will supersede existing revenue recognition guidance and apply to all
entities that enter into contracts to provide goods or services to customers. The guidance also addresses the measurement and
recognition of gains and losses on the sale of certain non-financial assets, such as real estate, property and equipment. In August
2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, which defers the
effective date of the guidance in ASU 2014-09 by one year. This update is now effective for annual and interim period beginning
after December 15, 2017, and has been adopted for the year ended December 31, 2018. The Company has finalized its assessment of
ASU 2014-09 and adopted the standard using the modified retrospective method. The Company concluded that the adoption will not
have an impact on the timing of its revenue recognition for revenue. Any cumulative effect from this change would be recorded
to the accumulated deficit but as March 31, 2019 and December 31, 2018, there was no material impact.
In
February 2016, the FASB issued ASU 2016-02,
Leases
. ASU 2016-02 requires lessees to recognize the assets and liabilities
on their balance sheet for the rights and obligations created by most leases and continue to recognize expenses on their income
statements over the lease term. It will also require disclosures designed to give financial statement users information on the
amount, timing, and uncertainty of cash flows arising from leases. The guidance is effective for annual reporting periods beginning
after December 15, 2018, and interim periods within those years. Early adoption is permitted. The Company has adopted and any
cumulative effect from this change will not have a material impact on its financial statements.
In
August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Receipts and Cash
Payments
. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice
in how certain receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company has adopted this
update for the three months ended March 31, 2019 and the year ended December 31, 2018
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.
1In
June 2018, the FASB issued ASU 2018-07,
Compensation - Stock Compensation (Topic 718)
to expand the scope of ASC 718, Compensation
- Stock Compensation (Topic 718) (“ASU 2017-07”), to include share-based payment transactions for acquiring goods
and services from non-employees. The pronouncement is effective for fiscal years, and for interim periods within those fiscal
years, beginning after December 15, 2018, with early adoption permitted. The Company has adopted and any cumulative effect from
this change will not have a material impact on its financial statements.
In
July 2017, the FASB issued ASU 2017-11,
Earnings per share (Topic 260), Distinguishing Liabilities from Equity (Topic 480),
and Derivatives and Hedging (Topic 815): Accounting for Certain Financial Instruments with Down Round Features
. The update
addresses the complexity of accounting for certain financial instruments with down round features and the liability or equity
classification of financial instruments with warrants or convertible features. The guidance eliminates the requirement to consider
“down round” features when determining whether certain equity-linked financial instruments or embedded features are
indexed to an entity’s own stock. The ASU is effective for annual periods beginning after December 15, 2018, and for interim
periods within those years, with early adoption permitted. The Company has adopted and any cumulative effect from this change
will not have a material impact on its financial statements.
In
January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
.
The update provides that when substantially all the fair value of the assets acquired is concentrated in a single identifiable
asset or a group of similar identifiable assets, the set is not a business. This update is effective for annual and interim periods
beginning after December 15, 2017, and interim periods within that reporting period. We adopted this ASU on January 1, 2018 and
the impact on our financial statements will depend on the facts and circumstances of any specific future transactions.
NOTE 3
|
LIQUIDITY AND GOING CONCERN
|
The Company’s financial statements are
prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States
of America and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of
liabilities in the normal course of business. However, the Company has incurred significant losses and experienced negative cash
flow since inception. At March 31, 2019, the Company had cash of $438,164 and a deficit in working capital of $392,253. Further,
at March 31, 2019, the accumulated deficit amounted to approximately $36.5 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.
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 through the use of cash on hand, increased revenue from Vytex division license fees, stock warrant exercises
from existing shareholders, and raising capital through private placement memoranda (see Note 13, Subsequent Events).
As
a result of this history of losses and financial condition, there is substantial doubt about the Company’s ability to continue
as a going concern.
There
can be no assurances that the Company will be able to achieve projected levels of revenue in 2019 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 2019, 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 for bankruptcy or cease operations. The financial statements do not
include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities
that might be necessary should the Company be forced to take any such actions.
The
Company’s future expenditures will depend on numerous factors, including: the rate at which the Company can introduce and
license Vytex NRL to manufacturers; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual
property rights; and market acceptance of the Company’s products, services and competing technological developments. As
the Company expands our 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 – PROPERTY AND EQUIPMENT
Property
and equipment, net consists of the following at December 31:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Tooling and testing equipment
|
|
$
|
319,000
|
|
|
$
|
319,000
|
|
Warehouse equipment
|
|
|
3,831
|
|
|
|
3,831
|
|
Website development
|
|
|
500
|
|
|
|
—
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|
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|
|
|
|
|
|
|
|
|
|
323,331
|
|
|
|
322,831
|
|
Accumulated depreciation
|
|
|
(41,717
|
)
|
|
|
(31,485
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
281,614
|
|
|
$
|
291,346
|
|
The
Company incurred $10,232 in depreciation expense for the three months ended March 31, 2019. There was no depreciation expense
incurred for the three months ended March 31, 2018.
NOTE
5 – INTANGIBLE ASSETS
Intangible
assets were as follows at March 31, 2019 and December 31, 2018:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
Amortization
Period
(in years)
|
|
Amortized intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
100,000
|
|
|
$
|
100,000
|
|
|
10
|
|
Proprietary technology
|
|
|
610,000
|
|
|
|
610,000
|
|
|
10
|
|
Tradename and brand
|
|
|
610,000
|
|
|
|
610,000
|
|
|
10
|
|
Patents
|
|
|
242,149
|
|
|
|
242,149
|
|
|
6 - 20
|
|
Noncompete
|
|
|
50,000
|
|
|
|
50,000
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,612,149
|
|
|
|
1,612,149
|
|
|
|
|
Accumulated amortization
|
|
|
(276,723
|
)
|
|
|
(237,302
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amortized intangibles
|
|
|
1,335,426
|
|
|
|
1,374,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
147,092
|
|
|
|
147,092
|
|
|
|
|
Trademarks
|
|
|
11,912
|
|
|
|
9,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
$
|
1,494,430
|
|
|
$
|
1,531,011
|
|
|
|
|
Amortization
expense for the three months ended March 31, 2019 and 2018 was $39,421 and $3,920, respectively.
Estimated
future amortization expense for finite-lived intangible assets is as follows:
|
|
|
Amount
|
|
Remaining in 2019
|
|
|
$
|
118,263
|
|
2020
|
|
|
|
157,684
|
|
2021
|
|
|
|
157,684
|
|
2022
|
|
|
|
157,684
|
|
2023 & thereafter
|
|
|
|
744,111
|
|
Total
|
|
|
$
|
1,335,426
|
|
As
discussed in Note 13, in May 2018, nine (9) shareholders of the Company consented to purchase substantially all the assets of
UV Flu Technologies, Inc., a Nevada corporation (“UV Flu”). Pursuant to the Asset Purchase Agreement, the purchase
of substantially all assets of UV Flu was consummated on May 7, 2018. Vystar acquired all UV Flu intellectual property and two
patents, product lines, tooling, FDA clearances, research data, websites and other assets for the purchase price of $1,814,670
or 27,918,000 shares of Vystar restricted common stock which may not be assigned or sold by UV Flu for twelve months. In addition,
In April 2018, the Company issued 27,769,500 shares of its restricted common stock valued at approximately $1,110,780 based on
the closing price of the Company’s common stock on April 18, 2018 in exchange for certain assets of NHS Holdings, LLC (NHS),
the exclusive U.S. distributorship of Vystar’s Vytex® virtually allergen-, VOC-, and odor-free natural rubber latex
(NRL) foam.
In
determining the fair value of the intangible assets related to the purchases, the Company considered, among other factors, the
best use of acquired assets such as tooling and testing equipment, analysis of historical financial performance of the products
and estimates of future performance of the products and intellectual properties acquired. An analysis was done of historical financial
performance of the products and estimates of future performance of the products and intellectual properties acquired. This helped
determine the fair values of the identified intangible assets related to the website, FDA Certification, tradename and branding,
reacquired distribution rights and customer relationships.
NOTE 6
|
NOTES PAYABLE AND LOAN FACILITY
|
Related
Party Line Loan (CMA Note Payable)
On
November 2, 2012, the Company executed a $1,500,000 unsecured line of credit agreement with CMA Investments, LLC, a related party
and a Georgia limited liability company (the “CMA Note”). Three of the directors of the Company (“CMA directors”)
were initially the members of CMA. Pursuant to the terms of the CMA Note, interest is computed at LIBOR plus 5.25% (8.22% at March
31, 2019) on amounts drawn and fees. The weighted average interest rate in effect on the borrowings for the three months ended
March 31, 2019 was 7.99%. There are no available borrowings under the CMA note at March 31, 2019.
The
holders of CMA Investments, LLC agreed as of July 10, 2018, to change the terms of the debt as follows:
|
●
|
The Company will continue to service the interest
on the debt through 2019.
|
|
●
|
This debt is considered long-term.
|
|
|
|
|
|
The
Company entered into a Loan Payoff and Share Payment Agreement on July 10, 2018. The Company
had borrowed approximately $1,500,000 from CMA Investments, LLC (a related party) (the “Lender”)
pursuant to several promissory notes. The Lender made the loans by using proceeds from a loan
through Atlantic Capital Bank (the “ACB Loan”). In lieu of cash, the Company has
paid the Lender 15,000,000 shares of restricted common stock (the “Shares”), which
based on closing price on June 10, 2018 of $0.034 is equal to $510,000, provided that the
Company continue to pay interest on the ACB Loan on Lender’s behalf for a six-month
period. The certificate representing the Shares will be delivered to an escrow agent. After
six months, the Escrow Agent is authorized to sell the Shares at a price of no less than $0.035
per share with a targeted date to complete sales of July 1, 2022. The Company shall be required
to pay any shortfall between the proceeds Lender receives on the sale of the Shares and the
total principal outstanding on the Company Loan at the settlement date. In the event of a
surplus, the Company shall be authorized to repurchase the remaining Shares at par value.
As of March 31, 2019, the Company reduced the amounts due by approximately $144,000 of the
$1.5 million dollar CMA loan through the issuance out of escrow and sale of approximately
2,512,900 shares of its common stock. The balance as of March 31, 2019 on the CMA loan was
approximately $1.4 million. See Note 13.
There
was no accrued interest on the loan as of March 31, 2019 and December 31, 2018, respectively.
|
Fidelity
Note Payable
During
the year ended December 31, 2018, certain investors have 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, 2019.
Shareholder
convertible and contingent convertible Notes Payable
The
following table summarizes the shareholder notes payable:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Shareholder convertible notes
|
|
$
|
200,695
|
|
|
$
|
338,195
|
|
Contingent convertible notes
|
|
|
354
,500
|
|
|
|
204,333
|
|
Accrued interest
|
|
|
18,082
|
|
|
|
35,140
|
|
Debt discount
|
|
|
—
|
|
|
|
(73,519
|
)
|
Total shareholder notes & accrued interest
|
|
|
573,278
|
|
|
|
504,149
|
|
|
|
|
|
|
|
|
|
|
Less: current portion
|
|
|
(353,643
|
)
|
|
|
(504,149
|
)
|
Total long-term debt
|
|
$
|
219,634
|
|
|
$
|
—
|
|
Shareholder
Convertible Notes Payable
Included
in the table above, there were shareholder notes payable outstanding as of March 31, 2019 and December 31, 2018 totaling $555,195
and $200,695, respectively.
From
January 1, 2018 to February 9, 2018, the Company issued contingently convertible promissory notes (the “Notes”) for
contract work performed by other entities in lieu of compensation and expense reimbursement in the amount of $200,695. 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. As of March 31, 2019, the balance on these notes was $212,537
and they were extended one additional year until January 2020 at which point they become eligible for conversion.
Convertible
and Contingently Convertible Notes Payable
From January 1, 2018 and through the date of
these financial statements, the Company has issued certain convertible and contingently convertible promissory notes in varying
amounts, in the aggregate of $710,000. The face amount of the notes represents 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 contingently convertible notes provide 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 notes ranges from $0.05
to $0.10 per share, subject to adjustment as provided therein. The total outstanding balance of the contingent convertible notes
was converted as of March 31, 2019. They were converted into 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 after a change in fair value of $1,044,250 and a decrease
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 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 three months ended March 31, 2019 upon negotiation and conversion of the remaining outstanding balances.
Peak
One Opportunity Fund, L.P.
During
the year ended December 31, 2018, the Company entered into a financing agreement with Peak One Opportunity Fund, L.P. to receive
$435,000 of original issue discount notes in three tranches as follows:
|
1.
|
July 17, 2018, principal $85,000 with an imputed
interest rate of 6%, discounted by 10%, and $5,000 for legal fees, for a net of $71,500 due three years from the funding date.
The Company has the option of receiving two additional amounts ninety days apart;
|
|
2.
|
September 14, 2018: $150,000 principal, $135,000
net.
|
|
3.
|
November 13, 2018: a final $200,000 principal,
$180,000 net.
|
Peak
One Opportunity Fund is entitled to convert the note into common stock at a price equal to 65% of the lowest traded price for
the twenty trading days immediately preceding the date of the date of conversion. The Company has the option to redeem the note
at varying prices based upon the redemption date. As of March 31, 2019, the entire balance has been converted into shares of common
stock.
Crown
Bridge Partners, LLC
During
the year ended December 31, 2018, the Company entered into a financing agreement with Crown Bridge Partners, LLC to receive $100,000
of original issue discount notes in two tranches as follows:
|
1.
|
August 6, 2018: principal $50,000 bearing interest
at 8%, discounted by 10%, and $2,000 for legal fees, for a net of $43,000 due one year from the funding date;
|
|
2.
|
The remaining tranche may be funded at the holder’s
discretion.
|
Crown Bridge Partners was entitled to convert
the note into common stock at a price equal to 65% of the average of the two lowest traded prices for the twenty-five trading days
immediately preceding the date of the date of conversion.
In addition, the following notes were convertible
after six months from the issue date:
|
|
Face
|
|
|
Interest
|
|
|
|
|
|
Net
Cash
|
|
|
Amount
|
|
Issue
Date and Name
|
|
Amount
|
|
|
Rate
|
|
|
Maturity
|
|
|
Proceeds
|
|
|
Converted/Paid
|
|
Jan 29, 2018 EMA
|
|
$
|
80,000
|
|
|
|
12
|
%
|
|
|
Jan 29,
2019
|
|
|
$
|
72,300
|
|
|
$
|
80,000
|
|
Feb 14, 2018 Auctus
|
|
|
80,000
|
|
|
|
12
|
%
|
|
|
Nov 14, 2018
|
|
|
|
72,500
|
|
|
|
80,000
|
|
Feb 13, 2018 FirstFire Global
|
|
|
76,500
|
|
|
|
5
|
%
|
|
|
Nov 13, 2018
|
|
|
|
72,500
|
|
|
|
81,500
|
|
May 2, 2018 Power Up #3
|
|
|
83,000
|
|
|
|
12
|
%
|
|
|
May 23, 2019
|
|
|
|
80,000
|
|
|
|
83,000
|
|
October 10, 2018 Power Up #4
|
|
|
103,000
|
|
|
|
12
|
%
|
|
|
Oct 10, 2019
|
|
|
|
103,000
|
|
|
$
|
103,000
|
|
All
notes have been paid in full.
During
the three months ended March 31, 2019, approximately $63,000 of the convertible notes and approximately $21,000 of accrued interest
were exchanged for approximately 227,000,000 shares of common stock. In addition, approximately $142,000 of the Power Up notes
have been settled in cash and all notes have been fully converted or paid as of March 31, 2019
During
the three months ended March 31, 2019, the Company has issued certain convertible promissory notes in varying amounts to existing
shareholders. The face amount of the notes represents the amount due at maturity along with the accrued interest, at which time
that amount can be converted upon the triggering event of a reverse stock split. At which time the conversion into shares of the
Company stock will be based on the lowest 2 day closing price for the trailing 20 days prior to conversion and carrying a 35%
discount. These notes are included in the table below:
Issue
Date
|
|
Face
Amount
|
|
|
Interest
Rate
|
|
|
Maturity
|
|
|
Net
Cash Proceeds
|
|
Jan
3, 2019
|
|
$
|
4,500
|
|
|
|
5
|
%
|
|
|
Jan
3, 2021
|
|
|
$
|
4,500
|
|
Jan
3, 2019
|
|
$
|
93,750
|
|
|
|
5
|
%
|
|
|
Jan
3, 2021
|
|
|
$
|
93,750
|
|
Jan
3, 2019
|
|
$
|
102,200
|
|
|
|
5
|
%
|
|
|
Jan
3, 2021
|
|
|
$
|
102,200
|
|
Feb
4, 2019
|
|
$
|
18,750
|
|
|
|
5
|
%
|
|
|
Feb
4, 2021
|
|
|
$
|
18,750
|
|
Note that these notes can be converted only
after an acceleration event which involves a symbol change, uplisting, or reverse stock split.
NOTE 7
|
DERIVATIVE LIABILITIES
|
As
of March 31, 2019, the Company had a $0 derivative liability balance on the balance sheet and recorded a loss from derivative
fair value adjustments of $1,044,250 for the three months ended March 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 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 statement of
operations and the associated fair value carrying amount on the balance sheet is adjusted by the change. The Company fair values
the embedded derivative using a lattice-based valuation model. The conversion feature is valued at the date the feature can be
convertible which ranges from the issuance date of the note to 180 days after the issue date.
The
following table summarizes the derivative liabilities included in the balance sheet at March 31, 2019:
Fair Value of Embedded Derivative and Warrant Liabilities:
|
|
|
|
|
Balance, December 31, 2018
|
|
$
|
235,085
|
|
|
|
|
|
|
Change in fair value
|
|
|
1,044,250
|
|
|
|
|
|
|
Settlement due to conversion
|
|
|
(1,279,335
|
)
|
|
|
|
|
|
Balance, March 31, 2019
|
|
$
|
—
|
|
NOTE 8
|
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 $10.00 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, 2019, the 13,828 shares of outstanding preferred stock had accumulated undeclared dividends of approximately $80,857
and could be converted into 4,382,730 shares of common stock, at the option of the holder.
As
of December 31, 2018, the 13,828 shares of outstanding preferred stock had accumulated undeclared dividends of approximately $77,447
and could be converted into 4,314,537 shares of common stock, at the option of the holder.
Common Stock and Warrants
From January 1, 2018 through March 31, 2018,
we issued 1,498,000 shares of our common stock valued at approximately $69,048 for services rendered to the Company in 2018.
During the three months ended March 31, 2019,
through majority shareholder consent, the Company increased the amount of authorized common stock shares to 1,500,000,000 which
increased the available shares to be issued and outstanding.
During the three months ended March 31, 2019,
the Company issued 144,933,992 shares under equity purchase agreements for cash proceeds totaling $434,800 (included in this were
approximately 19,999,999 shares to be subsequently issued in connection with cash proceeds received during the three months ended
March 31, 2019). Included in this amount are 12,999,999 of shares purchased for $14,000 from related parties. Approximately 54,999,997
shares were issued during the three months ended March 31, 2019 but were included in shares issued and outstanding at December
31, 2018 as the related cash was received prior to year end 2018. There were additional shares issuances to First Fire Global Opportunities
Fund, LLC and Crown Bridge Partners for cash related to the settlement of warrants previously attached to convertible notes payable.
See discussion below in
Other Shares Issued.
During the three months ended March 31, 2019,
the Company issued 227,336,218 shares due to the conversion of principal and interest totaling $85,000. The fair value at dates
of conversion totaled approximately $1.3 million which were offset by the settlement of derivative liabilities upon conversion
of approximately $1.3 million. The difference was recognized as a gain on settlement of debt of approximately $21,000 and is included
in the condensed statement of operations in other income (expense) for the three months ended March 31, 2019. See Note 6 for further
details on conversion of the contingent convertible notes
As discussed
in Note 6, in July 2018,
the Company issued 15 million shares in escrow which CMA began to sell in March 2019 at the end
of the six-month period. The sales were sold at their discretion to bring down the balance of the debt. In accordance with the
agreement, CMA had to sell all shares at no less than $0.035 per share. As of March 31, 2019, the Company reduced the amounts due
by approximately $144,000 of the $1.5 million CMA loan through the issuance and sale of approximately 2,512,900 shares of its common
stock that were previously held in escrow. Subsequent to year end the remaining balance of the loan has been settled (see Note
13).
On February 25, 2019, Vystar issued an aggregate
of 4,000,000 shares to each Board member for compensation totaling 24,000,000 shares. The shares were valued at $1,207,200 for
six (6) board members (based on the fair value on the measurement date).
Other
Shares Issued
On
February 5, 2018, the Company issued 1,500,000 shares under the terms of a Consulting Agreement dated January 26, 2018 to STILLH20s
Financial, LLC. The shares were valued at $75,000.
In
January 2019, the Company repurchased 30,000 shares of common stock from an existing shareholder for $30 in cash. The transaction
was recorded as treasury stock repurchased and is included in the accompanying financial statements as a separate item in the
condensed statement of stockholders’ deficit.
In January 2019, the Company issued 14,746,324
shares to Peak One as part of a settlement. The shares were issued to settle any exercise of the 600,000 warrants previously granted
to the investor related to convertible debt that was already converted, in addition to under conversion of previously outstanding
convertible notes payable. As part of settlement to consider any remaining dispute over convertible notes payable and to avoid
returning shares to the Company, the parties agreed the debt would be considered fully converted as of March 31, 2019. As part
of that settlement agreement, the previously issued warrants were forfeited during the three months ended March 31, 2019 in exchange
for shares issued for cash noted above. On the date of settlement, the shares had a fair value of $33,917.
In
March 2019, the Company issued a total of 31,133,333 shares for $200,000 in cash received from First Fire Global Opportunities
Fund, LLC. The shares were issued to settle any exercise of the 286,875 warrants previously granted to the investor related to
convertible debt that was already converted in addition to over conversion of previously outstanding convertible notes payable.
These warrants were issued in connection with convertible notes payable. As part of settlement to consider any remaining dispute
over convertible notes payable and to avoid returning shares to the Company, the parties agreed the debt would be considered fully
converted as of March 31, 2019. As part of that settlement agreement, the previously issued warrants were forfeited during the
three months ended March 31, 2019 in exchange for shares issued for cash noted above.
In
January and March of 2019, the Company issued 31,166,667 shares for $100,000 in cash received from Crown Bridge. The shares were
issued to settle any exercise of the 125,000 warrants previously granted to the investor related to convertible debt that was
already converted. As part of settlement to consider any remaining dispute over convertible notes payable, the parties agreed
the debt would be considered fully converted as of March 31, 2019. As part of that settlement agreement, the previously issued
warrants were forfeited during the three months ended March 31, 2019 in exchange for shares issued for cash noted above.
During the three months ended March 31, 2019,
the Company issued 147,704,875 shares for consulting services valued at approximately $842,000 based on the respective measurement
dates. Of these shares, 81,664,655 were issued to related parties and the total expense amount of approximately $700,000 was accrued
at December 31, 2018. See further detail of related party shares in Note 10.
NOTE 9
|
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.
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, 2019:
|
●
|
Expected Dividend
Yield - because we do not currently pay dividends, the expected dividend yield is zero;
|
|
●
|
Expected Volatility
in Stock Price - volatility based on our own 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, 2019 and 2018, the Company recorded $17,783 and $1,404,889, respectively, of share-based
compensation expense related to employee and Board Members’ stock options. The unrecognized compensation expense as of March
31, 2019 was $81,938 for non-vested share-based awards to be recognized over a period of approximately four 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, 2019,
there are 2,251,729 shares of common stock available for issuance under the Plan. In 2014, the Board adopted an additional stock
option plan which provides for an additional 5,000,000 shares which are all available as of March 31, 2019. 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-month period ended March 31, 2019. The following table summarizes all stock option activity
of the Company for the period.
|
|
Options - Number of Shares
|
|
|
Weighted Average Exercise Price
|
|
Outstanding, December 31,
2018
|
|
|
29,098,270
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
—
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2019
|
|
|
29,098,270
|
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
|
Exercisable, March 31, 2019
|
|
|
27,273,270
|
|
|
$
|
0.03
|
|
As
of March 31, 2019 and December 31, 2018, the aggregate intrinsic value of the Company’s outstanding options was $52,380
and $22,000, 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, 2019:
|
|
|
Number
of
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31,
2018
|
|
|
|
15,488,832
|
|
|
$
|
|
|
|
$
|
0.12
|
|
|
|
4.27
|
|
Exercisable, December 31, 2018
|
|
|
|
15,488,832
|
|
|
|
|
|
|
|
0.12
|
|
|
|
4.27
|
|
Granted
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
(1,106,452
|
)
|
|
|
|
|
|
|
0.48
|
|
|
|
—
|
|
Expired
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2019
|
|
|
|
14,382,380
|
|
|
|
|
|
|
|
0.09
|
|
|
|
2.56
|
|
Exercisable, March 31, 2019
|
|
|
|
14,382,380
|
|
|
$
|
|
|
|
$
|
0.09
|
|
|
|
2.56
|
|
Of
the warrants that were forfeited, 1,011,875 of them were issued in connection with convertible notes payable. When the notes fully
converted, 411,875 warrants were forfeited during the three months ended March 31, 2019 as part of a settlement in two separate
cash transactions. The remaining 600,000 warrants were forfeited during the three months ended March 31, 2019 as part of a separate
settlement in a cashless issuance. See further discussion in Note 8 of these financial statements.
There
was no stock compensation expense for the three months ended March 31, 2019 related to warrants. The stock compensation expense
for the three months ended March 31, 2018 was $13,947.
NOTE
10 – RELATED PARTY TRANSACTIONS
Officers
and Directors
Per Steven Rotman’s Employment agreement,
he is to be paid approximately $1 per year in cash and $20,833 per month to be paid in shares based on a 20-day average at a 0%
discount to market. During the three months ended March 31, 2019, the Company issued Steven Rotman 28,016,022 shares in accordance
with his employment agreement that were accrued and expensed as of December 31, 2018. The Company expensed $201,000 during the
three months ended March 31, 2019 related to 4,000,000 shares issued for services as a Board Member of the Company. In addition,
the Company accrued and expensed approximately $103,000 related to shares to be issued in the future.
Designcenters.com
This
entity is owned by Jamie Rotman, who is the daughter of the Company’s CEO, Steven Rotman. Designcenters.com provides bookkeeping
and management services to the Company. In exchange for such services, the Company has entered into a consulting agreement with
the related party entity.
Per
Designcenter.com consulting agreement, it is to be paid approximately $7,100 per month to be paid in shares
based on a 20-day average at a 50% discount to market, and a $10,000 quarterly bonus to be paid in shares using the same formula.
During the three months ended March 31, 2019, the Company issued Designcenters.com 20,030,407 shares in accordance with the consulting
agreement that were accrued and expensed as of December 31, 2018. During the three months ended March 31, 2019, the Company expensed
approximately $46,122 related to the consulting agreement. Of the expensed amount, approximately $17,992 was paid in cash.
As of March 31, 2019, the Company had an accrued stock-based compensation balance of $22,820 related to this party.
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 provides business
consulting services to the Company. In exchange for such services, the Company has entered into a consulting agreement with the
related party entity.
Per Blue Oar Consulting consulting
agreement, it is to be paid approximately $15,000 per month in cash for expenses, and $12,500 per month to be paid in shares.
It will be based on a 20-day average at a 50% discount to market. During the three months ended March 31, 2019, the Company
issued Blue Oar 33,618,226 shares in accordance with the consulting agreement that were accrued and expensed as of
December 31, 2018. During the three months ended March 31, 2019, the Company expensed approximately $82,500. Of the expensed
amount, approximately $45,000 was paid in cash. As of March 31, 2019, the Company had an accrued stock-based compensation
balance of $123,002 related to this party.
Rotmans
Furniture
During
the three months ended March 31, 2019, the Company had sales of approximately $42,000 to Murida Furniture Co., Inc, DBA Rotmans
Furniture (“Rotmans”). Steven Rotman, the Company’s CEO, is a 42% owner of Rotmans. At March 31, 2019 and December
31, 2018, the Company had an amount receivable of approximately $15,522 and $2,254, respectively.
During
the three months ended March 31, 2019 and 2018, the Company utilized certain warehouse staff, warehouse and office space/services
and an executive assistant of Rotmans for the Company’s purposes. The Company estimates the cost of such services to be
approximately $40,000 per month or approximately $120,000, respectively, for the three months ended March 31, 2019 and 2018 (based
on the term such resources were used). The Company was not charged for these resources and does not owe any amounts to Rotmans
for the services utilized through March 31, 2019.
NOTE
11 – COMMITMENTS
Employment
and Consulting Agreements
We
have 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 for 2018 and 2019 with the CEO, Steven Rotman. See compensation terms in Note 10.
During
the 3 months ended March 31, 2019, the Company entered into various services agreement with consultants for financial reporting,
advisory, and compliance services. The services agreement calls for monthly payments.
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.
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 at 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. As of March 31, 2019, there
was no accurate assumption of liability to be accrued. It is the Company’s position that they issued all shares under the
conversion terms. 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.
NOTE
12 – MAJOR CUSTOMERS AND VENDORS
Major
customers and vendors are defined as a customer or vendor from which the Company derives at least 10% of its revenue and cost
of revenue, respectively.
During
the three months ended March 31, 2019, Vytex licensing revenue came from three major customers; Wurfbian Polymer, Centrotrade
and Mast Global, which collectively comprised 100% of the total Vytex licensing revenue. No amounts were owed to major vendors
at March 31, 2019 and December 31, 2018.
During
the three months ended March 31, 2019, Vytex Foam revenue came from three major customers; Jeffco, King Koil, and Rotmans. The
receivable for Rotmans was $15,522 as of March 31, 2019. There was no receivable for Jeffco and King Koil as of March 31, 2019.
During
the three months ended March 31, 2019 Vytex licensing revenue came from three major customers; Wurfbian Polymer, Centrotrade,
Mast Global, which collectively comprised 100% total Vytex licensing revenue. No amounts were owed to major vendors at December
31, 2018 and December 31, 2017.
During the three months ended March 31, 2019,
Vytex Foam revenue came from three major customers; Jeffco, King Koil, and Rotmans. The receivable for Rotmans was $2,254 as of
December 31, 2018. There was no receivable for Jeffco and King Koil as of December 31, 2018.
NOTE 13
|
SUBSEQUENT EVENTS
|
As discussed in Note 8,
in
July 2018,
the Company issued 15 million shares in escrow which CMA began to sell in March 2019 at the end of the six-month
period. The sales were sold at their discretion to bring down the balance of the debt. In accordance with the agreement, CMA had
to sell all shares at no less than $0.035 per share. As of March 31, 2019, the Company reduced the amounts due by approximately
$138,000 of the $1.5 million CMA loan through the issuance and sale of approximately 2,512,900 shares of its common stock that
were previously held in escrow. Subsequent to March 31, 2019, the remaining shares were considered issued by the Company when CMA
sold the remaining 12,487,100 shares held in escrow. The total value received upon the sale of the 15 million shares of approximately
$1.1 million was less than the total obligation outstanding after all shares were sold through April 2019. In May 2019, the Company
began to negotiate the remaining shortfall and was finalizing an agreement to issue an additional 30,000,000 shares to CMA for
approximately $500,000. This would settle the shortfall in accordance with the agreement. At such point, the Company would reduce
any remaining amounts due on the outstanding debt to become fully satisfied.
On April 29, 2019, the previously approved
increase to the authorized shares by majority shareholder consent was ratified by the board. The authorized common stock shares
increased to 1,500,000,000 for the three months ended March 31, 2019, which increased the available shares to be issued and outstanding.