UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______________ to ________________
Commission
File Number
(Exact Name of Registrant as Specified in its Charter)
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
(Address of Principal Executive Offices, Zip Code)
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| NONE | NONE | NONE |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Smaller
reporting company | ||
| Emerging
growth company |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) YES ☐
| Class | Outstanding as of December 6, 2022 | |
Common Stock, $0.0001 par value per share |
shares |
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
In addition to historical information, this Form 10-Q contains statements relating to our future results (including certain projections and business trends) that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are subject to the “safe harbor” created by those sections. The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the financial statements and the related notes thereto included in this Quarterly Report on Form 10-Q (this “Report”). This Report contains certain forward-looking statements and the Company’s future operating results could differ materially from those discussed herein. Our disclosure and analysis included in this Report concerning our operations, cash flows and financial position, including, in particular, the likelihood of our success in expanding our business and raising debt and capital securities include forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expect”, “anticipate”, “intend”, “plan”, “believe”, “estimate”, “may”, “project”, “will likely result”, and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to certain risks, uncertainties, and assumptions, including prevailing market conditions and are more fully described under “Part I, Item 1A - Risk Factors” of our Form 10-K for the year ended December 31, 2021. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. In any event, these and other crucial factors, including those set forth in Item 1A - “Risk Factors” of our Form 10-K for the year ended December 31, 2021 may cause actual results to differ materially from those indicated by our forward-looking statements.
Although we believe that these statements are based upon reasonable assumptions, we cannot guarantee future results and readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date of this filing. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct or (iv) our strategy, which is based in part on this analysis, will be successful. The Company undertakes no obligation to update or revise forward-looking statements.
All references to “we”, “us”, “our” or “Vystar” in this Quarterly Report on Form 10-Q mean Vystar Corporation, and affiliates.
| 2 |
VYSTAR CORPORATION
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2022
INDEX
| 3 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VYSTAR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Other receivables | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other | ||||||||
| Deferred commission costs | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Finance lease right-of-use assets, net | ||||||||
| Other assets: | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Inventories, long-term | ||||||||
| Deferred commission costs, net of current portion | ||||||||
| Other | ||||||||
| Total other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued expenses | ||||||||
| Stock subscription payable | ||||||||
| Operating lease liabilities - current maturities | ||||||||
| Finance lease liabilities - current maturities | ||||||||
| Shareholder, convertible and contingently convertible notes payable and accrued interest - current maturities | ||||||||
| Related party debt - current maturities | ||||||||
| Unearned revenue | ||||||||
| Derivative liabilities | ||||||||
| Related party advances | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Operating lease liabilities, net of current maturities | ||||||||
| Finance lease liabilities, net of current maturities | ||||||||
| Unearned revenue, net of current maturities | ||||||||
| Related party debt, net of current maturities and debt discount | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Stockholders’ deficit: | ||||||||
| Convertible
preferred stock series A, $ par value shares authorized; shares issued and outstanding at September
30, 2022 and December 31, 2021, respectively (liquidation preference of $ | ||||||||
| Convertible
preferred stock series B, $ par value shares authorized; and shares issued and outstanding at September
30, 2022 and December 31, 2021, respectively (liquidation preference of $ | ||||||||
| Convertible
preferred stock series C, $ par value shares authorized; and shares issued and outstanding at September
30, 2022 and December 31, 2021, respectively (liquidation preference of $ | ||||||||
| Common stock, $ par value, shares authorized; shares issued at September 30, 2022 and December 31, 2021, and and shares outstanding at September 30, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Common stock in treasury, at cost; shares at September 30, 2022 and December 31, 2021, respectively | ( | ) | ( | ) | ||||
| Total Vystar stockholders’ deficit | ( | ) | ( | ) | ||||
| Noncontrolling interest | ||||||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
VYSTAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of revenue | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Salaries, wages and benefits | ||||||||||||||||
| Share-based compensation | ||||||||||||||||
| Agent fees | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Advertising | ||||||||||||||||
| Rent | ||||||||||||||||
| Service charges | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Other operating | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value of derivative liabilities | ( | ) | ( | ) | ||||||||||||
| Gain (loss) on settlement of debt, net | ( | ) | ( | ) | ||||||||||||
| Other income, net | ( | ) | ( | ) | ||||||||||||
| Total other income (expense), net | ( | ) | ( | ) | ( | ) | ||||||||||
| Net income (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Net (income) loss attributable to noncontrolling interest | ( | ) | ||||||||||||||
| Net loss attributable to Vystar | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per share: | ||||||||||||||||
| Basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of common shares outstanding: | ||||||||||||||||
| Basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
VYSTAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022
(Unaudited)
| Attributable to Vystar | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number | Number | Number | Number | Number | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| of | of | of | of | Additional | of | Vystar | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred | Preferred | Preferred | Preferred | Preferred | Preferred | Common | Common | Paid-in | Accumulated | Treasury | Treasury | Stockholders’ | Noncontrolling | Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares A | Stock A | Shares B | Stock B | Shares C | Stock C | Shares | Stock | Capital | Deficit | Shares | Stock | Deficit | Interest | Deficit | ||||||||||||||||||||||||||||||||||||||||||||||
| Ending balance December 31, 2021 | | $ | $ | $ | $ | $ | $ | ( | ) | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation - options | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Retirement of common stock | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | ( | ) | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| Ending balance March 31, 2022 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation - options | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Ending balance June 30, 2022 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation - options | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock issued for services | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock issued for cash | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock issued for settlement of accounts payable | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock issued for settlement of shareholder notes payable | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock issued for settlement of related party notes payable | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock issued for settlement of stock payable | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | ( | ) | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| Ending balance September 30, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 6 |
VYSTAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2021
(Unaudited)
| Attributable to Vystar | ||||||||||||||||||||||||||||||||||||||||||||
| Number | Number | Number | Total | |||||||||||||||||||||||||||||||||||||||||
| of | of | Additional | of | Vystar | Total | |||||||||||||||||||||||||||||||||||||||
| Preferred | Preferred | Common | Common | Paid-in | Accumulated | Treasury | Treasury | Stockholders’ | Noncontrolling | Stockholders’ | ||||||||||||||||||||||||||||||||||
| Shares | Stock | Shares | Stock | Capital | Deficit | Shares | Stock | Deficit | Interest | Deficit | ||||||||||||||||||||||||||||||||||
| Ending balance December 31, 2020 | $ | $ | $ | $ | ( | ) | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||
| Common stock issued for services | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation - options | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for settlement of related party payable | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for cash received in prior period | ||||||||||||||||||||||||||||||||||||||||||||
| Preferred stock conversion | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Net income | - | - | - | |||||||||||||||||||||||||||||||||||||||||
| Ending balance March 31, 2021 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Share-based compensation - options | ||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | - | - | ( | ) | - | ( | ) | |||||||||||||||||||||||||||||||||||||
| Ending balance June 30, 2021 | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Common stock issued for services | ||||||||||||||||||||||||||||||||||||||||||||
| Share-based compensation - options | ||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for settlement of related party payable | ||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | ( | ) | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||
| Ending balance September 30, 2021 | $ | $ | $ | ( | ) | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 7 |
VYSTAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | ( | ) | $ | ||||
| Adjustments to reconcile net income (loss) to net cash used in operating activities: | ||||||||
| (Gain) loss on settlement of debt, net | ( | ) | ||||||
| Share-based compensation | ||||||||
| Depreciation | ||||||||
| Bad debts (recovery) | ( | ) | ||||||
| Amortization of intangible assets | ||||||||
| Noncash lease expense | ||||||||
| Amortization of debt discount | ||||||||
| Change in fair value of derivative liabilities | ( | ) | ||||||
| Loss on sale of property and equipment | ||||||||
| Gain on sale of investments | ( | ) | ||||||
| (Increase) decrease in assets: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Other receivables | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other | ||||||||
| Deferred commission costs | ||||||||
| Increase (decrease) in liabilities: | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses and interest payable | ( | ) | ||||||
| Unearned revenue | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Acquisition of property and equipment | ( | ) | ||||||
| Proceeds from the sale of property and equipment | ||||||||
| Proceeds from the sales of investments | ||||||||
| Patents and trademark fees | ( | ) | ||||||
| Net cash provided by investing activities | ||||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of term debt | ||||||||
| Proceeds from the issuance of notes - related parties | ||||||||
| Proceeds from the issuance of convertible notes payable | ||||||||
| Proceeds from related party advances | ||||||||
| Repayment of related party debt | ( | ) | ||||||
| Repayment of finance lease obligations | ( | ) | ( | ) | ||||
| Proceeds from issuance of preferred stock | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash - beginning of period | ||||||||
| Cash - end of period | $ | $ | ||||||
| Cash paid during the period for: | ||||||||
| Interest | $ | $ | ||||||
| Non-cash transactions: | ||||||||
| Common stock issued for accrued compensation | $ | $ | ||||||
| Common stock issued for settlement of related party payable | ||||||||
| Common stock issued for cash received in prior period | ||||||||
| Common stock issued for preferred stock | ||||||||
| Prepaid expenses with common stock | ||||||||
| Prepaid expenses with preferred stock | ||||||||
| Notes payable paid with preferred stock | ||||||||
| Related party notes payable paid with preferred stock | ||||||||
| Warrants and consulting paid by preferred stock | ||||||||
| Preferred stock issued for stock subscription payable | ||||||||
| Vendor payables paid with preferred stock | ||||||||
| Vendor payables paid directly by related party | ||||||||
| Reduction of third-party vendor payable with transfer of inventories | ||||||||
| Acquisition of inventories with third-party vendor payable at commencement of second sale agreement | ||||||||
| Derivatives issued as a debt discount | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 8 |
VYSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
Nature of Business
Vystar Corporation (“Vystar”, the “Company”, “we,” “us,” or “our”) is based in Worcester, Massachusetts. The Company uses patented technology to produces a line of innovative air purifiers, which destroy viruses and bacteria through the use of ultraviolet light. Vystar is also the creator and exclusive owner to produce Vytex® Natural Rubber Latex (“NRL”) currently being used primarily in various bedding products. In addition, Vystar has a majority ownership in Murida Furniture Co., Inc. dba Rotmans Furniture (“Rotmans”), one of the largest independent furniture retailers in the U.S.
On
September 1, 2022, our amendment effecting a
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed consolidated financial statements of the Company and the accompanying notes included in this Quarterly Report on Form 10-Q are unaudited. In the opinion of management, all adjustments necessary for the fair presentation of the condensed consolidated financial statements have been included. Such adjustments are of a normal, recurring nature. The condensed consolidated financial statements, and the accompanying notes, are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and do not contain certain information included in the Company’s Annual Report and Form 10-K for the year ended December 31, 2021. Therefore, the interim condensed consolidated financial statements should be read in conjunction with that Annual Report on Form 10-K.
The Company has evaluated subsequent events through the date of the filing of its Form 10-Q with the Securities and Exchange Commission. Other than those events disclosed in Note 18, the Company is not aware of any other significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on the Company’s financial statements.
Basis of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned or controlled operating subsidiaries. All significant intercompany accounts and transactions have been eliminated.
COVID-19 and Economic Conditions
The novel coronavirus (“COVID-19”) pandemic, its contributory efforts on the economy and general economic conditions, continues to impact our business and results of operations. During the nine months ended September 30, 2022, we experienced rising product prices, volatile transportation costs and supply chain disruptions. In addition, discretionary consumer spending has been adversely impacted by rising inflation, including fuel costs and interest rates. We cannot reasonably estimate the extent and duration of any future impact from the COVID-19 pandemic or general economic conditions on our business. Accordingly, the estimates and assumptions made as of September 30, 2022 could change in subsequent interim reports, and it is reasonably possible that such changes could be significant (although the potential effects cannot be measured at this time).
Segment Reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company’s chief operating decision maker is the chief executive officer. The Company and the chief executive officer view the Company’s operations and manage its business as one reportable segment with different operating segments.
| 9 |
Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures. Significant estimates made by management include, among others, allowance for obsolete inventory, the recoverability of long-lived assets, valuation and impairment of intangible assets, fair values of right of use assets and lease liabilities, valuation of derivative liabilities, share-based compensation and other equity issuances. Although these estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future, actual results could differ from these estimates.
Fair Value of Financial Instruments
The Company’s financial instruments consist principally of cash, accounts receivable, accounts payable, accrued expenses and interest payable, shareholder notes payable, long-term debt and unearned revenue. The carrying values of all the Company’s financial instruments approximate or equal fair value because of their short maturities and market interest rates or, in the case of equity securities, being stated at fair value.
In specific circumstances, certain assets and liabilities are reported or disclosed at fair value. Fair value is the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the Company’s principal market for such transactions. If there is not an established principal market, fair value is derived from the most advantageous market.
Valuation inputs are classified in the following hierarchy:
| ● | Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities. | |
| ● | Level 2 inputs are directly or indirectly observable valuation inputs for the asset or liability, excluding Level 1 inputs. | |
| ● | Level 3 inputs are unobservable inputs for the asset or liability. |
Highest priority is given to Level 1 inputs and the lowest priority to Level 3 inputs. Acceptable valuation techniques include the market approach, income approach, and cost approach. In some cases, more than one valuation technique is used. The derivative liabilities were recognized at fair value on a recurring basis through the date of the settlement and September 30, 2022 and are level 3 measurements. There have been no transfers between levels during the nine months ended September 30, 2022.
Acquisitions
Amounts paid for acquisitions are allocated to the assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition. The fair value of identifiable intangible assets is based on valuations that use information and assumptions provided by management. Identifiable intangible assets with finite lives are amortized over their useful lives. Acquisition-related costs, including, legal, accounting, and other costs, are capitalized in asset acquisitions and for business combinations are expensed in the periods in which the costs are incurred. The results of operations of acquired assets are included in the financial statements from the acquisition date.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents include all liquid investments with a maturity date of less than three months when purchased. Cash equivalents also include amounts due from third-party financial institutions for credit and debit card transactions which typically settle within five days. Restricted cash represents cash balances restricted as to withdrawal or use and are included in prepaid expenses and other on the condensed consolidated balance sheets.
| 10 |
Accounts Receivable, Net
Accounts
receivable, net are stated at the amount management expects to collect from outstanding balances. The Company routinely sells, without
recourse, trade receivables resulting from retail furniture sales to two financial institutions at an average service charge of
Other Receivables
Under
the provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) signed into law on March 27, 2020
and the subsequent extension of the CARES Act, the Company was eligible for a refundable employee retention credit subject to certain
criteria. The Company recognized employee retention credits of $
Rotmans
terminated its agreement with a supplier in 2021 and will receive $
Inventories
Inventories include those costs directly attributable to the product before sale. Inventories consist primarily of finished goods of furniture, mattresses, RxAir purifier units, foam toppers and pillows and are carried at net realizable value, which is defined as selling price less cost of completion, disposal and transportation. The Company evaluates the need to record write-downs for inventory on a regular basis. Appropriate consideration is given to obsolescence, slow-moving and other factors in evaluating net realizable values. Inventories not expected to be sold within 12 months are classified as long-term.
Prepaid Expenses and Other
Prepaid expenses and other include restricted cash, amounts related to prepaid insurance policies, which are expensed on a straight-line basis over the life of the underlying policy, and other expenses.
Property and Equipment
Property
and equipment are stated at cost less accumulated depreciation. Depreciation is provided over the estimated useful lives of the assets,
generally
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 September 30, 2022, the net balance of property and equipment is $
| 11 |
Intangible Assets
Patents
represent legal and other fees associated with the registration of patents. The Company has five issued patents with the United States
Patent and Trade Office (“USPTO”) as well as five issued international Patent Cooperation Treaty (“PCT”) patents.
Patents are carried at cost and are being amortized on a straight-line basis over their estimated useful lives, typically ranging from
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
Our intangible assets are reviewed for impairment annually or more frequently as warranted by events of changes in circumstances. As disclosed in Note 18, Rotmans will be closing its showroom at the end of 2022. At that time, the carrying amounts of our intangible assets may not be fully recoverable and an impairment charge will be recorded.
Long-Lived Assets
We review our long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be fully recoverable. We evaluate assets for potential impairment by comparing estimated future undiscounted net cash flows to the carrying amount of the assets. If the carrying amount of the assets exceeds the estimated future undiscounted cash flows, impairment is measured based on the difference between the carrying amount of the assets and fair value. Assets to be disposed of would be separately presented in the condensed consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale would be presented separately in the appropriate asset and liability sections of the condensed consolidated balance sheet, if material. During the nine months ended September 30, 2022 and 2021, we did not recognize any impairment of our long-lived assets. As disclosed in Note 18, Rotmans will be closing its showroom at the end of 2022. At that time, the carrying amounts of the assets may not be fully recoverable and an impairment charge will be recorded.
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.
As disclosed in Note 18, Rotmans will be closing its showroom at the end of 2022. At that time, goodwill will be reviewed and, if impaired, a loss will be recorded.
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.
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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 September 30, 2022, the Company has classified all conversion features as derivative liabilities and has estimated the fair value of these embedded conversion features using a Monte Carlo simulation model.
Unearned Revenue
Unearned revenue consists of customer advance payments, deposits on sales of undelivered merchandise and deferred warranty revenue on self-insured stain protection warranty coverage.
Changes to unearned revenue during the nine months ended September 30, 2022 and 2021 are summarized as follows:
| 2022 | 2021 | |||||||
| Balance, beginning of the period | $ | $ | ||||||
| Customer deposits received | ||||||||
| Gift cards purchased | ||||||||
| Revenue earned | ( | ) | ( | ) | ||||
| Balance, end of the period | $ | $ | ||||||
The Company presents basic and diluted loss per share. As the Company reported a net loss in the nine months ended September 30, 2022 and 2021, 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 and shares of common stock for the nine months ended September 30, 2022 and 2021, respectively, as their effect would be anti-dilutive. Warrants to purchase and shares of common stock for the nine months ended September 30, 2022 and 2021, respectively, were also excluded from the computation of diluted loss per share as their effect would be anti-dilutive. In addition, preferred stock series A convertible to and shares of common stock for the nine months ended September 30, 2022 and 2021, respectively, were excluded from the computation of diluted loss per share as their effect would be anti-dilutive. Preferred stock series B and C convertible to and shares of common stock for the nine months ended September 30, 2022 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 of and shares of common stock for the nine months ended September 30, 2022 and 2021, respectively, were also excluded from the computation of diluted loss per share as their effect would be anti-dilutive.
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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 September 30, 2022 and December 31, 2021, reserves for estimated sales returns totaled $
We recognize revenue when we satisfy a performance obligation in a contract by transferring control over a product to a customer when product is shipped based on fulfillment by the Company. The Company considers fulfillment when it passes all liability at the point of shipping through third party carriers or in-house delivery services. Delivery fees are charged to customers and are included in revenue in the accompanying condensed consolidated statements of operations and the costs associated with these deliveries are included in revenues as a third-party delivery service is engaged. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of revenue in the accompanying condensed consolidated statements of operations.
The
Company also defers revenues for separately-priced stain protection warranty coverage for which it is ultimately self-insured. Revenue
is recognized from the extended warranty sales on a straight-line basis over the respective contract term. The extended warranty terms
primarily range from three to five years from the date of delivery. The Company ended this warranty
program during 2020 but continues to amortize the previously contracted warranties over their original terms. The Company currently offers
a separately-priced stain protection warranty serviced by a third-party. At September 30, 2022 and December 31, 2021, deferred
warranty revenue was approximately $
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Cost of Revenue
Cost of revenue consists primarily of product and freight costs and fees paid to online retailers.
Research and Development
Research and development costs are expensed when incurred. Research and development costs include all costs incurred related to the research, development and testing. For the nine months ended September 30, 2022 and 2021, Vystar’s research and development costs were not significant.
Advertising Costs
Advertising
costs, which include television, radio, newspaper, digital and other media advertising, are expensed upon first showing. Advertising
costs were approximately $
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
The Company remains subject to income tax examinations from Federal and state taxing jurisdictions for 2019 through 2021.
Concentration of Credit Risk
Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of cash and accounts receivable. Cash held in operating accounts may exceed the Federal Deposit Insurance Corporation, or FDIC, insurance limits. While the Company monitors cash balances in our operating accounts on a regular basis and adjust the balances as appropriate, these balances could be impacted if the underlying financial institutions fail. To date, the Company has experienced no loss or lack of access to our cash; however, the Company can provide no assurances that access to our cash will not be impacted by adverse conditions in the financial markets. Credit concentration risk related to accounts receivable is mitigated as customer credit is checked prior to the sales.
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Other Risks and Uncertainties
The Company is exposed to risks pertinent to the operations of a retailer, including, but not limited to, the ability to acquire new customers and maintain a strong brand as well as broader economic factors such as interest rates and changes in customer spending patterns.
Recent Accounting Pronouncements
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). The new ASU eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. The amendments in the ASU are effective for public business entities that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Board also specified that an entity should adopt the guidance as of the beginning of its annual fiscal year and is not permitted to adopt the guidance in an interim period. The Company is still evaluating the effect the adoption will have on its financial statements.
NOTE 3 - LIQUIDITY AND GOING CONCERN
The
Company’s financial statements are prepared using the accrual method of accounting in accordance with U.S. GAAP and have been prepared
on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business.
However, the Company has incurred significant losses and experienced negative cash flow since inception. At September 30, 2022, the Company
had cash of $
A successful transition to attaining profitable operations is dependent upon obtaining sufficient financing to fund the Company’s planned expenses and achieving a level of revenue adequate to support the Company’s cost structure. Management plans to finance future operations using cash on hand, increased revenue from RxAir air purification units, Vytex license fees and stock issuances to new and existing shareholders.
There can be no assurances the Company will be able to achieve projected levels of revenue in 2022 and beyond. If the Company is not able to achieve projected revenue and obtain alternate additional financing of equity or debt, the Company would need to significantly curtail or reorient operations during 2022, which could have a material adverse effect on the ability to achieve the business objectives, and as a result, may require the Company to file bankruptcy or cease operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities that might be necessary should the Company be forced to take any such actions.
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The Company’s future expenditures will depend on numerous factors, including: the rate at which the Company can introduce RxAir air purification units and license Vytex NRL raw materials to manufacturers, and subsequently retailers; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; market acceptance of the Company’s products, services and competing technological developments; the Company’s ability to successfully acquire new customers and maintain a strong brand; and broader economic factors such as interest rates and changes in customer spending patterns. As the Company expands its activities and operations, cash requirements are expected to increase at a rate consistent with revenue growth after the Company has achieved sustained revenue generation.
NOTE 4 - INVESTMENTS – EQUITY SECURITIES
Investments,
which represented equity securities in a publicly traded company, were sold during the nine months ended September 30, 2021 at a gain
of approximately $
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment, net consists of the following:
| September 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Furniture, fixtures and equipment | $ | $ | ||||||
| Tooling and testing equipment | ||||||||
| Parking lots | ||||||||
| Leasehold improvements | ||||||||
| Motor vehicles | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation
expense for the nine months ended September 30, 2022 and 2021 was $
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NOTE 6 - INTANGIBLE ASSETS
Intangible assets consist of the following:
| September 30, | December 31, | Amortization Period | ||||||||
| 2022 | 2021 | (in Years) | ||||||||
| Amortized intangible assets: | ||||||||||
| Customer relationships | $ | $ | ||||||||
| Proprietary technology | ||||||||||
| Tradename and brand | ||||||||||
| Marketing related | ||||||||||
| Patents | ||||||||||
| Noncompete | ||||||||||
| Total | ||||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||||
| Intangible assets, net | ||||||||||
| Indefinite-lived intangible assets: | ||||||||||
| Trademarks | ||||||||||
| Total intangible assets | ||||||||||