Vystar Corp - Quarter Report: 2011 June (Form 10-Q)

 

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x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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Georgia	20-2027731
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification No.)

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Large accelerated filer   ¨	Accelerated filer   ¨	Non-accelerated filer   ¨	Smaller reporting company   x
		(Do not check if a smaller reporting company)

Part I.  Financial Information
Item 1.	Financial Statements	3
	Balance Sheets at June 30, 2011 (unaudited) and December 31, 2010	3
	Statements of Operations for the Three and Six Months Ended June 30, 2011 and 2010 (unaudited)	4
	Statements of Cash Flows for the Six Months Ended June 30, 2011 and 2010 (unaudited)	5
	Notes to Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4.	Controls and Procedures	19
Part II.  Other Information
Item 1.	Legal Proceedings	20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
Item 3.	Defaults Upon Senior Securities	21
Item 4.	[Removed and Reserved]	21
Item 5.	Other Information	21
Item 6.	Exhibits	21

		June 30, 2011				December 31, 2010
		(unaudited)
ASSETS
CURRENT ASSETS
Cash		$	247,325			$	282,625
Accounts receivable			55,227				31,707
Inventory			44,234				189,268
Prepaid expenses			75,777				97,396
Other			45,442				54,898
TOTAL CURRENT ASSETS			468,005				655,894
PROPERTY AND EQUIPMENT, NET			1,558				2,622
OTHER ASSETS
Deferred financing costs, net			438,988				0
Patents and trademarks, net			155,489				125,260
Other			4,421				4,421
TOTAL ASSETS		$	1,068,461			$	788,197
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable		$	254,679			$	210,106
Accrued compensation			91,632				205,395
Accrued expenses			163,734				250,656
TOTAL CURRENT LIABILITIES			510,045				666,157
NOTES PAYABLE AND ACCRUED INTEREST, net of debt discount of $50,600			495,775				0
RELATED PARTY LINE OF CREDIT			633,750				0
TOTAL LIABILITIES			1,639,570				666,157
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock, $0.0001 par value, 15,000,000 shares authorized; none issued and outstanding			0				0
Common stock, $0.0001 par value, 50,000,000 shares authorized; 15,553,983 and 15,417,524 shares issued and outstanding at June 30, 2011 and December 31, 2010, respectively			1,555				1,542
Additional paid-in capital			15,808,194				14,192,551
Deferred compensation			0				(11,836	)
Accumulated deficit			(16,380,858	)			(14,060,217	)
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)			(571,109	)			122,040
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)		$	1,068,461			$	788,197

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
REVENUES		$	125,892			$	353,302			$	244,931			$	436,711
COST OF REVENUES			75,075				482,462				152,955				554,687
Gross Margin			50,817				(129,160	)			91,976				(117,976	)
OPERATING EXPENSES
Sales and marketing, including non-cash share-based compensation of $30,893 and $13,143 for the three months ended June 30, 2011 and 2010, respectively and $124,305 and $35,051 for the six months ended June 30, 2011 and 2010, respectively			178,301				196,606				428,913				385,085
General and administrative, including non-cash share-based compensation of $115,187 and $306,517 for the three months ended June 30, 2011 and 2010, respectively and $611,377 and $480,917 for the six months ended June 30, 2011 and 2010, respectively			356,307				614,741				1,146,478				1,081,329
Research and development			20,844				12,591				47,203				29,528
Total Operating Expenses			555,452				823,938				1,622,594				1,495,942
LOSS FROM OPERATIONS			(504,635	)			(953,098	)			(1,530,618	)			(1,613,918	)
OTHER INCOME (EXPENSE)
Interest income			273				863				471				2,046
Interest expense			(752,741	)			(331	)			(790,494	)			(959	)
NET LOSS		$	(1,257,103	)		$	(952,566	)		$	(2,320,641	)		$	(1,612,831	)
Basic and Diluted Loss per Share		$	(0.08	)		$	(0.07	)		$	(0.15	)		$	(0.12	)
Basic and Diluted Weighted Average Number of Common Shares Outstanding			15,511,776				14,342,238				15,464,993				13,861,871

		Six Months Ended June 30,
		2011				2010
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(2,320,641	)		$	(1,612,831	)
Adjustment to reconcile net loss to net cash used in operating activities
Share-based compensation expense			735,682				515,968
Depreciation			1,064				3,772
Amortization of patents and trademarks			5,320				4,160
Amortization of deferred financing costs			750,261				0
(Increase) decrease in assets
Accounts receivable			(23,520	)			(125,745	)
Inventory			145,034				(192,680	)
Prepaid expenses			21,619				15,577
Other			9,456				13,711
Increase (decrease) in liabilities
Accounts payable			44,573				94,998
Accrued compensation and expenses			(200,685	)			253,267
Interest payable			21,375				(27,087	)
Net cash used in operating activities			(810,462	)			(1,056,890	)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from related party note receivable			0				137,949
Cost of patents			(35,549	)			(8,594	)
Net cash (used in) provided by investing activities			(35,549	)			129,355
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable			525,000				0
Proceeds from related party line of credit			633,750				0
Deferred financing costs			(389,289	)			0
Issuance of common stock			41,250				959,750
Net cash provided by financing activities			810,711				959,750
NET (DECREASE) INCREASE IN CASH			(35,300	)			32,215
CASH - BEGINNING OF PERIOD			282,625				780,147
CASH - END OF PERIOD		$	247,325			$	812,362
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Stock purchase warrants issued in connection with line of credit and notes payable financings		$	797,409			$	0
Beneficial conversion feature associated with shareholder notes payable			29,287				0
CASH PAID DURING THE PERIOD FOR
Interest		$	1,117			$	959

		June 30, 2011				December 31, 2010
Furniture and fixtures		$	15,347			$	15,347
Equipment			23,431				23,431
			38,778				38,778
Accumulated depreciation			(37,220	)			(36,156	)
		$	1,558			$	2,622

		June 30, 2011				December 31, 2010
Patents		$	171,891			$	136,342
Accumulated amortization			(25,474	)			(20,154	)
			146,417				116,188
Trademarks			9,072				9,072
		$	155,489			$	125,260

·

The CMA Note is unsecured;

·

No payments of principal are due until the second anniversary of the Note, at which time all outstanding principal is due and payable; and

·

As compensation to the directors for providing the CMA note, the Company issued warrants to purchase 2,600,000 shares of the Company’s common stock to the directors at $0.45 per share, which was the closing price of the Company’s stock on April 29, 2011, which vest 20% immediately and 10% upon each draw by the Company of $100,000 under the CMA Note.

·

Expected Dividend Yield – because the Company does not currently pay dividends, the expected dividend yield is zero;

·

Expected Volatility in Stock Price – because trading in the Company’s stock began late in 2009, there was insufficient data to project the Company’s future volatility and instead the expected volatility of similar public entities (including companies engaged in the manufacture and/or distribution of medical, surgical and healthcare supplies) was considered with expected volatility ranging from 38% - 39%;

·

Risk-free Interest Rate – reflects the average rate on a United States Treasury bond with maturity equal to the expected term of the option, ranging from 1.32 – 2.84%; and

·

Expected Life of Awards – because the Company has had minimal experience with the exercise of options or warrants for use in determining the expected life for each award, the simplified method was used to calculate an expected life based on the midpoint between the vesting date and the end of the contractual term of the stock award.

		2011				2010
Expected Dividend Yield			0				0
Expected Volatility in Stock Price			39	%			39.27	%
Risk-Free Interest Rate			2.70	%			3.00	%
Expected Life of Stock Awards - Years			6				6
Weighted Average Fair Value at Grant Date		$	0.29			$	0.75

		Number of				Weighted Average
		Options				Exercise Price
Outstanding, December 31, 2010			5,987,500			$	1.33
Granted			1,200,000			$	0.67
Forfeited			(75,000	)		$	2.00
Outstanding, June 30, 2011			7,112,500			$	0.69
Exercisable, June 30, 2011			4,373,333			$	0.69

		2011				2010
Expected Dividend Yield			0				0
Expected Volatility in Stock Price			39	%			38.68	%
Risk-Free Interest Rate			2.0	%			2.42	%
Expected Life of Awards, Years			5				5

						Weighted Average								Weighted Average
		Number of				Grant Date				Weighted Average				Remaining
		Warrants				Fair Value				Exercise Price				Contractual Life (Years)
Outstanding, December 31, 2010			1,727,920							$	1.64				3.86
Issued in financing transactions			3,556,425							$	0.39
Granted			17,921			$	0.20			$	0.56
Exercised			(82,500	)						$	0.50
Expired			(48,830	)						$	1.23
Outstanding, June 30, 2011			5,170,936							$	0.74				7.55
Exercisable, June 30, 2011			4,630,624							$	0.78				7.29

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

		Three Months Ended
		June 30,								$				%
		2011				2010				Change				Change
OPERATING EXPENSES:
Sales and marketing		$	178,301			$	196,606			$	(18,305	)			-9.3	%
General and administrative			356,307				614,741				(258,434	)			-42.0	%
Research and development			20,844				12,591				8,253				65.5	%
		$	555,452			$	823,938			$	(268,486	)			-32.6	%

		Six Months Ended
		June 30,								$				%
		2011				2010				Change				Change
OPERATING EXPENSES:
Sales and marketing		$	428,913			$	385,085			$	43,828				11.4	%
General and administrative			1,146,478				1,081,329				65,149				6.0	%
Research and development			47,203				29,528				17,675				59.9	%
		$	1,622,594			$	1,495,942			$	126,652				8.5	%

·

The addition of staff to our workforce as needs arise;

·

Increased spending for the expansion of our research and development efforts, including clinical trials, regulatory submissions, assistance with manufacturing trials and product enhancements;

·

Increased spending in marketing as our products are introduced into the marketplace;

·

Increases in our general and administrative activities related to our operations as a reporting public company and related corporate compliance requirements.

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM  4.

CONTROLS AND PROCEDURES

(A)

Evaluation of disclosure controls and procedures

(B)

Changes in internal control over financial reporting

(C)

Limitations on the Effectiveness of Controls

Number		Description
3.1		Articles of Incorporation of Vystar Acquisition Corporation (now named Vystar Corporation) dated December 17, 2003 (as amended) (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)
3.2		Bylaws of Vystar Corporation (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)
4.1		Specimen Certificate evidencing shares of Vystar common stock (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)
10.5		Addendum to Management Agreement dated February 29, 2008 between Universal Capital Management, Inc. and Vystar Corporation (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)
10.6		Warrant Purchase Agreement dated January 31, 2008 between Universal Capital Management, Inc. and Vystar Corporation (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)
10.7		Management Agreement dated April 30, 2008 between Universal Capital Management, Inc. and Vystar Corporation (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)
10.8		Warrant Purchase Agreement dated April 30, 2008 between Universal Capital Management, Inc. and Vystar Corporation (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)

10.9		Vystar Corporation 2004 Long-Term Compensation Plan, as amended (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)
10.10		Employment Agreement between Vystar Corporation and Sandra Parker dated April 1, 2008 (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)
10.11		First Amendment to Employment Agreement dated July 1, 2009, between Vystar Corporation and Sandra Parker (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)
10.12*		Distributor Agreement among Vystar Corporation, Centrotrade Minerals & Metals, Inc. and Centrotrade Deutschland, GmbH dated January 6, 2009 (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)
10.13		Note agreement between Vystar Corporation and Climax Global Energy, Inc. dated August 15, 2008 (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)
10.14		Lockup Agreement with Glen W. Smotherman dated July 30, 2009 (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344)
10.15		$3,000,000 Loan and Security Agreement between Topping Lift Capital LLC dated March 11, 2011 (incorporated by reference to Vystar’s Current Report on Form 8-K dated March 11, 2011 and filed on March 15, 2011)
10.16		Validity and Fraud Guaranty from William R. Doyle, Jack W. Callicutt and Matthew P. Clark to Topping Lift Capital LLC dated March 11, 2011 (incorporated by reference to Vystar’s Current Report on Form 8-K dated March 11, 2011 and filed on March 15, 2011)
10.17		Intellectual Property Security Agreement between Topping Lift Capital LLC and Vystar Corporation dated March 11, 2011 (incorporated by reference to Vystar’s Current Report on Form 8-K dated March 11, 2011 and filed on March 15, 2011)
10.18		Form of Investor Note (incorporated by reference to Vystar’s Current Report on Form 8-K dated March 11, 2011 and filed on March 15, 2011)
10.19		Promissory Grid Note dated April 29, 2011, in a principal amount of $800,000 from Vystar Corporation to CMA Investments, LLC (incorporated by reference to Vystar’s Current Report on Form 8-K dated April 29, 2011 and filed on May 2, 2011)
31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	VYSTAR CORPORATION
Date:  August 12, 2011	By:	/s/ William R. Doyle
	William R. Doyle
	Chairman, President, Chief Executive Officer and
	Director (Principal Executive Officer)
Date: August 12, 2011	By:	/s/ Jack W. Callicutt
	Jack W. Callicutt
	Chief Financial Officer (Principal Financial and
	Accounting Officer)