Vystar Corp - Annual Report: 2013 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2013
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 000-53754
VYSTAR CORPORATION
(Exact name of registrant as specified in its charter)
GEORGIA |
| 20-2027731 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
|
|
|
2484 Briarcliff Road Suite 159, #22, Atlanta, GA |
| 30329 |
(Address of principal executive offices) |
| (Zip Code) |
Registrant’s telephone number, including area code: 866-674-5238
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.0001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer [ ] |
| Accelerated Filer [ ] |
| Non-Accelerated Filer [ ] |
| Smaller Reporting Company [X] |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of May 29, 2014, the aggregate market value of shares held by non-affiliates of the registrant (based upon the closing sale price of such shares on the Nasdaq Global Select Market on May 29, 2014) was $4,307,462. See Item 12.
As of May 29, 2014, there were 48,143,588 shares of the registrant’s Class A common stock outstanding and 30,085 shares of the registrant’s Series A preferred stock.
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Vystar Corporation
Annual Report on Form 10-K
For the Year Ended December 31, 2013
Table of Contents
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CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
Certain oral and written statements made by Vystar Corporation about future events and expectations, including statements in this Annual Report on Form 10-K (the “Report”) contain forward-looking statements, within the meaning of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and the Securities Act of 1933, as amended ( the “Securities Act”), that involve risks and uncertainties. For those statements, we claim the protection of the safe-harbor for forward-looking statements contained in the Private Securities Litigation Act of 1995. In some cases, forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may” and similar expressions. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Report or the statement. All of these forward-looking statements are based on information available to us at this time, and we assume no obligation to update any of these statements. Actual results could differ from those projected in these forward-looking statements as a result of many factors, including those identified in “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere. We urge you to review and consider the various disclosures made by us in this Report, and those detailed from time to time in our filings with the Securities and Exchange Commission (the “SEC”), that attempt to advise you of the risks and factors that may affect our future results. We qualify any forward-looking statements entirely by these cautionary factors.
The above mentioned risk factors are not all-inclusive. Given these uncertainties and that such statements, speak only as of the date made; you should not place undue reliance on forward-looking statements. We undertake no obligation to update publicly or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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ITEM 1. 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"). In addition, on September 13, 2012, we acquired SleepHealth, LLC and SleepHealth North Carolina, LLC (“SleepHealth”), privately-held sleep diagnostic companies headquartered in Monroe, Georgia. SleepHealth provides sleep lab management services to physicians’ offices, specialty and multi-specialty clinics in Georgia, North Carolina and South Carolina. In addition, on June 28, 2013, Vystar Corporation (the “Company”) completed the acquisition of Kiron Clinical Sleep Lab, LLC (“Kiron”) a vertically integrated sleep diagnostic practice located in Durham, NC. As a result of both acquisitions, Vystar Corporation was comprised of three segments, a Vytex Division, focused on expanding the licensing and utilization of its proprietary source natural rubber latex technology, a SleepHealth Division focused on the third-party management of sleep diagnostic labs and Durable Medical Equipment (“DME”) business, and a Kiron Division providing full sleep medicine services including clinical, diagnostic and treatment. Vystar has since essentially closed the SleepHealth and focused on growing Kiron and its vertical integration as opposed to the underperforming SleepHealth managed labs and the never realized promise of DME business.
The Vytex Division contains our global multi-patented technology that reduces antigenic and total protein in natural rubber latex products to virtually undetectable levels. Vytex NRL, our “ultra-low protein” natural rubber latex has been introduced throughout the worldwide marketplace that uses NRL or latex substitutes as a raw material for end products. Natural rubber latex or latex substitutes are used in an extensive range of products including balloons, textiles, footwear and clothing (threads), adhesives, foams (mattresses, pillows, mattress toppers, etc.), furniture (foam and adhesives), carpet, paints, coatings, protective equipment, sporting equipment, and, especially health care products such as condoms, surgical and exam gloves, among others. Our challenge has been that a manufacturer’s conversion from the use of standard latex or synthetic raw material to Vytex NRL involves a protracted sales cycle ranging from eighteen to thirty six months. Additionally, in the past, our primary method of distribution was via toll manufacturing. We now have several licensing agreements in place for global distribution that will allow us to focus on and transition to sales and marketing with a technical oversight.
The SleepHealth, LLC (“SleepHealth”), acquisition made on September 13, 2012, was expected to be mutually beneficial by providing each company with new expansion options and presented an indirect vertical integration opportunity as a potential channel for Vystar’s recently announced Vytex® NRL foam bedding products such as pillows, mattresses, and mattress toppers. Since the acquisition, local hospitals have taken over several of our profitable locations, we were forced to close other locations due to a lack of payment for our services and our efforts to increase contract pricing with our remaining locations to a profitable level have failed. The Durable Medical Equipment business, the primary driver in the decision to acquire SleepHealth never materialized and early in 2014, Vystar made the decision to suspend operations and transferred the remaining accounts to the SleepHealth management team, sold the few remaining SleepHealth assets and is contemplating its next move to re-coup what it considers to be hidden fees, ineffective contract price expectations and outright fabrication of potential by the seller.
On June 28, 2013, Vystar Corporation entered into an LLC Ownership Interest Purchase Agreement (the “Agreement”) with Michael Soo, M.D. (“Seller”), the sole member of Kiron Clinical Sleep Lab, LLC, a North Carolina limited liability company (“Kiron”) to purchase all outstanding membership and ownership interests of Kiron, and on July 1, 2013 completed such purchase (the “Purchase”). Pursuant to the Agreement, the Company:
(a) Paid $90,000 cash to Seller;
(b) Issued 727,434 shares of Vystar common stock to Seller; and
(c) Agreed to pay two percent (2%) of Kiron’s gross receipts received by the Company after the Closing Date of the Acquisition for a period of five (5) years.
In addition, the Company agreed to pay an additional $60,000 (the “Adjustment Amount”), $10,000 in cash and $50,000 in shares of Vystar common stock, in the event the audited financial results of Kiron for the year-end 2011, 2012, and the first six (6) months of 2013 were within two percent (2%) variability of the Statement of Revenues and Expenses provided by the Seller at closing for the periods referenced above. If the audited financial results were within three percent (3%) variability, fifty percent (50%) of the Adjustment Amount would be paid to the Seller. The completed audit of Kiron’s 2011 and 2012 financial statements showed financial results that exceeded the three percent (3%) variability allowed under the Agreement and thus the $60,000 Adjustment Amount was forfeited. In addition, the Seller resigned from the role of Medical Director and as such has forfeited the two percent (2%) of gross receipts for five (5) years that was included in the original consideration. The Purchase Consideration was therefore adjusted to $140,000 and all initial Goodwill associated with the purchase was written-off.
At closing, the Company and Seller entered into an agreement (“Contract”) pursuant to which the Seller through his medical practice, Durham Neurology, PLLC, a wholly owned professional limited liability company would provide ongoing clinical and medical services to the Company and Kiron as Medical Director. The Seller subsequently dissolved Durham Neurology, PLLC on September 13, 2013 leaving Kiron without a Medical Director. On March 10, 2014, Vystar and Kiron filed Civil Suit 74A-07997-1 IN THE SUPERIOR COURT OF GWINNETT COUNTY, STATE OF GEORGIA against Michael Soo, MD and Durham Neurology, PLLC for multiple breaches of the Agreement and Contract. Potential settlement discussions are currently taking place but there is no assurance they will be successful.
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Since this time, a new Medical Director has been hired and Kiron has re-established its practice with sleep consultations, sleep studies, Continuous Positive Airway Pressure (“CPAP”) titrations studies, CPAP clinics and a solid CPAP therapy re-supply business focusing on its existing and growing patient base.
Products and Services
Natural Rubber Latex
Natural rubber latex is an agricultural product produced from the sap of the rubber tree, Hevea brasiliensis. According to data presented at the India Rubber Expo in March 2011 by the International Rubber Study Group, Singapore, an estimated 10.7 million metric tonnes of natural rubber was consumed in 2010. The Study Group has also reported that over 1.3 million tonnes of this consumption was liquid natural rubber latex, which is used in the production of dipped goods, (e.g. gloves, condoms, balloons, catheters), adhesives, various types of foams and numerous other products. Substantially all of the latex processors are located in Southeast Asia, India, Africa and Latin America and are owned by local groups or large multinational corporations. Some reports show a shortage of NRL in the coming decade as demand in developing countries such as China and India continue to grow. This future demand is awakening interest in other areas of the world where the climate is suitable, particularly in Guatemala, where it is expected the latex industry will grow from 57,000 tonnes produced in 2006 to over 95,000 tonnes by 2016, a 67% increase, according to a report issued by the office of Consulate General of Guatemala, Atlanta, Georgia in 2008. This is particularly attractive to U.S. manufacturers of latex products who could potentially see reduced transportation costs and lead times over the usual Asian sources. In addition to the resurgence of Central and South America in natural rubber latex production, countries such as Vietnam and Cambodia have launched major efforts to meet the needs of the global liquid natural rubber latex market.
Our initial product portfolio included Vytex NRL in high ammonia (HA) and low ammonia (LA) formulations. New specialized formulations are projected to come to market over the next year. Vystar has used its technology to work with customers to solve production issues and provide them with a point of difference.
Vytex NRL is produced at the latex processor level and can be integrated into the current processing environments without additional capital equipment investment. The protein removal and modification process that leads to Vytex NRL allows manufacturers to lower manufacturing costs with the benefit of reduced protein levels. We presented a paper on this topic (“technical paper”) at the RAPRA Latex and Synthetic Polymer Dispersions 2010 Conference in Amsterdam in March 2010. Reduced leaching times and resulting reductions in energy, water and material handling consumption can lead to realized cost savings.
In January 2011, William Doyle, our Chairman and Chief Executive Officer, presented a paper entitled, “Eco-Friendly Manufacturing of High Performance Latex using Ultra Low Antigenic Protein Latex” at the India Rubber Expo (IRE 2011) in Chennai, India. This paper reviewed some of the learnings Vystar had made since commercializing Vytex NRL. Among these discoveries were: improved air and helium retention in balloons; reduced leaching needs for some dipped products; truer colors for dyed dipped products; and low latex odor in foams. Later in the year, Vystar published and presented a paper, “Further Development of Vytex® Natural Rubber Latex Leads to Strong Niche Market Advances”, at the July meeting of the International Latex Conference (ILC 2011) in Akron, Ohio. This paper added additional learnings related to slow release foam formulations and other technical improvements helping customers solve their new product development challenges.
We have transitioned from toll manufacturing agreements to licensing agreements. Licensing agreements eliminate the need to maintain a costly infrastructure along with the other investment and regulatory compliance costs to develop and operate a processing or manufacturing facility. All of these costs are or will be borne by our manufacturing and distribution contractors and/or customers. This means we must show the NRL producers and product manufacturers the economic value proposition of including Vytex NRL in their product lines, hence the technical paper presentations we have made and continue to make. In addition, as an all-natural raw material, Vytex NRL puts the main component in gloves and other products back in the environmentally friendly arena.
We have had a toll manufacturing agreement with Revertex (Malaysia), the world’s largest producer of pre-vulcanized natural rubber lattices, since 2008.
To implement our licensing model, in March 2010 we signed a licensing agreement with Pica de Hule Natural, a division of Grupo Agroindustrial de Occidente (“Occidente”), located in Guatemala. Occidente is the largest processor of natural rubber latex in Latin America and the largest exporter serving more than 15 countries. Under the agreement, Occidente will manufacture, sell and market Vytex NRL throughout Latin America as well as supply Vytex NRL to North America through our existing distribution system.
In October 2010, we signed a second licensing agreement with KA Prevulcanized Latex (KAPVL) to manufacture and sell Vytex NRL in the SAARC region which includes India, Pakistan, Sri Lanka, Bangladesh, Bhutan and Nepal. India is the second largest consumer of concentrated latex behind China.
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In addition, in January 2009, we entered into a Distribution Agreement with Centrotrade Minerals & Metals, US and Centrotrade Deutschland, GmbH, Germany, the leading global distributors of latex raw materials, to create a worldwide distribution network that will further enhance our ability to cost effectively reach and service manufacturer customers in these key manufacturing areas. This provides an expansive distribution network that facilitates both the licensing and toll manufacturing models and can assist with various processors in taking their products to market. On December 19, 2012, we amended our agreement with Centrotrade to expand Vytex NRL distribution rights to the world’s largest NRL consuming markets in Southeast Asia, specifically Malaysia and Thailand. Under this new license agreement, Centrotrade controls production scheduling of Vytex NRL, inventory, sales, pricing and customer financing, while Vystar will focus on marketing, customized product development and support activities.
In January 2013 William Doyle presented a paper entitled, “The Non Enzymatic Deproteinization of Natural Rubber Latex (DPNRL) Enabling the Greater Versatility in End Product Applications” at the India Rubber and Tyre Expo (IRE 2013) in Mumbai, India. This paper discussed improvements that extend beyond the ultra-low allergenicity of the DPNRL and include improved color, absence of rubber odor, and improved physicochemical attributes. Improved air and helium retentions results were reported. The potential to extend applications into other non-conventional areas other than latex end products was discussed. In July 2013, William Doyle presented an updated version of the IRE paper at the International Latex Conference in Akron, Ohio and in conjunction with its foam partner, Islatex, a division of Occidente; the Company began the development of a new line of bedding products. We are currently in the final test market stages for the United States based manufacturing of mattresses, pillows and toppers to key furniture stores and buying groups, primarily in the Northeastern United States.
Clinical Sleep Diagnostics and Durable Medical Equipment
On December 24, 2013, Vystar entered into an Independent Contractor Agreement with Jamila Randolph Battle, MD, a North Carolina physician and sleep specialist, to assume the role of Medical Director for Kiron on January 1, 2014. Dr. Battle received her undergraduate degree from Duke University and her medical degree from the University of North Carolina at Chapel Hill School of Medicine. She completed her family medicine residency at the University of Michigan. Upon completion of her training she returned to North Carolina where she practiced family medicine and served as a consulting associate at Duke Family Medicine. In 2010 she began formal training and education with The School of Sleep Medicine in Palo Alto, California and the Mayo Clinic in Rochester, MN. In 2012, she became Board Certified in Sleep Medicine.
Since this time Kiron has re-established its practice with sleep consultations, sleep studies, CPAP titrations studies, CPAP clinics and a solid re-supply business focusing on its existing and growing patient base and is now cash flow positive.
Competition
Natural Rubber Latex
Synthetic raw materials such as ethylene, propylene, styrene and butadiene compete with NRL. Currently, it is estimated that NRL processors have lost one-half of the overall latex market to synthetic latex. Despite the switch to non-latex alternatives, it is estimated that in U.S. hospitals as recently as September, 2010 over 70% of exam gloves and nearly 80% of surgical gloves were still made with NRL.
Several attempts, including new source crops, synthetic lattices and various treatment methods, have been made to eliminate problem proteins from Hevea NRL by biological, physical and/or chemical methods that act on proteins. One approach has been to introduce the latex articles to multiple leaching steps and chlorination. While it does reduce the protein levels in the finished product, it weakens the latex film thus compromising the desirable physical properties of the product. Another attempt to reduce proteins in NRL is the use of proteolytic enzymes to degrade the proteins in the latex solution but this approach introduces another protein (the enzyme) to the latex, which may itself be allergenic. Attempts to commercialize two other non-Hevea NRL materials have been made in the United States: guayule rubber latex and Taraxacum kok-saghyz, also known as the Russian dandelion. These materials are reported to be higher in cost compared to natural rubber latex and presently are available only in limited quantities.
These facts, coupled with the uncomplicated transition to the utilization Vytex NRL, make it very attractive for the processors to regain lost business by switching to Vytex NRL. We believe our unique patented technology offers a viable alternative to the marketplace. The licensing model will allow the message to spread through more sales channels than we could reach in the past.
Clinical Sleep Diagnostics and Durable Medical Equipment
We compete against numerous sleep-diagnostic providers, from smaller physicians’ offices to larger healthcare providers, including clinics and hospitals. While the competition is intense, we believe we have good relationships with our referring physicians and patient-base. Since sleep studies are performed overnight, the practice gains another revenue stream in off hours. Sleep-related problems are a public health crisis, with an estimated 50 to 70 million Americans experiencing sleep disorders.
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Intellectual Property
Vystar has four issued patents by the United States Patent Trademark Office (“USPTO”) that were issued in 2005 (Patent No. 6,906,126), 2006 (Patent No. 7,056,970), 2011 (Patent No. 8,048,951) and 2012 (Patent No. 8,324,312). International patents include one issued patent from the Republic of South Africa in 2009 (2008/00886), a second foreign patent issued by China in 2011 (No. 200580051526.1), a third foreign patent issued by Japan in 2012 (No. 4944885) and a fourth foreign patent issued by Hong Kong in 2013 (HK1125959). In 2005, we sought international patent protection of our application that would become our U.S. Patent No. 6,906,126 pursuant to the Patent Cooperation Treaty (“PCT”) (No. PCT/US2005/025018), and this application has been nationalized in the following countries and regions: The European Union (No.05775523.3), Canada (No. 2,614,945), India (No.295/DELNP/2008), and Sri Lanka (No.14827). Additionally, this PCT was nationalized back into the United States to expand our protection to both method and composition claims (No.11/988,498). We expect patents to be issued in these countries without objection.
On January 18, 2012, we converted the provisional patent filed January 18, 2011 (No. 61/433,853) to full utility applications based on new discoveries and unexpected results (No. 13/374,851). We also sought international protection for the new developments and unexpected results reflected in this 2009 USPTO patent application through another PCT application (No. PCT/US2009/031445). This PCT application was nationalized in the following countries in 2010: the European Union (No. 09702339.4), Brazil (No. PI0906513-0), Guatemala (No. 2010-000208), India (No.2487/KOLNP/2010), Indonesia (No. W-00201002436), and Malaysia (No. PI2010003317). In addition, we filed the same patent application that was the subject of our USPTO patent application No. 12/356,355 and PCT/US2009/031445 directly into Thailand (No. 0901000201). Thailand has informed us that our patent application is now published for open comments.
Vystar filed and has received registered trademark protected status in the United States for the marks “Vystar”, “Vytex” and “Created by Nature. Recreated by Science.” In 2010 Vystar filed for international trademark protection of “Vytex” in Malaysia (No.2010013149) and India (No. 1992991), which was granted in India.
While we believe that the pending patent and trademark applications will be granted without objection, there are no guarantees that all such patents or trademarks will be granted by each relevant governing body. No assurance can be given that such patent and trademark protection will provide substantial protection from competition. We realize that the market for Vytex NRL is an industrialized world concern and we are committed to aggressively challenging any infringements of our patents and/or trademarks. As of December 31, 2013, Vystar has expended, since inception, approximately $250,000 on such patent and trademark costs and has budgeted approximately $50,000 more for the year ended December 31, 2014 to continue to pursue and maintain its patents and trademarks around the world.
Research and Development
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 December 31, 2013, Vystar's research and development costs have been approximately $2.4 million, with an additional $50,000 budgeted for continued efforts in 2014. These efforts past and future have been and will continue to be patented and/or trademarked.
Government Regulation
Vytex:
In the United States, healthcare and many food and food-based packaging products are subject to regulation by the Food and Drug Administration (FDA). Vystar is not directly subject to regulation by the FDA due to the fact that it does not manufacture a finished medical device or other product, but only provides Vytex NRL as a component or raw material to healthcare or other product manufacturers. However, there will be FDA regulation of the labeling of healthcare and food-based packaging products that are produced with Vytex NRL and the FDA has promulgated standards for good manufacturing practices for manufacturing the end products, which makes the end product manufacturers responsible for seeing that all of their components and component manufacturers, including Vytex NRL, are produced using good manufacturing processes. Additionally, the FDA prohibits the use of the term “hypoallergenic” or “low protein” on any natural rubber latex product it regulates. In order to make any such claim, the latex product manufacturer must seek a waiver from the FDA of such regulatory prohibitions. Commentary by the FDA in its guidance documents and other rulings indicate that the prohibition on the use of the “hypoallergenic” or “low protein” label is based, at least in part, on the fact that, although the use of such terms in such labeling may be intended to indicate that the risk of allergic reaction to residual levels of processing chemicals has been reduced, consumers may interpret the labeling to mean that the risk of allergic reactions to any component in the device would be minimal. Thus the hypoallergenic or low protein label is deemed misleading. There can be no assurance, however, that we will succeed in securing FDA approval for any claim regarding the “hypoallergenic” “low protein” or reduced allergy potential of latex produced with the Vytex NRL process. Failure to secure, if required, such FDA approval, could delay or otherwise detrimentally affect our introduction to natural rubber latex healthcare and/or food packaging products regulated by the FDA. Notwithstanding, the medical or food packaging manufacturer will be able to use the Vytex NRL trademark on its label if size permits to indicate only that the Vytex NRL component was used in the production of the healthcare product, and what protein levels the end product does contain, but no further claim is asserted. We have been able to provide sufficient testing data to the FDA to support our protein level claims with respect to the natural rubber latex antigenic and total proteins present in end products made with Vytex NRL.
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On May 1, 2009, a condom manufactured from Vytex NRL received 510(k) clearance from the U.S. Food and Drug Administration. This was the first medical product available in the U.S. made from Vytex NRL, which had less than 2 micrograms/dm2, virtually undetectable levels, of the antigenic proteins that cause an allergic response, while retaining and improving upon all of the desirable qualities of latex. While the product is no longer available, this condom is a predicate device for future products. Vystar continues to seek other U.S. manufacturers interested in pursuing similar claims for products.
On July 22, 2009, an un-powdered medical exam glove manufactured with Vytex NRL received 510(k) clearance from the FDA, with an approved claim of less than 50 micrograms/gram of total proteins. As with the condom product, Vystar continues to pursue U.S. manufacturers using this exam glove as a predicate device.
Clinical Sleep Diagnostics and Durable Medical Equipment:
Our business is subject to extensive federal, state and local regulation including the Health Insurance Portability and Accountability Act (“HIPAA”), Health Information Technology for Economic and Clinical Health (“HITECH”) Act, the Affordable Care Act, and the Fair Debt Collection Practices Act relating to, among other things, licensure, conduct of operations, privacy of patient information, physician relationships, addition of facilities and services, reimbursement rates for services, and consumer debt collections.
The laws, rules and regulations governing the health care industry are extremely complex and, in certain areas, the industry has little or no regulatory or judicial interpretation for guidance. If a determination is made that we were in violation of such laws, rules or regulations, we could be subject to penalties or liabilities or required to make significant changes to our operations.
Inflation and Seasonality
We do not believe that our operations are significantly impacted by inflation. Our NRL business is not seasonal in nature, but is subject to commodity pricing. Our NRL product is a commodity-based raw material and prices for such material fluctuate from day-to-day, though this will have less impact as we transition to sales via licensing fees.
The sleep diagnostic business shows a decrease in revenue in the fourth quarter, particularly in November and December, due to holiday commitments making patients reluctant to schedule tests as compared to other times of the year.
Employees
As of December 31, 2013, Vystar and its subsidiaries had a total of 25 associates. The SleepHealth division had 16 associates: 6 full-time and 10 part-time employees. Kiron had 5 associates: 5 full-time employees and the Vystar division had 4 associates: 2 full-time employees, 1 part-time employee, and 1 full-time contractor.
With the closing of the SleepHealth Division, Vystar moved one key employee to Kiron, did not renew its office lease and has reduced its corporate staff to one full-time employee, one part-time employee and assistance from key consultants on an as needed basis.
Corporate Information
Vystar Corporation is a Georgia corporation that was incorporated in 2003. Our predecessor company, Vystar LLC, was formed by our founder, Travis Honeycutt, in February 2000 as a Georgia limited liability company.
Our principal mailing address is 2484 Briarcliff Road, Ste 159, #22, Atlanta, GA 30329. Our website address is www.vytex.com. The information contained on, or that can be accessed through, our website is not a part of this Report. We have links on our website to reports, information statements, and other information that we file electronically with the Securities and Exchange Commission, or SEC, at the Internet website maintained by the SEC, www.sec.gov. In addition to visiting our website and the SEC’s website, you may read and copy public reports we file with or furnish to the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
ITEM 1A. RISK FACTORS
Our business is subject to a number of risks and uncertainties — many of which are beyond our control — that may cause our actual operating results or financial performance to be materially different from our expectations. If one or more of the events discussed in the following risks were to occur, actual outcomes could differ materially from those expressed in or implied by any forward-looking statements we make in this report or our other filings with the SEC, and our business, financial condition, results of operations or liquidity could be materially adversely affected; furthermore, the trading price of our common stock could decline and our shareholders could lose all or part of their investment.
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Neither of our business divisions presently generates the cash needed to finance our current and anticipated operations.
We have had very limited revenue in our history prior to 2011 and transitioned from the development stage to the operational stage during the fourth quarter of 2009. We are still in the early stages of establishing our business including attracting new customers and increasing sales; our financial success will be dependent upon the soundness of our business concept, our management’s ability to successfully and profitably execute our plan, and our ability to raise additional capital.
In the Vytex Division, while we anticipate that revenue will continue to grow from what we achieved after transitioning from the development stage to the operational stage, our limited operating history makes it difficult to evaluate our business. We expect to make significant future operating expenditures to develop and expand our business. We may incur significant losses in the future for a number of reasons, including due to the other risks described in this Report, and we may encounter unforeseen expenses, difficulties, complications and delays and other unknown events. Accordingly, we may not be able to achieve or maintain profitability, and we may incur significant losses for the foreseeable future. See additional discussion under Liquidity and Capital Resources.
The SleepHealth, LLC (“SleepHealth”), acquisition made on September 13, 2012, was expected to be mutually beneficial by providing each company with new expansion options and presented an indirect vertical integration opportunity as a potential channel for Vystar’s recently announced Vytex® NRL foam bedding products such as pillows, mattresses, and mattress toppers. Since the acquisition, local hospitals have taken over several of our profitable locations, we were forced to close other locations due to a lack of payment for our services and our efforts to increase contract pricing with our remaining locations to a profitable level have failed. The Durable Medical Equipment business which was a primary driver in the decision to acquire SleepHealth has never materialized and early in 2014, Vystar made the decision to suspend operations and transferred the remaining accounts to the SleepHealth management team, sold the remaining SleepHealth assets and will focus on its wholly owned Kiron facility in addition to Vystar’s growing natural rubber latex business and Vytex foam mattress and pillow offerings.
At December 31, 2013 we had $56,373 cash on hand and an accumulated deficit of $22,919,355. We plan to finance our operations for the next twelve (12) months through the use of cash on hand, stock warrant exercises from existing shareholders, raising of capital through private placements and the possible acquisition of cash flow positive foam business in key areas of the furniture world. You should consider, among other factors, our prospects for success in light of the risks and uncertainties encountered by companies that, like us, have not generated net earnings on an annual basis. Various factors, such as economic conditions, regulatory and legislative considerations, and competition, may also impede our ability to expand our market presence. We may not successfully address these risks and uncertainties or successfully implement our operating strategies. If we fail to do so, it could materially harm our business and impair the value of our common stock. Even if we accomplish these objectives, we may not generate positive cash flows or profits we anticipate in the future.
The following risk factors apply to our Vytex Division:
Our Vytex operating results could fluctuate and differ considerably from our financial forecasts.
Our business model is based on assumptions derived from (i) the experience of the principals of the Company, and (ii) third party market information and analysis. There are no assurances that these assumptions will prove to be valid for our future operations or plans.
Our operating results may fluctuate significantly as a result of a variety of factors, including:
·
Acceptance by manufacturers of the Vytex Natural Rubber Latex technology;
·
Our ability to achieve and sustain profitability;
·
Consumer confidence in products manufactured using our Vytex Natural Rubber Latex technology;
·
Our ability to raise additional capital.
Our Vytex NRL Division business is totally dependent on market demand for, and acceptance of, the Vytex Natural Rubber Latex process.
We expect to derive most of our Vytex NRL Division revenue from the sales of our Vytex Natural Rubber Latex raw material to various manufacturers of rubber and rubber end products using NRL through our distribution agreement with Centrotrade Deutschland. We pay natural rubber latex processors a fee for the service of manufacturing and creating Vytex NRL for us under our toll manufacturing agreements. Conversely, Vystar collects a fee under the Centrotrade and Occidente (PICA) licensing models. Our Vytex NRL product operates within broad, diverse and rapidly changing markets. As a result, widespread acceptance and use of product is critical to our future growth and success. If the market for our product fails to grow or grows more slowly than we currently anticipate, demand for our product could be negatively affected.
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Our ability to generate significant revenue in the Vytex Division is substantially dependent upon the willingness of consumers to make discretionary purchases and the willingness of manufacturers to utilize capital for research and development and the retooling of their manufacturing process, both of which are impacted by the state of the economy.
The current state of the world economy has and likely will in the future impact upon our ability to increase revenue. Certain of the products that we anticipate will be manufactured with our Vystar NRL process, such as mattresses and sponge products, are considered discretionary consumer purchases which decline during economic downturns. Additionally, certain manufacturers who might otherwise utilize the Vytex NRL process in the manufacturing of products with NRL have determined not to expend capital to complete the research of the Vytex NRL process or to retool their manufacturing process because of the general downturn in the economy. As part of a strategy to increase awareness of the Vytex NRL brand, the Company has been aggressively seeking to have end products produced and labeled “made with Vytex NRL” such as SleepHealth pillows. As these products enter the market, the Company plans to create consumer awareness of these end products and in so doing begin to develop consumer demand pull through as part of the Company’s efforts to complete the push-pull cycle using an ingredient branding strategy.
Assertions by a third party that our Vytex process infringes its intellectual property, whether or not correct, could subject us to costly and time-consuming litigation or expensive licenses.
There is frequent litigation based on allegations of infringement or other violations of intellectual property rights. As we face increasing competition and become increasingly visible as an operating company, the possibility of intellectual property rights claims against us may grow.
Any intellectual property rights claim against us or our customers, with or without merit, could be time-consuming, expensive to litigate or settle and could divert management attention and financial resources. An adverse determination also could prevent us from offering our process, require us to pay damages, require us to obtain a license or require that we stop using technology found to be in violation of a third party’s rights or procure or develop substitute services that do not infringe, which could require significant resources and expenses.
The latex market in which we will participate is competitive and if we do not compete effectively, our operating results may be harmed.
The markets for our product are competitive and rapidly changing. With the introduction of new technologies, increasing scrutiny of alternative lattices such as Russian dandelion, and market entrants, we expect competition to intensify in the future. In addition, pricing pressures and increased competition generally could result in reduced sales, reduced margins or the failure of our products to achieve or maintain widespread market acceptance.
While early interest was strong in a new innovative product in the natural rubber latex industry, pricing and regulatory approvals remain a key selling factor especially in the exam glove arena. There is no exam glove manufacturer signed to date that has accepted Vytex NRL into its product mix.
Our Vytex revenue will vary based on fluctuations in commodity prices for NRL.
NRL is a commodity and, as such, its price fluctuates on a daily basis. Since 2009 the market prices have been particularly volatile with prices rising 222% from a low of approximately $1080/wet metric tonne (mT) in January 2009 to a peak of over $3475/wet mT in February 2011. While prices have come down from this high to as low as $2100/wet mT in December 2011, 2012 prices started to rise again primarily due to seasonality. The pricing model for 2013 continued the rollercoaster ride and as of December 31, 2013 stood at $2576/wet mT. As a result, our revenue (even licensing fees) and cost of goods will also fluctuate upward or downward based upon changing market prices for the raw material used to produce Vytex NRL. Prolonged periods of elevated market prices can also cause manufacturers to look for lower cost alternatives to NRL.
While Vytex NRL has received 510(k) clearance from the FDA for condoms and exam gloves, there is no assurance that future applications will be cleared.
In order for Vytex to be used in medical device applications, the manufacturer of the end product must submit an application to the FDA. If the device is classified by the FDA as Class II (e.g., condoms, surgical gloves, and most non-cardiac and non-renal/dialysis catheters) and in some cases Class I (e.g., exam gloves), a 510(k) application must be filed with the FDA seeking clearance to market the device based on the fact that there is at least one other predicate or similar device already marketed. If the product is classified as a Class III product (e.g., most cardiac and renal/dialysis catheters, certain adhesives and other in vivo devices), or is otherwise a new device with no predicate on the market already, then the manufacturer of the end product must submit a Pre-Market Approval (“PMA”) application seeking approval by the FDA to market the device. The PMA approval process is much more in depth and lengthy and requires a greater degree of clinical data and FDA review than does a 510(k) clearance process.
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Since Vytex is a raw material and not an end-product, Vystar is not the entity that files with the FDA for any clearance or approval to market a device. Instead, the end-product manufacturers who will be selling and marketing the device(s) must submit applications and seek FDA clearance or approval depending upon the device classification. Vystar’s role in this process is only as background support to the manufacturers to supply information and any technical or test data regarding the Vytex raw material if and to the extent needed.
An American manufacturer of condoms and exam gloves had been engaged in production work and had completed required testing and received FDA clearance for using Vytex NRL in their condom and exam glove lines. However this manufacturer is not currently producing products made with Vytex NRL or any other type of raw material. Notwithstanding such approvals, we have no assurance that future products will provide acceptable test results and even if they do, there is no certainty that the FDA will approve the applications.
Each of the above mentioned 510(k)s have been sold to other manufacturers.
Vytex may seek to have lower protein claims than what is currently on the market today for exam gloves, and may ultimately seek to have latex warnings removed from or modified on all FDA-regulated products, but it cannot guarantee that either of such actions will be approved by the FDA.
The FDA heavily scrutinizes any and all claims categorizing the protein levels and other claims of an NRL product. Currently, the FDA has allowed claims only stating the level of less than 50 micrograms/gram of total extractable proteins pursuant to only one of two FDA-recognized standards on exam or surgical gloves. Vystar intends to claim protein levels pursuant to both of the two FDA-recognized standards, which will result in claiming the lowest level of antigenic proteins for a Hevea NRL product currently on the market. Although the FDA has cleared such claims on the condom using Vytex NRL, the FDA rejected those claims for the exam glove. There is no guarantee that the FDA will ultimately or ever allow these claims on an exam glove.
Additionally, for many years, the FDA has required warnings on products containing latex due to the latex allergy issue that exists. Vystar plans on petitioning the FDA to have that label removed from or modified on products manufactured with Vytex NRL, by filing a Citizen’s Petition. The Petition will be filed when we see that the benefits of filing will far outweigh the costs since such Petition is likely to require clinical test results indicating acceptable allergic reactions associated with Vytex NRL. There are no assurances that the FDA will grant that request.
Manufacturers are implementing trials of Vytex NRL in their facilities but final data are not yet available from all these manufacturers on its viability for their particular environments.
Over the past several years, samples of Vytex NRL have been made available to over 50 natural rubber latex and latex substitute end product manufacturers, 30 of which have been in place since early 2009. Since the completion of the Vytex NRL Standard Operation Procedures (SOPs), Vytex has been produced at Revertex (Malaysia), Occidente (Guatemala), KAPVL (India) and most recently Mardec-Yala (Thailand) and MMG (Thailand). Manufacturers that have signed a ‘sampling’ agreement with us have been provided with samples of Vytex NRL for validating its use in their manufacturing processes. To date, a number of manufacturers have completed those runs and feedback is often minimal. Although most feedback to date has been positive, there is no assurance that such feedback continues to be satisfactory.
Another risk is the validity of the customer as testing completes. Recently Vystar has completed more than three years of a specialized version of Vytex NRL only to have the end product manufacturer fail to upgrade their production line and fulfill their own contract.
As part of the Company’s learnings, we have found that in listening closely to customer challenges and needs, our technical team has been able to develop solutions. The Company has come to realize that what we offer is not just a raw material but often a technology solution to a production or product development challenge.
While many of these new formulations look promising there is no guarantee that these technological innovations will be successfully scaled up or successfully implemented by the customer.
The following risk factors apply to our Clinical Sleep Diagnostics and Durable Medical Equipment division:
Our revenue may vary based on changes in reimbursement rates from third party providers received by our business.
Although our contracts require a certain reimbursement rate, these rates are constantly changing, with little to no control on our part.
Specifically, the success of our business depends in significant part on the number, quality and specialties of the physicians from whom we receive new patient referrals and maintaining good relations with those physicians. If we are unable to attract and retain sufficient numbers of quality physician referrals by providing adequate support personnel, technologically advanced equipment and facilities that meet the needs of those physicians and their patients, physicians may be discouraged from referring patients to our facilities, admissions may decrease and our operating performance may decline.
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We cannot predict with certainty the effect the Affordable Care Act may have on our business, financial condition, results of operations or cash flows.
The Affordable Care Act was enacted to change how health care services in the United States are covered, delivered and reimbursed. The expansion of health insurance coverage under the law may result in a material increase in the number of patients using our facilities who have either private or public program coverage. Reductions to reimbursements under the Medicare and Medicaid programs by the Affordable Care Act could adversely affect our business and results of operations.
In June 2012, the U.S. Supreme Court upheld the Affordable Care Act’s individual mandate and struck down its penalties for states that refused to comply with Medicaid expansion provisions. We remain unable to predict with certainty the full impact of the Affordable Care Act on our future revenue and operations at this time due to the law’s complexity and the limited amount of implementing regulations and interpretive guidance, as well as our inability to foresee how individuals and businesses will respond to the choices available to them under the law. Furthermore, many of the provisions of the Affordable Care Act that expand insurance coverage will not become effective until 2014 or later. In addition, the Affordable Care Act will result in increased state legislative and regulatory changes in order for states to participate in Medicaid expansion and the grants and other incentive opportunities under the law, and we are unable to predict the timing and impact of changes resulting from actions individual states have taken or might take with respect to expanding Medicaid coverage at this time.
In general, there is significant uncertainty with respect to the positive and negative effects the Affordable Care Act may have on reimbursement, utilization and the future designs of provider networks and insurance plans (including pricing, provider participation, coverage, co-pays and deductibles), and the multiple models that attempt to predict those effects may differ materially from our expectations.
Further changes in the Medicare and Medicaid programs or other government health care programs could have an adverse effect on our business.
In addition to the changes affected by the Affordable Care Act, the Medicare and Medicaid programs are subject to: other statutory and regulatory changes, administrative rulings, interpretations and determinations concerning patient eligibility requirements, funding levels and the method of calculating payments or reimbursements, among other things; requirements for utilization review; and federal and state funding restrictions, all of which could materially increase or decrease payments from these government programs in the future, as well as affect the cost of providing services to our patients and the timing of payments to our facilities, which could in turn adversely affect our overall business, financial condition, results of operations or cash flows. Any material adverse effects resulting from future reductions in payments from government programs could be exacerbated if we are not able to manage our operating costs effectively.
In general, we are unable to predict the effect of future government health care funding policy changes on our operations. If the rates paid by governmental payers are reduced, if the scope of services covered by governmental payers is limited or if one or more of our physician partners are excluded from participation in the Medicare or Medicaid program or any other government health care program, there could be a material adverse effect on our business, financial condition, results of operations or cash flows.
Our health care business operates in a competitive environment, and competition is one reason increases in patient volumes have been constrained.
Overall, our health care business operates in a competitive environment, and we believe increases in patient volumes have been constrained, in part, by competition for market share in high margin services and for quality physicians and personnel. Generally, other hospitals and outpatient centers in the local communities we serve provide services similar to those we offer, and, in some cases, competing facilities are more established or newer than ours. Furthermore, competing facilities (1) may offer a broader array of services to patients and physicians than ours, (2) may have larger or more specialized medical staffs to admit and refer patients, (3) may have more favorable contracts with managed care plans, (4) may have a better reputation in the community, or (5) may be more centrally located with better parking or closer proximity to public transportation. We also face increased competition from specialty clinics (some of which are physician-owned) and unaffiliated freestanding outpatient centers for market share in high margin services and for personnel. Furthermore, some of the hospitals that compete with our business are owned by government agencies or not-for-profit organizations. These tax-exempt competitors may have certain financial advantages not available to our facilities, such as endowments, charitable contributions, tax-exempt financing, and exemptions from sales, property and income taxes. In addition, in certain markets in which we operate, large teaching hospitals provide highly specialized facilities, equipment and services that may not be available at our locations. If competing health care providers are better able to attract patients, recruit and retain physicians, expand services or obtain favorable managed care contracts at their facilities, our patient volume levels may suffer.
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Our labor costs could be adversely affected by competition for staffing and the shortage of experienced licensed personnel.
Our operations depend on the efforts, abilities and experience of our management and technicians, as well as our physician partners. We compete with other health care providers in recruiting and retaining qualified technicians responsible for the daily operations of our sleep labs. In addition, like others in the health care industry, we continue to experience a shortage of experienced licensed technicians in certain key geographic areas. As a result, from time to time, we may be required to enhance wages and benefits to recruit and retain experienced technicians or hire more expensive temporary or contract personnel. In general, our failure to recruit and retain qualified personnel, or to control labor costs, could have a material adverse effect on our business, financial condition, results of operations or cash flows.
Our business and financial results could be harmed by violations of existing regulations or compliance with new or changed regulations.
Our business is subject to extensive federal, state and local regulation including the Health Insurance Portability and Accountability Act (“HIPAA”) and Health Information Technology for Economic and Clinical Health (“HITECH”) Act relating to, among other things, licensure, conduct of operations, privacy of patient information, physician relationships, addition of facilities and services, and reimbursement rates for services. The laws, rules and regulations governing the health care industry are extremely complex and, in certain areas, the industry has little or no regulatory or judicial interpretation for guidance. If a determination is made that we were in violation of such laws, rules or regulations, we could be subject to penalties or liabilities or required to make significant changes to our operations. In addition, Kiron’s failure to comply with the laws and regulations applicable to it could result in reduced demand for its services. Even a public announcement that we are being investigated for possible violations of law could have a material adverse effect on our business, financial condition or results of operations, and our business reputation could suffer. Furthermore, health care, as one of the largest industries in the United States, continues to attract much legislative interest and public attention. We are unable to predict the future course of federal, state and local regulation or legislation, including Medicare and Medicaid statutes and regulations. Further changes in the regulatory framework affecting health care providers could have a material adverse effect on our business, financial condition, results of operations or cash flows.
We are also required to comply with various federal and state labor laws, rules and regulations governing a variety of workplace wage and hour issues.
The failure to comply with debt collection and consumer credit reporting regulations could subject Kiron to fines and other liabilities, which could harm Kiron’s reputation and business, and could make it more difficult for Kiron to retain existing customers or attract new customers.
The Fair Debt Collection Practices Act (“FDCPA”) regulates persons who regularly collect or attempt to collect, directly or indirectly, consumer debts in default that are owed or asserted to be owed to another person. Many states impose additional requirements on debt collection communications, and some of those requirements may be more stringent than the federal requirements. Moreover, regulations governing debt collection are subject to changing interpretations that may be inconsistent among different jurisdictions. Kiron could incur costs or could be subject to fines or other penalties under the FDCPA, the Fair Credit Reporting Act and the Federal Trade Commission Act if it is determined to have mishandled protected information. Kiron’s customers could be required to report such breaches to affected consumers or regulatory authorities, leading to disclosures that could damage Kiron’s reputation, making it more difficult to retain existing customers or attract new customers, or otherwise harm Kiron’s business.
We could be subject to substantial uninsured liabilities or increased insurance costs as a result of significant legal actions.
We are subject to medical malpractice lawsuits, class action lawsuits and other legal actions in the ordinary course of business. Some of these actions may involve large demands, as well as substantial defense costs. Even in states that have imposed caps on damages, litigants are seeking recoveries under new theories of liability that might not be subject to such caps. Our professional and general liability insurance does not cover all claims against us, and it may not continue to be available at a reasonable cost for us to maintain adequate levels, as the health care industry has seen significant increases in the cost of such insurance due to increased litigation. We cannot predict the outcome of current or future legal actions against us or the effect that judgments or settlements in such matters may have on us or on our insurance costs. Additionally, all professional and general liability insurance we purchase is subject to policy limitations. If the aggregate limit of any of our professional and general liability policies is exhausted, in whole or in part, it could deplete or reduce the limits available to pay any other material claims applicable to that policy period. Any losses not covered by or in excess of the amounts maintained under insurance policies will be funded from our working capital. Furthermore, one or more of our insurance carriers could become insolvent and unable to fulfill its or their obligations to defend, pay or reimburse us when those obligations become due. In that case or if payments of claims exceed our estimates or are not covered by our insurance, it could have a material adverse effect on our business, financial condition, results of operations or cash flows.
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Our business could be negatively impacted by security threats, catastrophic events and other disruptions affecting our information technology and related systems.
As a provider of health care services, we rely on our information technology which are regulated by HIPAA and HITECH in the day-to-day operation of our business to process, transmit and store sensitive or confidential data, including electronic health records, other protected health information, and financial, payment and other personal data of patients, as well as to store our proprietary and confidential business performance data. Although we have redundancies and other measures designed to protect the security and availability of the data we process, transmit and store, our information technology and infrastructure is vulnerable to computer viruses, attacks by hackers or breaches due to employee error or malfeasance. Furthermore, our network and technology systems are subject to disruption due to events such as a major earthquake, fire, telecommunications failure, terrorist attack or other catastrophic event. Any such breach or system interruption could result in the unauthorized disclosure, misuse or loss of confidential, sensitive or proprietary information, could negatively impact our ability to conduct normal business operations (including the collection of revenue), and could result in potential liability and damage to our reputation, any of which could have a material adverse effect on our business, financial position, results of operations or cash flows.
The economic downturn and other economic factors have impacted, and may continue to impact, our business, financial condition and results of operations.
We continue to be impacted by a number of industry-wide challenges, including constrained growth in patient volumes. We believe factors associated with the economic downturn — including higher levels of unemployment, reductions in commercial managed care enrollment, and patient decisions to postpone or cancel elective and non-emergency health care procedures — have impacted our volumes. If industry trends or general economic conditions worsen, we may not be able to reach profitability, and our liquidity and ability to repay our outstanding debt may be harmed.
Furthermore, the availability of liquidity and credit to fund the continuation and expansion of many business operations worldwide has been limited in recent years. Our ability to access the capital markets on acceptable terms has been severely restricted at a time when we need, to access these markets, and has had a negative impact on our growth plans, our flexibility to react to changing economic and business conditions, and our ability to refinance existing debt. The economic downturn or other economic conditions could also adversely affect the counterparties to our agreements.
Trends affecting our actual or anticipated results may require us to record charges that would adversely affect our results of operations.
As a result of factors that have negatively affected the health care industry generally and the sleep diagnostic business specifically, we have been required to record various charges in our results of operations. Our impairment tests presume stable, improving or, in some cases, declining operating results in our sleep labs. If these projections are not met, or if in the future negative trends occur that impact our future outlook, future impairments of long-lived assets and goodwill may occur, and we may incur additional restructuring charges. Future restructuring of our operating structure could also result in future impairments of our goodwill. Any such charges could adversely affect our results of operations.
The following risk factors apply to our company as a whole:
We do not expect to declare any dividends in the foreseeable future.
We do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future. Consequently, shareholders must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our common stock.
There is no assurance that any significant public market for our shares of common stock will develop.
While our shares of common stock trade on the OTC Bulletin Board under the symbol “VYST”, there is currently no significant public market for our common stock and there is no assurance that there will be any such significant public market for our common stock in the future.
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The utilization of our tax losses could be substantially limited if we experience an ownership change as defined in the Internal Revenue Code.
Because of net operating losses we have experienced for federal income tax purposes, at December 31, 2013, we had federal net operating loss (“NOL”) carry-forwards of approximately $15.3 million pretax available to offset future taxable income. Our ability to utilize NOL carry-forwards to reduce future taxable income may be limited under Section 382 of the Internal Revenue Code if certain ownership changes in our Company occur during a rolling three-year period. These ownership changes include purchases of common stock under share repurchase programs, the offering of stock by us, the purchase or sale of our stock by 5% shareholders, as defined in the Treasury regulations, or the issuance or exercise of rights to acquire our stock. If such ownership changes by 5% shareholders result in aggregate increases that exceed 50 percentage points during the three-year period, then Section 382 imposes an annual limitation on the amount of our taxable income that may be offset by our NOL carry-forwards or tax credit carry-forwards at the time of ownership change. The limitation may affect the amount of our deferred income tax asset and, depending on the limitation, a significant portion of our NOL carry-forwards or tax credit carry-forwards could expire before we are able to use them. In such an event, our business, financial condition, results of operations or cash flows could be adversely affected.
We believe we have not experienced an ownership change under Section 382 of the Internal Revenue Code as of May 29, 2013; however, the amount by which our ownership may change in the future could be affected by purchases and sales of stock by 5% shareholders and new issuances of stock by us, should we choose to do so.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None
ITEM 2. PROPERTIES
Although we believe that our current space is adequate for the foreseeable future, if additional office space is required, we believe that suitable space will be available at market rates.
ITEM 3. LEGAL PROCEEDINGS
At the closing of the Kiron Clinical Sleep Lab, LLC acquisition, the Company and Michael Soo, MD, the Seller, entered into an agreement (“Contract”) pursuant to which the Michael Soo, MD, through his medical practice, Durham Neurology, PLLC, a wholly owned professional limited liability company would provide ongoing clinical and medical services to the Company and Kiron as Medical Director. The Seller subsequently dissolved Durham Neurology, PLLC on September 13, 2013 leaving Kiron without a Medical Director. On March 10, 2014, Vystar and Kiron filed Civil Suit 74A-07997-1 IN THE SUPERIOR COURT OF GWINNETT COUNTY, STATE OF GEORGIA against Michael Soo, MD and Durham Neurology, PLLC for multiple breaches of the Agreement and Contract. Potential settlement discussions are currently taking place but there is no assurance they will be successful.
On March 17, 2014, Audrey Soo, prior employee of Kiron Clinical Sleep Lab, LLC and spouse of Michael Soo, MD, filed Civil Suit 14CV-2373 IN THE DISTRICT COURT OF DURHAM COUNTY, STATE OF NORTH CAROLINA against Vystar Corporation and Kiron Clinical Sleep Lab, LLC for non-payment of accrued vacation and sick time.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND PURCHASES OF
Market Price Information
Our common stock is traded in the United States on the Over the Counter Bulletin Board (OTCBB) under the symbol “VYST.” The following table shows the range of high and low closing prices for our common stock.
Holders
As of May 29, 2014, there were 448 holders of record of our common stock.
Dividends
We have never paid or declared any cash dividends on our common stock and we do not intend to pay or declare dividends on our common stock in the near future. We presently expect to retain any future earnings to fund continuing development and growth of our business. Our payment of dividends is subject to the discretion of our board of directors and will depend on earnings, financial condition, capital requirements and other relevant factors.
Issuer Purchases of Equity Securities
We did not make any repurchases of our equity securities during the 2013 fiscal year.
Securities Authorized for Issuance Under Equity Compensation Plans
Information concerning our equity compensation plans is set forth in Item 12 of Part III of this Annual Report on Form 10-K.
Recent Sales of Unregistered Securities
Common Stock and Warrant Grants
From January 1, 2013 through December 31, 2013, we issued 4,000,000 shares of our common stock valued at $154,000 for services rendered to the Company in 2013.
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From January 1, 2013 through December 31, 2013, we issued warrants to purchase 3,678,051 shares of common stock for services rendered to the Company per the following:
Stock Option Grants
From January 1, 2013 through December 31, 2013, we issued 1,439,906 options to purchase common stock exercisable at $0.07 per share to $0.15 per share to Board members and employees.
Options |
| Exercise Price per Share |
|
|
|
189,906 |
| $ 0.07 |
1,250,000 |
| $ 0.15 |
Application of Securities Laws and Other Matters
No underwriters were involved in the foregoing sales of securities. The securities described above were issued to investors in reliance upon the exemption from the registration requirements of the Securities Act, as set forth in Section 4(2) under the Securities Act and Regulation D promulgated thereunder, as applicable, relative to sales by an issuer not involving any public offering, to the extent an exemption from such registration was required.
The issuance of stock options as described above were issued pursuant to written compensatory plans or arrangements with our employees, directors and consultants, in reliance on the exemption provided by Rule 701 promulgated under the Securities Act. All recipients either received adequate information about us or had access, through employment or other relationships, to such information.
All of the foregoing securities are deemed restricted securities for purposes of the Securities Act. All certificates representing the issued shares of common stock, warrants and options described above included appropriate legends setting forth that the securities had not been registered and the applicable restrictions on transfer.
ITEM 6. SELECTED FINANCIAL DATA
As a smaller reporting company, we are not required to provide the information required by this Item pursuant to 301(c) of Regulation S-K.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This analysis of our results of operations should be read in conjunction with the accompanying financial statements, including notes thereto, contained in Item 8 of this Report. This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. Statements that are predictive in nature and that depend upon or refer to future events or conditions are forward-looking statements. Although we believe that these statements are based upon reasonable expectations, we can give no assurance that projections will be achieved. Please refer to the discussion of forward-looking statements included in Part I of this Report.
Overview
Vystar LLC, the predecessor to the Company, was formed February 2, 2000, as a Georgia limited liability company by Travis W. Honeycutt. Operations under the LLC entity were focused substantially on the research, development and testing of the Vytex® Natural Rubber Latex ("NRL") process, as well as attaining intellectual property rights. In 2003, the Company reorganized as Vystar Corporation, a Georgia corporation, at which time all assets and liabilities of the limited liability company became assets and liabilities of Vystar Corporation, including all intellectual property rights, patents and trademarks.
We are the creator and exclusive owner of the innovative technology to produce Vytex NRL. This technology reduces antigenic protein in natural rubber latex products to virtually undetectable levels in both liquid NRL and finished latex products. We have introduced Vytex NRL, our “ultra-low protein” natural rubber latex, throughout the worldwide marketplace that uses NRL or latex substitutes as a component of manufactured products. Natural rubber latex is used in an extensive range of products including balloons, textiles, footwear and clothing (threads), adhesives, foams, furniture, carpet, paints, coatings, protective equipment, sporting equipment, and especially health care products such as condoms, surgical and exam gloves. We produce Vytex through toll manufacturing and licensing agreements and have introduced Vytex NRL into the supply channels with aggressive, targeted marketing campaigns directed to the end users.
We transitioned from a development stage company to the operating stage during the last quarter of 2009. During the last four years, our financial condition and results of operations have experienced substantial fluctuations as we provided introductory pricing in 2010 and then began to switch to a licensing rather than a toll model in 2011. Accordingly, the financial condition and results of operations reflected in our historical financial statements are not expected to be indicative of our future financial condition and results of operations.
We believe that the key for increased Vytex NRL product acceptance is to focus on companies seeking solutions to production challenges or ways to differentiate their product offering. Vystar’s technical team has been successful in developing customized formulations to meet specific manufacturer needs. Some of these formulations will become new line extensions. Vystar is becoming less of a raw material provider and more of a technology innovator through its technical consultation and formulation activities.
In addition to this technology focus, we are determined to have the “made with Vytex” claim added to products made using various forms of Vytex NRL. To help drive this effort we’re focusing on products that benefit from Vytex NRL low non-rubber features. As part of this effort, we are working with a licensee to launch a line of foam core products used in various bedding products including pillows, mattresses and mattress toppers.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. As such, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty. Our management reviews its estimates on an on-going basis. We base our estimates and assumptions on historical experience, knowledge of current conditions and our understanding of what we believe to be reasonable that might occur in the future considering available information. Actual results may differ from these estimates, and material effects on our operating results and financial position may result.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.
Fair Value Inputs Related to Share-based and Other Equity Compensation
Generally accepted accounting principles require all share-based payments, including grants of employee stock options, stock grants and warrants, to be recognized in the financial statements based on their fair values. We compute the value of awards granted by utilizing the Black-Scholes valuation model based upon their expected lives, expected volatility, expected dividend yield, and the risk-free interest rate. The value of the awards is then straight-line expensed over the service period of the awards.
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Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Our allowances for doubtful accounts amounted to $257,160 and $33,745 for December 31, 2013 and 2012 respectfully.
Fixed Asset Lives
We estimate the useful life of equipment and other fixed assets using judgment, conventions in the industries in which we operate, and research on resale values. We review equipment and fixed asset lives annually in our impairment analyses.
Impairment Analyses
We review long-lived assets such as property and equipment for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. If the total of the estimated undiscounted future cash flows is less than the carrying value of the assets, an impairment loss is recognized for the excess of the carrying value over the fair value of the long-lived assets.
Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired. We utilize a discounted cash flow analysis to determine a reporting unit’s fair value. The methodology used in estimating discounted cash flows is inherently complex and involves significant management assumptions, including expected revenue growth and increases in expenses, to determine an appropriate discount rate and cash flows. Estimated cash flows extend into the future and, by their nature, are difficult to determine over an extended timeframe. Factors that have and may significantly affect the estimates, and ultimately their carrying amount in our financials, include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures and technology, government regulation and changes in discount rates or market sector conditions. Significant changes in these assumptions could affect the need to record an impairment charge.
Income Taxes
We account for income taxes using the assets and liability method. This method requires that the deferred tax consequences of temporary differences between the amounts recorded in our financial statements and the amounts included in our federal and state income tax returns be recognized in the balance sheet. Estimates are often required with respect to, among other things, the potential utilization of any operating and capital loss carry-forwards for both federal and state income tax purposes and valuation allowances required, if any, for tax assets that may not be realizable in the future. We believe that it is more likely than not that the amounts recorded as deferred income tax assets will not be recoverable through future taxable income generated by us. As a result, the Company recorded a 100% valuation allowance against our net deferred tax assets as of December 31, 2013 and 2012. We believe the procedures and estimates used in our accounting for income taxes are reasonable and in accordance with established tax law. A tax benefit arising from an uncertain tax position can only be recognized for financial reporting purposes if, and to the extent that, the position is more likely than not to be sustained in an audit by the applicable taxing authority. We had no material unrecognized tax benefits and related tax liabilities at December 31, 2013 and 2012. Penalties related to uncertain tax positions would be recorded as a component of general and administrative expenses. Interest relating to uncertain tax positions would be recorded as a component of interest expense.
20
RESULTS OF OPERATIONS
Year ended December 31, 2013 compared to year ended December 31, 2012
21
Consolidated Companies
Consolidated revenue for Vystar’s companies was $1,307,776 in 2013 compared to just $540,168 in 2012, an increase of $767,608, or a 142.1% improvement over 2012. The consolidated revenue increase was due primarily to a full year of sleep study revenue from the SleepHealth division as opposed to just three months in 2012 and the addition of six months of revenue from the Kiron division. Although the revenue increase was substantial, it fell far short of expectations as SleepHealth was affected by the failure of the Seller of SleepHealth and contract General Manager to deliver any of the promised Durable Medical Equipment (“DME”) revenue and the Seller of Kiron and contracted Medical Director dissolving his Limited Liability Company and not continuing in this role.
For the years ended December 31, 2013 and 2012, total operating expenses were $2,516,811 and $2,199,850, respectively, for an increase of $316,961 or 14.4%.
In 2013, $701,204 was recorded for share-based compensation as well as an additional $75,000 for amortization of deferred compensation. This compares with $519,010 for share-based compensation and $135,000 for amortization of deferred compensation in 2012. The deferred compensation expense in 2013 and 2012 represents the amortized fair value of stock and warrants issued for services to non-employees. Share-based compensation charges to operations in 2013 and 2012 were primarily for stock options granted under our Stock Option Plan to executive officers and directors and were made so their interests would align with those of shareholders, providing incentive to improve Company performance on a long-term basis. Grants of stock purchase warrants and common stock were also made to executive officers in lieu of cash compensation and to third parties for various services rendered and as additional compensation for financing agreements. Amortization of deferred compensation is recorded in general and administrative expenses. Share-based compensation expense is included in both sales and marketing and general and administrative expenses. For 2013, the amount of share-based compensation and deferred compensation included in sales and marketing was $84,635 and $616,569 in general and administrative of which $321,704 in share-based compensation was paid in the form of common stock and stock purchase warrants to outside third parties for contracted services. For 2012, the amount of share-based compensation and deferred compensation included in sales and marketing was $146,356 and in general and administrative was $352,402.
For the years ended December 31, 2013 and 2012, sales and marketing expenses were $123,303 and $409,963, respectively. The decrease of $286,660 was primarily due to the departure of the full-time Vice President of Technical Sales and Vice President of Marketing. Sales and marketing expenses consist primarily of compensation and support costs for sales and marketing personnel, professional services, promotional, marketing and related activities.
For the years ended December 31, 2013 and 2012 general and administrative expenses were $2,215,961 and $1,665,918, respectively. The $550,043 increase in 2013 is primarily composed of the full 12 months of general and administrative expenses for the SleepHealth division as opposed to just three months in 2012; the addition of Kiron for the final six months of 2013; and the appointment of a full-time chief financial officer. General and administrative expenses consist primarily of compensation and support costs for management and administrative staff, and for other general and administrative costs, including professional fees related to accounting, finance, and legal services as well as other operating expenses.
Goodwill Impairment/Intangible Write-Off
As a result of both the Sleephealth and Kiron divisions underperforming expectations and the departures of the SleepHealth seller as General Manager and the Kiron seller as Medical Director, Vystar expensed $155,313 of goodwill impairment/intangible write-off in 2013 as opposed to $87,000 in 2012.
Other Income (Expense)
Other income (expense) for the year ended December 31, 2013, consisted of $6,543 of interest and ($22,466) of other income as compared to interest/other income of $5,776 for the same period in 2012. Other income (expense) for 2013 included a loss of $24,906 on the disposal of Kiron fixed assets associated with the closing of an under-utilized sleep lab. Interest expense of $420,238 for the year ended December 31, 2013, compared to interest expense in 2012 of $650,298. The net decrease of $230,060 in interest expense is primarily due to the warrant expense associated with the CMA Related Party line of credit (see Note 6). Amortization of deferred financing costs connected with the CMA Related Party line of credit was $182,225 and $515,374 in 2013 and 2012, respectively.
Vytex Sales Environment
The overall natural rubber markets remain in a state of flux as new plantations come on line in SE Asia in countries such as Vietnam, Cambodia, etc., and increases in production are noted in other countries such as Guatemala. Moves by certain countries to control pricing have succeeded in a few instances but just as often fail as manufacturers do not buy as far forward as the controlled pricing areas would like. Of keen interest is the improvement in non-latex gloves as synthetic glove makers have made great strides in perfecting their offerings. Gloves, as a segment, are the biggest segment of users of natural rubber latex. Vystar has focused on fewer segments of the marketplace as we see trends in areas that look to embrace the low non-rubber aspects of Vytex NRL such as adhesives, balloons, condoms, bandages, etc. and Vystar plans to launch a line of branded foam products during the second quarter of 2014. Initial, non-scientific, market research points to a definite market for pure natural rubber latex foam products made with Vytex NRL.
22
SleepHealth Performance, Impairment, and Closing
SleepHealth’s post acquisition performance has fallen far below Vystar’s expectations. For the period from January 1, 2013 through December 31, 2013, revenue from sleep studies was $975,084, well below projections and $149,212 below SleepHealth’s full year revenue for 2012. There are a number of facts available to Vystar now regarding the valuation of SleepHealth.
Vystar originally based the valuation of SleepHealth on their 2010 and 2011 tax returns and the annualized results of the first six months of 2012 as presented by SleepHealth. At the time of the acquisition, the 2012 accounting had not been assembled by an outside CPA firm and SleepHealth’s 2010 and 2011 books and records required significant work to complete an independent audit. The audited financial statements for 2010 and 2011 actually showed net losses, contrary to the net profit presented in the 2010 and 2011 compilations and tax returns.
At the acquisition date, SleepHealth was invoicing 25 accounts, 13 of which performed fewer than 10 studies per month and utilization of the rooms available for testing was far from ideal. A sleep technician can monitor two to three patients, depending on testing needs, but numerous single patient nights were performed. Increased room utilization and 2:1 patient to technician studies were included in the forward looking projections.
The contracted sleep study fee and SleepHealth’s hourly technician labor costs are the largest factors in determining whether an account is or has the potential to be profitable. SleepHealth needs a two-patient per night minimum to cover all of its costs and provide acceptable profits. Vystar instituted a two patient study per night minimum; closed eight unprofitable accounts and began working with the remaining accounts to achieve the new goals that benefit both parties.
After the acquisition, Vystar discovered that prior collections efforts resulted in slow cash flow and an inability to timely meet key obligations and unpaid tax consequences.
Additionally, the sales pipeline was much weaker than anticipated and Vystar broadened its approach in an attempt to secure a healthy sales pipeline in 2013.
The number of studies performed at a location over the term of the contract is dependent on the physician’s specialty, size of the physician’s patient base, advertising or partnering with other physicians to grow the patient base, or other reasons outside our direct control. As a physician cycles through his/her patient base, the number of studies from that location can decline over the term of the contract without active management of the account. Vystar has introduced steps that implement active account management.
During 2013, SleepHealth continued to underperform as local hospitals took over several of our profitable locations, and we were forced to close other locations due to a lack of payment for our services and our efforts to increase contract pricing to a profitable level with our remaining locations failed. The Durable Medical Equipment business, the primary driver in the decision to acquire SleepHealth never materialized and early in 2014, Vystar made the decision to suspend operations and transferred the remaining accounts to the SleepHealth management team, sold the meager remaining SleepHealth assets and is contemplating its next move to re-coup what it considers to be hidden fees, ineffective contract price expectations and outright fabrication of financials and potential by the seller.
As a result of the above facts, the valuation of SleepHealth was revised with an additional $48,641of intangible write-down expense recognized in the fourth quarter of 2013 in addition to the $87,000 goodwill impairment taken in 2012.
The new valuation reduced physician relationships from $193,000 to zero; trade names from $29,000 to zero and the non-compete agreement from $20,000 to zero. The reductions in these values were reclassified to goodwill and subsequently written-off. Vystar also reversed the $8,199 contingent consideration amount due the Seller.
Kiron Performance and Impairment
Kiron’s post acquisition performance has not met Vystar’s expectations. For the period from January 1, 2013 through December 31, 2013, revenue was $734,820, $150,538 below the same period last year. The dissolving of Durham Neurology, PLLC on September 13, 2013 which was contracted to provide Kiron a Medical Director by the Seller of Kiron and the subsequent departure of the Seller as Medical Director negatively impacted revenue by an estimated $200,000.
Vystar originally based the valuation of Kiron on its 2010, 2011, and 2012 tax returns and the financial statements as prepared by Kiron’s outside CPA firm, Self & Associates, CPAs, PC. Upon outside audit, the financial statements for 2011 and 2012 showed significantly less revenue and identified approximately $150,000 in general operating expenses necessary for the business to operate which were not disclosed in the financials or due diligence material provided to Vystar. The Purchase Consideration was therefore adjusted to $140,000 and all the initial Goodwill in the amount of $106,031 associated with the purchase was written-off.
A new Medical Director was identified and hired as of January 1, 2014 and Kiron has re-established its practice with sleep consultations, sleep studies, CPAP titrations studies, CPAP clinics and a solid re-supply business focusing on its existing and growing patient base.
23
Net Loss
As a result of the factors described above, the consolidated net loss improved $230,496 to $2,513,808 for the year ended December 31, 2013 compared to $2,744,304 for the year ended December 31, 2012.
LIQUIDITY AND CAPITAL RESOURCES
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, we have incurred significant losses and experienced negative cash flow since inception. At December 31, 2013, the Company had cash of approximately $56,373 and a deficit in working capital of $2,299,034. For the year ended December 31, 2013, we had a net loss of $2,513,808 and the accumulated deficit amounted to $22,919,355. We use working capital to finance our ongoing operations and since those operations do not currently cover all of our operating costs, managing working capital is essential to our Company’s future success.
Net cash used in operating activities was $1,019,972 for the year ended December 31, 2013 as compared to $1,579,839 for the year ended December 31, 2012. During the year ended December 31, 2013, cash used in operations was primarily due to the net loss for the year of $2,513,808, net of non-cash related add-back of share-based compensation expense of $701,204.
Net cash used by investing activities was $34,480 during the year ended December 31, 2013, as compared to net cash used of $108,424 during the year ended December 31, 2012. During the year ended December 31, 2013 $69,524 was used for the acquisition of Kiron Clinical Sleep Lab, LLC (as discussed in more detail in Note 3), $8,035 for patents and intellectual property offset by a net inflow of $43,079 from equipment purchases/disposals. During the year ended December 31, 2012, cash used by investing activities was used for the acquisition of SleepHealth, LLC, equipment purchases and costs related to our patents and intellectual property.
Net cash provided by financing activities was $1,018,906 during the year ended December 31, 2013, as compared to cash provided of $1,763,523 during the year ended December 31, 2012. In 2013, the cash provided was from the issuance of notes payable of $325,068 (as discussed in more detail in Note 6), issuance of preferred stock of $300,852, issuance of common stock of $309,944, advances under the related party line of credit of $70,000, and advances of $47,479 under an A/R facility offset by payments of $34,437 under promissory and other notes. In 2012, the cash provided was from an increase in the related party line of credit of $491,125 (see Note 6), equipment financing arrangements of $29,208, a related party promissory note of $100,000 (see Note 6), and the issuance of common stock of $1,196,799 offset by cash financing costs incurred of $42,750.
As discussed in detail in Note 6, the CMA Note matured on April 29, 2013, was renewed for another year and was most recently renewed again until April 29, 2015. All the Shareholder Notes which matured on various dates from March 11 through May 31, 2013 were either converted to preferred stock or were renewed for two years.
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 better utilization of existing Kiron facilities, increased revenue from Vytex division license fees, stock warrant exercises from existing shareholders, and raising capital through private placement memoranda (see Note 17, 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 we will be able to achieve projected levels of revenue in 2014 and beyond. If we are not able to achieve projected revenue and obtain alternate additional financing of equity or debt, we would need to significantly curtail or reorient operations during 2014, which could have a material adverse effect on our ability to achieve our 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.
Our future expenditures will depend on numerous factors, including: the rate at which we 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 our products and services and competing technological developments; rate at which we can build Kiron’s business, especially with respect to its Durable Medical Equipment (“DME”) business. As we expand our activities and operations, our cash requirements are expected to increase at a rate consistent with revenue growth after we have achieved sustained revenue generation.
24
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements.
Certain Relationships and Related Transactions
On April 29, 2011, the Company executed with CMA Investments, LLC, a Georgia limited liability company (“CMA”) a line of credit (Note 6) with a principal amount of up to $800,000 (the “CMA Note”). CMA is a limited liability company of which three of the directors of the Company are the members. Proceeds under the line were drawn to pay off amounts owed under the Topping Lift Agreement and for general working capital purposes. Under the terms of the CMA Note, the Company may draw up to a maximum principal amount of $800,000. Interest and fees will be paid by an affiliate of a director of the Company, to CMA. Pursuant to an agreement between the Company and such affiliate, the Company will issue common stock to such affiliate with a value equal to such interest and fees paid based on the closing price of the common stock on the OTC Bulletin Board on the date of such payments. The maturity date of the CMA Note was April 29, 2013. The CMA Note is unsecured and no payments of principal are due until the second anniversary of the CMA Note, at which time all outstanding principal is due and payable. 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 $.45 per share which was the closing price of the Company’s common stock on that day, later adjusted to $.27 per share, which was the closing price of the Company’s common stock on the day it was adjusted.
On September 14, 2011, the Company’s Board of Directors approved increasing the line of credit to $1,000,000 and the Company’s Chairman and Chief Executive Officer became a member of CMA. As compensation for increasing the line, the directors approved issuing warrants to purchase an additional 1,600,000 shares of the Company’s common stock at $.27 per share, which was the closing price of the Company’s common stock on that day.
On November 2, 2012, the Board of Directors approved an increase in the line of credit from $1,000,000 to $1,500,000. As compensation to the CMA members, we issued warrants to purchase an additional 2,100,000 shares of the Company’s common stock at $0.35 per share. The closing price of the Company’s stock on November 2, 2013 was $0.21. The warrants vest 20% immediately and 16% upon each $100,000 draw above $1,000,000. Substantially all of the additional $500,000 had been drawn as of December 31, 2012 and vesting was completed. Accordingly, $143,726 was capitalized into deferred financing costs for the warrants in 2012. These costs will be amortized to interest expense over the remaining term of the CMA Note.
On April 29, 2013, the maturity date of the CMA Note was extended to April 29, 2014. As compensation to the CMA Directors for extending the maturity date of the CMA Note, the Board of Directors approved modifying the exercise price for the 6,300,000 compensatory stock purchase warrants previously issued to the Directors to $0.10 per share and the CMA Directors forfeited 630,000 of the warrants. Amortization of the financing costs associated with extending the CMA Note was amortized through interest expense.
On April 29, 2014, the maturity date of the CMA Note was again extended for a year to April 29, 2015. No compensation was paid to the CMA Directors for this extension.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide the information required by this Item pursuant to 301(c) of Regulation S-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
25
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
Vystar Corporation
Atlanta, Georgia
We have audited the accompanying consolidated balance sheet of Vystar Corporation and subsidiaries (the “Company”) as of December 31, 2013, and the related consolidated statements of loss, stockholders’ deficit, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. The consolidated financial statements of Vystar Corporation and subsidiaries as of December 31, 2012, and for the year then ended were audited by other auditors and whose report, dated June 14, 2013, on these financial statements included an explanatory paragraph that expressed substantial doubt about the Company’s ability to continue as a going concern.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2013 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Vystar Corporation and subsidiaries as of December 31, 2013, and the results of their operations and their cash flows for the year then ended in conformity with U.S. generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company's recurring losses from operations, capital deficit, and limited capital resources raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters also are described in Note 2. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Porter Keadle Moore, LLC
Atlanta, Georgia
May 30, 2014
F 1
VYSTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
| December 31, | ||
|
|
|
| 2013 |
| 2012 |
ASSETS |
|
|
|
| ||
|
|
|
|
|
|
|
CURRENT ASSETS |
|
|
|
| ||
| Cash |
| $ 56,373 |
| $ 91,919 | |
| Accounts receivable, net of allowance for uncollectible amount of $257,160 and $33,745 at December 31, 2013 and 2012, respectively |
| 64,351 |
| 246,694 | |
| Inventory |
| 3,449 |
| 3,449 | |
| Prepaid expenses |
| 93,854 |
| 97,755 | |
| Other |
| - |
| 5,357 | |
|
| TOTAL CURRENT ASSETS |
| 218,027 |
| 445,174 |
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT, NET |
| 157,977 |
| 220,554 | ||
|
|
|
|
|
|
|
OTHER ASSETS |
|
|
|
| ||
| Intangible assets, net |
| 186,783 |
| 306,176 | |
| Deferred financing costs |
| - |
| 218,845 | |
| Deposits |
| - |
| 4,421 | |
|
|
|
|
|
|
|
TOTAL ASSETS |
| $ 562,787 |
| $ 1,195,170 | ||
|
|
|
|
|
|
|
| LIABILITIES AND STOCKHOLDERS' DEFICIT |
|
|
|
| |
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
| ||
| Related party line of credit |
| $ 1,499,875 |
| $ 1,429,875 | |
| Bank line of credit |
| 49,737 |
| 49,850 | |
| Accounts receivable line of credit |
| 47,479 |
| - | |
| Accounts payable |
| 728,557 |
| 472,296 | |
| Accrued compensation |
| 88,781 |
| 70,133 | |
| Accrued expenses |
| 92,900 |
| 214,939 | |
| Shareholder notes payable |
| - |
| 518,320 | |
| Current portion of long term debt |
| 9,732 |
| 142,435 | |
|
| TOTAL CURRENT LIABILITIES |
| 2,517,061 |
| 2,897,848 |
|
|
|
|
|
|
|
Shareholder notes payable |
| 862,568 |
| - | ||
|
|
|
|
| ||
Long term debt, net of current portion |
| 73,955 |
| 42,287 | ||
|
|
|
|
|
|
|
TOTAL LIABILITIES |
| 3,453,584 |
| 2,940,135 | ||
|
|
|
|
|
|
|
STOCKHOLDERS' DEFICIT |
|
|
|
| ||
| Preferred stock, $0.0001 par value, 15,000,000 shares authorized; 30,085 and none issued and outstanding at December 31, 2013 and 2012, respectively |
| 3 |
| - | |
| Common stock, $0.0001 par value, 150,000,000 shares authorized; 39,160,255 and 23,020,518 shares issued and outstanding at December 31, 2013 and 2012, respectively |
| 3,916 |
| 2,302 | |
| Additional paid-in capital |
| 20,024,639 |
| 18,733,280 | |
| Deferred compensation |
| - |
| (75,000) | |
| Accumulated deficit |
| (22,919,355) |
| (20,405,547) | |
TOTAL STOCKHOLDERS' DEFICIT |
| (2,890,797) |
| (1,744,965) | ||
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT |
| $ 562,787 |
| $ 1,195,170 | ||
The accompanying notes are an integral part of these financial statements.
F 2
VYSTAR CORORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS
|
|
| For the years ended December 31, | ||
|
|
| 2013 |
| 2012 |
|
|
|
|
|
|
REVENUE |
| $ 1,307,776 |
| $ 540,168 | |
|
|
|
|
|
|
COST OF REVENUE |
| 868,612 |
| 440,100 | |
| Gross Margin |
| 439,164 |
| 100,068 |
|
|
|
|
|
|
OPERATING EXPENSES |
|
|
|
| |
| Sales and marketing, including non-cash share-based compensation of $84,635 and $146,356 in 2013 and 2012, respectively |
| 123,303 |
| 409,963 |
| General and administrative, including non-cash share-based compensation of $616,569 and $352,402 in 2013 and 2012, respectively |
| 2,215,961 |
| 1,665,918 |
| Research and development |
| 22,234 |
| 36,969 |
| Goodwill impairment and intangible write-off |
| 155,313 |
| 87,000 |
| Total Operating Expenses |
| 2,516,811 |
| 2,199,850 |
|
|
|
|
|
|
LOSS FROM OPERATIONS |
| (2,077,647) |
| (2,099,782) | |
|
|
|
|
|
|
OTHER INCOME (EXPENSE) |
|
|
|
| |
| Interest income |
| 6,543 |
| 526 |
| Other income (expense) |
| (22,466) |
| 5,250 |
| Interest expense |
| (420,238) |
| (650,298) |
|
|
|
|
|
|
NET LOSS |
| $ (2,513,808) |
| $ (2,744,304) | |
|
|
|
|
|
|
| Basic and Diluted Loss per Share |
| $ (0.09) |
| $ (0.13) |
|
|
|
|
|
|
| Basic and Diluted Weighted Average Number of Common Shares Outstanding |
| 29,365,815 |
| 20,445,512 |
VYSTAR CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
For the Years Ended December 31, 2013 and 2012
| Number of Preferred Shares |
| Preferred Stock |
| Number of |
| Common |
| Additional |
| Deferred |
| Accumulated |
| Total |
Ending Balance, December 31, 2011 | - |
| - |
| 16,407,201 |
| $ 1,641 |
| $ 16,590,829 |
| $ (90,000) |
| $ (17,661,243) |
| $ (1,158,773) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued in private placement valued at $0.25 per share net of issuance costs of $42,750 and 148,000 shares of common stock valued at $48,390 and warrants valued at $8,934 | - |
| - |
| 5,037,600 |
| 504 |
| 1,179,145 |
| - |
| - |
| 1,179,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for exercise of warrants, valued between $0.25 and $0.27 per share | - |
| - |
| 67,000 |
| 7 |
| 17,143 |
| - |
| - |
| 17,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for acquisition of SleepHealth, valued at $0.27 per share | - |
| - |
| 636,098 |
| 64 |
| 171,683 |
| - |
| - |
| 171,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services already rendered, valued between $0.20 and $0.34 per share | - |
| - |
| 72,619 |
| 7 |
| 20,205 |
| - |
| - |
| 20,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for services to be rendered, valued at $0.30 per share | - |
| - |
| 400,000 |
| 40 |
| 119,960 |
| (120,000) |
| - |
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued upon conversion of promissory note, valued at $0.25 per share | - |
| - |
| 400,000 |
| 40 |
| 99,960 |
| - |
| - |
| 100,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation issued for services already rendered-warrants | - |
| - |
| - |
| - |
| 62,649 |
| - |
| - |
| 62,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation to employees-options | - |
| - |
| - |
| - |
| 301,108 |
| - |
| - |
| 301,108 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued for increase in CMA line of credit | - |
| - |
| - |
| - |
| 143,726 |
| - |
| - |
| 143,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in conjunction with promissory note | - |
| - |
| - |
| - |
| 26,870 |
| - |
| - |
| 26,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred compensation | - |
| - |
| - |
| - |
| - |
| 135,000 |
| - |
| 135,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss | - |
| - |
| - |
| - |
| - |
| - |
| (2,744,304) |
| (2,744,304) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance, December 31, 2012 | - |
| - |
| 23,020,518 |
| $ 2,302 |
| $ 18,733,280 |
| $ (75,000) |
| $ (20,405,547) |
| $ (1,744,965) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock issued in private placement @ $0.25/common share with 1:1 warrants @ $0.35/share | - |
| - |
| 20,000 |
| 2 |
| 4,998 |
| - |
| - |
| 5,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock issued in private placement @ $0.075/share | - |
| - |
| 834,666 |
| 83 |
| 62,517 |
| - |
| - |
| 62,600 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock issued in private placement @ $0.05/share | - |
| - |
| 1,200,000 |
| 120 |
| 59,880 |
| - |
| - |
| 60,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock issued in private placement @ $0.03/common share with 1:2 warrants @ $0.05/share | - |
| - |
| 2,066,667 |
| 207 |
| 61,793 |
| - |
| - |
| 62,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock issued in private placement | 19,711 |
| 2 |
| - |
| - |
| 197,108 |
|
|
|
|
| 197,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock issued for acquisition of Kiron | - |
| - |
| 727,434 |
| 73 |
| 49,927 |
| - |
| - |
| 50,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock issued for services to be rendered | - |
| - |
| 4,000,000 |
| 400 |
| 153,600 |
| - |
| - |
| 154,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| - |
Commons Stock issued for expenses | - |
| - |
| 233,288 |
| 23 |
| 14,713 |
| - |
| - |
| 14,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock issued due to Ratchet Clause of 2012 Private Placement Managed by Wellfleet | - |
| - |
| 4,433,333 |
| 443 |
| (443) |
| - |
| - |
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock issued upon the cashless exercise of 429,000 of the Company's outstanding and exercisable warrants | - |
| - |
| 239,733 |
| 24 |
| (24) |
|
|
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock issued upon conversion of promissory note | 10,374 |
| 1 |
| - |
| - |
| 103,741 |
| - |
| - |
| 103,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation issued for services already rendered - warrants | - |
| - |
| - |
| - |
| 21,835 |
| - |
| - |
| 21,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation to employees - common stock | - |
| - |
| 2,384,616 |
| 239 |
| 97,555 |
| - |
| - |
| 97,794 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation to employees - options/warrants | - |
| - |
| - |
| - |
| 337,839 |
| - |
| - |
| 337,839 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred compensation. | - |
| - |
| - |
| - |
|
|
| 75,000 |
|
|
| 75,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued in conjunction with promissory notes. | - |
| - |
| - |
| - |
| 5,976 |
| - |
| - |
| 5,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation resulting from modification of exercise price of option and warrant grants made in prior periods | - |
| - |
| - |
| - |
| 120,344 |
| - |
| - |
| 120,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss | - |
| - |
| - |
| - |
| - |
| - |
| (2,513,808) |
| (2,513,808) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending Balance, December 31, 2013 | 30,085 |
| $ 3 |
| 39,160,255 |
| $ 3,916 |
| $ 20,024,639 |
| $ - |
| $ (22,919,355) |
| $ (2,890,797) |
|
|
|
|
|
| For the years ended December 31, | ||
|
|
|
|
|
| 2013 |
| 2012 |
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
| |||||
| Net loss |
|
| $ (2,513,808) |
| $ (2,744,304) | ||
| Adjustments to reconcile net loss to cash used in operating activities |
|
|
| ||||
|
| Share-based compensation | 701,204 |
| 519,010 | |||
|
| Allowance for uncollectible accounts receivable | 223,415 |
| - | |||
|
| Depreciation | 54,267 |
| 22,408 | |||
|
| Goodwill impairment | 106,672 |
| 87,000 | |||
|
| Write-off of acquired intangible assets | 48,641 |
| - | |||
|
| Amortization of intangible assets | 11,433 |
| 18,015 | |||
|
| Amortization of deferred financing costs | 244,001 |
| 521,290 | |||
|
| (Increase) decrease in assets |
|
|
| |||
|
|
| Accounts receivable | 521 |
| 21,038 | ||
|
|
| Inventory | - |
| 37,790 | ||
|
|
| Prepaid expenses | 10,084 |
| (22,515) | ||
|
|
| Other | 9,778 |
| (569) | ||
| Increase (decrease) in liabilities |
|
|
| ||||
|
| Accounts payable | 229,072 |
| 23,342 | |||
|
| Accrued compensation and expenses | (145,252) |
| (62,344) | |||
|
|
|
|
|
|
|
|
|
| Net cash used in operating activities | (1,019,972) |
| (1,579,839) | ||||
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
| |||||
|
| Cash paid to complete Sleephealth combination, net of cash received of $21,032 | - |
| (32,702) | |||
|
| Cash paid to complete Kiron combination, net of cash received of $20,476 | (69,524) |
| - | |||
|
| Disposal (Purchase) of equipment, net | 43,079 |
| (30,214) | |||
|
| Cost of patents | (8,035) |
| (45,508) | |||
|
|
|
|
|
|
|
|
|
| Net cash used in investing activities | (34,480) |
| (108,424) | ||||
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
| |||||
|
| Issuance of common stock, net of costs | 309,944 |
| 1,196,799 | |||
|
| Issuance of preferred stock | 300,852 |
| - | |||
|
| Proceeds from related party line of credit | 70,000 |
| 491,125 | |||
|
| Proceeds from related party promissory note | - |
| 100,000 | |||
|
| Proceeds from shareholder notes payable | 325,068 |
| - | |||
|
| Payments of notes payable | (34,437) |
| (43,609) | |||
|
| Advances under A/R facility | 47,479 |
| - | |||
|
| Proceeds from equipment loans | - |
| 29,208 | |||
|
| Deferred financing costs | - |
| (10,000) | |||
|
|
|
|
|
|
|
|
|
| Net cash provided by financing activities | 1,018,906 |
| 1,763,523 | ||||
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH | (35,546) |
| 75,260 | |||||
|
|
|
|
|
| - |
|
|
CASH - BEGINNING OF YEAR | 91,919 |
| 16,659 | |||||
|
|
|
|
|
|
|
|
|
CASH - END OF YEAR | $ 56,373 |
| $ 91,919 | |||||
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
| |||||
NON-CASH TRANSACTIONS |
|
|
| |||||
| Stock purchase warrants issued in connection with line of credit | $ - |
| $ 143,726 | ||||
| Warrants issued in conjunction with shareholder notes payable | 5,976 |
| - | ||||
| Common stock issued upon conversion of related party promissory note | - |
| 100,000 | ||||
| Preferred stock issued upon conversion of related party promissory note | 103,742 |
|
| ||||
| Warrants issued in conjunction with related party promissory note | - |
| 26,870 | ||||
| Common stock issued for services rendered | 821,548 |
| - | ||||
|
|
|
|
|
|
|
|
|
CASH PAID DURING THE PERIOD FOR | - |
|
| |||||
| Interest |
|
| $ 25,533 |
| $ 73,344 | ||
|
|
|
|
|
|
|
|
|
CASH PAID FOR BUSINESS COMBINATION (see Note 3) |
|
|
| |||||
| Working capital | $ (800) |
| $ 60,731 | ||||
| Equipment and furnishings | 34,769 |
| 210,564 | ||||
| Intangible assets | - |
| 48,000 | ||||
| Goodwill |
| 106,031 |
| 154,995 | |||
|
| Total assets acquired | 140,000 |
| 474,290 | |||
| Less: long-term debt assumed | - |
| (165,075) | ||||
| Less: line of credit assumed | - |
| (50,000) | ||||
| Less: promissory note issued to Seller | - |
| (33,735) | ||||
| Less: common stock issued to Seller | (50,000) |
| (171,746) | ||||
| Cash paid to acquire business | 90,000 |
| 53,734 | ||||
| Less: cash acquired in acquisition | (20,476) |
| (21,032) | ||||
|
| Net cash used in business combination | $ 69,524 |
| $ 32,702 | |||
The accompanying notes are an integral part of these financial statements.
F 7
VYSTAR CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
December 31, 2013 and 2012
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
History and Nature of Business
Vystar Corporation (“Vystar”, the “Company”) is the creator and exclusive owner of the innovative technology to produce Vytex® Natural Rubber Latex ("NRL"). On September 13, 2012, the Company acquired SleepHealth, LLC and SleepHealth North Carolina, LLC (“SleepHealth”), privately-held sleep diagnostic companies headquartered in Monroe, Georgia. SleepHealth provides sleep lab management services to physicians’ offices, specialty and multi-specialty clinics in Georgia, North Carolina and South Carolina. In addition, on June 28, 2013, the Company completed the acquisition of Kiron Clinical Sleep Lab, LLC (“Kiron”) a vertically integrated sleep diagnostic practice located in Durham, NC. As a result of the acquisitions, Vystar Corporation is comprised of two segments, a Vytex Division, focused on expanding the licensing and utilization of its proprietary source natural rubber latex technology and a Clinical Sleep Diagnostics and Durable Medical Equipment Division focused on the sleep diagnostic and Durable Medical Equipment (“DME”) businesses.
Basis of Presentation
The consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) as codified in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification.
The Company has evaluated subsequent events through the date of the filing of its Form 10-K with the Securities and Exchange Commission. Other than those events disclosed in Note 17, 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 consolidated financial statements.
Consolidation
The accompanying consolidated financial statements include the accounts of Vystar, SleepHealth, and Kiron. All intercompany accounts and transactions have been eliminated in consolidation.
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, and fair values of share-based compensation and other equity issuances.
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 we monitor 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, we have experienced no loss or lack of access to our cash; however, we can provide no assurances that access to our cash will not be impacted by adverse conditions in the financial markets.
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 December 31, 2013 and 2012, we have provided for uncollectible amounts through a charge to earnings of $257,160 and $33,745, respectively. We grant credit to our customers without requiring collateral. The amount of accounting loss for which we are at risk in these unsecured accounts receivable is limited to their carrying value.
Vytex Division customers are located in both the United States and internationally. The SleepHealth Division customer base is located in three southeastern states: Georgia, North Carolina and South Carolina. The Kiron Division’s customer base is exclusively in North Carolina.
F 8
Inventory
Inventory consisting of Vytex NRL is stated at the lower of cost or market and cost is determined using the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment is 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 years.
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.
The Company acquired the trade name, SleepHealth. Trade names are carried at cost and are being amortized on a straight-line basis over a period of five years.
The Company acquired various physician relationships. Physician relationships are carried at cost and are being amortized on a straight-line basis over a period of three years.
Impairment of Long-lived Assets
Long-lived assets, including property and equipment and intangible assets with finite lives, are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recognized in the amount that the carrying amount of the asset exceeds its fair value. Fair value is determined based on discounted future net cash flows associated with the use of the asset.
Goodwill Impairment
Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired. We utilize a discounted cash flow analysis to determine a reporting unit’s fair value. The methodology used in estimating discounted cash flows is inherently complex and involves significant management assumptions, including expected revenue growth and increases in expenses, to determine an appropriate discount rate and cash flows. Estimated cash flows extend into the future and, by their nature, are difficult to determine over an extended timeframe. Factors that have and may significantly affect the estimates, and ultimately their carrying amount in our financials, include, among others, competitive forces, customer behaviors and attrition, changes in revenue growth trends, cost structures and technology, government regulation and changes in discount rates or market sector conditions. Significant changes in these assumptions could affect the need to record an impairment charge.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash, accounts receivable, accounts payable, accrued expenses, 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 December 31, 2013 and 2012 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.
F 9
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.
Income Taxes
The Company follows the asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed for temporary differences between the financial statement and tax bases of assets and liabilities and for net operating loss carry-forwards that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences or carry-forwards are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount more likely than not to be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the net operating losses and temporary differences become deductible. Income tax expense (benefit) is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. As of December 31, 2013, our accumulated net operating loss was approximately $15,300,000.
In accordance with GAAP, a tax benefit arising from an uncertain tax position can only be recognized for financial reporting purposes if, and to the extent that, the position is more likely than not to be sustained in an audit by the applicable taxing authority. There were no material unrecognized tax benefits and related tax liabilities at December 31, 2013 and 2012. Penalties related to uncertain tax positions would be recorded as a component of general and administrative expenses. Interest relating to uncertain tax positions would be recorded as a component of interest expense.
Loss Per Share
The Company presents basic and diluted loss per share. Because the Company reported a net loss in 2013 and 2012, 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 7,488,239 and 6,867,500 shares of common stock for 2013 and 2012, respectively, as their effect would be anti-dilutive. Warrants to purchase 14,788,714 and 12,857,926 shares of common stock for 2013 and 2012, 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 3,008,500 shares of common stock for 2013 and none for 2012 were excluded from the computation of diluted loss per share as their effect would be anti-dilutive.
Revenue
The Vytex segment derives revenue from sales of or license fees of Vytex NRL raw material to manufacturers and distributors of rubber and rubber end products. Under both the direct and licensing agreement sales, the Vytex segment recognizes revenue at the time product is shipped and title passes to the customer. Revenue is recognized when the following four criteria are met: (1) persuasive evidence of an arrangement exists; (2) shipment or delivery has occurred; (3) the price is fixed or determinable and (4) collectability is reasonably assured.
SleepHealth bills its physician base of customers at the end of each month for services provided in that month and is not dependent on the physician collecting from insurance providers or from the patients. The SleepHealth segment recognizes revenue each month for sleep diagnostic services as services are provided.
Kiron bills insurance providers and patients directly and is dependent on the practice’s ability to collect from healthcare insurance providers and from its patients. The Kiron segment recognizes revenue each month for sleep services as services are provided.
Cost of Revenue
For Vytex, cost of revenue consists primarily of product and freight costs. For SleepHealth, cost of revenue consists primarily of sleep technician labor costs and for Kiron, cost of revenue is primarily sleep technician labor costs and medical director fees.
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.
F 10
NOTE 2 – 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 December 31, 2013, the Company had cash of approximately $56,373 and a deficit in working capital of $2,299,034. For the year ended December 31, 2013, the Company had a net loss of $2,513,808 and the accumulated deficit amounted to $22,919,355. Working capital is used to finance ongoing operations and since those operations do not currently cover all operating costs, managing working capital is essential to the Company’s future success.
Net cash used in operating activities was $1,019,972 for the year ended December 31, 2013 as compared to $1,579,839 for the year ended December 31, 2012. During the year ended December 31, 2013, cash used in operations was primarily due to the net loss for the year of $2,513,808, net of non-cash related add-back of share-based compensation expense of $701,204.
Net cash used by investing activities was $34,480 during the year ended December 31, 2013, as compared to net cash used of $108,424 during the year ended December 31, 2012. During the year ended December 31, 2013, $69,524 was used for the acquisition of Kiron Clinical Sleep Lab, LLC (as discussed in more detail in Note 3), $8,035 for patents and intellectual property offset by a net inflow of $43,079 from equipment purchases/disposals. During the year ended December 31, 2012, cash used by investing activities was used for the acquisition of SleepHealth, LLC, equipment purchases and costs related to the Company’s patents and intellectual property.
Net cash provided by financing activities was $1,018,906 during the year ended December 31, 2013, as compared to cash provided of $1,763,523 during the year ended December 31, 2012. In 2013, the cash provided was from the issuance of notes payable of $325,068, issuance of preferred stock of $300,852, issuance of common stock of $309,944, advances under the related party line of credit of $70,000, and advances of $47,479 under an accounts receivable facility offset by payments of $34,437 under promissory and other notes. In 2012, the cash provided was from an increase in the related party line of credit of $491,125 , equipment financing arrangements of $29,208, a related party promissory note of $100,000 , and the issuance of common stock of $1,196,799 offset by cash financing costs incurred of $42,750.
As discussed in detail in Note 6, the CMA Note matured on April 29, 2013, was renewed for another year and was most recently renewed again until April 29, 2015. All the Shareholder Notes which matured on various dates from March 11 through May 31, 2013 were either converted to preferred stock or were renewed for two years.
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 better utilization of existing Kiron facilities, increased revenue from Vytex division license fees, stock warrant exercises from existing shareholders, and raising capital through private placement memoranda (see Note 17, 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 2014 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 2014, 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 and services and competing technological developments; and the rate at which Kiron’s business can be built, especially with respect to its Durable Medical Equipment (“DME”) business. 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.
F 11
NOTE 3 – ACQUISITONS
On June 28, 2013, Vystar Corporation entered into an LLC Ownership Interest Purchase Agreement (the “Agreement”) with Michael Soo, M.D. (“Seller”), the sole member of Kiron Clinical Sleep Lab, LLC, a North Carolina limited liability company (“Kiron”) to purchase all outstanding membership and ownership interests of Kiron, and on July 1, 2013 completed such purchase (the “Purchase”). Pursuant to the Agreement, the Company:
(a) Paid $90,000 cash to Seller;
(b) Issued 727,434 shares of Vystar common stock to Seller; and
(c) Agreed to pay two percent (2%) of Kiron’s gross receipts received by the Company after the Closing Date of the Acquisition for a period of five (5) years.
In addition, the Company agreed to pay an additional $60,000 (the “Adjustment Amount”), $10,000 in cash and $50,000 in shares of Vystar common stock, in the event the audited financial results of Kiron for the year-end 2011, 2012, and the first six (6) months of 2013 were within two percent (2%) variability of the Statement of Revenues and Expenses provided by the Seller at closing for the periods referenced above. In the event the audited financial results were within three percent (3%) variability, fifty percent (50%) of the Adjustment Amount would be paid to the Seller. As this calculation is subject to the audited results, management’s initial estimate is subject to change.
At closing, the Company and Seller entered into an agreement (“Contract”) pursuant to which the Seller through his medical practice, Durham Neurology, PLLC, a wholly owned professional limited liability company would provide ongoing clinical and medical services to the Company and Kiron as Medical Director. The Seller subsequently dissolved Durham Neurology, PLLC in October 2013 leaving Kiron without a Medical Director. On March 10, 2014, Vystar and Kiron filed Civil Suit 74A-07997-1 IN THE SUPERIOR COURT OF GWINNETT COUNTY, STATE OF GEORGIA against Michael Soo, MD and Durham Neurology, PLLC for multiple breaches of the Agreement and Contract. Potential settlement discussions are currently taking place but there is no evidence that they will be successful.
The completed audit of Kiron’s 2011 and 2012 financial statements showed financial results that exceeded the three percent (3%) variability allowed under the Agreement and thus the $60,000 Adjustment Amount was forfeited. In addition, the Seller resigned from the role of Medical Director and as such has forfeited the two percent (2%) of gross receipts for five (5) years that was included in the original consideration. The Purchase Consideration was therefore adjusted to $140,000 and all initial Goodwill associated with the purchase was written-off.
The acquisition was accounted for as a business combination as defined by ASC Topic 805 – Business Combinations, with the purchase price allocation and valuation as follows:
Value of 727,434 shares issued at $0.0688 per share |
| $ 50,000 |
Cash paid at closing |
| 90,000 |
Total consideration |
| 140,000 |
|
|
|
Assets purchased: |
|
|
Tangible assets: |
|
|
Debt-free working capital |
| (800) |
Fixed assets and equipment |
| 34,769 |
Subtotal |
| $ 33,969 |
|
|
|
Goodwill |
| 106,031 |
Write-off of Goodwill |
| (106,031) |
Total assets purchased |
| 33,969 |
|
|
|
Net assets acquired |
| $ 33,969 |
Based on the timing of the acquisition, the Company, for comparability purposes, has disclosed the following pro-forma earnings information for the twelve months ended December 31, 2013, as if the acquisition had occurred effective January 1, 2012. As such, the actual and pro-forma earnings information for the twelve months ended December 31, 2013 and December 31, 2012 was as follows:
F 12
VYSTAR CORPORATION AND SUBSIDIARIES
Unaudited Pro Forma Combined Statements of Operations
For the Years Ended December 31
|
|
|
| 2013 |
|
|
|
|
| 2012 |
|
|
|
| Vystar |
| Kiron |
| Consolidated |
| Vystar |
| Kiron |
| Consolidated |
Revenues, net | $ 1,002,204 |
| $ 734,820 |
| $ 1,737,024 |
| $ 1,364,300 |
| $ 885,358 |
| $ 2,249,658 | |
Cost of revenues | 746,359 |
| 324,914 | B | 1,071,273 |
| 1,012,859 | D | 397,942 | C | 1,410,801 | |
| Gross profit | 255,845 |
| 409,906 |
| 665,751 |
| 351,441 |
| 487,416 |
| 838,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
| |
| Sales and marketing | 123,303 |
| - |
| 123,303 |
| 409,963 |
| - |
| 409,963 |
| General and administrative | 1,988,609 |
| 461,809 |
| 2,450,418 |
| 2,121,537 |
| 462,012 |
| 2,583,549 |
| Research and development | 22,234 |
| - |
| 22,234 |
| 36,969 |
| - |
| 36,969 |
| Goodwill impairment/intangible write-off | 155,313 |
| - |
| 155,313 |
| - |
| - |
| - |
| Total operating expenses | 2,289,459 |
| 461,809 |
| 2,751,268 |
| 2,568,469 |
| 462,012 |
| 3,030,481 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Profit/(Loss) from operations | (2,033,614) |
| (51,903) |
| (2,085,517) |
| (2,217,028) |
| 25,404 |
| (2,191,624) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
|
|
| |
| Interest income | 6,543 |
| - |
| 6,543 |
| 526 |
| - |
| 526 |
| Interest expense | (420,238) |
| (864) |
| (421,102) |
| (665,179) |
| - |
| (665,179) |
| Other (expense) income | 2,440 |
| (24,906) |
| (22,466) |
| 5,250 |
| - |
| 5,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net profit/(loss) | $ (2,444,869) |
| $ (77,673) |
| $ (2,522,542) |
| $ (2,876,431) |
| $ 25,404 |
| $ (2,851,027) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic and diluted loss per share | $ (0.08) |
| $ (0.00) |
| $ (0.08) |
| $ (0.14) |
| $ 0.00 |
| $ (0.14) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Basic and diluted weighted average number of common shares outstanding |
|
|
|
| 29,802,275 |
|
|
|
| A | 21,172,946 |
The accompanying notes are an integral part of these financial statements.
Pro Forma Financial Statement Adjustments
The following pro forma adjustments are included in the Company’s unaudited pro forma combined financial statements:
(A)
To record the 727,434 shares of Vystar common stock, valued at $50,000 or $0.0688 per share, issued to Seller.
(B)
To record Medical Director Fee Expense of $64,600 and Medical Insurance Billing Software of $1,194 for the six month period ending June 30, 2013.
(C)
To record Medical Director Fee of $130,700 and Medical Insurance Billing Software of $3,600 for the full year ending December 31, 2012.
(D)
2012 Vystar numbers include the pro-forma consolidated numbers of Sleephealth, LLC. For a full description of the 2012 SleepHealth pro-forma, please see Vystar’s fiscal year ended December 31, 2012 Form 10-K.
F 13
On September 13, 2012, the Company acquired SleepHealth as an indirect vertical integration opportunity as a potential channel for the Vytex® NRL foam bedding products. As consideration, the Company paid $53,734 in cash, $33,735 in a promissory note, and 636,098 shares of Vystar stock valued at $171,746 at the date of the transaction. Intangible assets of $48,000 were recorded, along with $154,995 of goodwill. Subsequent to the acquisition, SleepHealth’s financial performance has not met Company expectations, and a decision has been made to cease its operations as a part of the Company.
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31:
|
| 2013 |
| 2012 |
Furniture, fixtures and equipment |
| $ 423,552 |
| $ 280,627 |
Accumulated depreciation |
| (265,575) |
| (60,073) |
|
|
|
|
|
|
| $ 157,977 |
| $ 220,554 |
Depreciation expense for the years ended December 31, 2013 and 2012 was $54,267 and $22,408, respectively.
NOTE 5 – INTANGIBLE ASSETS
Intangible assets were as follows at December 31:
|
| 2013 |
| 2012 |
Physicians relationships |
| $ - |
| $ 29,000 |
Patents |
| 238,551 |
| 230,516 |
Goodwill (not amortizable) |
| - |
| 67,995 |
Trademarks & trade name |
| 9,072 |
| 28,072 |
Subtotal |
| 247,623 |
| 355,583 |
Accumulated amortization |
| (60,840) |
| (49,407) |
|
|
|
|
|
Intangible assets, net |
| $ 186,783 |
| $ 306,176 |
Amortization expense for the years ended December 31, 2013 and 2012 was $11,433 and $18,015, respectively.
Estimated future amortization expense for finite-lived intangible assets is as follows:
|
| 2014 |
| 2015 |
| 2016 |
| 2017 |
| 2018 |
| Thereafter |
Patents & trade name |
| $ 11,433 |
| $ 11,433 |
| $ 11,433 |
| $ 11,433 |
| $ 11,433 |
| $ 129,618 |
NOTE 6 – NOTES PAYABLE AND LOAN FACILITY
Related Party Line of Credit (CMA Note Payable)
On April 29, 2011, the Company executed with CMA Investments, LLC, a Georgia limited liability company (“CMA”), an unsecured line of credit with a principal amount of up to $800,000 (the “CMA Note”). CMA is a limited liability company of which three of the directors of the Company (“CMA directors”) are the members. Pursuant to the original terms of the CMA Note, the Company could draw up to a maximum principal amount of $800,000. Interest, which is computed at LIBOR plus 5.25% per annum (5.83% at December 31, 2013), on amounts drawn and fees, will be paid by a director of the Company, to CMA. The weighted average interest rate in effect on the borrowings for the year ended December 31, 2013 was 5.4%. Pursuant to an agreement between the Company and CMA, the Company will issue common stock with a value equal to the interest and fees paid based on the closing price of the common stock on the OTC Bulletin Board on the date of such payments. From June through December 2011, 110,848 shares of common stock were issued valued at $43,839 for interest and fees related to the CMA Note and in January and February 2012, 28,138 shares of common stock were issued valued at $9,005 for interest for the related party CMA Note. This agreement was modified during February 2012 and the Company assumed responsibility for payment of such interest and fees. The original maturity date of the CMA Note was April 29, 2013.
F 14
Other terms of the CMA Note include:
·
No payments of principal were due until the second anniversary of the CMA Note, at which time all outstanding principal was 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 CMA Directors at $0.45 per share, (the closing price of the Company’s stock on April 29, 2011), which vested 20% immediately and 10% upon each draw by the Company of $100,000 under the CMA Note. Because the warrants were issued and valued prior to the receipt of funds under this loan, no discount could be recorded and, accordingly, the value of the warrants was capitalized as a financing cost. These costs are being amortized on a straight line basis over the term of the CMA Note.
On September 14, 2011, the Company’s Board of Directors approved increasing the line of credit with CMA by $200,000 to a maximum principal amount of $1,000,000 and the Company’s Chairman and Chief Executive Officer became a member of CMA. As compensation to the CMA Directors for increasing the amount available under the CMA Note, the Board of Directors approved modifying the exercise price for the 2,600,000 compensatory stock purchase warrants previously issued to the directors from $0.45 to $0.27 per share, (the closing price of the Company’s common stock on that date) and the Company also issued warrants to purchase an additional 1,600,000 shares of the Company’s stock at $0.27 per share, (the closing price of the Company’s common stock on September 14, 2011), which vest upon the original terms of the CMA Note. The costs incurred in the modification of the exercise price of the 2,600,000 compensatory stock purchase warrants issued on April 29, 2011 and the additional 1,600,000 warrants issued on September 14, 2011 are being amortized to interest expense over the remaining term of the CMA Note.
On November 2, 2012, the Board of Directors approved an increase in the CMA line of credit from $1,000,000 to $1,500,000. As compensation to the CMA Directors for increasing the amount available under the CMA Note, warrants to purchase an additional 2,100,000 shares of the Company’s stock at $0.35 per share were issued and recorded as deferred financing cost to be amortized through interest expense over the remaining term of the CMA Note. Amortization of the financing costs associated with the CMA Note amounted to $182,225 and $515,374 for the years ended December 31, 2013 and 2012, respectively.
On April 29, 2013, the maturity date of the CMA Note was extended to April 29, 2014. As compensation to the CMA Directors for extending the maturity date of the CMA Note, the Board of Directors approved modifying the exercise price for the 6,300,000 compensatory stock purchase warrants previously issued to the Directors to $0.10 per share and the CMA Directors forfeited 630,000 of the warrants. Amortization of the financing costs associated with extending the CMA Note was amortized through interest expense.
Bank Line of Credit
On September 13, 2012, the Company as part of the acquisition of SleepHealth, LLC, assumed a line of credit with Wells Fargo Bank, N.A. which is (i) unsecured, (ii) bears interest at an annual rate of Prime plus 1.1% (as of December 31, 2013 was 4.35%), and (iii) is payable upon demand. As of December 31, 2013 the balance under the line of credit was $49,737.
Shareholder Notes Payable
The following table summarizes the shareholder notes payable:
| 2013 |
| 2012 |
|
|
|
|
Shareholder notes payable | $ 862,567 |
| $ 525,000 |
Discount associated with warrant issuances | - |
| (6,680) |
|
|
|
|
Total Shareholder Notes Payable | $ 862,568 |
| $ 518,320 |
On March 11, 2011, the Company issued to existing shareholders of the Company an aggregate of $400,000 of convertible promissory notes together with warrants to purchase an aggregate of 160,000 shares of the Company’s common stock at $0.68 per share for two years from the date of issuance. Such notes are (i) unsecured, (ii) bear interest at an annual rate of ten percent (10%) per annum, and (iii) are convertible into shares of common stock at the conversion rate of $0.68 of principal and interest for each such share. The principal and accrued interest came due on March 11, 2013. Four of the holders of these notes with a total initial principal amount of $200,000 agreed to convert their notes and accumulated interest to the Company’s 10% Series A Cumulative Convertible Preferred Stock. The remaining holders of notes have agreed to extend the maturity date until March 11, 2015.
F 15
On May 31, 2011, the Company issued to existing shareholders of the Company an aggregate of $125,000 of convertible promissory notes together with warrants to purchase an aggregate of 50,000 shares of the Company’s common stock at $0.49 per share for two years from the date of issuance. Such notes are (i) unsecured, (ii) bear interest at an annual rate of ten percent (10%) per annum, and (iii) are convertible into shares of common stock at a conversion rate of $0.49 of principal and interest for each such share. Accumulated interest and principal came due on May 31, 2013. One of the Shareholder Notes with an outstanding balance of $30,000 was retired. The holders of the other two Shareholder Notes having an initial principal balance of $100,000 agreed to extend the maturity date by two years and these notes with accumulated interest will be due on May 31, 2015.
The computed value of the warrants issued in connection with the Shareholder Notes issued in March and May 2011, was determined to be $29,287 and is reflected as a debt discount and netted against the Shareholder Notes on the balance sheet. Additionally, in conjunction with these transactions, the Company recorded a beneficial conversion feature, given the price allocated to the Shareholder Notes was less than the market price on the date of issuance, creating an intrinsic value in the conversion option. An additional $29,287 was recorded as a reduction in the Shareholder Notes along with an increase in paid in capital for the intrinsic value of the conversion feature. The debt discount and beneficial conversion feature amount are being amortized to interest expense over the life of the Shareholder Notes under the effective interest method at 15.58% per annum.
On October 7, 2011, the Company’s Board of Directors approved modifying the exercise price for the 210,000 stock purchase warrants previously issued to existing shareholders holding convertible promissory notes to $0.27 per share, the closing price of the Company’s common stock on September 14, 2011, the date when the exercise price of warrants previously issued to the Company’s directors for providing the CMA Note were modified to $0.27 per share. The Company incurred $10,105 in interest expense for the repricing of the warrants. As of December 31, 2013 none of the warrants had been exercised and all have expired.
On May 6, 2013, the Company issued to an existing shareholder of the Company an aggregate of $112,500 of convertible promissory notes (the “Note”). The Note is (i) unsecured, (ii) bears interest at an annual rate of ten percent (10%) per annum from date of issuance, and (iii) is convertible at any time until maturity at the holder’s option into shares of the Company’s common stock at a weighted average conversion rate of $0.075 of principal and interest for each such share. No payments of interest or principal are payable until May 6, 2015.
On September 6, 2013, the Company issued to the Chief Executive Office a convertible promissory note with a face value of $40,770 (the “Note”) in lieu of compensation. The Note is (i) unsecured, (ii) bears interest at an annual rate of ten percent (10%) per annum from date of issuance, and (iii) is convertible at any time until maturity at the holder’s option into shares of the Company’s common stock at a weighted average conversion rate of $0.075 of principal and interest for each such share. No payments of interest or principal are payable until September 6, 2018.
On December 30, 2013, the Company issued to the Chief Executive Office a convertible promissory note with a face value of $25,962 (the “Note”) in lieu of compensation. The Note is (i) unsecured, (ii) bears interest at an annual rate of ten percent (10%) per annum from date of issuance, and (iii) is convertible at any time until maturity at the holder’s option into shares of the Company’s common stock at a weighted average conversion rate of $0.075 of principal and interest for each such share. No payments of interest or principal are payable until December 30, 2015
The current base conversion price for the above referenced Shareholder and Promissory Notes with an outstanding balance as of December 31, 2013 of $953,913 including accrued interest, is $0.10 per share or 9,539,130 shares of the Company’s common stock. The face value of the Shareholder Notes at December 31, 2013 is $862,568.
The maturities (by year) of Shareholder Notes Payable as of December 31, 2013 are as follows:
Matured | 75,000 |
2014 | - |
2015 | 546,799 |
2016 | - |
2017 | - |
2018 & thereafter | 240,769 |
F 16
Kiron Acquisition Notes
On June 28, 2013, the Company entered into a note subscription agreement (the "NSA") with two investors (the “Investors") pursuant to which the Company agreed to issue to the Investors senior secured convertible promissory notes due June 30, 2018 bearing semi-annual interest at ten percent (10%) (the "Acquisition Notes") in the principal amount of $200,000. The Acquisition Notes are convertible into common stock at a price equal to the greater of $0.075 per share or eighty percent (80%) of the volume weighted average 20 day trailing closing price prior to the applicable conversion date. The financing resulted in $200,000 of cash proceeds to the Company and was used for the acquisition of Kiron Clinical Sleep Lab, LLC (“Kiron”). The Company's obligations under the Notes are secured by a first priority lien on all of the Kiron limited liability corporate membership and ownership interest pursuant to the terms of a security agreement ("Security Agreement") dated July 1, 2013 among the Company and the Investors.
Long-Term Debt
The following table summarizes long-term debt as of December 31, 2013 and 2012:
NOTE 7 – COMMITMENTS
Operating Leases
The Company is obligated under operating leases for its corporate office expiring in January 2014, Kiron clinical facilities expiring in 2018 and office equipment expiring in April 2016.
Aggregate minimum future lease payments are as follows:
Year Ending |
| Amount |
|
|
|
2014 |
| $ 69,730 |
2015 |
| $ 66,622 |
2016 |
| $ 65,494 |
2017 |
| $ 66,555 |
2018 |
| $ 45,137 |
|
|
|
|
| $ 313,538 |
Rent expense approximating $131,000 and $52,000 is included in general and administrative expense for the years ended December 31, 2013 and 2012, respectively.
F 17
Employment Agreements
The Company has entered into employment agreements with certain members of the executive management, which include provisions for the continued payment of salary and benefits for periods ranging from 3 months to 6 months, as well as a percentage of base salary for compliance with specified covenants in the agreements, upon termination of employment by the Company without cause, as defined.
Differences between the income tax benefit for 2013 and 2012 and the amount determined by applying the statutory federal income tax rate (34%) to the loss before income taxes were as follows:
|
|
| For the years ended | ||
|
|
| 2013 |
| 2012 |
Statutory rate |
| (34.0)% |
| (34.0)% | |
State income taxes, net of federal deduction |
| (4.0) |
| (4.0) | |
Non-deductible expenses |
| 13.5 |
| 8.8 | |
Valuation Allowance |
| 24.5 |
| 29.2 | |
|
|
| 0.0% |
| 0.0% |
|
|
|
|
|
|
Significant components of the Company's deferred tax assets are as follows as of December 31: | |||||
|
|
|
|
|
|
|
|
| 2013 |
| 2012 |
Deferred tax assets: |
|
|
|
| |
| Net operating loss carry-forwards |
| $ 5,796,000 |
| $ 5,055,000 |
| Share-based compensation |
| 1,385,000 |
| 1,202,000 |
| Other |
| 2,000 |
| 141,000 |
|
|
| 7,183,000 |
| 6,398,000 |
|
|
|
|
|
|
Valuation allowance |
| (7,183,000) |
| (6,398,000) | |
Net deferred tax asset |
| - |
| - | |
The change in the total valuation allowance for the years ended December 31, 2013 and 2012 was an increase of $785,000 and $783,000, respectively.
As of December 31, 2013, the Company had net operating loss carry-forwards of approximately $15,300,000 expiring during the years December 31, 2024 through 2033. This amount can be used to offset future taxable income of the Company.
The tax years 2009 to 2013 remain open to examination by the major taxing jurisdictions to which the Company is subject. Additionally, upon inclusion of the NOL carry-forward tax benefits in future tax returns, the related tax benefits for the period in which the benefit arose may be subject to examination.
NOTE 9 – DEFERRED COMPENSATION
Deferred compensation, which represents the unamortized fair value of the issuance of warrants and common stock for future services to non-employees, was as follows as of December 31:
|
| 2013 |
| 2012 |
|
|
|
|
|
Warrants |
| $ 1,549,209 |
| $ 1,549,209 |
Stock |
| 911,500 |
| 911,500 |
Accumulated amortization |
| (2,460,709) |
| (2,385,709) |
|
| $ - |
| $ 75,000.00 |
F 18
NOTE 10 – STOCKHOLDERS’ EQUITY
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 is convertible at a conversion price of $0.075 per common share at the option of the holder after a six month holding period. The holder may convert up to 5% of the shares to common shares per month. The preferred shares have full voting rights as if converted and have a fully participating liquidation preference.
As of August 29, 2013 the Company had received net investment of $197,110 and issued 19,711 shares of preferred stock under the terms of the offering. The Company has also issued an additional 10,374 shares of preferred stock in connection with the conversion of four of the Shareholder Notes issued on March 11, 2011 with a collective outstanding balance including accumulated interest on the date of conversion of $103,742.
At December 31, 2013, the 30,085 shares of outstanding preferred stock had accumulated undeclared dividends of approximately $19,000, and could be converted into 4,011,333 shares of common stock, at the option of the holder.
Common Stock and Warrants
On May 4, 2012, the Company commenced a new private placement offering to sell up to 3,000,000 shares of common stock. This offering was increased to a maximum of 4,900,000 shares of common stock on August 29, 2012. Under the terms of the offering, the Company offered to sell up to 4,900,000 shares of common stock at $0.25 per share with one stock purchase warrant exercisable at $0.35 per share for every one share purchased. During the second and third quarters of 2012, the Company received $482,750 and issued 1,900,000 shares of common stock and warrants to purchase an additional 1,900,000 shares of common stock. Aggregate commissions paid or issued to the placement agent were (1) $42,750 cash, (2) 133,000 shares of common stock valued at $43,890, and (3) warrants to purchase 152,000 shares of common stock at $0.35 per share, valued at $8,934. In June 2012, the Company sold 400,000 shares of common stock to an existing shareholder under the same terms as the private placement offering, receiving $100,000 and issuing 400,000 shares of common stock and warrants to purchase an additional 400,000 shares of common stock at $0.35 per share. At the same time, the Company issued 15,000 shares of common stock valued at $4,500 as reimbursement for expenses incurred for purposes of raising capital.
In January 2012, the Company issued 11,209 shares of common stock valued at $2,914 as reimbursement for expenses incurred.
During August 2012, the Company issued 400,000 shares of common stock valued at $120,000 under an agreement for professional services to be provided over a period of one year. The amortization of deferred compensation expense related to these shares for the years ended December 31, 2013 and 2012 was $85,000 and $35,000, respectively.
In September 2012, the Company issued 636,098 shares of common stock valued at $171,746 in connection with the acquisition of SleepHealth, LLC.
In November 2012, the Company issued 400,000 shares of common stock and 400,000 warrants to purchase common stock valued at $26,870, exercisable at $0.35 per share, in order to convert a $100,000 promissory note.
In December, 2012, the Company issued 33,172 shares of common stock valued at $8,293 as reimbursement for expenses incurred on behalf of the Company.
During the year ended December 31, 2012, the Company issued 67,000 shares of common stock for the exercise of warrants for proceeds of $17,143.
In January 2013, under the terms of the private placement offering which commenced on May 4, 2012, the Company sold 20,000 shares of common stock at $0.25 per share and 20,000 warrants to purchase common stock at $0.35 per share for proceeds of $5,000.
In March 2013, the Company issued 200,000 shares valued at $40,000 as compensation for a business development contract.
Between April 2013 and August 2013 the Company sold 834,666 shares of common stock to five (5) accredited investors in a private offering. Total gross proceeds of the issuances were $62,600. No commissions were paid. The shares of common stock were offered and sold in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. The Company also issued 4,433,333 shares to investors in the Company’s 2012 private placement of common stock who were the beneficiary of a “ratchet clause” trigger.
F 19
On May 30, 2013, the Company issued 133,333 common shares to its CEO in lieu of expense reimbursement.
On September 6, 2013, the Company issued 63,182 common shares to its CEO in lieu of expense reimbursement.
On December 30, 2013, the Company issued 36,773 common shares in lieu of expense reimbursement.
On July 1, 2013, the Company issued to the prior owner of Kiron Clinical Sleep Lab, LLC (“Kiron”) a total of 727,434 common shares in connection with the purchase of Kiron.
On August 8, 2013, the Company issued a total of 239,733 common shares upon the cashless warrant exercise of 429,000 of the Company’s outstanding and exercisable warrants.
On August 28, 2013, the Company issued a total of 3,300,000 common shares as compensation for an amendment to the Company’s Consulting Agreement with Blue Oar Consulting, Inc.
Between August 1, 2013 and September 30, 2013, the Company issued 1,200,000 shares of common stock to three (3) accredited investors in a private offering. Total gross proceeds of the issuances were $60,000. No commissions were paid. The shares of common stock and warrants were offered and sold in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
Between November 1, 2013 and December 1, 2013, the Company issued 2,066,667 shares of common stock and warrants to purchase 1,033,334 shares of common stock to twelve (12) accredited investors in a private offering. Total gross proceeds of the issuances were $62,000. No commissions were paid. All warrants issued to investors (a) are exercisable at $0.05 per share of common stock, (b) do not have cashless exercise rights, and (c) are exercisable for two years. The shares of common stock and warrants were offered and sold in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
On December 12, 2013, the Company issued 500,000 common shares as compensation for a business development and consulting contract (“Consulting Agreement”).
On December 30, 2013, the Company issued 692,308 common shares to its CEO in lieu of salary payable for fiscal year 2013; and 1,692,308 common shares to its CFO in lieu of salary payable for fiscal year 2013.
NOTE 11 – SHARE-BASED COMPENSATION
Generally accepted accounting principles require share-based payments to employees, including grants of employee stock options, 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 awards granted during 2013 and 2012. The following assumptions were used:
·
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 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 31.4% - 32.6% through the third quarter of 2012. During the fourth quarter of 2012 the Company began to utilize its own trading activity to determine expected volatility which was calculated to be 53.9%. Expected volatility calculations based on the Company’s trading activity ranged between 119.8% and 140.5% for 2013;
·
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 0.11 – 2.99%; and
·
Expected Life of Awards – because the Company has 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.
F 20
In total, the Company recorded $286,908 and $301,108 for the years ended December 31, 2013 and 2012, respectively, of share-based compensation expense related to employee and Board members’ stock options. As of December 31, 2013, approximately $228,591 of unrecognized compensation expense related to non-vested share-based awards remains to be recognized over a period of approximately three (3) years.
Stock Options
During 2004, the Board of Directors of the Company adopted a stock option plan (the “Plan”) and authorized up to 4,000,000 shares to be issued under the Plan. In April 2009, the Company’s Board of Directors authorized an increase in the number of shares to be issued under the Plan to 10,000,000 shares and to include the independent Board Members in the Plan in lieu of continuing the previous practice of granting warrants each quarter to independent Board Members for services. At December 31, 2013, there were 2,511,761 shares of common stock reserved for issuance under the Plan. 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.
The weighted-average assumptions used in the option pricing model for stock option grants were as follows:
| 2013 |
| 2012 |
Expected Dividend Yield | - |
| - |
Expected Volatility in Stock Price | 120.91% |
| 53.85% |
Risk-Free Interest Rate | 1.98% |
| 0.97% |
Expected Life of Stock Awards – Years | 10 |
| 6.5 |
Weighted Average Fair Value at Grant Date | $ 0.13 |
| $ 0.13 |
The following tables summarize all stock option activity of the Company for the years ended December 31, 2013 and 2012:
| Number of Shares |
| Weighted Average Exercise Price |
|
|
|
|
Outstanding, December 31, 2011 | 6,487,500 |
| $ 0.80 |
Granted | 605,000 |
| $ 0.09 |
Forfeited | (225,000) |
| $ 0.68 |
Outstanding, December 31, 2012 | 6,867,500 |
| $ 0.66 |
Granted | 1,439,906 |
| $ 0.14 |
Forfeited | (819,167) |
| $ 0.57 |
Outstanding, December 31, 2013 | 7,488,239 |
| $ 0.23 |
Exercisable, December 31, 2013 | 5,850,000 |
| $ 0.29 |
Additional details, including the average remaining contractual life of the options, as well as the range of exercise prices, is shown in the table below:
| Number of Shares |
| Weighted Average Remaining Contractual Life (Years) |
| Range of Exercise Prices |
Outstanding, December 31, 2012 | 6,867,500 |
| 6.03 |
| $0.25 – $1.50 |
Granted | 1,439,906 |
| 9.31 |
| $0.07 – $0.15 |
Forfeited | (819,167) |
|
|
| $0.25 – $0.68 |
Outstanding, December 31, 2013 | 7,488,239 |
| 5.49 |
| $0.07 - $1.50 |
Exercisable, December 31, 2013 | 5,850,000 |
| 5.64 |
| $0.10 - $1.50 |
F 21
As of December 31, 2013, there is no aggregate intrinsic value of outstanding stock options as the closing price of the Company’s common stock on the last trading day of the year was below the exercise price of all outstanding stock options. The amount of 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 weighted-average assumptions used in the option pricing model for stock warrant grants were as follows:
| 2013 |
| 2012 |
Expected Dividend Yield | - |
| - |
Expected Volatility in Stock Price | 130.03% |
| 45.30% |
Risk-Free Interest Rate | 2.05% |
| 0.73% |
Expected Life of Stock Awards – Years | 8.4 |
| 4.6 |
The weighted-average assumptions used in the option pricing model for stock warrant grants were as follows:
| Number of Shares |
| Weighted Average Grant Date Fair Value |
| Weighted Average Exercise Price |
| Weighted Average Remaining Contractual Life (Years) |
|
|
|
|
|
|
|
|
Outstanding, December 31, 2011 | 7,369,957 |
| - |
| $ 0.48 |
| 7.89 |
Issued for CMA Note increase & conversion of Promissory Note | 2,500,000 |
| $ 0.35 |
| $ 0.35 |
|
|
Issued in financing transactions | 2,300,000 |
| $ 0.25 |
| $ 0.25 |
|
|
Granted | 905,144 |
| $ 0.30 |
| $ 0.30 |
|
|
Exercised | (67,000) |
|
|
| $ 0.26 |
|
|
Expired | (150,175) |
|
|
| $ 0.51 |
|
|
Outstanding, December 31, 2012 | 12,857,926 |
|
|
| $ 0.35 |
| 5.64 |
Granted | 3,678,051 |
| $ 0.04 |
| $ 0.06 |
|
|
Exercised | (429,000) |
|
|
| $ 0.07 |
|
|
Expired | (1,318,263) |
|
|
| $ 0.92 |
|
|
Outstanding, December 31, 2013 | 14,788,714 |
|
|
| $ 0.16 |
| 6.67 |
Exercisable, December 31, 2013 | 14,638,714 |
|
|
| $ 0.16 |
| 6.71 |
The Company granted warrants for services during 2013 at exercise prices ranging from $0.04 to $0.35 per share, exercisable over ten years, warrants for private placement financing transactions and warrants in connection with debt financing, exercisable over five years. All of the warrant issuances vested immediately. The fair value of the warrants was calculated as of the date of the grant utilizing the Black-Scholes option pricing model and assumptions as detailed above. The total amount of the fair value of warrants totaling $170,619 was recorded in 2013 as vesting occurred.
NOTE 12 – RELATED PARTY TRANSACTIONS
Officers and Directors
During April 2009, the Company’s Board of Directors authorized the inclusion of the Board members in the Company’s stock option plan in lieu of continuing the previous practice of granting warrants each quarter to independent Board members. Each Board member was granted options to purchase 400,000 shares of the Company’s common stock, valued at approximately $233,000 each, at an exercise price of $1.63. Vesting occurs at the end of each complete calendar quarter served as an independent Board member of the Company at a rate of 20,000 shares each per quarter. The options are exercisable in whole or in part before September 30, 2019.
F 22
NOTE 13 – DEFINED CONTRIBUTION PLAN
The Company maintains a tax-qualified retirement plan that provides all regular employees with an opportunity to save for retirement on a tax-advantaged basis. Under the 401(k) plan, 100 percent of participants’ contributions up to a maximum of 3 percent of compensation and 50 percent of participants’ contributions up to an additional 2 percent of compensation are matched. Company contributions under the plan were approximately $6,000 and $13,000 for the years ended December 31, 2013 and 2012, respectively.
NOTE 14 – 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.
Vytex Division:
During 2013, the Vytex Division had product revenue from two major customers Occidente and Centrotrade, which comprised 85% and 15% of total Vytex revenue, respectively. As of December 31, 2013, no amount was due from either major customer. No amounts were owed to major vendors at December 31, 2013.
During 2012, the Vytex Division had product revenue from six major customers, which comprised 21%, 17%, 17%, 13%, 12% and 12% of total Vytex revenue. The Company had $20,395 in accounts receivable from one major customer at December 31, 2012. During 2012, the Company had purchases from four major vendors, which comprised 30%, 25%, 16% and 11% of cost of revenue. No amounts were owed to major vendors at December 31, 2012.
During 2013, the Company’s revenue from this Division was 100% to customers outside of the United States. During 2012, the Company’s revenue was approximately 35% and 65% to customers in the United States and outside of the United States, respectively.
SleepHealth Division:
During 2013, the SleepHealth Division had service revenue from three major customers, which comprised 15%, 10%, and 10% of total revenue. The Company had accounts receivable from these customers in the amount of $13,000, $13,425, and $7,450 at December 31, 2013. The Company’s cost of revenue is primarily technician’s wages and salaries, and no individual earnings constitute 10% of cost of sales. During 2012, SleepHealth had service revenue from two major customers, which comprised 11% and 10% of total revenue. Accounts receivable from these two customers at December 31, 2012 was $17,350 and $46,448.
During 2013 and 2012, 100% of SleepHealth revenue was earned in the southeastern United States.
Kiron Division
During 2013, the Kiron Division had service revenue from two major health insurance companies, Blue Cross Blue Shield of North Carolina (“BCBS”) and Medicare. BCBS comprised 56% of total revenue and Medicare comprised 23% of total revenue. As of December 31, 2013, we had accounts receivable from BCBS totaling $52,865 and $53,016 from Medicare.
During 2013, 100% of Kiron’s revenue was earned in the state of North Carolina.
NOTE 15 – 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.
F 23
NOTE 16 – SEGMENT INFORMATION AND GEOGRAPHIC DATA
The Company’s operating segments are the Vytex Division, the Clinical Sleep Diagnostics Division and the Durable Medical Equipment Division. The Clinical Sleep Diagnostics and Durable Medical Equipment Divisions are comprised of SleepHealth and Kiron. These segments have distinct lines of business, service or distribution methods, separate financial information and are regularly reviewed by management.
During the greater part of 2012, the Vytex segment sold or patented natural rubber latex in toll manufacturing arrangements. Vystar is transitioning from a toll manufacturing model to a licensing model where cost of goods sold will be carried by the distributor licensing the technology to process Vytex NRL. In December, 2012 Vystar signed an addendum to its existing agreement with Centrotrade Deutschland to license Vytex NRL technology by securing the raw material, processing the Vytex NRL using dispersion kits, storing, shipping, billing, collecting and paying the licensing fee. Vytex segment revenue can be derived from anywhere in the world.
The Company acquired SleepHealth on September 13, 2012. SleepHealth provides sleep lab management services to physician offices and multi-specialty clinics in the states of Georgia, North Carolina and South Carolina. This line of business has since closed operations.
The Company completed the acquisition of Kiron on July 1, 2013. Kiron is a vertically integrated sleep diagnostic and treatment practice located in Durham, NC and provides clinical sleep diagnostic services and sells Continuous Positive Airway Pressure (CPAP) Therapy equipment and equipment resupply products for the treatment of obstructive sleep apnea CPAP (Durable Medical Equipment or DME).
Total revenue by industry segment includes sales to unaffiliated customers. There are no sales between our industry segments.
The following sets forth key financial information for our segments for the year ended December 31, 2013:
NOTE 17 – SUBSEQUENT EVENTS
Beginning February 24, 2014 and ending on March 7, 2014, the Company issued 9,316,667 shares of common stock and warrants to purchase 4,658,333 shares of common stock to twelve (12) accredited investors in a private offering. Total gross proceeds of the issuances were $279,500. No commissions were paid. All warrants issued to investors (a) are exercisable at $0.05 per share of common stock, (b) do not have cashless exercise rights, and (c) are exercisable for two years. The shares of common stock and warrants were offered and sold in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
On February 26, 2014, the Company issued 1,000,000 common shares as compensation for an amendment and extension to the Company’s Consulting Agreement executed in December 2013 with Jason Leaf and 1,500,000 common shares as compensation for a second amendment and extension to the Company’s Business Development Agreement with Blue Oar Consulting, Inc. executed in March 2013 as amended in August 2013.
On March 6, 2014, Sound Investment Partners, LLC converted its 10% Convertible Promissory Note due June 30, 2018. The face value of the $100,000 Note converted to 1,333,334 shares of common stock and the accrued interest of $6,972 converted to 232,408 shares of common stock and 166,204 warrants with a $0.05 exercise price and two year expiration. On March 31, 2014, Italia-Eire, LP and Diamond II Investments, LLC each converted their 10% Convertible Promissory Note due June 30, 2018. The face value of each of the $50,000 Notes converted to 666,667 shares of common stock and the accrued interest of $3,833 converted to 127,778 shares of common stock and 63,889 warrants with a $0.05 exercise price and two year expiration.
At the closing of the Kiron Clinical Sleep Lab, LLC acquisition, the Company and Michael Soo, MD, the Seller, entered into an agreement (“Contract”) pursuant to which Michael Soo, MD, through his medical practice, Durham Neurology, PLLC, a wholly owned professional limited liability company, would provide ongoing clinical and medical services to Kiron as Medical Director. The Seller subsequently dissolved Durham Neurology, PLLC on September 13, 2013 leaving Kiron without a Medical Director. On March 10, 2014, Vystar and Kiron filed Civil Suit 74A-07997-1 IN THE SUPERIOR COURT OF GWINNETT COUNTY, STATE OF GEORGIA against Michael Soo, MD and Durham Neurology, PLLC for multiple breaches of the Agreement and Contract. Potential settlement discussions are currently taking place but there is no assurance they will be successful.
F 24
On March 17, 2014, Audrey Soo, a prior employee of Kiron Clinical Sleep Lab, LLC and spouse of Michael Soo, MD, filed Civil Suit 14CV-2373 IN THE DISTRICT COURT OF DURHAM COUNTY, STATE OF NORTH CAROLINA against Vystar Corporation and Kiron Clinical Sleep Lab, LLC for non-payment of accrued vacation and sick time.
The SleepHealth, LLC (“SleepHealth”), acquisition made on September 13, 2012, was expected to be mutually beneficial by providing each company with new expansion options by presenting an indirect vertical integration opportunity as a potential channel for Vystar’s recently announced Vytex® NRL foam bedding products such as pillows, mattresses, and mattress toppers. Since the SleepHealth acquisition, local hospitals have taken over several of the profitable locations, the Company was forced to close other locations due to a lack of payment for the services rendered and efforts to increase contract pricing with the remaining locations to a profitable level have failed. The Durable Medical Equipment business, the primary driver in the decision to acquire SleepHealth, never materialized and early in 2014, the Company made the decision to suspend operations, transferring the remaining accounts to the SleepHealth management team, selling the few remaining SleepHealth assets and contemplating its next move to re-coup hidden fees, ineffective contract price expectations and outright fabrication of SleepHealth’s potential by the Seller.
F 25
ITEM 9. CHANGES IN DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
None
ITEM 9A. CONTROLS AND PROCEDURES
The Company’s Chief Executive Officer and Chief Financial Officer (the Certifying Officers) are responsible for establishing and maintaining disclosure controls and procedures for the Company. The Certifying Officers have designed such disclosure controls and procedures to ensure that material information is made known to them, particularly during the period in which this report was prepared. The Certifying Officers have evaluated the effectiveness of the Company's disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e) (the Rules) under the Securities Exchange Act of 1934 (or Exchange Act) as of the end of the period covered by this Annual Report and believe that the Company's disclosure controls and procedures are effective to the reasonable assurance level based on the required evaluation.
Management’s Annual Report on Internal Control Over Financial Reporting
Management of Vystar is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Securities Exchange Act Rule 13a-15(f). Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (principal executive officer) and the Chief Financial Officer (principal accounting and financial officer), the Company’s management conducted an evaluation of the effectiveness of its internal control over financial reporting as of December 31, 2013 as required by the Securities Exchange Act of 1934 Rule 13a-15(c). In making this assessment, the Company’s management used the criteria set forth in the framework in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on the evaluation conducted under the framework in “Internal Control – Integrated Framework,” the Company’s management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2013.
During our most recent fiscal quarter, there has not occurred any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
This annual report does not include an attestation report of our registered independent public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered independent public accounting firm that permit us to provide only management’s report in this annual report because we are not an accelerated filer.
26
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Board of Directors
The following tables set forth the name and information of each director of Vystar as of December 31, 2013. Each director is elected to serve until the next Annual Meeting of Stockholders.
Name |
| Principal Occupation During Last Five Years |
| Age |
| Director Since |
William R. Doyle |
| Mr. Doyle, the Chairman of the Board, President and Chief Executive Officer, joined Vystar in 2004 as Vice President Sales & Marketing. He became President and Chief Operating Officer in December 2005. He became Chairman of the Board, President and Chief Executive Officer of Vystar in March 2008. Prior to that, Mr. Doyle served as Vice President of Marketing, Women’s Health, for Matria Healthcare, Inc., a disease management company, from 1999 to 2004. Mr. Doyle spearheaded the initial branding efforts at Matria as well as held responsibility for sales development, training, public relations, and marketing. He has worked in many aspects of healthcare industry for over twenty years encompassing manufacturing, sales, marketing and advertising. In addition to Matria, he has experience with such companies as Isolyser Company, Inc., McGaw, Inc., Lederle Laboratories (now Wyeth), and in an advertising capacity for Novartis Ophthalmics. Mr. Doyle is a member of the Board of Directors of the Georgia Chapter of the March of Dimes. He holds a Bachelor of Science in Biochemistry from Penn State University and Master of Business Administration from Pepperdine University. |
| 56 |
| 2005 |
|
|
|
|
|
|
|
J. Douglas Craft |
| Since 1983, Mr. Craft has been the founder and chief executive officer of Atlanta-based Medicraft Inc., one of the largest independent distributors for Medtronic Spinal Products worldwide. Mr. Craft has more than 28 years of experience in the medical device arena and holds a biomedical engineering degree from Mississippi State University. |
| 52 |
| 2006 |
|
|
|
|
|
|
|
Joseph C. Allegra, M.D. |
| Dr. Allegra was previously a member of Vystar’s Board from April 2008 to June 2009, and rejoined Vystar’s Board in September 2009. Dr. Allegra is the founder/owner of various limited liability companies in the Atlanta area including Diamond II Investments, Oncology Molecular Imaging, and Kids’ Time Pediatrics. He is also the owner of Cyberlogistics, Inc and is a partner with the Seraph Group. Dr. Allegra has held various professorships and chairmanships as a practicing oncologist. He has an undergraduate degree in Chemistry from Temple University and obtained his MD from the Milton S. Hershey Medical Center of the Pennsylvania State University. |
| 65 |
| 2009 |
|
|
|
|
|
|
|
Mitsy Y. Mangum |
| From July 2009 to present, Ms. Mangum has been Vice President, Investments, WMS, RPC at American Capital Partners LLC., an independent investment banking firm in Atlanta, GA. From July 2004 to July 2009, Ms. Mangum was a Vice President-Investments, Financial Advisor WMS, RPC with Raymond James & Associates in the Atlanta area. Ms. Mangum is an accomplished investment professional with over 24 years of financial service and industry experience both from the retail side as well as the institutional side. Ms. Mangum maintains an in-depth knowledge of the financial markets, professional money management and managing portfolios. She has a Bachelor of Science in Business Administration/ Management from College of Charleston. |
| 50 |
| 2008 |
27
Director Independence
Under Rule 5605(b)(1) of the Nasdaq Marketplace Rules, independent directors must comprise a majority of a listed company’s board of directors within one year of listing. In addition, Nasdaq Marketplace Rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and governance committees be independent. While Vystar does not currently qualify for listing on Nasdaq and will likely not qualify for some time after the date of this proxy statement, it does intend to seek such listing as soon as possible and complies with its Marketplace Rules. Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended. Under Nasdaq Marketplace Rule 5605(a)(2), a director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In order to be considered to be independent for purposes of Rule 10A-3, a member of an audit committee of a public company may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee: (1) accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the public company or any of its subsidiaries; or (2) be an affiliated person of the listed company or any of its subsidiaries.
In March of 2013 in preparation for Mr. Waters assuming the role of Chief Financial Officer, our Board undertook a review of its composition, the composition of its committees and the independence of each director. Based upon information requested from and provided by each director concerning his or her background, employment and affiliations, including family relationships, our Board has determined that none of Messrs. Craft or Dr. Allegra or Ms. Mangum, representing three of our five directors, has a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is “independent” as that term is defined under Nasdaq Marketplace Rule 5605(a)(2).
28
Audit Committee
The Board member serving on our Audit Committee is Ms. Mangum. Ms. Mangum chairs and is the sole member of the Audit Committee. Our Board has determined that Ms. Mangum satisfies the requirements for financial literacy under the current requirements of the Nasdaq Marketplace Rules. Ms. Mangum is an “audit committee financial expert,” as defined by SEC rules and satisfies the financial sophistication requirements of The NASDAQ Global Market. Our Audit Committee assists our Board in its oversight of our accounting and financial reporting process and the audits of our financial statements. The Audit Committee’s responsibilities include:
•
appointing, approving the compensation of, and assessing the independence of our independent registered public accounting firm;
•
overseeing the work of our independent registered public accounting firm, including through the receipt and consideration of reports from such firm;
•
reviewing and discussing with management and the independent registered public accounting firm our annual and quarterly financial statements and related disclosures;
•
monitoring our internal control over financial reporting, disclosure controls and procedures and code of business conduct and ethics;
•
discussing our risk management policies;
•
establishing policies regarding hiring employees from the independent registered public accounting firm and procedures for the receipt and resolution of accounting related complaints and concerns;
•
meeting independently with our independent registered public accounting firm and management;
•
reviewing and approving or ratifying any related person transactions; and
•
preparing the audit committee report required by SEC rules.
All audit and non-audit services, other than de minimus non-audit services, to be provided to us by our independent registered public accounting firm must be approved in advance by our Audit Committee.
Audit Committee Charter
We have adopted an Audit Committee Charter which sets out the duties and responsibilities of our Audit Committee. The Audit Committee Charter is available on our website at www.vytex.com . Any amendments to the Charter, or any waivers of its requirements, will be disclosed on our website.
Meetings of the Board and Committees
During fiscal year 2013, our Board held four meetings and acted by written consent three times, and its Audit Committee held five meetings. Each director attended at least 75% of the meetings of the Board in fiscal year 2013. Members of our Board are encouraged to attend our annual meetings of shareholders.
CORPORATE GOVERNANCE
Corporate Governance Guidelines
We believe in sound corporate governance practices and have adopted formal Corporate Governance Guidelines to enhance our effectiveness. Our Board adopted these Corporate Governance Guidelines in order to ensure that it has the necessary practices in place to review and evaluate our business operations as needed and to make decisions that are independent of our management. The Corporate Governance Guidelines are also intended to align the interests of directors and management with those of our shareholders. The Corporate Governance Guidelines set forth the practices our Board follows with respect to Board and committee composition and selection, Board meetings, chief executive officer performance evaluation and management development and succession planning for senior management, including the chief executive officer position. A copy of our Corporate Governance Guidelines is available on our website at www.vytex.com.
Code of Business Conduct and Ethics
We adopted a Code of Business Conduct and Ethics applicable to all officers, directors and employees of Vystar that comply with NASDAQ listing standards. The Code of Business Conduct and Ethics includes an enforcement mechanism, and any waivers for directors or executive officers must be approved by our Board and disclosed in a current report on Form 8-K with the SEC. This Code of Business Conduct is publicly available on our website at www.vytex.com . There were no waivers of the Code of Business Conduct and Ethics for any of our directors or executive officers during fiscal year 2013.
29
ITEM 11. EXECUTIVE COMPENSATION
Overview
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information regarding compensation earned by our Chairman, Chief Executive Officer and President, our Chief Financial Officer during 2013 and 2012.
Name and Principal Position |
| Salary |
| Option |
| All Other |
| Total |
William R. Doyle (3) |
|
|
|
|
|
|
|
|
Chairman, Chief Executive Officer and President |
|
|
|
|
|
|
|
|
2013 |
| $ 58,923 |
| $ 71,033 |
| $ 77,117 |
| $ 207,073 |
2012 |
| 152,981 |
| 55,567 |
| 10,499 |
| 219,047 |
|
|
|
|
|
|
|
|
|
W. Dean Waters (4) |
|
|
|
|
|
|
|
|
Chief Financial Officer |
|
|
|
|
|
|
|
|
2013 |
| 48,460 |
| 106,580 |
| 74,366 |
| 229,406 |
|
|
|
|
|
|
|
|
|
Matthew P. Clark |
|
|
|
|
|
|
|
|
Vice President of Technical Sales |
|
|
|
|
|
|
|
|
2013 |
| 43,047 |
| - |
|
|
| 43,047 |
2012 |
| 69,462 |
| 14,077 |
| 7,558 |
| 91,097 |
|
|
|
|
|
|
|
|
|
Monica Schreiber (4) |
|
|
|
|
|
|
|
|
Acting Chief Financial Officer |
|
|
|
|
|
|
|
|
2013 |
| 34,769 |
| - |
| - |
| 34,769 |
2012 |
| 29,225 |
| 2,081 |
| - |
| 31,306 |
|
|
|
|
|
|
|
|
|
Linda S. Hammock (5) |
|
|
|
|
|
|
|
|
Acting Chief Financial Officer |
|
|
|
|
|
|
|
|
2012 |
| 74,865 |
| 4,163 |
| - |
| 79,028 |
1.)
These amounts do not reflect the actual economic value realized by the executive officers. In accordance with SEC rules, the amounts in this column for 2013 and 2012 represent the dollar amount recognized as compensation expense by Vystar for financial statement reporting purposes for fiscal years 2013 and 2012 for stock options granted to each of the executive officers in each such fiscal year in accordance with applicable accounting guidance related to stock-based compensation. In 2012, all outstanding options held by the Company’s executive officers were repriced to exercise prices of $ . In accordance with SEC rules, the amounts for 2012 represent the dollar amount recognized as compensation expense by Vystar for financial statement reporting purposes for fiscal year 2012 as a result of such repricing in such fiscal year in accordance with applicable accounting guidance related to stock-based compensation as well as the dollar amount recognized as compensation expense by Vystar for financial statement reporting purposes for fiscal year 2012 for stock options or warrants granted to each of the executive officers in such fiscal year in accordance with applicable accounting guidance related to stock-based compensation. Pursuant to SEC rules, the amounts shown disregard the impact of estimated forfeitures related to service-based vesting conditions.
2.)
Amounts consist of medical, dental, vision, life insurance and disability insurance premiums and 401(K) contributions paid by us on behalf of the named executive officer.
3.)
Mr. Doyle’s Option Awards includes $34,220.55 in 2012 to purchase 500,000 shares of common stock in connection with the CMA line of credit
4.)
Ms. Schreiber was an independent contractor. The Company was billed by Ms. Schreiber on a periodic basis for her services. Ms. Schreiber resigned as Acting Chief Financial Officer on April 1, 2013.
5.)
Ms. Hammock was an independent contractor of Accounting Professionals Network, Inc. (“APN”), a provider of professional financial management services to companies. The Company was billed by APN on a periodic basis for her services. Ms. Hammock retired as Acting Chief Financial Officer on September 4, 2012.
30
In 2012, William R. Doyle, Chairman, Chief Executive Officer and President of the Company, received warrants to purchase 207,393 shares of common stock in lieu of $21,346 cash compensation due Mr. Doyle under his employment agreement.
During the same time period, Matthew P. Clark, Vice President of Technical Sales of the Company, received warrants to purchase 136,767 shares of common stock in lieu of $14,077 cash compensation due Mr. Clark under his employment agreement.
In 2013, William R. Doyle, Chairman, Chief Executive Officer and President of the Company, received warrants to purchase 736,045 shares of common stock share in lieu of $38,141 cash compensation due Mr. Doyle under his employment agreement. Mr. Doyle also received 692,308 shares of common stock in lieu of $20,769 cash compensation due Mr. Doyle under his employment agreement and convertible promissory notes with a total face value of $66,732 in lieu of cash compensation.
On December 30, 2013, the Company issued to the Chief Executive Office, William R. Doyle a convertible promissory note with a face value of $25,962 (the “Note”) in lieu of compensation. The Note is (i) unsecured, (ii) bears interest at an annual rate of ten percent (10%) per annum from date of issuance, and (iii) is convertible at any time until maturity at the holder’s option into shares of the Company’s common stock at a weighted average conversion rate of $0.075 of principal and interest for each such share. No payments of interest or principal are payable until December 30, 2015.
During the same time period, W. Dean Waters, Chief Financial Officer of the Company, received warrants to purchase 846,154 shares of common stock in lieu of $21,797 cash compensation due Mr. Waters under his employment agreement. Mr. Waters also received 1,692,308 common shares in lieu of $50,769 cash compensation due Mr. Waters under his employment agreement.
Employment Agreements
On November 11, 2008, Vystar entered into an employment agreement with William R. Doyle to continue to serve as Vystar’s President, Chief Executive Officer and Chairman of the Board. The term of the agreement is effective until terminated by either party in accordance with the terms of the agreement. Under the agreement, Mr. Doyle receives a base salary of $185,000 per year, as such base salary may be adjusted by the Board, and an annual bonus equal to a maximum of 125% of Mr. Doyle’s base salary based on the success of the Company in meeting its objectives, as determined by the Board; provided, that no cash bonus is payable to Mr. Doyle on any date unless he is employed by the Company on that date. The amount of the annual bonus is determined by the Board based on the percentage of achievement of the stated company objectives. The effective date of the annual bonus calculation is the Company’s fiscal year-end and is payable in one or more installments as determined by the Board beginning in the first quarter of the following fiscal year. Mr. Doyle’s employment agreement is terminable at will by the Company for cause or without cause as defined in the agreement. However, if Mr. Doyle’s employment is terminated by Vystar without cause, Vystar is obligated to pay Mr. Doyle compensation earned through the date of termination plus a severance payment equal to six (6) months base salary from the date of termination payable as if he had remained an employee of the Company, plus, assuming Mr. Doyle complies with non-compete and non-solicitation covenants contained in the employment agreement, an amount equal to 75% of Mr. Doyle’s base salary amount for the one (1) year period after the date of termination. If Mr. Doyle is terminated for cause or he terminates the employment agreement without cause, he is only entitled to compensation accrued through the date of termination.
On April 1, 2013, W. Dean Waters was appointed Chief Financial Officer and Mr. Waters and the Company entered into an Executive Employment Agreement. The term of the Agreement is effective until terminated by either party in accordance with the terms of the agreement. Under the Agreement Mr. Waters receives a base salary of $120,000 as such base salary may be adjusted by the Board and an annual bonus equal to 10% of the Company’s earnings before taxes up to a maximum of $30,000. Mr. Waters also received a grant of 250,000 options to purchase Company common stock with an exercise price of $0.15 per share of common stock, which options vest 100,000 at date of grant and 50,000 each on the first, second and third anniversaries of the date of the initial grant. Mr. Waters also received a grant of 500,000 options to purchase Company common stock with an exercise price of $0.15 per share of common stock, which options vest (a) 125,000 upon the attainment of EBITDA (earnings before interest, taxes, depreciation and amortization) of breakeven or better for the period from April 1, 2013, to March 31, 2014, (b) an additional 125,000 upon the attainment of annual EBITDA of $250,000 or better for the period from April 1, 2013, to March 31, 2014, and (c) the balance upon attainment of annual EBITDA of $500,000 or better for the period from April 1, 2013, to March 31, 2014. Such options have a term of ten years. However, in the event Mr. Waters is terminated by the Company without cause, the Company shall (i) pay Mr. Waters his then current salary and provide Employee with group health insurance, for three (3) months (“Severance Period”) beginning with the date of termination; (ii) pay Mr. Waters any Company Bonus and Annual Bonus due and payable (collectively “Severance Payment”); (iii) the 250,000 Stock Option Grant shall automatically vest; and (iv) the 500,000 Stock Option Grant as shall vest if the performance criteria has been met.
Grants of Plan-Based Awards for Fiscal Year 2013
Mr. Doyle received a grant of 500,000 options to purchase Company common stock with an exercise price of $0.15 per share of common stock, which options vest (a) 125,000 upon the attainment of EBITDA (earnings before interest, taxes, depreciation and amortization) of breakeven or better for the period from April 1, 2013, to March 31, 2014, (b) an additional 125,000 upon the attainment of annual EBITDA of $250,000 or better for the period from April 1, 2013, to March 31, 2014, and (c) the balance upon attainment of annual EBITDA of $500,000 or better for the period from April 1, 2013, to March 31, 2014. Such options have a term of ten years.
31
Mr. Waters also received a grant of 250,000 options to purchase Company common stock with an exercise price of $0.15 per share of common stock, which options vest 100,000 at date of grant and 50,000 each on the first, second and third anniversaries of the date of the initial grant. Mr. Waters also received a grant of 500,000 options to purchase Company common stock with an exercise price of $0.15 per share of common stock, which options vest (a) 125,000 upon the attainment of EBITDA (earnings before interest, taxes, depreciation and amortization) of breakeven or better for the period from April 1, 2013, to March 31, 2014, (b) an additional 125,000 upon the attainment of annual EBITDA of $250,000 or better for the period from April 1, 2013, to March 31, 2014, and (c) the balance upon attainment of annual EBITDA of $500,000 or better for the period from April 1, 2013, to March 31, 2014. Such options have a term of ten years.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth certain information with respect to the value of all unexercised options previously awarded to our executive officers as of December 31, 2013:
Name |
| Number of |
| Number of |
| Equity Incentive |
| Options |
| Option |
William R. Doyle |
| 300,000 |
|
|
|
|
| $ 0.68 |
| 12/2/2014 |
|
| 100,000 |
|
|
|
|
| 0.68 |
| 4/28/2015 |
|
| 500,000 |
|
|
|
|
| 0.68 |
| 10/1/2016 |
|
| 1,750,000 |
|
|
|
|
| 0.68 |
| 2/11/2018 |
|
| 83,333 |
| 166,667 |
| 166,667 |
| 0.68 |
| 3/14/2021 |
|
|
|
| 500,000 |
| 500,000 |
| 0.15 |
| 4/1/2023 |
|
|
|
|
|
|
|
|
|
|
|
W. Dean Waters |
| 100,000 |
| 150,000 |
| 150,000 |
| 0.15 |
| 4/1/2023 |
|
|
|
| 500,000 |
| 500,000 |
| 0.15 |
| 4/1/2023 |
Risk Analysis of Performance-Based Compensation Programs
The Board of Directors believes that our executive compensation programs do not encourage or result in excessive risk taking. Such programs consist of base salaries, cash bonuses (none of which have been paid to date), and stock option grants. Cash bonuses and the vesting of stock option grants for Mr. Doyle, our Chief Executive Officer, Chairman and President and Mr. Waters, our Chief Financial Officer are based on milestones to be set by our Board of Directors. We anticipate that such bonuses and stock options will be based on attaining specified percentages of the company’s earnings before interest, taxes, depreciation and amortization (“EBITDA”). As a result, such bonuses will likely be focused on increasing revenue and managing expenses, all of which is consistent with the interests of our shareholders. Further, the cash bonuses will likely be capped at a percentage of his base salary. We believe this cap will limit the incentive for excessive risk-taking.
No other officers of the Company have employment agreements that specify compensation programs.
Retirement and Deferred Compensation Plan Benefits
We do not provide our employees, including the executive officers, with a defined benefit pension plan, any supplemental executive retirement plans, or retiree health benefits. The executive officers may participate on the same basis as other employees in Vystar’s Section 401(k) Retirement Savings Plan (the “401(k) Plan”). The 401(k) Plan allows for matching contributions to be made by us. We currently match dollar for dollar on the first three percent (3%) of compensation and $.50 on each dollar of the next two percent (2%) of compensation. As a tax-qualified retirement plan, contributions to the 401(k) Plan and earnings on those contributions are not taxable to the employees until distributed from the 401(k) Plan and all contributions are deductible by us when made. Vystar makes a matching contribution to help attract and retain employees and to provide an additional incentive for our employees to save for their retirement in a tax-advantaged manner.
32
Potential Payments upon Termination Without Cause
The following table sets forth the estimated potential payments and benefits payable to two (2) executive officers in the event of a termination of employment without cause.
Executive Officer |
| Monthly |
| Additional |
| Continuing |
| TOTALS |
|
|
|
|
|
|
|
|
|
William R. Doyle |
| $ 92,500 |
| $ 138,750 |
| $ 962 |
| $ 232,212 |
W. Dean Waters |
| 30,000 |
| - |
| 600 |
| 30,600 |
1.)
The amounts represent the aggregate of monthly payments for six (6) months for Mr. Doyle and three (3) months for Mr. Waters.
2.)
In the event that Mr. Doyle complies with certain restrictive covenants in his employment agreement, after termination without cause, he is additionally entitled to this amount (75% of his base salary) payable in monthly installments over a one (1) year period following the initial six (6) month period of monthly severance payments.
3.)
Consists of health insurance premiums.
DIRECTOR COMPENSATION
The following table sets forth certain information with respect to compensation awarded to, paid to or earned by each of Vystar’s non-employee directors during fiscal year 2013.
Name |
| Fees Earned or Paid in |
| Stock Awards ($) |
| Option Awards ($) (1) |
| Total ($) (2) | ||||
J. Douglas Craft |
|
|
|
|
|
|
|
| 56,230 |
|
| 56,230 |
Joseph Allegra, MD |
|
|
|
|
|
|
|
| 56,230 |
|
| 56,230 |
W. Dean Waters |
|
|
|
|
|
|
|
| 56,230 |
|
| 56,230 |
Mitsy Y. Mangum |
|
|
|
|
|
|
|
| 56,230 |
|
| 56,230 |
D. Thomas Marsh |
|
|
|
|
|
|
|
| 7,373 |
|
| 7,373 |
1.)
In 2009, all non-employee directors were granted 400,000 options at $1.63 per share which vest 20,000 options at the end of each fiscal quarter for five (5) years beginning June 30, 2009, for Messrs. Craft and Waters, and Ms. Mangum, and beginning September 30, 2009 for Dr. Allegra. Such vesting is based on each director’s continued service as a director at each quarterly vesting date. The amounts included represent the portion of the original total grant date fair value of options that vested in 2013 together with the dollar amount recognized as compensation expense by Vystar for financial statement reporting purposes for fiscal year 2013 as a result of all outstanding options held by the Company’s directors being repriced to exercise prices of $0.35 per share in such fiscal year in accordance with applicable accounting guidance related to stock-based compensation.
2.)
These amounts do not reflect the actual economic value realized by the directors. In accordance with SEC rules, this column represents the dollar amount recognized as compensation expense by Vystar for financial statement reporting purposes for fiscal year 2013 for stock options granted to each of the non-employee directors during fiscal year 2009, in accordance with applicable accounting guidance related to stock-based compensation. Pursuant to SEC rules, the amounts shown disregard the impact of estimated forfeitures related to service-based vesting conditions.
Compensation Philosophy
The current policy of our Board is that compensation for non-employee directors should be equity-based compensation to reward directors for quarterly periods of service in fulfilling their oversight responsibilities.
Expenses
We reimburse our directors for their travel and related expenses in connection with attending Board and committee meetings, as well as costs and expenses incurred in attending director education programs and other Vystar-related seminars and conferences.
33
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The following table sets forth the beneficial ownership of our common stock as of December 31, 2013 by each entity or person who is known to beneficially own 5% or more of our common stock, each of our directors, each Executive Officer identified in “Executive Compensation—Summary Compensation Table” contained in this proxy statement and all of our directors and current executive officers as a group. This table is based upon information supplied by executive officers, directors and principal shareholders. Unless otherwise indicated in the footnotes to this table and subject to community property laws where applicable, each of the shareholders named in this table has sole voting and investment power with respect to the shares indicated as beneficially owned. None of the shares beneficially owned by our executive officers and directors are pledged as security. Applicable percentages are based on shares outstanding on December 31, 2013, adjusted as required by rules promulgated by the SEC.
5% Stockholders |
|
|
Gregory Rotman | 3,000,000 | 7.661% |
|
|
|
Margaret Honeycutt | 2,497,000 | 6.376% |
|
|
|
Travis Honeycutt | 2,496,900 | 6.376% |
|
|
|
Keith Osborn | 8,256,437 | 21.084% |
|
|
|
Officers & Directors |
|
|
|
|
|
William R Doyle | 8,699,970 | 22.216% |
|
|
|
Dean Waters | 4,122,796 | 10.528% |
|
|
|
Joseph C Allegra, M.D. | 7,617,391 | 19.452% |
|
|
|
Michelle Mangum | 1,815,000 | 4.635% |
|
|
|
John Douglas Craft | 2,240,000 | 5.720% |
|
|
|
All Directors and Executive Officers as a Group | 24,495,157 | 62.551% |
|
|
|
Total Shares Outstanding | 39,160,255 |
|
(1)
Includes vested warrants to acquire 50,000 shares of common stock and convertible notes that are convertible into 5,566,437 shares of common stock.
(2)
Includes vested options to acquire 2,816,667 shares of common stock, vested warrants to acquire 2,769,478 shares of common stock, and convertible notes that are convertible into 680,336 shares of common stock.
(3)
Includes vested options to acquire 500,000 shares of common stock and vested warrants to acquire 1,156,154 shares of common stock.
(4)
Includes vested options to acquire 340,000 shares of common stock, vested warrants to acquire 1,830,000 shares of common stock, convertible notes that are convertible into 1,402,222 shares of common stock, and convertible preferred stock that are convertible into 1,625,700 shares of common stock.
(5)
Includes vested options to acquire 360,000 shares of common stock and vested warrants to acquire 1,390,000 shares of common stock.
(6)
Includes vested options to acquire 360,000 shares of common stock and vested warrants to acquire 1,550,000 shares of common stock.
34
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our executive officers and directors, and any person or entity who owns more than ten percent of a registered class of our common stock or other equity securities, to file with the SEC certain reports of ownership and changes in ownership of our securities. Executive officers, directors and shareholders who hold more than ten percent of our outstanding common stock are required by the SEC to furnish us with copies of all required forms filed under Section 16(a). We prepare Section 16(a) forms on behalf of our executive officers and directors based on the information provided by them.
Based solely on review of this information and written representations by our executive officers and directors that no other reports were required, we believe that, during fiscal year 2013, each director failed filed the forms required by Section 16(a) of the Exchange Act on a timely basis with respect to the repricing of option and warrants. Such filings are now current.
EQUITY COMPENSATION PLAN INFORMATION
The following table shows information related to our common stock which may be issued under our 2004 Long-Term Incentive Compensation Plan, as amended, as of December 31, 2013:
Plan Category |
| Number of securities |
| Number of | ||
2004 Long-Term Incentive Compensation Plan, as amended, approved by shareholders |
|
| 7,488,239 |
|
| 2,511,761 |
Total |
|
| 7,488,239 |
|
| 2,511,761 |
Our 2004 Long-Term Incentive Compensation Plan, as amended, which we refer to as the 2004 Plan, was adopted by our Board in 2004, and amended and approved by our shareholders in 2009. A maximum of 10,000,000 shares of common stock were authorized for issuance under the 2004 Plan.
The 2004 Plan provides for the grant of incentive stock options, non-statutory stock options, restricted stock and other stock-based awards. Our officers, employees, consultants and directors are eligible to receive awards under the 2004 Plan; however, incentive stock options may only be granted to our employees. In accordance with the terms of the 2004 Plan, our Board administers the 2004 Plan and, subject to any limitations in the 2004 Plan, selects the recipients of awards and determines:
·
the number of shares of common stock covered by options and the dates upon which those options become exercisable;
·
the exercise prices of options;
·
the duration of options;
·
the methods of payment of the exercise price; and
·
the number of shares of common stock subject to any restricted stock or other stock-based awards and the terms and conditions of those awards, including the conditions for repurchase, issue price and repurchase price.
Pursuant to the terms of the 2004 Plan, in the event of a change in control of our company, each outstanding option under the 2004 Plan will vest, but the holders shall have the right, assuming the holder still maintains a continuous service relationship with us, immediately prior to such dissolution or liquidation, to exercise the option to the extent exercisable on the date of such dissolution or liquidation.
In the event of a merger or other reorganization event, our Board shall have the discretion to provide for any or all of the following: (a) the acceleration of vesting or the termination of our repurchase rights of any or all of the outstanding awards, (b) the assumption or substitution of all options by the acquitting or succeeding entity or (c) the termination of all options that remain outstanding at the time of the merger or other reorganization event.
35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Review, Approval or Ratification of Transactions with Related Persons
Vystar’s Code of Business Conduct requires that all employees and directors avoid conflicts of interests that interfere with the performance of their duties or are not in the best interests of Vystar.
In addition, pursuant to its written charter, the Audit Committee considers and approves or disapproves any related person transaction as defined under Item 404 of Regulation S-K promulgated by the SEC, after examining each such transaction for potential conflicts of interest and other improprieties. The Audit Committee has not adopted any specific written procedures for conducting such reviews and considers each transaction in light of the specific facts and circumstances presented.
Transactions with Related Persons
On April 29, 2011, the Company executed with CMA Investments, LLC, a Georgia limited liability company (“CMA”) a line of credit with a principal amount of up to $800,000 (the “CMA Note”). CMA is a limited liability company of which three of the directors of the Company were the members at such date. Proceeds under the line were drawn for general working capital purposes. Under the terms of the CMA Note, the Company may draw up to a maximum principal amount of $800,000. Interest on amounts drawn and fees were paid by an affiliate of Joseph C. Allegra, M.D., a director of the Company, to CMA, until February 6, 2012, at which time the Company took over responsibility for the payment of such interest and fees. Pursuant to an agreement between the Company and such affiliate, the Company issued common stock to such affiliate with a value equal to such interest and fees paid based on the closing price of the common stock on the OTC Bulletin Board on the date of such payments. The maturity date of the Note is April 29, 2013 and was subsequently renewed for one year. The CMA Note is unsecured and no payments of principal are due until the second anniversary of the Note, at which time all outstanding principal is due and payable. 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 $.45 per share which was the closing price of the Company’s common stock on that day, later adjusted to $.27 per share, which was the closing price of the Company’s common stock on the day it was adjusted.
CMA is a limited liability company of which Joseph C. Allegra, M.D., J. Douglas Craft and Michelle Y. Mangum, each a director of the Company, are the members.
On September 14, 2011, the Company’s Board of Directors approved increasing the line of credit to $1,000,000 and William R. Doyle, the Company’s Chairman and Chief Executive Officer became a member of CMA. As compensation for increasing the line and for Mr. Doyle joining CMA, the directors approved issuing warrants to purchase an additional 1,600,000 shares of the Company’s common stock at $.27 per share, which was the closing price of the Company’s common stock on that day.
On November 2, 2012, the Board of Directors approved an increase in the CMA line of credit from $1,000,000 to $1,500,000. On January 10, 2013, as compensation to the CMA members for providing the increased CMA Note, the Company issued warrants to purchase 2,100,000 shares of the Company’s common stock to the CMA members at $0.35 per share and recorded as deferred financing cost to be amortized through interest expense over the remaining term of the CMA Note.
On April 29, 2013, the maturity date of the CMA Note was extended to April 29, 2014. As compensation to the CMA Directors for extending the maturity date of the CMA Note, the Board of Directors approved modifying the exercise price for the 6,300,000 compensatory stock purchase warrants previously issued to the Directors to $0.10 per share and the CMA Directors forfeited 630,000 of the warrants. Amortization of the financing costs associated with extending the CMA Note was amortized through interest expense.
On April 29, 2014, the maturity date of the CMA Note was extended to April 29, 2015 with no compensation being paid to the CMA Directors for this extension.
Director Independence
Under Rule 5605(b)(1) of the Nasdaq Marketplace Rules, independent directors must comprise a majority of a listed company’s board of directors within one year of listing. In addition, Nasdaq Marketplace Rules require that, subject to specified exceptions, each member of a listed company’s audit, compensation and nominating and governance committees be independent. While Vystar does not currently qualify for listing on Nasdaq and will likely not qualify for some time after the date of this proxy statement, it does intend to seek such listing as soon as possible and complies with its Marketplace Rules. Audit committee members must also satisfy the independence criteria set forth in Rule 10A-3 under the Securities Exchange Act of 1934, as amended. Under Nasdaq Marketplace Rule 5605(a)(2), a director will only qualify as an “independent director” if, in the opinion of that company’s board of directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. In order to be considered to be independent for purposes of Rule 10A-3, a member of an audit committee of a public company may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee: (1) accept, directly or indirectly, any consulting, advisory, or other compensatory fee from the public company or any of its subsidiaries; or (2) be an affiliated person of the listed company or any of its subsidiaries.
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In March of 2013 in preparation for Mr. Waters assuming the role of Chief Financial Officer, our Board undertook a review of its composition, the composition of its committees and the independence of each director. Based upon information requested from and provided by each director concerning his or her background, employment and affiliations, including family relationships, our Board has determined that neither Mr. Craft, Dr. Allegra nor Ms. Mangum, representing three of our five directors, has a relationship that would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and that each of these directors is “independent” as that term is defined under Nasdaq Marketplace Rule 5605(a)(2).
In connection with his appointment as Chief Financial Officer, Mr. Waters resigned his position as Chairman and member of the Company’s Audit Committee and Ms. Mangum, shall comprise our Audit Committee, satisfy the independence standards for those committees established by applicable SEC rules and the Nasdaq Marketplace Rules. In making this determination, our Board considered the relationships that each non-employee director has with our company and all other facts and circumstances our Board deemed relevant in determining their independence, including the beneficial ownership of our capital stock by each non-employee director. Our Board affirmed these determinations in 2013.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
During fiscal year 2013, we retained the firm of Porter Keadle Moore, LLC (“PKM”) to provide services in the following categories and amounts. During fiscal year 2012, we retained Habif, Arogeti and Wynne LLP, (“HAW”) to provide services in the following categories and amounts:
Fee Category | 2013 ($) |
| 2012 ($) |
Audit Fees | 69,985 |
| 101,769 |
Audit-Related Fees | - |
| - |
Tax Fees | - |
| 3,500 |
All Other Fees | 35,960 |
| - |
|
|
|
|
Total | 105,945 |
| 105,269 |
Audit fees include the audit of Vystar’s annual financial statements, review of financial statements included in each of our Quarterly Reports on Form 10-Q, and services that are normally provided in connection with statutory and regulatory filings or engagements for those fiscal years.
Audit-related fees consist of fees for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements. This category includes fees related to accounting-related consulting services.
Tax fees consist of fees for professional services for tax compliance, tax advice and tax planning. This category includes fees primarily related to the preparation and review of federal, state and international tax returns and assistance with tax audits.
All other fees include assurance services not related to the audit or review of our financial statements.
Our Audit Committee determined that the rendering of non-audit services by PKM and HAW was compatible with maintaining the independence of each firm.
AUDIT COMMITTEE PRE-APPROVAL OF SERVICES PERFORMED BY OUR
INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
It is the policy of our Audit Committee to pre-approve all audit and permissible non-audit services to be performed by PKM. Our Audit Committee pre-approves services by authorizing specific projects within the categories outlined above, subject to a budget for each category. Our Audit Committee’s charter delegates to one or more members of the Audit Committee the authority to address any requests for pre-approval of services between Audit Committee meetings, and the subcommittee or such member or members must report any pre-approval decisions to our Audit Committee at its next scheduled meeting.
All services related to audit fees, audit-related fees, tax fees and all other fees provided by PKM during fiscal year 2013 and HAW during fiscal year 2012 were pre-approved by the Audit Committee in accordance with the pre-approval policy described above.
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REPORT OF THE AUDIT COMMITTEE
The Audit Committee’s role includes the oversight of our financial, accounting and reporting processes; our system of internal accounting and financial controls; our enterprise risk management program; and our compliance with related legal, regulatory and ethical requirements. The Audit Committee oversees the appointment, compensation, engagement, retention, termination and services of our independent registered public accounting firm, including conducting a review of its independence; reviewing and approving the planned scope of our annual audit; overseeing our independent registered public accounting firm’s audit work; reviewing and pre-approving any audit and non-audit services that may be performed by it; reviewing with management and our independent registered public accounting firm the adequacy of our internal financial and disclosure controls; reviewing our critical accounting policies and the application of accounting principles; and monitoring the rotation of partners of our independent registered public accounting firm on our audit engagement team as required by regulation. The Audit Committee establishes procedures, as required under applicable regulation, for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or auditing matters and the submission by employees of concerns regarding questionable accounting or auditing matters. The Audit Committee’s role also includes meeting to review our annual audited financial statements and quarterly financial statements with management and our independent registered public accounting firm. The Audit Committee held four meetings during fiscal year 2013.
Each member of the Audit Committee meets the independence criteria prescribed by applicable regulation and the rules of the SEC for audit committee membership and is an “independent director” within the meaning of NASDAQ listing standards. Each Audit Committee member meets NASDAQ’s financial literacy requirements, and the Board further determined that Ms. Mangum is a “audit committee financial expert” is a “ as such term is defined in Item 407(d) of Regulation S-K promulgated by the SEC also meets NASDAQ’s financial sophistication requirements. The Audit Committee acts pursuant to a written charter, which complies with the applicable provisions of the Sarbanes-Oxley Act of 2002 and related rules of the SEC and NASDAQ, a copy of which can be found on our website at www.vytex.com.
We have reviewed and discussed with management and PKM Vystar’s audited financial statements. We discussed with PKM and Vystar’s Chief Financial Officer the overall scope and plans of PKM’s audits. We met with PKM, with and without management present, to discuss results of its examinations, its evaluation of Vystar’s internal controls, and the overall quality of Vystar’s financial reporting.
We have reviewed and discussed with PKM matters required to be discussed pursuant to Statement on Auditing Standards No. 61, as amended (AICPA, Professional Standards , Vol. 1. AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T. We have received from PKM the written disclosures and letter required by the applicable requirements of the Public Company Accounting Oversight Board regarding PKM’s communications with the Audit Committee concerning independence. We have discussed with PKM matters relating to its independence, including a review of both audit and non-audit fees, and considered the compatibility of non-audit services with PKM’s independence.
Based on the reviews and discussions referred to above and our review of Vystar’s audited financial statements for fiscal year 2013, we recommended to the Board that Vystar’s audited financial statements be included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2013, for filing with the SEC.
Respectfully submitted,
AUDIT COMMITTEE
Mitsy Y. Mangum, Chair
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PART IV
|
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1.
FINANCIAL STATEMENTS
The following financial statements and notes thereto of Vystar Corporation, and the related Report of Independent Registered Public Accounting Firm are set forth in Item 8.
Report of Independent Registered Public Accounting Firm |
| F-1 |
Consolidated Balance Sheets |
| F-2 |
Consolidated Statements of Loss |
| F-3 |
Consolidated Statements of Stockholders’ Equity (Deficit) |
| F-4 |
Consolidated Statements of Cash Flows |
| F-5 |
Notes to Financial Statements |
| F-6 |
2.
FINANCIAL STATEMENT SCHEDULES
All schedules for which provision is made in the applicable accounting regulations of the SEC have been omitted because they are not applicable or the required information is included in the financial statements or notes thereto.
3.
EXHIBITS
Exhibit Index *
* Some Exhibits have certain confidential information redacted pursuant to a request for confidential treatment
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) |
|
|
|
3.3*** |
| Articles of Amendment to the Articles of Incorporation of Vystar Corporation dated September 16, 2013 |
|
|
|
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) |
|
|
|
4.2 |
| Form of Share Subscription Agreements and Investment Letter (First Private Placement) (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344) |
4.3 |
| Form of Share Subscription Agreement and Investment Letter (Second Private Placement) (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344) |
| ||
4.4 |
| Form of Vystar Corporation Investor Questionnaire and Subscription Agreement (Third Private Placement) (incorporated by reference to Vystar’s Registration Statement on Form S-1 originally filed on November 13, 2008, Registration Statement No. 333-155344) |
|
|
|
4.5 |
| Warrant to Purchase Shares of Common Stock of Vystar Corporation dated March 11, 2011 issued to Topping Lift Capital LLC (incorporated by reference to Vystar’s Current Report on Form 8-K dated March 11, 2011 and filed on March 15, 2011) |
|
|
|
4.6 |
| Form of Warrant issued to Investor note holders (incorporated by reference to Vystar’s Current Report on Form 8-K dated March 11, 2011 and filed on March 15, 2011) |
|
|
|
4.7 |
| Form of Series A-1 Warrant (incorporated by reference to Vystar’s Current Report on Form 8-K filed on June 11, 2012) |
|
|
|
10.1* |
| Manufacturing Agreement between Vystar Corporation and Revertex (Malaysia) Sdn. Bhd. effective 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) |
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41
10.17 |
| Second Amendment to Agreement dated November 2, 2012, among Vystar, CMA Investments, LLC and Italia – Eire LP (incorporated by reference to Vystar’s Quarterly Report on Form 10-Q filed on November 11, 2012) |
|
|
|
10.18** |
| Employment Agreement between W. Dean Waters and Vystar dated April 1, 2013 |
|
|
|
10.19 |
| LLC Ownership Interest Purchase Agreement dated June 28, 2013, between the Company and Michal Soo, M.D. (incorporated by reference to the Company’s Current Report on Form 8-K filed on July 2, 2013) |
|
|
|
10.20 |
| Note Subscription Agreement dated June 28, 2013 between the Company and the Investors (incorporated by reference to the Company’s Current Report on Form 8-K filed on July 2, 2013) |
|
|
|
10.21 |
| Form of Senior Secured Convertible Promissory Note dated June 30, 2013 (incorporated by reference to the Company’s Current Report on Form 8-K filed on July 2, 2013) |
|
|
|
10.22 |
| Form of Security Agreement dated July 1, 2013 (incorporated by reference to the Company’s Current Report on Form 8-K filed on July 2, 2013) |
|
|
|
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 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 |
*
Some Exhibits have certain confidential information redacted pursuant to a request for confidential treatment.
** Exhibits and schedules to this exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company will furnish copies of the omitted exhibits and schedules to the Securities and Exchange Commission upon its request. Confidential treatment has been requested as to a portion of this exhibit, which portion has been omitted and filed separately with the Securities and Exchange Commission.
*** Filed herewith.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| VYSTAR CORPORATION | |
|
| |
Date: May 30, 2014 | By: | /s/ William R. Doyle |
| William R. Doyle | |
| Chairman, President, Chief Executive Officer and | |
| Director (Principal Executive Officer) | |
|
| |
Date: May 30, 2014 | By: | /s/ W. Dean Waters |
| W. Dean Waters | |
| Chief Financial Officer (Principal Financial | |
| and Accounting Officer) | |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on May 9, 2013.
Signature |
| Title |
|
|
|
/s/ William R. Doyle |
| Chairman, President, and Chief Executive Officer |
William R. Doyle |
|
|
|
|
|
/s/ W. Dean Waters |
| Chief Financial Officer |
W. Dean Waters |
|
|
|
|
|
/s/ J. Douglas Craft |
| Director |
J. Douglas Craft |
|
|
|
|
|
/s/ Joseph C. Allegra, MD |
| Director |
Joseph C. Allegra, MD |
|
|
|
|
|
/s/ Mitsy Y. Mangum |
| Director |
Mitsy Y. Mangum |
|
|
|
|
|
/s/ W. Dean Waters |
| Director |
W. Dean Waters |
|
|
|
|
|
43