Vystar Corp - Quarter Report: 2014 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

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

For the quarterly period ended September 30, 2014

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

For the transition period from ____________________to____________________

Commission File Number 000-53754

  

VYSTAR CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

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

2484 Briarcliff Rd, #22

Suite 159

Atlanta, GA 30329

(Address of Principal Executive Offices, Zip Code)

(866) 674-5238

(Registrant's telephone number including area code)

3235 Satellite Blvd.

Building 400, Suite 290

Duluth, GA 30096

(Former name, former address and former fiscal year, if changed since last report)

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 [ X]  NO  [ ]

 

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES  [X] NO  [ ]

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 November 15, 2014, there were 64,869,053 shares of the Registrant’s common stock, par value $0.0001 per share, outstanding.

1

INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS

In addition to historical information, this Form 10-Q contains statements relating to our future results (including certain projections and business trends) that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are subject to the “safe harbor” created by those sections. The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the financial statements and the related notes thereto included in this Quarterly Report on Form 10-Q (this “Report”).  This Report contains certain forward-looking statements and the Company’s future operating results could differ materially from those discussed herein.  Our disclosure and analysis included in this Report concerning our operations, cash flows and financial position, including, in particular, the likelihood of our success in expanding our business and raising debt and capital securities include forward-looking statements.  Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expect”, “anticipate”, “intend”, “plan”, “believe”, “estimate”, “may”, “project”, “will likely result”, and similar expressions are intended to identify forward-looking statements.  Such forward-looking statements are subject to certain risks, uncertainties, and assumptions, including prevailing market conditions and are more fully described under “Part I, Item 1A – Risk Factors” of our Form 10-K for the year ended December 31, 2013.  New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us.  In any event, these and other important factors, including those set forth in Item 1A – “Risk Factors” of our Form 10-K for the year ended December 31, 2013 may cause actual results to differ materially from those indicated by our forward-looking statements.  

Although we believe that these statements are based upon reasonable assumptions, we cannot guarantee future results and readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date of this filing. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct or (iv) our strategy, which is based in part on this analysis, will be successful. The Company undertakes no obligation to update or revise forward-looking statements.

 

All references to “we”, “us”, “our”, “Vystar”, “SleepHealth” or “Kiron” in this Quarterly Report on Form 10-Q mean Vystar Corporation, its subsidiaries and affiliates.

2

Vystar Corporation

Form 10-Q for the Quarter Ended September 30, 2014

 

Index

 

Part I.  Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets at September 30, 2014 (unaudited) and December 31, 2013		4
	Consolidated Statements of Operations for the Three Months and Nine months Ended September 30, 2014 and 2013 (unaudited)		5
	Consolidated Statements of Cash Flows for the Nine months Ended September 30, 2014 and 2013 (unaudited)		6
	Notes to Consolidated Financial Statements (unaudited)		7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		15
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		19
Item 4.	Controls and Procedures		19
Part II.  Other Information
Item 1.	Legal Proceedings		20
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		20
Item 3.	Defaults Upon Senior Securities		21
Item 4.	Mine Safety Disclosures		21
Item 5.	Other Information		21
Item 6.	Exhibits		21
SIGNATURES			22

3

Part I.       FINANCIAL INFORMATION

ITEM 1.

CONSOLIDATED FINANCIAL STATEMENTS

VYSTAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

The accompanying notes are an integral part of these financial statements.

4

 

VYSTAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

The accompanying notes are an integral part of these financial statements.

5

VYSTAR CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

The accompanying notes are an integral part of these financial statements.

6

 

VYSTAR CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1

DESCRIPTION OF BUSINESS

Vystar Corporation (“Vystar”, the “Company”, “we”, “us”, or “our”) is the creator and exclusive owner of the innovative technology to produce Vytex® Natural Rubber Latex ("NRL").  Vystar is focused on expanding the licensing and utilization of its proprietary source natural rubber latex technology and has expanded into the consumer arena with a planned introduction into the mattress, mattress topper and pillow arenas aligning with key foam manufacturers, mattress, mattress toppers and pillows producers, and furniture store chains in specific areas of the Unites States.  Vystar also owns Kiron Clinical Sleep Lab, LLC (“Kiron”) a vertically integrated sleep diagnostic practice located in Durham, NC focused on the sleep diagnostic and Durable Medical Equipment (“DME”) businesses.

 

NOTE 2

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles of the United States of America (“GAAP”) for interim financial information.  Accordingly, certain information and footnotes required by GAAP for complete financial statements may be condensed or omitted.  These interim financial statements should be read in conjunction with our audited financial statements and notes thereto included in the Company's annual report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission ("SEC").  In the opinion of Vystar management, these financial statements contain all adjustments (which comprise only normal and recurring accruals) necessary to present fairly the financial position and results of operations as of and for the three and nine month periods ended September 30, 2014 and 2013.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.

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 banks in many cases exceeds the Federal Deposit Insurance Corporation, or FDIC, insurance limits.  While we monitor our cash balances 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.

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.

Loss Per Share

Because the Company reported a net loss for the nine month periods ended September 30, 2014 and 2013, 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 outstanding to purchase 8,364,906 shares and 7,188,239 shares of common stock for the nine months ended September 30, 2014 and 2013, respectively, as their effect would be anti-dilutive.  Warrants to purchase 21,015,636 shares and 12,204,706 shares of common stock for the three months ended September 30, 2014 and 2013, respectively, were also excluded from the computation of diluted loss per share as their effect would be anti-dilutive.

Revenues

The Vytex derives revenue from license fees of Vytex NRL raw material to manufacturers and distributors of rubber and rubber end products.  Revenue is recognized when the licensee confirms payment and pays Vystar.

 

The 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.

7

Fair Value of Financial Instruments

The Company’s financial instruments consist of cash, accounts receivable, accounts payable, accrued expenses, line of credit and shareholder notes payable.  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 September 30, 2014 approximate market interest rates for the respective borrowings.

In specific circumstances, certain assets and liabilities are reported or disclosed at fair value.  Fair value is the exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the Company's principal market for such transactions.  If there is not an established principal market, fair value is derived from the most advantageous market.

Valuation inputs are classified in the following hierarchy:

	·	Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
	·	Level 2 inputs are directly or indirectly observable valuation inputs for the asset or liability, excluding Level 1 inputs.
	·	Level 3 inputs are unobservable inputs for the asset or liability.

 

Highest priority is given to Level 1 inputs and the lowest priority to Level 3 inputs.  Acceptable valuation techniques include the market approach, income approach, and cost approach.  In some cases, more than one valuation technique is used.

NOTE 3

ACQUISITIONS

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.  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:

Based on the timing of the acquisition, the Company, for comparability purposes, has disclosed the following pro-forma earnings information for the nine months ended September 30, 2014, as if the acquisition had occurred effective January 1, 2013.  As such, the actual and pro-forma earnings information for the nine months ended September 30, 2014 and September 30, 2013 was as follows:

 

8

VYSTAR CORPORATION AND SUBSIDIARIES

Unaudited Pro Forma Combined Statement of Operations

For the Nine months Ended September 30,

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)

The Company discontinued the operations of the SleepHealth division in January 2014.

(B)

To record the 727,434 shares of Vystar common stock, valued at $50,000 or $0.0688 per share, issued to the Seller of Kiron.

(C)

To record additional Medical Director Fee Expense of $64,600 and Medical Insurance Billing Software expense of $1,194 for the nine month period ending September 30, 2013.

9

NOTE 4

DISCONTINUED OPERATIONS

As part of the Company’s strategy to focus on realizing the potential of the Vytex foam business in the pillow and mattress markets as well as part of the Company’s cost reduction plan it initiated in 2013, the Company made the decision to discontinue the operations of SleepHealth acquired during September 2012.

SleepHealth revenue was $28,610 and $757,614 for the nine months ended September 30, 2014 and 2013, respectively.  Losses from discontinued operations were $25,747 and $127,830 for the nine months ended September 30, 2014 and 2013, respectively.

NOTE 5

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 its inception.  At September 30, 2014, the Company had cash of $84,842 and a deficit in working capital of $2,133,318.  Further, at September 30, 2014, the accumulated deficit amounted to $23,862,248.  As a result of the Company's history of losses and financial condition, there is substantial doubt about the ability of the Company to continue as a going concern.

A successful transition to attaining profitable operations is dependent upon obtaining sufficient financing to fund the Company’s planned expenses and achieving a level of revenue adequate to support the Company’s cost structure.  Management has completed a year-long cost cutting and reorganization plan culminating in the closing of SleepHealth, LLC in January 2014.  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 license fees, our credit facility, stock warrant exercises from existing shareholders, raising capital through private placements of capital stock and debt.

 

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; market acceptance of our products and services; competing technological developments; and the rate at which we are able to build Kiron’s Sleep Diagnostic and 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.

 

There can be no assurances that the Company will be able to achieve its projected level of revenue in 2014 and beyond.  If the Company is unable to achieve its projected revenue and is not able to obtain alternate additional financing of equity or debt, the Company would need to significantly curtail or reorient its operations during 2014, which could have a material adverse effect on the Company’s ability to achieve its 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.

NOTE 6

PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

Depreciation expense for the three months ended September 30, 2014 and 2013 was $702 and $22,172, respectively and for the nine months ended September 30, 2014 and 2013 was $2,165 and $54,265, respectively.

NOTE 7

INTANGIBLE ASSETS

Patents represent legal and other fees associated with the registration of patents.  The Company has two patents and two provisional patent submissions with the United States Patent and Trade Office (USPTO), as well as an international PCT (Patent Cooperation Treaty) patent.

10

Intangible assets are as follows:

Amortization expense for the three months ended September 30, 2014 and 2013 was $3,920 and $7,257, respectively and for the nine months ended September 30, 2014 and 2013 was $11,760 and $21,650, respectively.  

NOTE 8

INCOME TAXES

There is no income tax benefit recorded for the losses for the three and nine months ended September 30, 2014 and 2013 since management has determined that the realization of the net deferred tax asset is not assured and has created a valuation allowance for the entire amount of the net deferred tax asset.

NOTE 9

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”), a line of credit with a principal amount of up to $800,000 (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 $1,000,000 and on November 2, 2012, the Board of Directors approved an increase in the CMA line of credit to $1,500,000.  CMA is a limited liability company of which three of the directors of the Company (“CMA directors”) and the Company’s Chairman and Chief Executive Officer are members.  Interest, is computed at LIBOR plus 5.25% (5.42% at September 30, 2014), on amounts drawn and fees.  The weighted average interest rate in effect on the borrowings for the nine months ended September 30, 2014 was 5.44%.  

Other terms of the CMA Note include:

·

The Note is unsecured;

·

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

·

Note matures and is payable in full on April 30, 2015.  

Shareholder Notes Payable

The following table summarizes the shareholder notes payable:

September 30, 2014

December 31, 2013

Shareholder notes payable

$662,568

$862,568

Accrued interest

130,710

91,345

Total Shareholder Notes Payable

$793,278

$953,913

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 ranging between $0.075 and $0.10 of principal and interest for each such share.   

The current base conversion price for the above referenced Shareholder and Promissory Notes with an outstanding balance as of September 30, 2014 of $793,279 including accrued interest, is $0.10 per share or 7,932,790 shares of the Company’s common stock.  The face value of the Shareholder Notes at September 30, 2014 is $662,568.

11

NOTE 10

STOCKHOLDERS’ EQUITY

Common Stock and Warrants

On July 11, 2014, the Company issued 12,500 common shares to an outside consultant in lieu of cash compensation.

On July 16, 2014, the Company issued 500,000 common shares as compensation for a business development and consulting contract.

On July 18, 2014, the Company issued a total of 1,500,000 common shares as compensation for an amendment to the Company’s Consulting Agreement with Blue Oar Consulting, Inc.

From July 24, 2014 through September 30, 2014 the Company issued 2,500,000 shares of common stock to four (4) accredited investors in a private offering.  Total gross proceeds of the issuances were $137,500. 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.

On September 30, 2014, the Company issued 600,000 common shares to an outside consultant in lieu of cash compensation.

Cumulative Convertible Preferred Stock

At September 30, 2014, the 30,085 shares of outstanding preferred stock had accumulated undeclared dividends of approximately $41,315, and could be converted into 4,011,333 shares of common stock, at the option of the holder.

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.

In total, the Company recorded $251,236 and $279,065 of stock-based compensation expense for the three month periods ended September 30, 2014 and 2013, respectively, and $651,396 and $614,392 of stock-based compensation for the nine month periods ended September 30, 2014 and 2013, respectively related to employee and board member stock options and common stock and warrants issued to nonemployees.  As of September 30, 2014, $224,349 of unrecognized compensation expense related to non-vested share-based awards remains to be recognized over a period of approximately five years.

Options

During 2004, the Board of Directors of the Company adopted a stock option plan (the “Plan”) and authorized up to 4,000,000 shares to be issued under the Plan.  In April 2009, the Company’s Board of Directors authorized an increase in the number of shares to be issued under the Plan to 10,000,000 shares, which was also approved by the Company’s shareholders, 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 September 30, 2014, there were 1,535,094 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 typically 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 Company used the Black-Scholes option pricing model to estimate the grant-date fair value of awards granted.

12

Warrants

Warrants are issued to employees for expenses and for compensation in lieu of cash as well as to third parties as payment for services and in conjunction with the issuance of common stock.  The fair value of each common stock warrant issued for services is estimated on the date of grant using the Black-Scholes option pricing model.  The following weighted average assumptions were used for warrants granted for the nine months ended September 30:

13

The Company issued 1,682,445 warrants for services during the nine months ended September 30, 2014 at exercise prices from $0.04 to $0.15 per share, exercisable over a period of ten years from the grant date.  All of the warrants with the exception of 200,000 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 was $138,027 and was recorded as noncash share-based compensation expense when vesting occurred.  The Company also issued 4,533,338 warrants associated with a private placement offering of the Company’s common stock at an exercise price of $0.05.  The fair value of the private placement warrants was $237,180.

NOTE 12

SUBSEQUENT EVENTS

From October 1, 2014 through November 7, 2014 the Company issued 4,500,000 shares of common stock to six (6) accredited investors in a private offering.  Total gross proceeds of the issuances were $225,000.  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.

On October 17, 2014, the Company issued 500,000 common shares to its CEO in lieu of salary payable for 2014.

14

ITEM 2.

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

OVERVIEW

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"). This technology reduces antigenic protein and non-rubbers in natural rubber latex to virtually undetectable levels. With non-latex products growing at a rapid rate, the costs for these alternative materials incurred by the manufacturers of these many different products have greatly decreased with nearly all substitute materials being more expensive than NRL. This fact has changed in the past year as NRL prices have decreased and continue to fluctuate in the low price zone.  Supply for nitrile and neoprene has grown dramatically in the past year as additional facilities have come on line mostly in Southeast Asia.  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 and we have recently approved an ultra-low ammonia version for limited exposure on the workers in the manufacturing world. Recent industry estimates have the total rubber market at 11 million dry metric tons of which just over 1.2 million tons are in liquid latex form. There are more than 40,000 products made from the liquid latex while the other eight million plus tons are used to produce tires and other hard rubber 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 specialty health care products such as condoms, surgical and exam gloves, catheters and other items.

We are now involved in expanding our operations, particularly increasing market acceptance and sales of Vytex NRL through our new operating agreement with CT Group (“CT”).  As we conclude the first year of this agreement we feel we are better prepared to handle the consistent orders by utilizing CT’s ability to hedge raw material pricing, consistently produce larger quantities, store the  various forms of Vytex NRL effectively, package and ship, collect and pay Vystar its royalties. The sales cycle generally starts with a laboratory analysis of Vytex NRL whereby physical properties and protein levels of the finished goods are tested by potential customers to ensure it meets the required specifications and then progresses to a full production run on the manufacturer’s equipment.  CT recently shipped a manufacturing trial order to a major producer of adhesives for use in a few different industries such as shoe adhesives and food labeling and is now prepping for a trial in the surgical glove arena as well as adding additional condom makers.  The decision to convert to Vytex NRL is impacted by many functional areas including research and development, manufacturing, sales, marketing, purchasing and finance.   Each of these areas has a significantly different decision-making role per company thus the large difference in the sales cycle.  If the product is regulated and requires regulatory clearances or approvals prior to commercialization, the sales cycle could be extended by another nine to twelve months for testing, filing and agency review.  By diversifying the target product categories we believe this balanced approach will reduce our exposure to individual market fluctuations and increase our aggregate revenues.  Our focus on the consumer foam arena will greatly increase the global production and use of Vytex NRL and includes other licensees as well as the CT Group.

As noted in a press release issued March 19, 2014, Vystar announced a strategic directional shift taking it into the multi-billion dollar foam market using its patented Vytex NRL raw material.  The raw material is then transformed by its Guatemalan partner, Islatex, and potentially other companies into foam that is whiter, lighter weight and free of the off-gassing common among competitors' memory foam products. Because Vytex NRL results in a more translucent and cleaner latex following the removal of proteins and non-rubbers, manufacturers' production costs are decreased by utilizing less chemicals, water, and processing to remove proteins, and less dyes and perfumes to cover up the yellow color and odor of non-Vytex natural rubber latex.

Vystar's alliances have been formed to include mattress and pillow producers in the United States, business development strategists, and selected retailers that are prepping for the arrival of foam pillow and mattress cores for showroom analysis, market research and select early sales efforts. Through these broad alliances, Vystar will offer a broad array of mattresses and pillows to meet consumer needs across the board. The first shipping container of foam which has been delivered to our wholesale manufacturer exemplifies the flexibility of what foam made with Vytex NRL will provide to our target audience in the global marketplace.

Vystar has moved into a targeted role in the North American foam industry and not only have specific large audiences been identified for Vytex foam but key markets and retail stores are ready to start offering mattresses and pillows for their customers. Retail is an early start but immediate sales efforts include varied avenues, and product iterations, to meet the needs of the consumer. This is the first time that Vystar will participate directly in end product sales.

On July 21, 2014, Kiron Clinical Sleep Lab, LLC, entered into an Independent Contractor Agreement with Clifford Baggett, MD, a North Carolina physician and sleep specialist in response to continued growth in at Kiron.  Dr. Baggett was born in Reidsville, NC, and attended the University of North Carolina – Chapel Hill (“UNC”) and graduated in 1966.  He then attended UNC’s Medical School and graduated in 1970.  After residency at the Philadelphia Naval Hospital and board certification in Otolaryngology (Ear Nose and Throat-Head and Neck Surgery) in 1975, he returned to NC and served two more years in the Navy at Camp Lejeune. He established a practice in Rocky Mount, NC, and practiced there until 2004 when he moved to Raleigh. He became interested in Sleep Medicine in 2001 and he became board certified in Sleep Medicine in 2008.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended September 30, 2014 with the Three Months Ended September 30, 2013

15

Revenues

Revenues for the three months from the consolidated Company ended September 30, 2014 and 2013 were $113,373 and $430,252, respectively, for a decrease of $316,879 or 73.6%.  The decrease in revenues was due to the closing of the SleepHealth, LLC subsidiary.  Revenues for the three months ended September 30, 2014 and 2013 from the Company’s continuing operations were $113,373 and $191,751, respectively, for a decrease of $78,378 or 40.9%.  The decrease in revenues from continuing operations was mainly due to soft Vytex licensing revenue and lower fees at Kiron.  For the consolidated Company, gross profit was $12,778 and $185,095 for the period ended September 30, 2014 and 2013, respectively, a reduction of $172,317 or 93.1%.  Gross profit from continuing operations for the three months ended September 30, 2014 and 2013 were $12,778 and $132,878, respectively, for a decrease of $120,100 or 90.4 %.  Cost of revenue was $100,595 and $245,157 for the three months ended September 30, 2014 and 2013, respectively, a decrease of $144,562 or 59.0%.  This reduction in cost of revenue was primarily the result of closing the unprofitable Sleephealth subsidiary.

Operating Expenses

The Company’s consolidated operating expenses were $347,313 and $649,687 for the three months ended September 30, 2014 and 2013, respectively, for a decrease of $302,374 or 46.5%.  This was the result of the Company’s cost cutting initiative resulting in the elimination of two sales and marketing positions in 2013 and the closing of Sleephealth.  The Company’s consolidated operating expenses from continuing operations were $347,313 and $589,327 for the three months ended September 30, 2014 and 2013, respectively, for a decrease of $242,014 or 41.1%.  

The Company’s general and administrative expenses were $347,313 and $645,485 for the three months ended September 30, 2014 and 2013, respectively, for a decrease of $298,172 or 46.2%. The decrease in general and administrative expenses for the period ended September 30, 2014 was primarily the result of closing the SleepHealth division.  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.

Included in our operating expenses for the three months ended September 30, 2013 was $1,500 for research and development expense. No research and development expenses were incurred during the three month period ended September 30, 2014.    Research and development expenses consist primarily of compensation for employees and contractors engaged in internal research and product development activities, laboratory operations, and related operating expenses.

16

Other Income (Expense)

Other income for the three months ended September 30, 2014, consisted of interest expense of $45,735 and interest income of $2.  This compares to interest expense of $41,984 and interest income of $2 for the three months ended September 30, 2013.

Net Loss

Net loss was $383,962 and $512,346 for the three months ended September 30, 2014 and 2013, respectively, a decrease of $128,384 or a 25.1% reduction in the net loss.

Comparison of the Nine months Ended September 30, 2014 with the Nine months Ended September 30, 2013

Revenues

Revenues for the nine months ended September 30, 2014 and 2013 from the consolidated Company were $538,554 and $964,704, respectively, for a decrease of $426,150 or 44.2%.  Revenues for the nine months ended September 30, 2014 and 2013 from the Company’s continuing operations were $509,944 and $207,090, respectively, for an increase of $302,854 or 146.2%.  The increase in revenues from continuing operations was mainly due to the receipt of fees from Kiron for a full nine months in 2014.  For the consolidated Company, gross profit was $241,210 and $307,991 for the period ended September 30, 2014 and 2013, respectively a decrease of $66,781 or 21.7%.  Gross profit from continuing operations for the nine months ended September 30, 2014 and 2013 was $249,549 and $144,051, respectively, for an increase of $105,498 or 73.2%.

Operating Expenses

The Company’s consolidated operating expenses were $1,065,686 and $1,913,083 for the nine months ended September 30, 2014 and 2013, respectively, for a decrease of $847,397 or 44.3%.  This was the result of the Company’s cost cutting initiative resulting in the elimination of two sales and marketing positions in 2013 and the closing of Sleephealth.  The Company’s consolidated operating expenses from continuing operations were $1,042,861 and $1,626,106 for the nine months ended September 30, 2014 and 2013, respectively, for a decrease of $583,245 or 35.9%.  

The Company’s general and administrative expenses were $1,065,686 and $1,753,915 for the nine months ended September 30, 2014 and 2013, respectively, for a decrease of $688,229 or 39.2%. The decrease in general and administrative expenses for the period ended September 30, 2014 was primarily the result of closing the SleepHealth division.  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.

17

Included in our operating expenses for the nine months ended September 30, 2013 was $21,134 for research and development expense. No research and development expenses were incurred during the nine month period ended September 30, 2014.    Research and development expenses consist primarily of compensation for employees and contractors engaged in internal research and product development activities, laboratory operations, and related operating expenses.

Other Income (Expense)

Other income for the nine months ended September 30, 2014, consisted of interest expense of $130,627, interest income of $13, and other income of $6,780.  This compares to $9 of interest income, $60 of other expense and interest expense of $353,065 for the nine months ended September 30, 2013.

Net Loss

Net loss was $942,893 and $1,962,999 for the nine months ended September 30, 2014 and 2013, respectively, a decrease of $1,020,106 or a 52.0% in the net loss.

Discontinued Operations

As part of the Company’s strategy to focus on realizing the potential of the Vytex foam business in the pillow and mattress markets as well as part of the Company’s cost reduction plan it initiated in 2013, the Company made the decision to discontinue the operations of SleepHealth acquired during September 2012.

SleepHealth revenue was $28,610 and $757,614 for the nine months ended September 30, 2014 and 2013, respectively.  Losses from discontinued operations were $25,747 and $127,828 for the nine months ended September 30, 2014 and 2013, respectively.

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2014, the Company had cash of $84,842 and a deficit in working capital of $2,133,318.  Further, at September 30, 2014, the accumulated deficit amounted to $23,862,248.  As a result of the Company's history of losses and financial condition, there is substantial doubt about the ability of the Company to continue as a going concern.

A successful transition to attaining profitable operations is dependent upon obtaining sufficient financing to fund the Company’s planned expenses and achieving a level of revenue adequate to support the Company’s cost structure.  Management has completed a year-long cost cutting and reorganization plan culminating in the closing of SleepHealth, LLC in January 2014.  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 license fees, our credit facility, stock warrant exercises from existing shareholders, raising capital through private placements of capital stock and debt.

 

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; market acceptance of our products and services; competing technological developments; and the rate at which we are able to build Kiron’s Sleep Diagnostic and 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.

 

There can be no assurances that the Company will be able to achieve its projected level of revenue in 2014 and beyond.  If the Company is unable to achieve its projected revenue and is not able to obtain alternate additional financing of equity or debt, the Company would need to significantly curtail or reorient its operations during 2014, which could have a material adverse effect on the Company’s ability to achieve its 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.

Sources and Uses of Cash

For the nine months ended September 30, 2014 and 2013, net cash used in operations was $335,364 and $663,583 respectively.  The negative cash flow for the nine months ended September 30, 2014 resulted primarily from the net loss of $942,893, allowance for uncollectible accounts receivable of $197,454, and an extinguishment in debt of $133,424 offset by non-cash charges related to non-cash share-based compensation expense of $651,396, loss on disposal of equipment of $105,931, and an increase in accounts receivable of $171,654.  The negative cash flow for the nine months ended September 30, 2013 resulted primarily from the net loss of $1,962,999 reduced by non-cash charges related to non-cash share-based compensation expense of $614,392, amortization expense of $244,001 and an increase in accounts payable of $224,177.

Net cash provided by investing activities for the nine months ended September 30, 2014 was $44,312 from the disposal of the furniture and equipment from the discontinued SleepHealth division.  Net cash used by investing activities for the nine months ended September 30, 2013 totaled $78,887 consisting of $8,035 of legal and other costs associated with our patents, $69,524 for the purchase of Kiron and $1,328 in equipment purchases.

18

Net cash provided by financing activities for the nine months ended September 30, 2014 was $319,521 comprised of $367,000 in proceeds from the sale of common stock and warrants offset by $47,479 for the retirement of the A/R financing facility.  Net cash provided by financing activities for the nine months ended September 30, 2013 was $686,426 comprised of $105,000 in proceeds from the sale of common stock and warrants, $269,682 in proceeds from the sale of preferred stock, $240,769 in proceeds from Shareholder Notes, $70,000 under the CMA Note, and net proceeds of $975 from other financings.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that may be reasonably likely to have a current or future material effect on our financial condition, liquidity, or results of operations.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

Our Management’s Discussion and Analysis contains not only statements that are historical facts, but also statements that are forward-looking (within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Forward-looking statements are, by their very nature, uncertain and risky. These risks and uncertainties include international, national and local general economic and market conditions; demographic changes; our ability to sustain, manage, or forecast growth;  product development, introduction and acceptance; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other risks that might be detailed from time to time in our filings with the Securities and Exchange Commission.

Although the forward-looking statements in this Quarterly Report reflect the good faith judgment of our management, such statements can only be based on facts and factors currently known by them. Consequently, and because forward-looking statements are inherently subject to risks and uncertainties, the actual results and outcomes may differ materially from the results and outcomes discussed in the forward-looking statements. You are urged to carefully review and consider the various disclosures made by us in this report and in our other reports as we attempt to advise interested parties of the risks and factors that may affect our business, financial condition, and results of operations and prospects.

ITEM 3.         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

None

  

ITEM 4.         CONTROLS AND PROCEDURES

 (A)     Evaluation of disclosure controls and procedures

 Our management, including our principal executive and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2014.  Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in this quarterly report on Form 10-Q has been appropriately recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and principal financial officer, to allow timely decisions regarding required disclosure.  Based on that evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures are effective to the reasonable assurance level.

(B)     Changes in internal control over financial reporting

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment.  Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.

There were no changes in our internal control over financial reporting that occurred during the first nine months of 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

19

PART II.  OTHER INFORMATION

 

ITEM 1.         LEGAL PROCEEDINGS

The company is the plaintiff in the action styled Vystar Corporation, et al. v. Michael Soo, M.D., et al., Superior Court of Gwinnett County, Georgia, Civil Action No. 14-A-01997-1. This action was initiated by the company on or about March 10, 2014, against Soo who was the seller in the company’s purchase of Kiron Clinical Sleep Labs, LLC, on June 28, 2013. In its complaint, the company seeks to recover not less than $200,000.00 in damages against Soo as a result of Soo’s breach of the terms of the purchase agreement in several respects, including a failure to disclose material liabilities of the company prior to closing. Soo has filed an answer denying liability and also asserting a counterclaim against the company in which he alleges any breaches by him of the purchase agreement were “artificial breaches” created and arranged by the company. Soo seeks to recover actual and punitive damages in an unspecified amount. Discovery in the action is in its early stages.

The company is a defendant in an action styled Audrey Soo v. Vystar Corporation, et al., District Court Division, General Court of Justice, Durham County, North Carolina, Civil Action No. 14-CVD-2373. In this action, plaintiff, a former employee of Kiron Clinical Sleep Lab, LLC., seeks to recover approximately $17,000.00 in accrued vacation and personal time off pay for the period prior to Vystar’s purchase of Kiron.  Plaintiff also seeks to recover double or triple damages as well as attorneys’ fees and costs of the litigation. The company denies that Soo has adequately documented her entitlement to the recovery which she seeks and that the validity of her claim is barred by the employment policies that were in effect at the time of Soo’s claim arose. The company is vigorously defending the action.

The company is the defendant in an action styed Michael Allen Dyer v. Vystar Corporation, Superior Court Division, General Court of Justice, Mecklenburg County, North Carolina, Civil Action No. 14-CVD-7522. In this action, plaintiff seeks to recover against the company on a promissory note executed in his favor by SleepHealth, LLC, prior to Vystar’s acquisition of SleepHealth, LLC, in 2011. Plaintiff seeks damages in the amount of the unpaid balance of the promissory note, $36,000.00, together with other damages for alleged tortious interference, unjust enrichment, and unfair or deceptive trade practices. The company has denied liability and is defending the action. Discovery has not yet commenced.

The company is a defendant in an action styed Larry F. Berman, et al. v. Vystar Corporation, et al., Superior Court Division, General Court of Justice, Mecklenburg County, North Carolina, Civil Action No. 14-CVS-8488. This is an action commenced by the plaintiff who alleges that the company is liable for certain actions by its subsidiary, SleepHealth, LLC, prior to the company’s acquisition of SleepHealth, LLC. Plaintiff seeks to recover actual damages in an in excess of $25,000.00 together with attorneys’ fees and costs of litigation. The company denies liability and is vigorously defending the action. The case is in its early stages and discovery has not yet commenced.

ITEM 2.         UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Set forth below is information regarding shares of common stock, warrants and options to purchase common stock issued by the Company in the Quarter Ended September 30, 2014, that were not registered under the Securities Act of 1933, as amended (the “Securities Act”). Also included is the consideration, if any, received by the Company for such shares, warrants and options and information relating to the section of the Securities Act, or rule of the Securities and Exchange Commission, under which exemption from registration was claimed.

(a)

Common Stock and Warrant Financings

From December 31, 2013 through June 30, 2014, the Company issued 11,676,853 shares of its common stock at a price of $0.03 per share.

From December 31, 2013 through June 30, 2014, the Company issued 4,533,338 warrants to purchase shares of its common stock at a price of $0.05 per share.

From June 30, 2014 through September 30, 2014, the Company issued 2,500,000 shares of its common stock at a price of $0.05 per share.

(b)

Stock Option Grants

None

(c)      Application of Securities Laws and Other Matters

No underwriters were involved in the foregoing sales of securities. The securities described in section (a) of this Item 2 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.

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 in this Item 2 included appropriate legends setting forth that the securities had not been registered and the applicable restrictions on transfer.

20

 

ITEM 3.         DEFAULTS UPON SENIOR SECURITIES

 None

 

ITEM 4.         MINE SAFETY DISCLOSURES

 Not applicable

 

ITEM 5.         OTHER INFORMATION

 None

 

ITEM 6.         EXHIBITS

Exhibit Index

Number		Description
31.1 *		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 *		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

* Filed herewith

21

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:  November 14, 2014	By:	/s/ William R. Doyle
		William R. Doyle
		Chairman, President, Chief Executive Officer, Chief Financial Officer and Director (Principal Executive Officer, Principal Financial and Accounting Officer)

 

22