Vystar Corp - Quarter Report: 2023 March (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2023
| ☐ | 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)
| 20-2027731 | ||
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) |
725 Southbridge St
Worcester, MA 01610
(Address of Principal Executive Offices, Zip Code)
(508) 791-9114
(Registrant’s telephone number including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| NONE | NONE | NONE |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES ☐ ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☐ ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Non-accelerated filer ☐ | Smaller reporting company ☒ |
| (Do not check if a smaller reporting company) | Emerging growth company ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) YES ☐ NO ☒
| Class | Outstanding as of October 26, 2023 | |
| Common Stock, $0.0001 par value per share | shares |
INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS
In addition to historical information, this Form 10-Q contains statements relating to our future results (including certain projections and business trends) that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are subject to the “safe harbor” created by those sections. The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the financial statements and the related notes thereto included in this Quarterly Report on Form 10-Q (this “Report”). This Report contains certain forward-looking statements and the Company’s future operating results could differ materially from those discussed herein. Our disclosure and analysis included in this Report concerning our operations, cash flows and financial position, including, in particular, the likelihood of our success in expanding our business and raising debt and capital securities include forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expect”, “anticipate”, “intend”, “plan”, “believe”, “estimate”, “may”, “project”, “will likely result”, and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to certain risks, uncertainties, and assumptions, including prevailing market conditions and are more fully described under “Part I, Item 1A - Risk Factors” of our Form 10-K for the year ended December 31, 2022. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. In any event, these and other crucial factors, including those set forth in Item 1A - “Risk Factors” of our Form 10-K for the year ended December 31, 2022 may cause actual results to differ materially from those indicated by our forward-looking statements.
Although we believe that these statements are based upon reasonable assumptions, we cannot guarantee future results and readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management’s opinions only as of the date of this filing. There can be no assurance that (i) we have correctly measured or identified all of the factors affecting our business or the extent of these factors’ likely impact, (ii) the available information with respect to these factors on which such analysis is based is complete or accurate, (iii) such analysis is correct or (iv) our strategy, which is based in part on this analysis, will be successful. The Company undertakes no obligation to update or revise forward-looking statements.
All references to “we”, “us”, “our” or “Vystar” in this Quarterly Report on Form 10-Q mean Vystar Corporation, and affiliates.
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VYSTAR CORPORATION
FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2023
INDEX
| 3 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VYSTAR CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | 15,505 | $ | 12,274 | ||||
| Accounts receivable | 62,334 | 12,145 | ||||||
| Inventories | 75,657 | 91,724 | ||||||
| Prepaid expenses and other | 650,186 | 633,769 | ||||||
| Assets of discontinued operations | 1,337,516 | 3,026,971 | ||||||
| Total current assets | 2,141,198 | 3,776,883 | ||||||
| Property and equipment, net | 129,996 | 140,886 | ||||||
| Other assets: | ||||||||
| Intangible assets, net | 146,442 | 154,371 | ||||||
| Inventories, long-term | 63,009 | |||||||
| Assets of discontinued operations | 6,943,519 | 7,503,970 | ||||||
| Total other assets | 7,089,961 | 7,721,350 | ||||||
| Total assets | $ | 9,361,155 | $ | 11,639,119 | ||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 1,443,882 | $ | 1,361,483 | ||||
| Accrued expenses | 337,112 | 684,147 | ||||||
| Stock subscription payable | 1,794,118 | 1,655,208 | ||||||
| Shareholder, convertible and contingently convertible notes payable and accrued interest - current maturities | 340,278 | 336,263 | ||||||
| Related party debt - current maturities | 171,365 | 169,552 | ||||||
| Unearned revenue | 44,379 | 44,479 | ||||||
| Related party advances | 296,395 | 266,541 | ||||||
| Liabilities of discontinued operations | 1,638,809 | 2,328,589 | ||||||
| Total current liabilities | 6,066,338 | 6,846,262 | ||||||
| Long-term liabilities: | ||||||||
| Liabilities of discontinued operations | 5,292,703 | 5,513,667 | ||||||
| Total liabilities | 11,359,041 | 12,359,929 | ||||||
| Stockholders’ deficit: | ||||||||
| Convertible preferred stock series class A, $ par value shares authorized; shares issued and outstanding at March 31, 2023 and December 31, 2022, respectively (liquidation preference of $172,000 and $170,000 at March 31, 2023 and December 31, 2022, respectively) | 1 | 1 | ||||||
| Convertible preferred stock series B, $ par value shares authorized; shares issued and outstanding at March 31, 2023 and December 31, 2022 (liquidation preference of $2,774,000 and $2,710,000 at March 31, 2023 and December 31, 2022, respectively) | 37 | 37 | ||||||
| Convertible preferred stock series C, $ par value shares authorized; shares issued and outstanding at March 31, 2023 and December 31, 2022 (liquidation preference of $5,356,000 and $5,233,000 at March 31, 2023 and December 31, 2022, respectively) | 192 | 192 | ||||||
| Common stock, $ par value, shares authorized; shares issued at March 31, 2023 and December 31, 2022, and shares outstanding at March 31, 2023 and December 31, 2022, respectively | 1,294 | 1,294 | ||||||
| Additional paid-in capital | 53,361,925 | 53,361,925 | ||||||
| Accumulated deficit | (56,135,215 | ) | (55,368,868 | ) | ||||
| Common stock in treasury, at cost; shares | (30 | ) | (30 | ) | ||||
| Total Vystar stockholders’ deficit | (2,771,796 | ) | (2,005,449 | ) | ||||
| Noncontrolling interest | 773,910 | 1,284,639 | ||||||
| Total stockholders’ deficit | (1,997,886 | ) | (720,810 | ) | ||||
| Total liabilities and stockholders’ deficit | $ | 9,361,155 | $ | 11,639,119 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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VYSTAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Revenue | $ | 409,907 | $ | 123,520 | ||||
| Cost of revenue | 76,698 | 38,225 | ||||||
| Gross profit | 333,209 | 85,295 | ||||||
| Operating expenses: | ||||||||
| Salaries, wages and benefits | 54,929 | 59,338 | ||||||
| Share-based compensation | 138,910 | 137,948 | ||||||
| Professional fees | 55,442 | 132,813 | ||||||
| Advertising | 6,665 | 6,234 | ||||||
| Rent | 20,001 | 8,393 | ||||||
| Service charges | 804 | 1,769 | ||||||
| Depreciation and amortization | 18,819 | 35,119 | ||||||
| Other operating | 88,356 | 202,286 | ||||||
| Total operating expenses | 383,926 | 583,900 | ||||||
| Loss from operations | (50,717 | ) | (498,605 | ) | ||||
| Other income (expense): | ||||||||
| Interest expense | (10,337 | ) | (84,715 | ) | ||||
| Change in fair value of derivative liabilities | 57,000 | |||||||
| Total other expense, net | (10,337 | ) | (27,715 | ) | ||||
| Net loss from continuing operations | (61,054 | ) | (526,320 | ) | ||||
| Discontinued operations: | ||||||||
| Loss from operations | (1,216,022 | ) | (427,646 | ) | ||||
| Net loss | (1,277,076 | ) | (953,966 | ) | ||||
| Net loss attributable to noncontrolling interest | 510,729 | 179,612 | ||||||
| Net loss attributable to Vystar | $ | (766,347 | ) | $ | (774,354 | ) | ||
| Basic and diluted loss per share: | ||||||||
| Net loss from continuing operations | $ | ) | $ | ) | ||||
| Net income (loss) from discontinued operations | $ | ) | $ | ) | ||||
| Net income (loss) attributable to noncontrolling interest | $ | (0.04 | ) | $ | (0.01 | ) | ||
| Net loss attributable to common shareholders | $ | ) | $ | ) | ||||
| Basic and diluted weighted average number of common shares outstanding | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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VYSTAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 2023
(Unaudited)
| Attributable to Vystar | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number | Number | Number | Number | Number | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| of | of | of | of | Additional | of | Vystar | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred | Preferred | Preferred | Preferred | Preferred | Preferred | Common | Common | Paid-in | Accumulated | Treasury | Treasury | Stockholders’ | Noncontrolling | Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares A | Stock A | Shares B | Stock B | Shares C | Stock C | Shares | Stock | Capital | Deficit | Shares | Stock | Deficit | Interest | Deficit | ||||||||||||||||||||||||||||||||||||||||||||||
| Ending balance December 31, 2022 | 8,698 | $ | 1 | 370,969 | $ | 37 | 1,917,973 | $ | 192 | 12,942,592 | $ | 1,294 | $ | 53,361,925 | $ | (55,368,868 | ) | (300 | ) | $ | (30 | ) | $ | (2,005,449 | ) | $ | 1,284,639 | $ | (720,810 | ) | ||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | (766,347 | ) | - | (766,347 | ) | (510,729 | ) | (1,277,076 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| Ending balance March 31, 2023 | 8,698 | $ | 1 | 370,969 | $ | 37 | 1,917,973 | $ | 192 | 12,942,592 | $ | 1,294 | $ | 53,361,925 | $ | (56,135,215 | ) | (300 | ) | $ | (30 | ) | $ | (2,771,796 | ) | $ | 773,910 | $ | (1,997,886 | ) | ||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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VYSTAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
FOR THE THREE MONTHS ENDED MARCH 31, 2022
(Unaudited)
| Attributable to Vystar | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number | Number | Number | Number | Number | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| of | of | of | of | Additional | of | Vystar | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Preferred | Preferred | Preferred | Preferred | Preferred | Preferred | Common | Common | Paid-in | Accumulated | Treasury | Treasury | Stockholders’ | Noncontrolling | Stockholders’ | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares A | Stock A | Shares B | Stock B | Shares C | Stock C | Shares | Stock | Capital | Deficit | Shares | Stock | Deficit | Interest | Deficit | ||||||||||||||||||||||||||||||||||||||||||||||
| Ending balance December 31, 2021 | 8,698 | $ | 1 | $ | $ | 12,942,792 | $ | 1,294 | $ | 43,851,510 | $ | (51,410,516 | ) | (300 | ) | $ | (30 | ) | $ | (7,557,741 | ) | $ | 1,657,442 | $ | (5,900,299 | ) | ||||||||||||||||||||||||||||||||||
| Share-based compensation - options | 3,691 | 3,691 | 3,691 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Retirement of common stock | (200 | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | (774,354 | ) | - | (774,354 | ) | (179,612 | ) | (953,966 | ) | |||||||||||||||||||||||||||||||||||||||||||||||
| Ending balance March 31, 2022 | 8,698 | $ | 1 | $ | $ | 12,942,592 | $ | 1,294 | $ | 43,855,201 | $ | (52,184,870 | ) | (300 | ) | $ | (30 | ) | $ | (8,328,404 | ) | $ | 1,477,830 | $ | (6,850,574 | ) | ||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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VYSTAR CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (1,277,076 | ) | $ | (953,966 | ) | ||
| Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||||
| Share-based compensation | 138,910 | 137,948 | ||||||
| Depreciation | 16,074 | 64,268 | ||||||
| Bad debts (recovery) | 6,833 | (4,342 | ) | |||||
| Amortization of intangible assets | 7,929 | 86,312 | ||||||
| Noncash lease expense | 38,701 | 78,488 | ||||||
| Amortization of debt discount | 16,250 | |||||||
| (Gain) on settlement of debt, net | (39,770 | ) | ||||||
| Change in fair value of derivative liabilities | (57,000 | ) | ||||||
| (Increase) decrease in assets: | ||||||||
| Accounts receivable | (47,218 | ) | 27,560 | |||||
| Inventories | 79,075 | (24 | ) | |||||
| Prepaid expenses and other | (16,417 | ) | 48,390 | |||||
| Assets of discontinued operations | 2,189,604 | 303,713 | ||||||
| Increase (decrease) in liabilities: | ||||||||
| Accounts payable | 82,400 | 154,990 | ||||||
| Accrued expenses and interest payable | (341,207 | ) | 56,637 | |||||
| Unearned revenue | (100 | ) | (34,059 | ) | ||||
| Liabilities of discontinued operations | (492,510 | ) | 98,349 | |||||
| Net cash provided by operating activities | 345,228 | 23,514 | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from related party advances | 29,855 | 40,000 | ||||||
| Cash flows used in discontinued operations | (227,604 | ) | (42,349 | ) | ||||
| Net cash used in financing activities | (197,749 | ) | (2,349 | ) | ||||
| Net increase in cash | 147,479 | 21,165 | ||||||
| Cash - beginning of period | 135,599 | 151,175 | ||||||
| Cash - end of period | 283,078 | 172,340 | ||||||
| Less: cash of discontinued operations | (267,573 | ) | (150,829 | ) | ||||
| Cash of continuing operations - end of period | $ | 15,505 | $ | 21,511 | ||||
| Cash paid during the period for: | ||||||||
| Interest | $ | 4,510 | $ | 2,724 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
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VYSTAR CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
Nature of Business
Vystar Corporation (“Vystar”, the “Company”, “we,” “us,” or “our”) is based in Worcester, Massachusetts. The Company uses patented technology to produces a line of innovative air purifiers, which destroy viruses and bacteria through the use of ultraviolet light. Vystar is also the creator and exclusive owner to produce Vytex® Natural Rubber Latex (“NRL”) currently being used primarily in various bedding products. In addition, Vystar has a majority ownership in Murida Furniture Co., Inc. dba Rotmans Furniture (“Rotmans”), formerly one of the largest independent furniture retailers in the U.S.
All activities of Rotmans have been included in discontinued operations. Additional disclosure can be found in Note 15.
NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed consolidated financial statements of the Company and the accompanying notes included in this Quarterly Report on Form 10-Q are unaudited. In the opinion of management, all adjustments necessary for the fair presentation of the condensed consolidated financial statements have been included. Such adjustments are of a normal, recurring nature. The condensed consolidated financial statements, and the accompanying notes, are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and do not contain certain information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Therefore, the interim condensed consolidated financial statements should be read in conjunction with that Annual Report on Form 10-K.
The Company has evaluated subsequent events through the date of the filing of its Form 10-Q with the Securities and Exchange Commission. Other than those events disclosed in Note 16, the Company is not aware of any other significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on the Company’s financial statements.
Basis of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned or controlled operating subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Discontinued Operations
In accordance with ASC No. 205-20, Discontinued Operations, for all periods presented, the results of operations and related balance sheet items associated with Rotmans are reported in discontinued operations in the accompanying consolidated financial statements. See Note 15 for further details.
Property and Equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is provided over the estimated useful lives of the assets, generally 5 to 10 years, using straight-line and accelerated methods.
Expenditures for major renewals and betterments are capitalized, while routine repairs and maintenance are expensed as incurred. When property items are retired or otherwise disposed of, the asset and related reserve accounts are relieved of the cost and accumulated depreciation, respectively, and the resultant gain or loss is reflected in earnings. As of March 31, 2023, the net balance of property and equipment is $129,996 with accumulated depreciation of $212,407. As of December 31, 2022, the net balance of property and equipment is $140,886 with accumulated depreciation of $201,517.
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Unearned Revenue
Unearned revenue consists of customer advance payments and deposits on sales of undelivered merchandise.
Changes to unearned revenue during the three months ended March 31, 2023 and 2022 are summarized as follows:
| 2023 | 2022 | |||||||
| Balance, beginning of the period | $ | 44,479 | $ | 79,368 | ||||
| Customer deposits received | ||||||||
| Revenue earned | (100 | ) | (34,058 | ) | ||||
| Balance, end of the period | $ | 44,379 | $ | 45,310 | ||||
The Company presents basic and diluted loss per share. As the Company reported a net loss in the three months ended March 31, 2023 and 2022, common stock equivalents, including stock options and warrants, were anti-dilutive; therefore, the amounts reported for basic and dilutive income per share were the same. Excluded from the computation of diluted income per share were options to purchase and shares of common stock for the three months ended March 31, 2023 and 2022, respectively, as their effect would be anti-dilutive. Warrants to purchase and shares of common stock for the three months ended March 31, 2023 and 2022, respectively, were also excluded from the computation of diluted income per share as their effect would be anti-dilutive. In addition, preferred stock convertible to and shares of common stock for the three months ended March 31, 2023 and 2022, respectively, were excluded from the computation of diluted income per share as their effect would be anti-dilutive. Both shareholder and Rotman Family contingently convertible notes for the three months ended March 31, 2023 and 2022 were also excluded from the computation of diluted loss per share as no contingencies were met.
Revenue
Our principal activities from which we generate our revenue are product sales. Revenue is measured based on considerations specified in a contract with a customer. A contract exists when it becomes a legally enforceable agreement with a customer. The contract is based on either the acceptance of standard terms and conditions at the retail store and on the websites for e-commerce customers, or the execution of terms and conditions contracts with retailers and wholesalers. These contracts define each party’s rights, payment terms and other contractual terms and conditions of the sale.
Consideration is typically paid prior to shipment via credit card or check when our products are sold direct to consumers, which is typically within 1 to 2 days or approximately 30 days from the time control is transferred when sold to wholesalers, distributors and retailers. We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience and, in some circumstances, published credit and financial information pertaining to the customer.
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A performance obligation is a promise in a contract to transfer a distinct product to the customer, which for us is transfer of finished goods to our customers. Performance obligations promised in a contract are identified based on the goods that will be transferred to the customer that are both capable of being distinct and are distinct in the context of the contract, whereby the transfer of the goods is separately identifiable from other promises in the contract. We have concluded the sale of finished goods and related shipping and handling are accounted for as the single performance obligation.
The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation. The transaction price is determined based on the consideration to which we will be entitled to receive in exchange for transferring goods to the customer. We issue refunds to retail, e-commerce and print media customers, upon request, within 30 days of delivery. We estimate the amount of potential refunds at each reporting period using a portfolio approach of historical data, adjusted for changes in expected customer experience, including seasonality and changes in economic factors. For retailers, distributors and wholesalers, we do not offer a right of return or refund and revenue is recognized at the time products are shipped to customers. Our RxAir units carry a one year warranty. In all cases, judgment is required in estimating these reserves. Actual claims for returns could be materially different from the estimates. As of March 31, 2023 and December 31, 2022, reserves for estimated sales returns totaled $58,000 and $415,000, respectively, and are included in the accompanying condensed consolidated balance sheets as accrued expenses.
We recognize revenue when we satisfy a performance obligation in a contract by transferring control over a product to a customer when product is shipped based on fulfillment by the Company. The Company considers fulfillment when it passes all liability at the point of shipping through third party carriers. Delivery fees are charged to customers and are included in revenue in the accompanying condensed consolidated statements of operations and the costs associated with these deliveries are included in revenues as third party carrier are engaged. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of revenue in the accompanying condensed consolidated statements of operations.
Advertising Costs
Advertising costs, which include television, radio, newspaper, digital and other media advertising, are expensed upon first showing. Advertising costs were approximately $7,000 and $6,000 for the three months ended March 31, 2023 and 2022, respectively.
NOTE 3 - LIQUIDITY AND GOING CONCERN
The Company’s financial statements are prepared using the accrual method of accounting in accordance with U.S. GAAP and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. However, the Company has incurred significant losses and experienced negative cash flow since inception. At March 31, 2023, the Company had cash of $15,505 and a deficit in working capital of approximately $3.9 million. Further, at March 31, 2023, the accumulated deficit amounted to approximately $56.1 million. We use working capital to finance our ongoing operations, and since those operations do not currently cover all our operating costs, managing working capital is essential to our Company’s future success. Because of this history of losses and financial condition, there is substantial doubt about the Company’s ability 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 plans to finance future operations using cash on hand, increased revenue from RxAir air purification units, Vytex license fees and stock issuances to new and existing shareholders.
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There can be no assurances the Company will be able to achieve projected levels of revenue in 2023 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 2023, which could have a material adverse effect on the ability to achieve the business objectives, and as a result, may require the Company to file bankruptcy or cease operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities that might be necessary should the Company be forced to take any such actions.
The Company’s future expenditures will depend on numerous factors, including: the rate at which the Company can introduce RxAir air purification units and license Vytex NRL raw materials to manufacturers, and subsequently retailers; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; market acceptance of the Company’s products, services and competing technological developments; the Company’s ability to successfully acquire new customers and maintain a strong brand; and broader economic factors such as interest rates and changes in customer spending patterns. As the Company expands its activities and operations, cash requirements are expected to increase at a rate consistent with revenue growth after the Company has achieved sustained revenue generation.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment, net consists of the following:
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Tooling and testing equipment | $ | 338,572 | $ | 338,572 | ||||
| Furniture, fixtures and equipment | 3,831 | 3,831 | ||||||
| 342,403 | 342,403 | |||||||
| Accumulated depreciation | (212,407 | ) | (201,517 | ) | ||||
| Property and equipment, net | $ | 129,996 | $ | 140,886 | ||||
Depreciation expense for the three months ended March 31, 2023 and 2022 was $10,890.
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NOTE 5 - INTANGIBLE ASSETS
Intangible assets consist of the following:
| Amortization | |||||||||||
| March 31, | December 31, | Period | |||||||||
| 2023 | 2022 | (in Years) | |||||||||
| Amortized intangible assets: | |||||||||||
| Patents | $ | 361,284 | $ | 361,284 | 6 - 20 | ||||||
| Proprietary technology | 13,000 | 13,000 | 10 | ||||||||
| Tradename and brand | 13,000 | 13,000 | 5 - 10 | ||||||||
| Total | 387,284 | 387,284 | |||||||||
| Accumulated amortization | (249,914 | ) | (241,985 | ) | |||||||
| Intangible assets, net | 137,370 | 145,299 | |||||||||
| Indefinite-lived intangible assets: | |||||||||||
| Trademarks | 9,072 | 9,072 | |||||||||
| Total intangible assets | $ | 146,442 | $ | 154,371 | |||||||
Amortization expense for the three months ended March 31, 2023 and 2022 was $7,929 and $24,229, respectively.
Estimated future amortization expense for finite-lived intangible assets is as follows:
| Amount | ||||
| Remaining in 2023 | $ | 23,787 | ||
| 2024 | 31,716 | |||
| 2025 | 24,652 | |||
| 2026 | 16,032 | |||
| 2027 | 16,032 | |||
| Thereafter | 25,151 | |||
| Total | $ | 137,370 | ||
NOTE 6 - LEASES (DISCONTINUED OPERATIONS)
Rotmans leases equipment, a showroom, offices and warehouse facilities. These leases expire at various dates through 2031 and have monthly base rents which range from $800 to $81,000. One of the leases may be terminated early by the lessor at the end of 2028 with a six-month notice.
| 13 |
The table below presents the lease costs for the three months ended March 31, 2023 and 2022:
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Operating lease cost | $ | 165,186 | $ | 287,670 | ||||
| Finance lease cost: | ||||||||
| Amortization of right-of-use assets | 44,468 | |||||||
| Interest on lease liabilities | 7,312 | |||||||
| Total lease cost | $ | 165,186 | $ | 339,450 | ||||
During the three months ended March 31, 2022, the Company recognized sublease income of approximately $34,000, which in included in discontinued operations in the accompanying condensed consolidated statements of operations.
Our leases generally do not provide an implicit rate, and therefore we use our incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease. We used incremental borrowing rates as of the implementation date for operating leases that commenced prior to that date.
The following table presents other information related to leases:
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2023 | 2022 | |||||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
| Operating cash flows used for operating leases | $ | 245,924 | $ | 263,616 | ||||
| Financing cash flows used for financing leases | 49,661 | |||||||
| Assets obtained in exchange for operating lease liabilities | ||||||||
| Assets obtained in exchange for finance lease liabilities | 4,739 | |||||||
| Weighted average remaining lease term: | ||||||||
| Operating leases | 7.8 years | 8.8 years | ||||||
| Finance leases | 3.2 years | 4.1 years | ||||||
| Weighted average discount rate: | ||||||||
| Operating leases | 5.60 | % | 5.60 | % | ||||
| Finance leases | 5.16 | % | 5.16 | % | ||||
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The future minimum lease payments required under operating and financing lease obligations as of March 31, 2023 having initial or remaining non-cancelable lease terms in excess of one year are summarized as follows:
| Operating Leases | Finance Leases | Total | ||||||||||
| Remainder of 2023 | $ | 803,427 | $ | 139,080 | $ | 942,507 | ||||||
| 2024 | 955,272 | 139,080 | 1,094,352 | |||||||||
| 2025 | 870,000 | 139,080 | 1,009,080 | |||||||||
| 2026 | 870,000 | 68,395 | 938,395 | |||||||||
| 2027 | 870,000 | 870,000 | ||||||||||
| Thereafter | 2,682,500 | 2,682,500 | ||||||||||
| Total undiscounted lease liabilities | 7,051,199 | 485,635 | 7,536,834 | |||||||||
| Less: imputed interest | (1,291,023 | ) | (42,108 | ) | (1,333,131 | ) | ||||||
| Net | $ | 5,760,176 | $ | 443,527 | $ | 6,203,703 | ||||||
As of March 31, 2023, Vystar and Rotmans do not have additional operating and finance leases that have not yet commenced.
NOTE 7 - NOTES PAYABLE AND LOAN FACILITY
Discontinued Operations
Advances/Receivable
On May 29, 2020, Rotmans entered into a sale promotion consulting agreement with a national furniture sales event company. Under the agreement, Rotmans appointed the third-party as its exclusive agent to assist with a high-impact sale. Before the sale, the agent advanced the Company funds of approximately $2,300,000 to pay off a bank line of credit and certain other vendors. The agent was reimbursed for the advance from the proceeds of the sale. The initial sales agreement with the agent ended in May 2021. The agreement has been amended numerous times and ended in December 2022. At the conclusion of the agreement, the remaining inventories were transferred to the agent. As of March 31, 2023 and December 31, 2022, a receivable is due from the agent for the inventories in the amount of $229,434 and $1,853,972, respectively, and is included in assets of discontinued operations.
Continuing Operations
Shareholder, Convertible and Contingently Convertible Notes Payable
The following table summarizes shareholder, convertible and contingently convertible notes payable:
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Shareholder, convertible and contingently convertible notes | $ | 309,500 | $ | 309,500 | ||||
| Accrued interest | 30,778 | 26,763 | ||||||
| 340,278 | 336,263 | |||||||
| Less: current maturities | (340,278 | ) | (336,263 | ) | ||||
| $ | $ | |||||||
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Shareholder Convertible Notes Payable
During the year ended December 31, 2021, the Company issued certain contingently convertible promissory notes in varying amounts to existing shareholders which totaled $290,000. The notes are unsecured and bear interest at an annual rate of five percent (5%) from date of issuance. The face amount of the notes represents the amount due at maturity along with the accrued interest. In the event that the spin-off of RxAir does not occur within 2023, the Company will convert these notes into common stock at a conversion price of $1.60. If the spin-off does occur, these notes will convert into RxAir common stock with two conversion prices of $0.15 and $2, which equates to a blended conversion price of $0.18. All of these notes are outstanding as of March 31, 2023 and December 31, 2022. At the issuance date of these notes, it was determined they contain a beneficial conversion feature amounting to approximately $90,000. As these notes are contingently convertible, the beneficial conversion feature will not be recorded on the consolidated financial statements until the actual conversion occurs.
One note remains from the Company’s issuance of shareholder contingently convertible notes payable in 2018 and is (i) unsecured, (ii) bore interest at an annual rate of five percent (5%) from date of issuance, and (iii) is convertible at the Company’s option post April 19, 2018. The note matured one year from issuance and was extended one (1) additional year by the Company. If converted, the note plus accrued interest are convertible into shares of the Company’s common stock at the prior twenty (20) day average closing price with a 50% discount. The outstanding balance as of March 31, 2023 and December 31, 2022 is $19,500. The note matured in January 2020 and continues to accrue interest until settlement. The note is in default and bears interest at an annual rate of eight percent (8%) in arrears. The value of the embedded conversion features on the one remaining note was de minimis at March 31, 2023 and December 31, 2022.
Related Party Debt
The following table summarizes related party debt:
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Rotman Family convertible note | $ | 5,000 | $ | 5,000 | ||||
| Rotman Family nonconvertible note | 140,000 | 140,000 | ||||||
| Accrued interest | 26,365 | 24,552 | ||||||
| 171,365 | 169,552 | |||||||
| Less: current maturities | (171,365 | ) | (169,552 | ) | ||||
| $ | $ | |||||||
Rotman Family Convertible Note
On August 17, 2021, the Company issued a contingently convertible promissory note totaling $5,000 to Jamie Rotman. The note is unsecured and bears interest at an annual rate of five percent (5%) from date of issuance. The face amount of the note represents the amount due at maturity along with the accrued interest. In the event that the spin-off of RxAir does not occur within one year, the Company will convert the note into common stock at a conversion price of $1.60. If the spin-off does occur, the note will convert into RxAir common stock with two conversion prices of $0.15 and $2, which equates to a blended conversion price of $0.18. At the issuance date of this note, it was determined to contain a beneficial conversion feature amounting to approximately $2,000. As this note is contingently convertible, the beneficial conversion feature will not be recorded on the consolidated financial statements until the actual conversion occurs. The balance of the note payable including accrued interest to Jamie Rotman is approximately $5,000 at March 31, 2023 and December 31, 2022.
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The following table summarizes the Rotman Family Convertible Note:
| Carrying Amount | ||||||||||||||
| March 31, | December 31, | |||||||||||||
| Issue Date | Principal Amount | 2023 | 2022 | |||||||||||
| Jamie Rotman 5.00% note due August 2023 | 08/17/21 | $ | 5,000 | $ | 5,406 | $ | 5,344 | |||||||
Rotman Family Nonconvertible Note
In connection with the acquisition of 58% of Rotmans, Bernard Rotman was issued a related party note payable in the amount of $140,000. The note bears interest at an annual rate of five percent (5%) and matures four years from issuance. Monthly payments of $2,917 to Bernard Rotman were scheduled to begin six months from issuance until maturity in December 2023. The balance of Bernard Rotman’s note including accrued interest is approximately $166,000 and $164,000 at March 31, 2023 and December 31, 2022, respectively, as no payments have been made to date.
The following table summarizes the Rotman Family Nonconvertible Note:
| Carrying Amount | ||||||||||||||
| March 31, | December 31, | |||||||||||||
| Issue Date | Principal Amount | 2023 | 2022 | |||||||||||
| Bernard Rotman 5.00% note due July 2023 | 07/18/19 | $ | 140,000 | $ | 165,958 | $ | 164,208 | |||||||
Discontinued Operations Note
In April 2022, Blue Oar Consulting, Inc. (“Blue Oar”), an entity wholly owned by Gregory Rotman, advanced Rotmans $500,000 and paid bills totaling $100,000 on Rotmans behalf. Rotmans formalized the advances and issued a promissory note to Blue Oar. The note bore interest at an annual rate of six percent (6%) and required weekly payments of $12,500 until the note and interest is paid in full. The Company also granted Blue Oar a security interest in its inventory. As of March 31, 2023 and December 31, 2022, the balance of the note payable including accrued interest was approximately $197,000 and $407,000, respectively, and is included in liabilities from discontinued operations. The final principal payment on the note balance was made in April 2023.
NOTE 8 - STOCKHOLDERS’ DEFICIT
Cumulative Convertible Preferred Stock
Series A Preferred Stock
On May 2, 2013, the Company began a private placement offering to sell up to 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 shares of preferred stock at $ per share for a value of $2,000,000. The preferred stock was convertible at a conversion price of $7.50 per common share at the option of the holder after a nine-month holding period. The conversion price was lowered to $5.00 per common share for those holders who invested an additional $ or more in Vystar’s common stock in the aforementioned September 2014 Private Placement. The preferred shares have full voting rights as if converted and have a fully participating liquidation preference. In the event of a liquidation, dissolution or winding up of the Company, the holders of Series A Preferred Stock shall be entitled to receive an amount equal to the dividends accumulated and unpaid thereon to the date of final distribution to such holders, whether or not declared, without interest, plus a sum equal to $ per share. As of March 31, 2023 and December 31, 2022, the liquidation preference totals approximately $172,000 and $170,000, respectively.
| 17 |
As of March 31, 2023, the shares of outstanding preferred stock had undeclared dividends of approximately $85,000 and could be converted into shares of common stock, at the option of the holder.
As of December 31, 2022, the shares of outstanding preferred stock had undeclared dividends of approximately $83,000 and could be converted into shares of common stock, at the option of the holder.
Series B Preferred Stock
On April 11, 2022, the Company amended its Articles of Incorporation to add the terms of a 10% Series B Cumulative Convertible Preferred Stock. Under the amendment, the number of shares authorized are . The preferred stock accumulates a 10% per annum dividend and is convertible into shares of common stock at the option of the holder after a six-month holding period. The holders of Series B preferred stock have full voting rights as if converted and have a fully participating liquidation preference. In the event of a liquidation, dissolution or winding up of the Company, the holders of Series B Preferred Stock shall be entitled to receive an amount equal to the dividends accumulated and unpaid thereon to the date of final distribution to such holders, whether or not declared, without interest, plus a sum equal to $ per share. As of March 31, 2023 and December 31, 2022, the liquidation preference totals approximately $2,774,000 and $2,710,000, respectively.
As of March 31, 2023, the shares of outstanding preferred stock had undeclared dividends of approximately $177,000 and could be converted into shares of common stock, at the option of the holder.
As of December 31, 2022, the shares of outstanding preferred stock had undeclared dividends of approximately $113,000 and could be converted into shares of common stock, at the option of the holder.
Series C Preferred Stock
On July 8, 2022, the Company amended its Articles of Incorporation to add the terms of a 10% Series C Cumulative Convertible Preferred Stock. Under the amendment, the number of shares authorized are . The preferred stock accumulates a 10% per annum dividend and is convertible into shares of common stock at the option of the holder after a six-month holding period. The holders of Series C preferred stock have full voting rights as if converted and have a fully participating liquidation preference. In the event of a liquidation, dissolution or winding up of the Company, the holders of Series C Preferred Stock shall be entitled to receive an amount equal to the dividends accumulated and unpaid thereon to the date of final distribution to such holders, whether or not declared, without interest, plus a sum equal to $ per share. As of March 31, 2023 and December 31, 2022, the liquidation preference totals approximately $5,356,000 and $5,233,000, respectively.
As of March 31, 2023, the shares of outstanding preferred stock had undeclared dividends of approximately $350,000 and could be converted into shares of common stock, at the option of the holder.
As of December 31, 2022, the shares of outstanding preferred stock had undeclared dividends of approximately $227,000 and could be converted into shares of common stock, at the option of the holder.
Common Stock and Warrants
Included in stock subscription payable at March 31, 2023 and December 31, 2022, is $ received under common stock subscription agreements for shares during the year ended December 31, 2020.
Stock Subscription Payable
At March 31, 2023 and December 31, 2022, the Company recorded $1,794,118 and $1,655,208, respectively, of stock subscription payable related to common stock to be issued. The following summarizes the activity of stock subscription payable during the period ended March 31, 2023 and December 31, 2022:
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| Amount | Shares | |||||||
| Balance, January 1, 2022 | $ | 1,247,549 | 605,058 | |||||
| Additions | 659,647 | 1,552,386 | ||||||
| Issuances | (251,988 | ) | (25,568 | ) | ||||
| Balance, December 31, 2022 | 1,655,208 | 2,131,876 | ||||||
| Additions | 138,910 | 995,608 | ||||||
| Balance, March 31, 2023 | $ | 1,794,118 | 3,127,484 | |||||
NOTE 9 - REVENUES
The following table presents our revenues disaggregated by each major product category and service for the three months ended March 31, 2023 and 2022:
| Three Months Ended March 31, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| % of | % of | |||||||||||||||
| Net Sales | Net Sales | Net Sales | Net Sales | |||||||||||||
| Merchandise: | ||||||||||||||||
| Air Purification Units | $ | 403,696 | 98.5 | $ | 103,290 | 83.6 | ||||||||||
| Mattresses and Toppers | 6,011 | 1.5 | 12,514 | 10.1 | ||||||||||||
| Accessories and Other | 200 | 0.0 | 7,716 | 6.3 | ||||||||||||
| $ | 409,907 | 100.0 | $ | 123,520 | 100.0 | |||||||||||
Generally accepted accounting principles require share-based payments to employees, including grants of employee stock options, warrants, and common stock to be recognized in the income statement based on their fair values at the date of grant, net of estimated forfeitures.
In total, the Company recorded $ and $ of stock-based compensation for the three months ended March 31, 2023 and 2022, respectively, including shares to be issued related to consultants and board member stock options and common stock and warrants issued to non-employees. Included in stock subscription payable is accrued stock-based compensation of $ and $ at March 31, 2023 and December 31, 2022, respectively.
The Company used the Black-Scholes option pricing model to estimate the grant-date fair value of option and warrant awards:
| ● | Expected Dividend Yield - because the Company does not currently pay dividends, the expected dividend yield is ; | |
| ● | Expected Volatility in Stock Price - volatility based on the Company’s trading activity was used to determine expected volatility; | |
| ● | Risk-free Interest Rate - reflects the average rate on a United States Treasury Bond with a maturity equal to the expected term of the option; and | |
| ● | Expected Life of Award - because we have minimal experience with the exercise of options or warrants for use in determining the expected life of each award, we used the option or warrant’s contractual term as the expected life. |
| 19 |
In total for the three months ended March 31, 2022, the Company recorded $ of share-based compensation expense related to employee and Board Members’ stock options. The Company did not recognize any such share-based compensation for the three months ended March 31, 2023. There is no unrecognized compensation expense as of March 31, 2023 for non-vested share-based awards to be recognized over a period of less than one year.
Options
During 2004, the Board of Directors of the Company adopted a stock option plan (the “Plan”) and authorized up to 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 shares and to include the independent Board Members in the Plan in lieu of continuing the previous practice of granting warrants each quarter to independent Board Members for services. At March 31, 2023, there are shares of common stock available for issuance under the Plan. In 2014, the Board of Directors adopted an additional stock option plan which provides for an additional shares which are all available as of March 31, 2023. In 2019, the Board of Directors adopted an additional stock option plan with provides for shares which are all available as of March 31, 2023. 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 years and are typically exercisable up to years.
There were options granted during the three months ended March 31, 2023 and 2022, respectively. Forfeitures are recognized as they occur.
| Weighted | ||||||||||||
| Weighted | Average | |||||||||||
| Average | Remaining | |||||||||||
| Number | Exercise | Contractual | ||||||||||
| of Shares | Price | Life (Years) | ||||||||||
| Outstanding, December 31, 2022 | 265,267 | $ | 19.54 | |||||||||
| Granted | - | - | ||||||||||
| Exercised | - | - | ||||||||||
| Forfeited | (220,500 | ) | $ | 22.00 | - | |||||||
| Outstanding, March 31, 2023 | 44,767 | $ | 7.42 | |||||||||
| Exercisable, March 31, 2023 | 44,767 | $ | 7.42 | |||||||||
As of March 31, 2023 and 2022, the aggregate intrinsic value of the Company’s outstanding options was minimal. The aggregate intrinsic value will change based on the fair market value of the Company’s common stock.
| 20 |
Warrants
Warrants are issued to third parties as payment for services, debt financing compensation and conversion and in conjunction with the issuance of common stock. The fair value of each common stock warrant issued for services is estimated on the date of grant using the Black-Scholes option pricing model.
The following table represents the Company’s warrant activity for the three months ended March 31, 2023:
| Weighted | ||||||||||||||||
| Weighted | Average | |||||||||||||||
| Weighted | Average | Remaining | ||||||||||||||
| Number | Average | Exercise | Contractual | |||||||||||||
| of Shares | Fair Value | Price | Life (Years) | |||||||||||||
| Outstanding, December 31, 2022 | 37,266 | $ | 7.57 | |||||||||||||
| Granted | - | - | ||||||||||||||
| Exercised | - | - | ||||||||||||||
| Forfeited | - | |||||||||||||||
| Expired | (10,441 | ) | $ | 34.22 | - | |||||||||||
| Outstanding, March 31, 2023 | 26,825 | $ | 6.59 | |||||||||||||
| Exercisable, March 31, 2023 | 26,825 | $ | 6.59 | |||||||||||||
NOTE 11 - RELATED PARTY TRANSACTIONS
Officers and Directors
Per Steven Rotman’s Employment agreement dated July 22, 2019, as amended, he is to be paid $125,000 per year in cash, $10,417 per month in shares based on a 20-day average price at a 50% discount to market, $5,000 per month in cash for expenses as well as access to a Company provided vehicle and health and life insurance. During the three months ended March 31, 2023, the Company expensed approximately $112,000 related to this employment agreement. As of March 31, 2023, the Company had a stock subscription payable balance of $682,225, or approximately shares to be issued in the future and $198,155 of reimbursable expenses payable and $116,403 of unpaid salary related to this party.
The Board of Directors authorized their board fees for 2021 be paid in common stock of the Company. Included in stock subscription payable at March 31, 2023 and December 31, 2022 is shares valued at $, of which shares valued at $ is included in Steven Rotman’s balance above.
Blue Oar Consulting, Inc.
This entity is owned by Gregory Rotman, who is the son of the Company’s CEO, Steven Rotman. Blue Oar provides business consulting services to the Company. In exchange for such services, the Company has entered into a consulting agreement with the related party entity.
Per the consulting agreement, Blue Oar is to be paid $15,000 per month in cash for expenses, and $12,500 per month to be paid in shares based on a 20-day average at a 50% discount to market. During the three months ended March 31, 2023, the Company expensed approximately $121,000 related to the consulting agreement. As of March 31, 2023, the Company had a stock subscription payable balance of $705,672, or approximately shares.
Related Party Advances
As of March 31, 2023, Gregory Rotman and Steven Rotman advanced the Company funds totaling $266,170 and $30,225, respectively. The advances are due on demand as repayment terms have not yet been finalized.
| 21 |
Designcenters.com
This entity is owned by Jamie Rotman, who is the daughter of the Company’s CEO, Steven Rotman. Designcenters.com (“Design”) provided bookkeeping and management services to the Company through July 2019. In exchange for such services, the Company had entered into a consulting agreement with the related party entity. As of March 31, 2023, the Company had a stock subscription payable balance of $42,000, for approximately shares related to this party for services incurred and expensed in 2019.
NOTE 12 - COMMITMENTS
Employment and Consulting Agreements
The Company has entered into employment and consulting agreements with certain of our officers, employees, and affiliates. For employees, payment and benefits would become payable in the event of termination by us for any reason other than cause, or upon change in control of our Company, or by the employee for good reason.
There is currently one employment agreement in place with the CEO, Steven Rotman. See compensation terms in Note 11.
During the three months ended March 31, 2023, the Company entered into various service agreements with consultants for financial reporting, advisory, and compliance services.
Litigation
From time to time, the Company is party to certain legal proceedings that arise in the ordinary course and are incidental to our business. Future events or circumstances, currently unknown to management, will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on our consolidated financial position, liquidity or results of operations in any future reporting periods.
EMA Financial
On February 19, 2019, EMA Financial, Inc. filed a lawsuit in the Southern District of New York against the Company. The lawsuit alleged various breaches of an underlying convertible promissory note and stock purchase agreement and sought four claims for relief: (i) specific performance to enforce a stock conversion and contractual obligations; (ii) breach of contract; (iii) permanent injunction to enforce the stock conversion and contractual obligations; and (iv) legal fees and costs of the litigation. The complaint was filed with a motion seeking: (i) a preliminary injunction seeking an immediate resolution of the case through the stock conversion; (ii) a consolidation of the trial with the preliminary injunctive hearing; and (iii) summary judgment on the first and third claims for relief.
The Company filed an opposition to the motion and upon oral argument the motion for injunctive relief was denied. The Court issued a decision permitting a motion for summary judgment to proceed and permitted the Company the opportunity to supplement its opposition papers together with the plaintiff who was also provided opportunity to submit reply papers. On April 5, 2019, the Company filed the opposition papers as well as a motion to dismiss the first and third causes of action in the complaint. On March 13, 2020, the Court granted the Company’s motion dismissing the first and third claims for relief and denied the motion for summary judgment as moot.
The Company subsequently filed an amended answer with counterclaims. The affirmative defenses if granted collectively preclude the relief sought. In addition, Vystar filed counterclaims asserting: (a) violation of 10(b)(5) of the Securities and Exchange Act; (b) violation of Section 15(a)(1) of the Exchange Act (failure to register as a broker-dealer); (c) pursuant to the Uniform Declaratory Judgment Act, 28 U.S.C. §§ 2201, the Company requests the Court to declare: (i) pursuant to Delaware law, the underlying agreements are unconscionable; (ii) the underlying agreements are unenforceable and/or portions are unenforceable, such as the liquidated damages sections; (iii) to the extent the agreement is enforceable, Vystar in good faith requests the Court to declare the legal fee provisions of the agreements be mutual (d) unjust enrichment; (e) breach of contract (in the alternative); and (f) attorneys’ fees.
| 22 |
On June 10, 2020, EMA filed a motion for summary judgment as to its remaining claims for relief and a motion to dismiss the Company’s affirmative defenses and counterclaims. The Company opposed the motion on July 10, 2020, and the same was fully submitted to the Court on July 28, 2020. On March 29, 2021, the Court issued a decision granting in part and denying in part the motion. Specifically, the Court granted that part of the motion seeking summary judgment and dismissal on the Company’s affirmative defense and counterclaim regarding Sections 15(a)/29(b) of the Exchange Act. Two weeks later the Company filed a motion for reconsideration as to the dismissal portion of the order, or, for the alternative, a motion for certification for the right to file a petition to the Second Circuit Court of Appeals on the issue. The Court denied the motion for reconsideration and certification. Subsequently, fact discovery has been completed and on June 24, 2022 both parties submitted competing motions for summary judgment.
On EMA seeks summary judgment on its breach of contract and attorneys’ fees claims, specifically seeking damages in the amount of $1,820,000 with 24% interest premised on the argument it was entitled to effectuate a January 15 and February 5, 2019, notices of conversions. EMA further seeks to dismiss Vystar’s affirmative defenses and counterclaims. Conversely, Vystar filed its motion for summary judgment seeking an order to dismiss the EMA complaint on the grounds: (i) the underlying note was satisfied on December 11, 2018; and (ii) EMA, through multiple breaches of the note, over-converted the note by shares equating to a request of damages against EMA and in favor of Vystar for $4,802,000, with interest accruing at 24%, and attorneys’ fees. The briefing by the parties was fully submitted on July 29, 2022.
On January 6, 2023, the Court issued a series of preliminary rulings based upon the parties’ respective summary judgment motions. Those rulings narrowed the outstanding issues (and claims) to only the parties’ breach of contract claim and counterclaim (and affirmative defenses) regarding the conversion process. Of particular importance, the Court found EMA breached the note by failing to effectuate the conversions in the manner outlined by the controlling note. The Court further found the principal balance at issue was $80,000, interest accrued from the date set in the note and default interest, to the extent applicable, was to accrue at the default rate from September 2018, forward. The Court left undecided whether EMA’s breach of the note was material, whether affirmative defenses as previously raised by the parties were applicable to each parties’ contractual claim, and a damages analysis associated with the same. The Court then requested a supplemental briefing as to the issues of materiality, liability and damages. The issues were fully briefed and submitted on February 24 and March 15, 2023. The parties await a final decision from the Court.
NOTE 13 - MAJOR CUSTOMERS AND VENDORS
Major customers and vendors are defined as a customer or vendor from which the Company derives at least 10% of its revenue and cost of revenue, respectively.
During the three months ended March 31, 2023, the Company made approximately 27% of its sales to one customer. Included in accounts receivable is $16,184 at March 31, 2023 from the major customer.
During the three months ended March 31, 2022, the Company made approximately 16% of its purchases from one major vendor. The Company owed its major vendor approximately $111,000 at March 31, 2022.
| 23 |
NOTE 14 - INCOME TAXES
The provision (benefit) for income taxes for the three months ended March 31, 2023 and 2022 assumes a 21% effective tax rate for federal income taxes. A reconciliation of the federal statutory income tax rate and the effective income tax rate as a percentage of income before income taxes is as follows:
| Three Months Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Federal statutory income tax rate | (21.0 | )% | (21.0 | )% | ||||
| Change in valuation allowance on net operating loss carryforwards | 21.0 | 21.0 | ||||||
| Effective income tax rate | 0.0 | % | 0.0 | % | ||||
Deferred tax assets as of March 31, 2023 and December 31, 2022 are as follows:
| 2023 | 2022 | |||||||
| NOL carryforwards | $ | 8,300,000 | $ | 8,300,000 | ||||
| Less valuation allowance | (8,300,000 | ) | (8,300,000 | ) | ||||
| Deferred tax assets | $ | $ | ||||||
Deferred taxes are caused primarily by net operating loss carryforwards. U.S. Tax Legislation enacted in 2017 (the “TCJA”) has significantly changed certain aspects of U.S. federal income taxation. Net Operating Losses (“NOLs”) generated in 2017 and prior years can be carried forward for 20 years. NOLs generated in 2018 – 2020, as enacted by the CARES Act, can be carried forward indefinitely. However, NOLs generated after 2020 can also carried forward indefinitely but limited to 80% of taxable income.
For federal income tax purposes, the Company has a net operating loss carryforward of approximately $39,700,000 as of March 31, 2023, of which approximately $18,400,000 expires beginning in 2024 and $21,300,000 which can be carried forward indefinitely. For state income tax purposes, the Company has a net operating loss carryforward of approximately $18,400,000 and $21,000,000 as of March 31, 2023 in Georgia and Massachusetts, respectively, which expires beginning in 2038.
In addition, as of March 31, 2023, Rotmans has a net operating loss carryforward of approximately $5,500,000 for federal income tax purposes of which $1,800,000 expires beginning in 2029 and $3,700,000 can be carried forward indefinitely. Rotmans has a state operating loss carryforward of approximately $4,600,000 which expires beginning in 2038.
Pursuant to Internal Revenue Code Section 382, the future realization of our net operating loss carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that may have occurred previously or that could occur in the future.
NOTE 15 - DISCONTINUED OPERATIONS
Rotmans closed its showroom on December 14, 2022. The Company has accounted for the closing as discontinued operations in accordance with ASC No. 205-20, Discontinued Operations. The results of operations are reported as discontinued operations in 2023 and 2022. The assets and liabilities have been reported in the condensed consolidated balance sheets as assets and liabilities of discontinued operations.
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The loss from discontinued operations for the three months ended March 31, 2023 and 2022 are as follows:
| 2023 | 2022 | |||||||
| Revenue | $ | 107,479 | $ | 3,715,738 | ||||
| Cost of revenue | 122,650 | 1,622,049 | ||||||
| Gross profit (loss) | (15,171 | ) | 2,093,689 | |||||
| Operating expenses: | ||||||||
| Salaries, wages and benefits | 264,671 | 849,144 | ||||||
| Agent fees | 418,179 | |||||||
| Professional fees | 98,593 | 56,590 | ||||||
| Advertising | 67,280 | 287,254 | ||||||
| Rent | 179,782 | 175,334 | ||||||
| Service charges | 20,600 | 105,403 | ||||||
| Depreciation and amortization | 5,184 | 115,461 | ||||||
| Other operating | 526,505 | 453,328 | ||||||
| Total operating expenses | 1,162,615 | 2,460,693 | ||||||
| Loss from operations | (1,177,786 | ) | (367,004 | ) | ||||
| Other income (expense): | ||||||||
| Interest expense | (83,702 | ) | (94,594 | ) | ||||
| Gain on settlement of debt, net | 39,770 | |||||||
| Other income | 5,696 | 33,952 | ||||||
| Total other expense, net | (38,236 | ) | (60,642 | ) | ||||
| Net loss from discontinued operations | $ | (1,216,022 | ) | $ | (427,646 | ) | ||
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Details of the balance sheet items for discontinued operations as are as follows:
| March 31, | December 31, | |||||||
| 2023 | 2022 | |||||||
| Current assets: | ||||||||
| Cash | $ | 267,573 | $ | 123,325 | ||||
| Accounts receivable | 229,434 | 1,853,972 | ||||||
| Other receivables | 444,680 | 684,775 | ||||||
| Property held for sale | 365,707 | |||||||
| Inventories | 76,379 | |||||||
| Prepaid expenses and other | 30,122 | 288,520 | ||||||
| Total current assets | $ | 1,337,516 | $ | 3,026,971 | ||||
| Non-current assets: | ||||||||
| Property and equipment, net | $ | 119,529 | $ | 490,420 | ||||
| Operating lease right-of-use assets, net | 6,818,716 | 7,008,276 | ||||||
| Other assets | 5,274 | 5,274 | ||||||
| Total non-current assets | $ | 6,943,519 | $ | 7,503,970 | ||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 321,293 | $ | 339,426 | ||||
| Accrued expenses | 209,298 | 726,410 | ||||||
| Operating lease liabilities - current maturities | 761,000 | 737,000 | ||||||
| Finance lease liabilities - current maturities | 150,000 | 119,000 | ||||||
| Related party debt - current maturities | 197,218 | 406,753 | ||||||
| Total current liabilities | $ | 1,638,809 | $ | 2,328,589 | ||||
| Non-current liabilities: | ||||||||
| Operating lease liabilities, net of current maturities | $ | 4,999,176 | $ | 5,189,140 | ||||
| Finance lease liabilities, net of current maturities | 293,527 | 324,527 | ||||||
| Total non-current liabilities | $ | 5,292,703 | $ | 5,513,667 | ||||
The consolidated statements of cash flows do not present the cash flows from discontinued operations separately from cash flows from continuing operations. Included in adjustments to reconcile net loss to net cash provided by operating activities for the three months ended March 31, 2023 and 2022 are the following discontinued operations items:
| 2023 | 2022 | |||||||
| Depreciation | $ | 5,184 | $ | 53,378 | ||||
| Bad debts | 9,804 | 3,158 | ||||||
| Amortization of intangible assets | 62,083 | |||||||
| Noncash lease expense | 38,701 | 78,488 | ||||||
| (Gain)on settlement of debt, net | (39,770 | ) | ||||||
NOTE 16 - SUBSEQUENT EVENTS
Rotmans final principal payment to Blue Oar was made in April 2023.
Rotmans sold its parking lots to a third-party in May 2023 at a gain of approximately $200,000. The lots were classified as held for sale as a plan was made in March 2023 to sell the lots.
Rotmans facilities lease was amended on August 10, 2023. Beginning in September 2023, in addition to the monthly base rent, Rotmans will be responsible for the base year heating costs of $9,833 per month with any annual increase over the base year due within thirty days of receipt. A supplementary payment of $10,106 for insurance costs was made with the amendment. Rotmans also assumed liability for roof repairs for a specified building within the facilities; subleases will be deemed approved by the lessor unless notified to the contrary within ten days, and the lessor has the option, with a six-month notice, to terminate the lease after December 31, 2028. Simultaneously, two subleases were approved with occupancy scheduled to begin shortly. Base sublease rent in the aggregate totals $30,993 per month with annual increases based on the consumer price index. Each lease term is at least five years.
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
OVERVIEW
This analysis of our results of operations should be read in conjunction with the accompanying financial statements. 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.
About RxAir
RxAir promotes a healthy lifestyle through the use of its innovative, patented ViraTech air purification technology, thereby improving the quality of life of each and every customer. Independently tested by the U.S. Environmental Protection Agency (“EPA”) and U.S. Food and Drug Administration (“FDA”) certified laboratories, the RxAir has been proven to destroy greater than 99% of bacteria and viruses and reduce concentrations of odors and volatile organic compounds (“VOCs”). The RxAir uses high-intensity germicidal UV lamps that destroy bacteria and viruses instead of just trapping them, setting it apart from ordinary air filtration units. RxAir® and ViraTech® are registered trademarks of Vystar Corp. For more information, visit http://www.RxAir.com.
The Company’s RxAir product line use 48 inches of high-intensity germicidal UV lamps that destroy bacteria, viruses and other germs instead of just trapping them, setting it apart from ordinary air filtration units. RxAir is one of the few UV air purifiers that have been proven in independent EPA- and FDA- certified testing laboratories to destroy on the first pass 99.6% of harmful airborne viruses and bacteria. In addition to inactivating airborne viruses that cause influenza (flu) and colds, RxAir’s device disarms the airborne pathogens that cause MRSA (staph), strep (whooping cough), tuberculosis (TB), measles, pneumonia and a myriad of other antibiotic-resistant and viral infections.
The RxAir product line includes:
| ● | RxAir™ Residential Filterless Air Purifier | |
| ● | RX400 ™ FDA cleared Class II Filterless Air Purifier | |
| ● | RX3000™ Commercial FDA cleared Class II Air Purifier |
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Vystar produces the RxAir product line with a new world-class manufacturer and an expert U.S. engineer with a full understanding of the RxAir technology. Vystar sells RxAir residential and commercial units through multiple distributors and the Company’s website. Once distribution channels are firmly established, Vystar expects the air purification products will produce margins of approximately 70%.
Vystar’s Board of Directors have approved preliminary plans to spin off the RxAir, Vytex and FEC product lines into a separate legal entity which Vystar intends to take public. Vystar anticipates retaining approximately 10% of the shares in the new entity and will distribute the remaining ownership percentage to Vystar shareholders. This plan is expected to be executed in late 2023.
About Vytex
Vytex is a multi-patented latex raw material in which the allergy causing proteins are reduced to a level that falls at or below detection based on ASTM approved test methods. Vytex has been available as a raw material commercially for over fifteen years and through that time has a group of manufacturers who use it in end products such as electrical gloves, condoms, adhesives, etc. Latex has been trading below $1,000 a metric tonne for some time now, hence a large oversupply heading into the winter. Synthetics are dominating the market.
Ironically, most use Vytex as it’s better for their manufacturing process as an easier to use raw material and not for protein properties. As of mid-2020 Vystar and the Indian Rubber Manufacturers Research Association’s (“IRMRA”) had been actively collaborating to develop viscoelastic deproteinized natural rubber (DPNR) variants having properties for expanding applications in specific new arenas such as green tires, biodegradable and other unique bioelastoplast product lines that desire a new approach. Additionally, this research, while slowed by the COVID-19 pandemic, showed attributes with extra low ammonia offerings that are desired.
Towards the end of 2020, Vystar entered into a Market Development and Distribution Agreement with Corrie MacColl, Ltd. (“CMC Global”) to produce, develop and manage the Vytex product and supply lines. This agreement allows Vystar to expand the market for its Natural Rubber Latex products and has garnered much attention across a broad range of industries including liquid Vytex as well as the newly developed dry rubber Vytex. As of the date of this report, CMC Global has provided numerous opportunities that are in a trial basis or moving towards manufacturing trials in industries that use a significant amount of natural rubber latex, hence Vytex that now includes production size trial runs in a large dipped product consumer line starting late 2022. Additionally Vystar now has a testing supply of Vytex dry rubber for larger trials. The success of early trials and the shipping crisis has led to broader spectrum of manufacturers combining the potential of Cameroon production with strategically placed contract manufacturers based on geographical needs including the North American maket. Also Vystar research has shown great strides in specializing liquid Vytex (ultra low protein latex, ULPL) to meet the immediate needs of customers such as low or no nitrosamine and others (discussed in the presentation below available in the pdf) and additional patents have been proposed to cover these findings. Research into dry rubber continues at a moderate pace as tire companies seek out alternatives to synthetics.
Vytex researcher Dr. Ranjit Matthan and CMC Global Director John Heath presented at The International Latex Conference which was held virtually July 20 to 22, 2021 and offered a plenary session entitled “Innovations and Sustainability in Natural Rubber Latex - The New Paradigm.” The presentation discussed the dramatic effect the COVID-19 pandemic has had on the natural rubber supply chain, and how the industry is reacting the new economic circumstances; including strategy and policy shifts in supply chain management and restoring greater geographic diversification of latex processing and product manufacturing. The R&D association with IRMRA promises quicker laboratory and field-based testing and evaluations downstream. At Vystar, the recalibrated sustainability programme (FSC, nitrosamines & ammonia free, ultralow proteins, no SVHC and green carbon neutrality) emphasize certifications with Corrie MacColl market reach facilitating faster rollouts. Nontraditional/non Hevea brasiliensis based production efforts are likely to continue to face new penetration and high cost-benefit acceptance challenges in this decade. A PDF of the full presentation is available on vytex.com.
Additionally, in August 2021, Dr. Matthan presented new data to the Automotive Tyre Manufacturers’ Association including Vytex dry rubber.
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About FEC
Vystar is looking to Fluid Energy as it moves forward in its quest for a cleaner and safer environment. The Company is planning to improve its air purifying by using the ultrasonic technology of Fluid Energy and combining it with its leading UV-C technology. The designs and prototypes are in development. This ultrasonic technology is applied into water products with the same goal. We have working prototypes for our water product targets that have tested beyond expectation for bacterial killing and flow metering. We will begin soon evaluating our ability to eradicate hard water pollution that fouls pools, fountains, and pumps. These products will move us toward living more safely and cleanly in our environment.
RESULTS OF OPERATIONS
Comparison of the Three Months Ended March 31, 2023 with the Three Months Ended March 31, 2022
| Three Months Ended March 31, | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
| CONSOLIDATED | ||||||||||||||||
| Revenue | $ | 409,907 | $ | 123,520 | $ | 286,387 | 231.9 | % | ||||||||
| Cost of revenue | 76,698 | 38,225 | 38,473 | 100.6 | % | |||||||||||
| Gross profit | 333,209 | 85,295 | 247,914 | 290.7 | % | |||||||||||
| Operating expenses: | ||||||||||||||||
| Salaries, wages and benefits | 54,929 | 59,338 | (4,409 | ) | -7.4 | % | ||||||||||
| Share-based compensation | 138,910 | 137,948 | 962 | 0.7 | % | |||||||||||
| Professional fees | 55,442 | 132,813 | (77,371 | ) | -58.3 | % | ||||||||||
| Advertising | 6,665 | 6,234 | 431 | 6.9 | % | |||||||||||
| Rent | 20,001 | 8,393 | 11,608 | 138.3 | % | |||||||||||
| Service charges | 804 | 1,769 | (965 | ) | -54.6 | % | ||||||||||
| Depreciation and amortization | 18,819 | 35,119 | (16,300 | ) | -46.4 | % | ||||||||||
| Other operating | 88,356 | 202,286 | (113,930 | ) | -56.3 | % | ||||||||||
| Total operating expenses | 383,926 | 583,900 | (199,974 | ) | -34.2 | % | ||||||||||
| Loss from operations | (50,717 | ) | (498,605 | ) | 447,888 | -89.8 | % | |||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | (10,337 | ) | (84,715 | ) | 74,378 | -87.8 | % | |||||||||
| Change in fair value of derivative liabilities | - | 57,000 | (57,000 | ) | -100.0 | % | ||||||||||
| Total other expense, net | (10,337 | ) | (27,715 | ) | 17,378 | -62.7 | % | |||||||||
| Net loss from continuing operations | (61,054 | ) | (526,320 | ) | 465,266 | -88.4 | % | |||||||||
| Discontinued operations: | ||||||||||||||||
| Loss from operations | (1,216,022 | ) | (427,646 | ) | (788,376 | ) | 184.4 | % | ||||||||
| Net loss | (1,277,076 | ) | (953,966 | ) | (323,110 | ) | 33.9 | % | ||||||||
| Net loss attributable to noncontrolling interest | 510,729 | 179,612 | 331,117 | 184.4 | % | |||||||||||
| Net loss attributable to Vystar | $ | (766,347 | ) | $ | (774,354 | ) | $ | 8,007 | -1.0 | % | ||||||
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Revenues
Revenues for the three months ended March 31, 2023 and 2022 were $409,907 and $123,520, respectively, for an increase of $286,387 or 231.9%. The increase in revenues was due to increased sales to distributors and income recognized upon the satisfaction of the warranty coverage term on RxAir units.
The Company reported gross profit of $333,209 for the three-month period ended March 31, 2023 compared to gross profit of $85,295 for the three-month period ended March 31, 2022, an increase of $247,914 or 290.7%. The increase in gross profit is attributable to the income recognized upon the satisfaction of the RxAir warranty coverage term which was partially offset by an increase in slow-moving reserves.
The cost of revenue for the three months ended March 31, 2023 and 2022 was $76,698 and $38,225, respectively, an increase of $38,473 or 100.6%. The increase is consistent with increased product sales and an increase in slow-moving reserves of approximately $26,000.
Operating Expenses
The Company’s operating 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 advertising, rent and other operating expenses. The Company’s operating expenses were $383,926 and $583,900 for the three months ended March 31, 2023 and 2022, respectively, a decrease of $199,974 or 34.2%. The decrease was due to reduced legal fees and cost cutting of general and administrative expenditures.
Other Expense
Other expense for the three months ended March 31, 2023 was $10,337 which consisted of interest expense. This compares to other expense of $27,715 for the three months ended March 31, 2022, which consisted of interest expense of $84,715 and change in fair value of derivative liabilities of $57,000.
Discontinued Operations
Loss from discontinued operations for the three months ended March 31, 2023 and 2022 was $1,216,022 and $427,646, respectively, for an increase of $788,376 or 184.4%. The loss in 2023 included post-closing store costs and fixed costs which exceeded revenues earned from inventory sales.
Net Loss
Net loss was $1,277,076 and $953,966 for the three months ended March 31, 2023 and 2022, respectively, an increase of $323,110 or 33.9%. Net loss in the quarter ended March 31, 2023 versus net loss in the same period in 2022 reflected the burden of post-closing and fixed costs of the Rotmans store.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s financial statements are prepared using the accrual method of accounting in accordance with U.S. GAAP and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. However, we have incurred significant losses and experienced negative cash flow since inception. At March 31, 2023, the Company had cash of $15,505 and a deficit in working capital of approximately $3.9 million. Further, at March 31, 2023, the accumulated deficit amounted to approximately $56.1 million. 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. Because of this history of losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.
A successful transition to 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.
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Management plans to finance future operations using cash on hand, as well as increased revenue from RxAir air purifier sales and Vytex license fees. The Company will also raise capital with common stock subscription issuances.
There can be no assurances that we will be able to achieve projected levels of revenue in 2023 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 2023, 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 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 RxAir products and license Vytex NRL raw material and the foam cores made from Vytex to manufacturers and subsequently retailers; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, along with market acceptance of our products, and services and competing technological developments. As we expand our activities and operations, our cash requirements are expected to increase at a rate consistent with revenue growth after we achieve sustained revenue generation.
Sources and Uses of Cash
Net cash provided by operating activities was $345,228 for the three months ended March 31, 2023 as compared to net cash provided by operating activities of $23,514 for the three months ended March 31, 2022. During the three months ended March 31, 2023, cash provided by operations was primarily due to the net loss offset by the increase of assets of discontinued operations, and non-cash related add-back of share-based compensation expense, depreciation, amortization and noncash lease expense.
The Company had no cash provided by investing activities during the three months ended March 31, 2023 and 2022.
Net cash used in financing activities was $197,749 during the three months ended March 31, 2023, as compared to net cash of $2,349 used in financing activities during the three months ended March 31, 2022. During the three months ended March 31, 2023, cash was provided by related party advances of $29,855 which was offset by cash flows used in discontinued operations of $227,604. During the three months ended March 31, 2022, cash was provided by related party advances in the amount of $40,000 which was offset by cash flows used in discontinued operations of $42,349.
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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
ITEM 4. CONTROLS AND PROCEDURES
The Company’s Chief Executive Officer and Chief Financial Officer (the “Certifying Officer”) is responsible for establishing and maintaining disclosure controls and procedures for the Company. Although the Certifying Officer has 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, certain material weaknesses occurred during the period ended March 31, 2023 and subsequent to period end. The Certifying Officer has 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 Quarterly Report and is working on improving controls with an outside CPA firm and internal resources.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d - 15(f) under the Securities Exchange Act of 1934). Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those policies and procedures that: (i) in reasonable detail accurately and fairly reflect our transactions; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; (iii) provide reasonable assurance that our receipts and expenditures are made in accordance with management authorization; and (iv) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting, however well designed and operated, can provide only reasonable, and not absolute, assurance that the controls will prevent or detect misstatements. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only the reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.
Management, under the supervision and with the participation of our Chief Executive Officer and our acting Chief Financial Officer, conducted an evaluation of our internal control over financial reporting as of March 31, 2023, based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) 2013. Based on our evaluation under the COSO framework, management concluded that our internal control over financial reporting was not effective as of March 31, 2023. Such conclusion was reached based on the following material weaknesses noted by management:
| a) | We have a lack of segregation of duties due to the small size of the Company. | |
| b) | The Company did not maintain reasonable control over records underlying transactions necessary to permit preparation of the Company’s financial statements. | |
| c) | Lack of controls that provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposal of the Company’s assets that could have a material effect on the financial statements. | |
| d) | Lack of a formal CFO position who can devote significant attention to financial reporting resulted in multiple audit adjustments. | |
| e) | Lack of a functioning audit committee, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures. Management believes the lack of a functioning audit committee results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future period. |
Management expects to strengthen internal control during 2023 by developing stronger business and financial processes for accounting for transactions such as warrant/stock issuances, which will enhance internal control for the Company.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is subject to legal proceedings and claims that have not been fully resolved and have arisen in the ordinary course of business. See the discussion of pending legal proceedings in Note 12 of the Notes to Condensed Consolidated Financial Statements.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
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 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 | |
| 101.INS | Inline XBRL Instance Document | |
| 101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* 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: October 26, 2023 | By: | /s/ Steven Rotman |
| Steven Rotman | ||
| President, Chief Executive Officer, Chief Financial Officer and Director | ||
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