The accompanying notes are an integral part of these condensed consolidated
financial statements.
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 and produces a line of innovative air purifiers, which destroy viruses and bacteria through the use
of ultraviolet light. Vystar is the creator and exclusive owner of the innovative technology to produce Vytex®
Natural Rubber Latex (“NRL”). Vystar manufactures and sells NRL used primarily in various bedding products. In addition,
Vystar has a majority ownership in Murida Furniture Co., Inc. dba Rotmans Furniture (“Rotmans”), the largest furniture
and flooring stores in New England and one of the largest independent furniture retailers in the U.S.
|
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, 2019.
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 19, the Company is not aware of any other significant events that occurred subsequent
to the balance sheet date but prior to the filing of this report that would have a material impact on the Company’s financial
statements.
Basis
of Consolidation
The
condensed consolidated financial statements include the accounts of the Company and its wholly-owned or controlled operating subsidiaries.
All significant intercompany accounts and transactions have been eliminated.
COVID-19
In
December 2019, a novel coronavirus (“COVID-19”) emerged and has subsequently spread worldwide. The World Health Organization
has declared COVID-19 a pandemic resulting in federal, state, and local governments mandating various restrictions, including
travel restrictions, restrictions on public gatherings, stay at home orders and advisories and quarantining of people who may
have been exposed to the virus. On March 24, 2020, Massachusetts required all non-essential businesses to close their physical
workplaces. As a result, the Rotmans showroom, offices and warehouse temporarily closed. During that time, associates worked remotely
where possible. The Company re-opened on June 10, 2020 and continues to monitor developments, including government requirements
and recommendations.
In
addition, the COVID-19 pandemic has caused, among other things, interruptions in our supply chains and suppliers, including potential
problems with inventory availability and the potential result of the volatility or higher cost of product and international freight
due to the high demand of products and low supply for an unpredictable period of time.
The
results of operations for the three and six months ended June 30, 2020 are not necessarily indicative of results for the entire
year. The pandemic has resulted in significant economic disruption. Although our showroom has reopened, we cannot reasonably estimate
the impact on Vystar should the pandemic persist or worsen. Accordingly, the estimates and assumptions made as of June 30, 2020
could change in subsequent interim reports and upon final determination at year-end, and it is reasonably possible that such changes
could be significant (although the potential effects cannot be measured at this time).
Segment
Reporting
Operating
segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation
by the chief operating decision maker, or decision-making group, in making decisions on how to allocate resources and assess performance.
The Company’s chief operating decision maker is the chief executive officer. The Company and the chief executive officer
view the Company’s operations and manage its business as one reportable segment with different operating segments.
Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying disclosures. Significant estimates made by management include,
among others, allowance for obsolete inventory, the allocation of purchase price related to acquisitions, the recoverability of
long-lived assets, fair values of right of use assets and lease liabilities, valuation of derivative liabilities, share-based
compensation and other equity issuances. Although these estimates are based on management’s best knowledge of current events
and actions the Company may undertake in the future, actual results could differ from these estimates.
Fair
Value of Financial Instruments
The
Company’s financial instruments consist principally of cash, accounts receivable, investments - equity securities, accounts
payable, accrued expenses and interest payable, lines of credit, shareholder notes payable, long-term debt and unearned revenue.
The carrying values of all the Company’s financial instruments approximate or equal fair value because of their short maturities
and market interest rates or, in the case of equity securities, being stated at fair value.
In
specific circumstances, certain assets and liabilities are reported or disclosed at fair value. Fair value is the exit price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date in the Company’s principal market for such transactions. If there is not an established principal market,
fair value is derived from the most advantageous market.
Valuation
inputs are classified in the following hierarchy:
|
|
●
|
Level
1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities.
|
|
|
|
|
|
|
●
|
Level
2 inputs are directly or indirectly observable valuation inputs for the asset or liability, excluding Level 1 inputs.
|
|
|
|
|
|
|
●
|
Level
3 inputs are unobservable inputs for the asset or liability.
|
Highest
priority is given to Level 1 inputs and the lowest priority to Level 3 inputs. Acceptable valuation techniques include the market
approach, income approach, and cost approach. In some cases, more than one valuation technique is used. The derivative liabilities
were recognized at fair value on a recurring basis through the date of the settlement and June 30, 2020 and are level 3 measurements.
There have been no transfers between levels during the six months ended June 30, 2020.
Acquisitions
Amounts
paid for acquisitions are allocated to the assets acquired and liabilities assumed based on their estimated fair value at the
date of acquisition. The fair value of identifiable intangible assets is based on valuations that use information and assumptions
provided by management. Identifiable intangible assets with finite lives are amortized over their useful lives. Acquisition-related
costs, including, legal, accounting, and other costs, are capitalized in asset acquisitions and for business combinations are
expensed in the periods in which the costs are incurred. The results of operations of acquired assets are included in the financial
statements from the acquisition date.
Cash
and Cash Equivalents
Cash
and cash equivalents include all liquid investments with a maturity date of less than three months when purchased. Cash equivalents
also include amounts due from third-party financial institutions for credit and debit card transactions which typically settle
within five days.
Accounts
Receivable
Accounts
receivable are stated at the amount management expects to collect from outstanding balances. The Company routinely sells, without
recourse, trade receivables resulting from retail furniture sales to various financial institutions at an average service charge
of 5.1% in 2020. Amounts sold during the six months ending June 30, 2020 were approximately $2,150,000. There were no sales of
trade receivables during the six months ending June 30, 2019. Retail furniture receivables retained by the Company are generally
collateralized by the merchandise sold, represent valid claims against debtors for sales arising on or before the balance sheet
date and are reduced to their estimated net realizable value. In addition, the Company grants credit to Vytex customers without
requiring collateral. The amount of accounting loss for which Vystar is at risk in these unsecured accounts receivable is limited
to their carrying value. Management provides for uncollectible amounts through a charge to earnings and a credit to an allowance
for doubtful accounts based upon its assessment of the current status of individual accounts. Balances that are still outstanding
after management has performed reasonable collection efforts are written off through a charge to the allowance and a credit to
accounts receivable. As of June 30, 2020 and December 31, 2019, the Company considers accounts receivable to be fully collectible
and no allowance for doubtful accounts was recorded.
Inventories
Inventories
include those costs directly attributable to the product before sale. Inventories consist primarily of finished goods of furniture,
mattresses, foam toppers and pillows and are carried at net realizable value, which is defined as selling price less cost of completion,
disposal and transportation. The Company evaluates the need to record write-downs for inventory on a regular basis. Appropriate
consideration is given to obsolescence, slow-moving and other factors in evaluating net realizable values. Inventories not expected
to be sold within 12 months are classified as long-term.
Prepaid
Expenses and Other
Prepaid
expenses and other include amounts related to prepaid insurance policies, which are expensed on a straight-line basis over the
life of the underlying policy, and other expenses.
Investments
- Equity Securities
Marketable
equity securities have been categorized as available-for-sale and, as a result, are stated at fair value. Unrealized gains and
losses are reflected in the statement of operations. The Company periodically reviews the available-for-sale securities for other
than temporary declines in fair value below cost and more frequently when events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. As of June 30, 2020, the Company believes the cost of the available-for-sale
securities was recoverable in all material respects.
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 June 30, 2020, the net balance of property and equipment
is $1,695,493 with accumulated depreciation of $393,045. As of December 31, 2019, the net balance of property and equipment is
$1,879,739 with accumulated depreciation of $208,799.
Intangible
Assets
Patents
represent legal and other fees associated with the registration of patents. The Company has five issued patents with the United
States Patent and Trade Office (“USPTO”) as well as five issued international Patent Cooperation Treaty (“PCT”)
patents. Patents are carried at cost and are being amortized on a straight-line basis over their estimated useful lives, typically
ranging from 9 to 20 years.
The
Company has trademark protection for “Vystar”, “Vytex”, and “RxAir” among others. Trademarks
are carried at cost and since their estimated life is indeterminable, no amortization is recognized. Instead, they are evaluated
annually for impairment.
Customer
relationships, tradename and marketing related intangibles are carried at cost and are being amortized on a straight-line basis
over their estimated useful lives, typically ranging from 5 to 10 years.
Long-Lived
Assets
We
review our long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of the assets
may not be fully recoverable. We evaluate assets for potential impairment by comparing estimated future undiscounted net cash
flows to the carrying amount of the assets. If the carrying amount of the assets exceeds the estimated future undiscounted cash
flows, impairment is measured based on the difference between the carrying amount of the assets and fair value. Assets to be disposed
of would be separately presented in the consolidated balance sheet and reported at the lower of the carrying amount or fair value
less costs to sell and are no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale would
be presented separately in the appropriate asset and liability sections of the consolidated balance sheet, if material. During
the six months ended June 30, 2020 and 2019, we did not recognize any impairment of our long-lived assets.
Goodwill
Goodwill
reflects the cost of an acquisition in excess of the fair values assigned to identifiable net assets acquired. Goodwill is not
amortized, rather, it is subject to a periodic assessment for impairment by applying a fair value-based test. We perform our annual
impairment test at the end of each calendar year, or more frequently if events or changes in circumstances indicate the asset
might be impaired.
Accounting
for acquisitions requires us to recognize, separately from goodwill, the assets acquired and the liabilities assumed at their
acquisition-date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the
net of the acquisition-date fair values of the assets acquired and the liabilities assumed. While we use best estimates and assumptions
to accurately value assets acquired and liabilities assumed at the acquisition date, the estimates are inherently uncertain and
subject to refinement.
The
impairment model permits, and we utilize, a simplified approach for determining goodwill impairment. In the first step, we evaluate
the recoverability of goodwill by estimating the fair value of our reporting unit using multiple techniques, including an income
approach using a discounted cash flow model and a market approach. Based on an equal weighting of the results of these two approaches,
a conclusion of fair value is estimated. The fair value is then compared to the carrying value of our reporting unit. If the fair
value of a reporting unit is less than its carrying value, the Company recognizes this amount as an impairment loss. Impairment
losses, limited to the carrying value of goodwill, represent the excess of the carrying amount of goodwill over its implied fair
value.
Convertible
Notes Payable
Borrowings
are recognized initially at the principal amount received. Borrowings are subsequently carried at amortized cost; any difference
between the proceeds (net of transaction costs) and the redemption value is recognized as interest expense in the statements of
operations over the period of the borrowings using the effective interest method.
Derivatives
The
Company evaluates its debt instruments or other contracts to determine if those contracts or embedded components of those contracts
qualify as derivatives to be separately accounted for under the relevant sections of Accounting Standards Codification (“ASC”)
Topic 815-40, Derivative Instruments and Hedging: Contracts in Entity’s Own Equity. The result of this accounting
treatment could be that the fair value of a financial instrument is classified as a derivative instrument and is marked-to-market
at each balance sheet date and recorded as a liability. In the event the fair value is recorded as a liability, the change in
fair value is recorded in the statements of operations as other income or other expense. Upon conversion or exercise of a derivative
instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.
Financial instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815-40 are
reclassified to a liability account at the fair value of the instrument on the reclassification date.
The
Company applies the accounting standard that provides guidance for determining whether an equity-linked financial instrument,
or embedded feature, is indexed to an entity’s own stock. The standard applies to any freestanding financial instrument
or embedded features that have the characteristics of a derivative, and to any freestanding financial instruments that are potentially
settled in an entity’s own common stock. From time to time, the Company has issued notes with embedded conversion features.
Certain of the embedded conversion features contain price protection or anti-dilution features that result in these instruments
being treated as derivatives for accounting purposes. Accordingly, as of June 30, 2020, the Company has classified all conversion
features as derivative liabilities and has estimated the fair value of these embedded conversion features using a Monte Carlo
simulation model.
Unearned
Revenue
Unearned
revenue consists of customer advance payments, deposits on sales of undelivered merchandise and deferred warranty revenue on self-insured
stain protection warranty coverage. There was no unearned revenue during the six months ended June 30, 2019.
Changes
to unearned revenue during the six months ended June 30, 2020 are summarized as follows:
|
Balance,
December 31, 2019
|
|
$
|
2,500,572
|
|
|
|
|
|
|
|
|
Customer
deposits received
|
|
|
7,426,477
|
|
|
|
|
|
|
|
|
Warranty
coverage purchased
|
|
|
112,121
|
|
|
|
|
|
|
|
|
Gift
cards purchased
|
|
|
4,000
|
|
|
|
|
|
|
|
|
Revenue
earned
|
|
|
(7,139,242
|
)
|
|
|
|
|
|
|
|
Balance,
June 30, 2020
|
|
$
|
2,903,928
|
|
Loss
Per Share
The
Company presents basic and diluted loss per share. Because the Company reported a net loss for the six months ended June 30, 2020
and 2019, common stock equivalents, including stock options and warrants, were anti-dilutive; therefore, the amounts reported
for basic and dilutive loss per share were the same. Excluded from the computation of diluted loss per share were options to purchase
27,883,271 and 27,898,271 shares of common stock for the six months ended June 30, 2020 and 2019, respectively, as their effect
would be anti-dilutive. Warrants to purchase 14,218,051 and 14,373,493 shares of common stock for the six months ended June 30,
2020 and 2019, respectively, were also excluded from the computation of diluted loss per share as their effect would be anti-dilutive.
In addition, preferred stock convertible to 4,731,260 and 4,451,880 shares of common stock for the six months ended June 30, 2020
and 2019, respectively, were excluded from the computation of diluted loss per share as their effect would be anti-dilutive.
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, on the websites for e-commerce customers
and via telephone with our third-party call center for our print media and direct mail customers, or the execution of terms and
conditions contracts with retailers and wholesalers. These contracts define each party’s rights, payment terms and other
contractual terms and conditions of the sale.
Consideration
is typically paid prior to shipment via credit card or check when our products are sold direct to consumers, which is typically
within 1 to 2 days or approximately 30 days from the time control is transferred when sold to wholesalers, distributors and retailers.
We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including
the customer’s historical payment experience and, in some circumstances, published credit and financial information pertaining
to the customer.
A
performance obligation is a promise in a contract to transfer a distinct product to the customer, which for us is transfer of
finished goods to our customers. Performance obligations promised in a contract are identified based on the goods that will be
transferred to the customer that are both capable of being distinct and are distinct in the context of the contract, whereby the
transfer of the goods is separately identifiable from other promises in the contract. We have concluded the sale of finished goods
and related shipping and handling are accounted for as the single performance obligation.
The
transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the
customer receives the benefit of the performance obligation. The transaction price is determined based on the consideration to
which we will be entitled to receive in exchange for transferring goods to the customer. We issue refunds to retail, e-commerce
and print media customers, upon request, within 30 days of delivery. We estimate the amount of potential refunds at each reporting
period using a portfolio approach of historical data, adjusted for changes in expected customer experience, including seasonality
and changes in economic factors. For retailers, distributors and wholesalers, we do not offer a right of return or refund and
revenue is recognized at the time products are shipped to customers. In all cases, judgment is required in estimating these reserves.
Actual claims for returns could be materially different from the estimates. As of June 30, 2020 and December 31, 2019, reserves
for estimated sales returns totaled $3,000, respectively, and are included in the accompanying 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 or in-house delivery services. Delivery fees are charged to customers and are
included in revenue in the accompanying consolidated statements of operations and the costs associated with these deliveries are
included in operating expenses in the accompanying consolidated statements of operations. 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 consolidated statements
of operations.
The
Company also defers revenues for separately-priced stain protection warranty coverage for which it is ultimately self-insured.
Revenue is recognized from the extended warranty sales on a straight-line basis over the respective contract term. The extended
warranty terms primarily range from three to five years from the date of delivery. At June 30, 2020 and December 31, 2019, deferred
warranty revenue was approximately $1,157,000 and $1,309,000, respectively, and is included in unearned revenue in the accompanying
consolidated balance sheets. During the six months ended June 30, 2020, the Company recorded total proceeds of approximately $112,000
and recognized total revenues of approximately $264,000 related to deferred warranty revenue arrangements. There were no proceeds
or deferred warranty revenues during the six months ended June 30, 2019. Commission costs in obtaining extended warranty contracts
are capitalized and recognized as expense on a straight-line basis over the period of the warranty contract. At June 30, 2020
and December 31, 2019, deferred commission costs were approximately $305,000 and $346,000, respectively, and are included in the
accompanying consolidated balance sheets. All other costs, such as costs of services performed under the contract, general and
administrative expenses, and advertising costs are expensed as incurred.
Cost
of Revenue
Cost
of revenue consists primarily of product and freight costs and fees paid to online retailers.
Research
and Development
Research
and development costs are expensed when incurred. Research and development costs include all costs incurred related to the research,
development and testing. For the six months ended June 30, 2020 and 2019, Vystar’s research and development costs were not
significant.
Advertising
Costs
Advertising
costs, which include television, radio, newspaper and other media advertising, are expensed upon first showing. Advertising costs
included in general and administrative expenses in the accompanying consolidated statements of operations were approximately $681,000
and $43,000 for the six months ended June 30, 2020 and 2019, respectively.
Share-Based
Compensation
The
fair value of stock options is estimated on the grant date using the Black-Scholes option pricing model, based on weighted average
assumptions. Expected volatility is based on historical volatility of our common stock. The Company has elected to use the simplified
method described in the Securities and Exchange Commission Staff Accounting Bulletin Topic 14C to estimate the expected term of
employee stock options. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The value
of restricted stock awards is determined using the fair value of the Company’s common stock on the date of grant. The Company
accounts for forfeitures as they occur. Compensation expense is recognized on a straight-line basis over the requisite service
period of the award.
Income
Taxes
Vystar
recognizes income taxes on an accrual basis based on a tax position taken or expected to be taken in its tax returns. A tax position
is defined as a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected
in measuring current or deferred income tax assets or liabilities. Tax positions are recognized only when it is more likely than
not (i.e., likelihood of greater than 50%), based on technical merits, that the position would be sustained upon examination by
taxing authorities. Tax positions that meet the more likely than not threshold will be measured using a probability-weighted approach
as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Income taxes are accounted
for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in our financial statements or tax returns. A valuation allowance
is established to reduce deferred tax assets if all, or some portion, of such assets will more likely than not be realized. Should
they occur, interest and penalties related to tax positions are recorded as interest expense. No such interest or penalties have
been incurred for the six months ended June 30, 2020 and 2019.
The
Company remains subject to income tax examinations from Federal and state taxing jurisdictions for 2016 through 2019.
Concentration
of Credit Risk
Certain
financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily
of cash and accounts receivable. Cash held in operating accounts may exceed the Federal Deposit Insurance Corporation, or FDIC,
insurance limits. While the Company monitors cash balances in our operating accounts on a regular basis and adjust the balances
as appropriate, these balances could be impacted if the underlying financial institutions fail. To date, the Company has experienced
no loss or lack of access to our cash; however, the Company can provide no assurances that access to our cash will not be impacted
by adverse conditions in the financial markets. Credit concentration risk related to accounts receivable is mitigated as customer
credit is checked prior to the sales and accounts receivable consists of a high number of relatively small balances.
Other
Risks and Uncertainties
The
Company is exposed to risks pertinent to the operations of a retailer, including, but not limited to, the ability to acquire new
customers and maintain a strong brand as well as broader economic factors such as interest rates and changes in customer spending
patterns.
|
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 June 30, 2020, the Company had cash of $832,632 and a deficit in working capital of approximately $8.2 million. Further,
at June 30, 2020 the accumulated deficit amounted to approximately $44.3 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 and Vytex license fees that
now also include the Company’s association with foam cores made from Vytex used in mattresses, mattress toppers and pillows,
and stock warrant exercises from existing shareholders. The Company has also focused the efforts of key internal employees on
the goal of creating efficiencies in each department in our retail furniture business, including purchasing, marketing, inventory
control, advertising, accounting, warehousing and customer service.
There
can be no assurances that the Company will be able to achieve projected levels of revenue in 2020 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 2020, 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 and 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; market acceptance
of the Company’s products, services and competing technological developments; the Company’s ability to successfully
realize synergies through the integration of the merged companies, acquire new customers and maintain a strong brand; the success
of our efforts to reduce expenses in our retail furniture business; and broader economic factors such as interest rates and changes
in customer spending patterns. As the Company expands its activities and operations, cash requirements are expected to increase
at a rate consistent with revenue growth after the Company has achieved sustained revenue generation.
|
NOTE
4 -
|
INVESTMENTS
– EQUITY SECURITIES
|
Cost
and fair value of investments - equity securities are as follows as of June 30, 2020:
|
|
|
|
Gross
|
|
|
Fair
|
|
|
Cost
|
|
|
Unrealized
Losses
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
141,225
|
|
|
$
|
(30,370
|
)
|
|
$
|
110,855
|
|
Net
unrealized holding losses on available-for-sale securities were approximately $39,000 in the first six months of 2020 and have
been included in other income (expenses) in the accompanying statements of operations. There were no investments – equity
securities prior to the Rotmans acquisition in July 2019. Investments represent equity securities in a publicly traded company.
|
NOTE
5 -
|
PROPERTY
AND EQUIPMENT
|
Property
and equipment, net consists of the following:
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Furniture,
fixtures and equipment
|
|
$
|
1,354,665
|
|
|
$
|
1,354,665
|
|
|
Tooling
and testing equipment
|
|
|
319,000
|
|
|
|
319,000
|
|
|
Parking
lots
|
|
|
365,707
|
|
|
|
365,707
|
|
|
Motor
vehicles
|
|
|
49,166
|
|
|
|
49,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,088,538
|
|
|
|
2,088,538
|
|
|
Accumulated
depreciation
|
|
|
(393,045
|
)
|
|
|
(208,799
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
1,695,493
|
|
|
$
|
1,879,739
|
|
Depreciation
expense for the six months ended June 30, 2020 and 2019 was $279,369 and $20,422, respectively.
|
NOTE
6 -
|
INTANGIBLE
ASSETS
|
Intangible
assets consist of the following:
|
|
|
|
|
|
|
|
|
Amortization
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
Period
|
|
|
|
|
2020
|
|
|
2019
|
|
|
(in
Years)
|
|
|
Amortized
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$
|
210,000
|
|
|
$
|
210,000
|
|
|
|
6
- 10
|
|
|
Proprietary
technology
|
|
|
610,000
|
|
|
|
610,000
|
|
|
|
10
|
|
|
Tradename
and brand
|
|
|
1,380,000
|
|
|
|
1,380,000
|
|
|
|
5
- 10
|
|
|
Marketing
related
|
|
|
380,000
|
|
|
|
380,000
|
|
|
|
5
|
|
|
Patents
|
|
|
359,101
|
|
|
|
355,418
|
|
|
|
6
- 20
|
|
|
Noncompete
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,989,101
|
|
|
|
2,985,418
|
|
|
|
|
|
|
Accumulated
amortization
|
|
|
(713,357
|
)
|
|
|
(504,878
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
assets, net
|
|
|
2,275,744
|
|
|
|
2,480,540
|
|
|
|
|
|
|
Indefinite-lived
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
9,072
|
|
|
|
9,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
intangible assets
|
|
$
|
2,284,816
|
|
|
$
|
2,489,612
|
|
|
|
|
|
Amortization
expense for the six months ended June 30, 2020 and 2019 was $208,479 and $79,682, respectively. Estimated future amortization
expense for finite-lived intangible assets is as follows:
|
|
|
Amount
|
|
|
|
|
|
|
|
Remaining
in 2020
|
|
$
|
208,477
|
|
|
2021
|
|
|
416,956
|
|
|
2022
|
|
|
417,140
|
|
|
2023
|
|
|
410,529
|
|
|
2024
|
|
|
311,306
|
|
|
Thereafter
|
|
|
511,336
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,275,744
|
|
The
Company leases equipment, a showroom, offices and warehouse facilities. These leases expire at various dates through 2024 with
options to extend to 2031.
The
table below presents the lease costs for the three and six months ended June 30, 2020:
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
|
June
30, 2020
|
|
|
June
30, 2020
|
|
|
|
|
|
|
|
|
|
|
Operating
lease cost
|
|
$
|
394,766
|
|
|
$
|
789,114
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance
lease cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of right-of-use assets
|
|
|
47,561
|
|
|
|
95,122
|
|
|
Interest
on lease liabilities
|
|
|
11,141
|
|
|
|
22,831
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
lease cost
|
|
$
|
453,468
|
|
|
$
|
907,067
|
|
During
the six months ended June 30, 2020, the Company recognized sublease income of approximately $58,000, which in included in other
income (expense), net in the accompanying condensed consolidated statements of operations.
There
were no lease costs or sublease income for the three and six months ended June 30, 2019.
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
|
|
|
Six Months Ended
|
|
|
|
|
June 30, 2020
|
|
|
June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating cash flows used for operating leases
|
|
$
|
375,911
|
|
|
$
|
748,795
|
|
|
Financing cash flows used for financing leases
|
|
|
54,152
|
|
|
|
108,304
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets obtained in exchange for finance lease liabilities
|
|
|
-
|
|
|
|
75,739
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining lease term:
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
9 years
|
|
|
|
9 years
|
|
|
Finance leases
|
|
|
5 years
|
|
|
|
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average discount rate:
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
5.53
|
%
|
|
|
5.53
|
%
|
|
Finance leases
|
|
|
5.16
|
%
|
|
|
5.16
|
%
|
The
future minimum lease payments required under operating and financing lease obligations as of June 30, 2020 having initial or remaining
non-cancelable lease terms in excess of one year are summarized as follows:
|
|
|
Operating
Leases
|
|
|
Finance
Leases
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remainder
of 2020
|
|
$
|
751,822
|
|
|
$
|
106,004
|
|
|
$
|
857,826
|
|
|
2021
|
|
|
1,503,643
|
|
|
|
205,545
|
|
|
|
1,709,188
|
|
|
2022
|
|
|
1,117,377
|
|
|
|
150,943
|
|
|
|
1,268,320
|
|
|
2023
|
|
|
878,807
|
|
|
|
150,142
|
|
|
|
1,028,949
|
|
|
2024
|
|
|
870,000
|
|
|
|
140,002
|
|
|
|
1,010,002
|
|
|
Thereafter
|
|
|
5,220,000
|
|
|
|
207,475
|
|
|
|
5,427,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
undiscounted lease liabilities
|
|
|
10,341,649
|
|
|
|
960,111
|
|
|
|
11,301,760
|
|
|
Less:
imputed interest
|
|
|
(2,301,652
|
)
|
|
|
(124,598
|
)
|
|
|
(2,426,250
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
lease liabilities
|
|
$
|
8,039,997
|
|
|
$
|
835,513
|
|
|
$
|
8,875,510
|
|
As
of June 30, 2020, the Company does not have additional operating and finance leases that have not yet commenced.
|
NOTE
8 -
|
NOTES
PAYABLE AND LOAN FACILITY
|
Line
of Credit
The
Company formerly had a $2,500,000 revolving line of credit with Fidelity Co-operative Bank. Advances were limited to 50% of eligible
inventory and bore interest at the prime rate plus 0.50% with a floor of 3.75%. The Company was not in compliance with certain
covenants and was in default at March 31, 2020. The line was paid in full with proceeds from advances noted below and closed
in May 2020.
Advances
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 the Fidelity line of credit and certain other vendors.
The agent will be reimbursed for the advance from the proceeds of the sale. In addition, the agent has a senior first priority
security interest and lien in Rotmans inventories and other assets until all obligations and liabilities are satisfied. Profits
of the sale will be distributed according to the specific terms of the agreement. The agreement will expire 240 days from the
commencement date of May 29, 2020. The outstanding balance is approximately $1,229,000 as of June 30, 2020 and is included in
accounts payable in the accompanying consolidated balance sheet.
Term
Notes
On
February 24, 2020, the Company entered into an agreement with Libertas Funding LLC (“Libertas”) to sell future sale
receipts totaling $1,089,000 for a purchase price of $825,000. The sold amount of future sales receipts are delivered weekly to
Libertas at predetermined amounts over a period of nine months. The agreement contains an early delivery discount fee for delivering
the future revenues before the end of the contract term and an origination fee of $16,500, which has been capitalized and is being
amortized over the term of the agreement. The implicit borrowing rate of the agreement is approximately 75%. The agreement is
personally guaranteed by Steven Rotman. As of June 30, 2020, the outstanding balance on this obligation of $597,575 is included
in current maturities of term notes. In June 2020, the Company and Libertas agreed
to defer repayment on the loan until August 2020.
Other
term debt totaling $7,443 and $16,374 at June 30, 2020 and December 31, 2019, respectively, represents three 0% loans on motor
vehicles, requiring cumulative monthly payments of $1,488 through maturity in November 2020.
On
April 16, 2020, Rotmans received $1,402,900 in loan funding from the Paycheck Protection Program (the “PPP”), established
pursuant to the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and administered
by the U.S. Small Business Administration (“SBA”). The unsecured loan (the “PPP Loan”) is evidenced by
a promissory note of the Company dated April 16, 2020 (the “Note”) in the principal amount of $1,402,900 with United
Community Bank (the “Bank”), the lender. Under the terms of the Note and the PPP Loan, interest accrues on the outstanding
principal at the rate of 1.0% per annum. The term of the Note is two years, though it may be payable sooner in connection with
an event of default under the Note. To the extent the loan amount is not forgiven under the PPP, Rotmans is obligated to make
equal monthly payments of principal and interest, beginning seven months from the date of the Note, until the maturity date.
Certain
investors guaranteed $100,000 each with Ameris Bank (formerly Fidelity Bank) to establish a $500,000 revolving line of credit.
At the present time, the Company is paying interest only at a rate of 4.5% per annum, with a balloon payment of $500,000 due in
2033. The balance is $500,000 as of June 30, 2020 and December 31, 2019.
Shareholder,
Convertible and Contingently Convertible Notes Payable
The
following table summarizes shareholder, convertible and contingently convertible notes payable:
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Shareholder,
convertible and contingently convertible notes
|
|
$
|
951,895
|
|
|
$
|
951,895
|
|
|
Accrued
interest
|
|
|
70,366
|
|
|
|
46,569
|
|
|
Debt
discount
|
|
|
(69,758
|
)
|
|
|
(137,775
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
952,503
|
|
|
|
860,689
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
current maturities
|
|
|
(806,911
|
)
|
|
|
(366,326
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
145,592
|
|
|
$
|
494,363
|
|
Shareholder
Convertible Notes Payable
During
the year ended December 31, 2018, the Company issued shareholder contingently convertible notes payable (the “Notes”),
some of which were for contract work performed by other entities in lieu of compensation and expense reimbursement, totaling approximately
$335,000. The Notes are (i) unsecured, (ii) bear interest at an annual rate of five percent (5%) per annum from date of issuance,
and (iii) are convertible at the Company’s option post April 19, 2018. The Notes mature one year from issuance but may be
extended one (1) additional year by the Company. If converted, the Notes 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
of all of these Notes of as June 30, 2020 and December 31, 2019 is $338,195. The Notes matured in January 2020 and continue
to accrue interest until settlement.
During
the year ended December 31, 2019, the Company issued certain contingently convertible promissory notes in varying amounts to existing
shareholders which totaled $613,700. The face amount of the note represents the amount due at maturity along with the accrued
interest. The amount can be converted into shares of the Company’s stock, at the option of the Company, based on the average
closing price for the trailing 20 days prior to conversion and carrying a 35% to 50% discount. These notes can be converted only
after an acceleration event which involves a symbol change, uplisting, or reverse stock split and such conversion is in the control
of the Company. All of these notes are outstanding as of June 30, 2020.
Based on the variable conversion price of
these notes, the Company recorded the embedded conversion features as derivative liabilities, which amounted to $535,700 and
$442,934 at June 30, 2020 and December 31, 2019, respectively.
Related
Party Debt
The
following table summarizes related party debt:
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Rotman
Family convertible notes
|
|
$
|
1,832,707
|
|
|
$
|
1,782,707
|
|
|
Rotman
Family nonconvertible notes
|
|
|
507,500
|
|
|
|
507,500
|
|
|
Accrued
interest
|
|
|
113,644
|
|
|
|
53,152
|
|
|
Debt
discount
|
|
|
(52,076
|
)
|
|
|
(585,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,401,775
|
|
|
|
1,758,259
|
|
|
Less:
current maturities
|
|
|
(46,000
|
)
|
|
|
(46,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,355,775
|
|
|
$
|
1,712,259
|
|
Rotman
Family Convertible Notes
On
June 30, 2019, the Company issued contingently convertible promissory notes totaling $180,000, to Steven Rotman ($105,000) and
Greg Rotman ($75,000). These notes are (i) unsecured, (ii) bear interest at an annual rate of eight percent (8%) per annum from
date of issuance, (iii) are convertible at the Company’s option after December 31, 2019, and (iv) mature five years from
issuance. If converted, the notes plus accrued interest are convertible into shares of the Company’s common stock at the
average of the five lowest closing prices in the 90-day period prior to conversion with a 50% discount. The balance of the notes
payable including accrued interest to Steven and Greg Rotman is approximately $113,000 and $60,000, respectively, at June 30,
2020 and approximately $109,000 and $57,000, respectively, at December 31, 2019.
On
July 18, 2019, the Company issued contingently convertible notes totaling $1,522,500, to Steven Rotman ($1,102,500) and Bernard
Rotman ($420,000) as partial consideration for the acquisition of 58% of Rotmans (see Note 18). These notes are (i) unsecured,
and (ii) bear interest at an annual rate of eight percent (8%) per annum from date of issuance. These notes can be converted only
after an acceleration event which involves a symbol change, or reverse stock split and such conversion is in the control of the
Company. Steven Rotman’s note matures eight years from issuance and Bernard Rotman’s note matures four years from
issuance. If converted, the notes plus accrued interest are convertible into shares of the Company’s common stock at a 20-day
average closing price at a 50% discount. The balance of the notes payable including accrued interest to Steven and Bernard Rotman
were approximately $1,155,000 and $440,000, respectively, at June 30, 2020 and approximately $1,128,000 and $430,000, respectively,
at December 31, 2019.
On
December 19, 2019, the Company issued a contingently convertible promissory note totaling $100,000, to Steven Rotman. The face
amount of the note represents the amount due at maturity along with the accrued interest. The amount can be converted into shares
of the Company’s stock, at the option of the Company, based on the average closing price for the trailing 20 days prior
to conversion and carrying 50% discount. The note can be converted only after an acceleration event which involves a symbol change,
uplisting, or reverse stock split and such conversion is in the control of the Company. The note matures two years from issuance.
The balance of the note payable including accrued interest to Steven Rotman is approximately $103,000 and $100,000 at June 30,
2020 and December 31, 2019, respectively.
On
February 20, 2020, the Company issued a contingently convertible promissory note totaling $50,000, to Steven Rotman. The face
amount of the note represents the amount due at maturity along with the accrued interest. The amount can be converted into shares
of the Company’s stock, at the option of the Company, based on the average closing price for the trailing 20 days prior
to conversion and carrying 50% discount. The note can be converted only after an acceleration event which involves a symbol change,
uplisting, or reverse stock split and such conversion is in the control of the Company. The note matures two years from issuance.
The balance of the note payable including accrued interest to Steven Rotman is approximately $51,000, at June 30, 2020.
Based on the variable conversion price for
all of these convertible notes, the Company recorded the embedded conversion features as derivative liabilities,
which amounted to $1,444,000 and $1,056,866 at June 30, 2020 and December 31, 2019, respectively.
Rotman
Family Nonconvertible Notes
In
connection with the acquisition of 58% of Rotmans, Steven and Bernard Rotman were issued related party notes payable in the amounts
of $367,500 and $140,000, respectively. The notes bear interest at an annual rate of five percent (5%). Steven Rotman’s
note matures eight years from issuance and Bernard Rotman’s note matures four years from issuance. Payments of $3,828 and
$2,917 to Steven and Bernard Rotman, respectively, per month begin six months from issuance until maturity in December 2027 and
2023, respectively. The balance of these notes payable including accrued interest to Steven and Bernard Rotman is approximately
$385,000 and $147,000, respectively, at June 30, 2020 and approximately $376,000 and $143,000, respectively, at December 31, 2019.
No payments have been made by the Company as of June 30, 2020.
Approximate
maturities for the succeeding years are as follows:
|
Remainder
of 2020
|
|
$
|
46,000
|
|
|
2021
|
|
|
59,000
|
|
|
2022
|
|
|
62,000
|
|
|
2023
|
|
|
85,000
|
|
|
2024
|
|
|
34,000
|
|
|
Thereafter
|
|
|
221,500
|
|
|
|
|
|
|
|
|
|
|
$
|
507,500
|
|
|
NOTE
9 -
|
DERIVATIVE
LIABILITIES
|
As of June 30, 2020 and December 31, 2019,
the Company had a $1,979,700 and $1,499,800, respectively, derivative liability balance on the consolidated balance
sheet and recorded a loss from change in fair value of derivative liabilities of $479,900 for the three and six months
ended June 30, 2020. The derivative liability activity comes from the convertible notes payable.
The Company analyzed the conversion features and warrants of the various note agreements for derivative accounting consideration
under ASC 815-15 “Derivatives and Hedging” and determined that the embedded conversion features should be classified
as a derivative because the exercise price of these Convertible notes are subject to a variable conversion rate. The Company has
determined that the conversion feature is not considered to be solely indexed to the Company’s own stock and is therefore
not afforded equity treatment. In accordance with ASC 815, the Company has bifurcated the conversion feature of the notes and
recorded a derivative liability.
The
embedded derivatives for the notes are carried on the Company’s consolidated balance sheet at fair value. The derivative
liability is marked-to-market each measurement period and any unrealized change in fair value is recorded as a component of the
consolidated statement of operations and the associated fair value carrying amount on the consolidated balance sheet is adjusted
by the change. The Company fair values the embedded derivative using a lattice-based valuation model or Monte Carlo simulation.
The
following table summarizes the derivative liabilities included in the consolidated balance sheet at June 30, 2020 and December
31, 2019:
Fair
Value of Embedded Derivative and Warrant Liabilities:
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
Balance,
beginning of the period
|
|
$
|
1,499,800
|
|
|
$
|
235,085
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial
measurement of liabilities
|
|
|
-
|
|
|
|
1,464,600
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in fair value
|
|
|
479,900
|
|
|
|
1,079,450
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlement
due to conversion
|
|
|
-
|
|
|
|
(1,279,335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
end of the period
|
|
$
|
1,979,700
|
|
|
$
|
1,499,800
|
|
|
NOTE
10 -
|
STOCKHOLDERS’
DEFICIT
|
Cumulative
Convertible Preferred Stock
On
May 2, 2013, the Company began a private placement offering to sell up to 200,000 shares of the Company’s 10% Series A Cumulative
Convertible Preferred Stock. Under the terms of the offering, the Company offered to sell up to 200,000 shares of preferred stock
at $10 per share for a value of $2,000,000. The preferred stock accumulates a 10% per annum dividend and was convertible at a
conversion price of $0.075 per common share at the option of the holder after a nine-month holding period. The conversion price
was lowered to $0.05 per common share for those holders who invested an additional $25,000 or more in the Company’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.
As
of June 30, 2020, the 13,828 shares of outstanding preferred stock had undeclared dividends of approximately $98,000 and could
be converted into 4,731,260 shares of common stock, at the option of the holder.
As
of December 31, 2019, the 13,828 shares of outstanding preferred stock had undeclared dividends of approximately $91,000 and could
be converted into 4,591,100 shares of common stock, at the option of the holder.
Common
Stock and Warrants
During
the six months ended June 30, 2020, no shares were issued under equity purchase agreements.
During
the six months ended June 30, 2020, no shares were issued for the conversion of principal and interest.
NOTE
11 - REVENUES
The
following table presents our revenues disaggregated by each major product category and service for the three and six months ended
June 30, 2020 and 2019:
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
|
%
of
|
|
|
|
|
Net Sales
|
|
|
Net Sales
|
|
|
Net Sales
|
|
|
Net Sales
|
|
|
Net Sales
|
|
|
Net Sales
|
|
|
Net Sales
|
|
|
Net Sales
|
|
|
Merchandise:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Case
Goods
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bedroom
Furniture
|
|
$
|
295,179
|
|
|
|
12.4
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
1,156,302
|
|
|
|
13.9
|
|
|
$
|
-
|
|
|
|
-
|
|
|
Dining
Room Furniture
|
|
|
218,948
|
|
|
|
9.2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
741,062
|
|
|
|
8.9
|
|
|
|
-
|
|
|
|
-
|
|
|
Occasional
|
|
|
445,511
|
|
|
|
18.6
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,405,890
|
|
|
|
16.9
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
959,638
|
|
|
|
40.2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,303,254
|
|
|
|
39.7
|
|
|
|
-
|
|
|
|
-
|
|
|
Upholstery
|
|
|
650,331
|
|
|
|
27.2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,267,878
|
|
|
|
27.3
|
|
|
|
-
|
|
|
|
-
|
|
|
Mattresses
and Toppers
|
|
|
320,136
|
|
|
|
13.4
|
|
|
|
139,326
|
|
|
|
75.1
|
|
|
|
1,391,463
|
|
|
|
16.7
|
|
|
|
318,343
|
|
|
|
84.4
|
|
|
Broadloom,
Flooring and Rugs
|
|
|
99,306
|
|
|
|
4.2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
506,185
|
|
|
|
6.1
|
|
|
|
-
|
|
|
|
-
|
|
|
Warranty
|
|
|
183,151
|
|
|
|
7.7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
281,460
|
|
|
|
3.4
|
|
|
|
-
|
|
|
|
-
|
|
|
Accessories
and Other *
|
|
|
176,344
|
|
|
|
7.4
|
|
|
|
46,237
|
|
|
|
24.9
|
|
|
|
570,904
|
|
|
|
6.9
|
|
|
|
58,887
|
|
|
|
15.6
|
|
|
|
|
$
|
2,388,906
|
|
|
|
100.0
|
|
|
$
|
185,563
|
|
|
|
100.0
|
|
|
$
|
8,321,144
|
|
|
|
100.0
|
|
|
$
|
377,230
|
|
|
|
100.0
|
|
*
Accessories and Other include sales of RxAir products, delivery fees, and other.
|
NOTE
12 -
|
SHARE-BASED
COMPENSATION
|
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 $308,627 and $2,100,736 of stock-based compensation for the six months ended June 30, 2020 and 2019,
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 $1,142,678 and $845,175
at June 30, 2020 and December 31, 2019, 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 zero;
|
|
|
|
|
|
|
●
|
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.
|
In
total for the six months ended June 30, 2020 and 2019, the Company recorded $11,124 and $2,100,736, respectively, of share-based
compensation expense related to employee and Board Members’ stock options. The unrecognized compensation expense as of June
30, 2020 was $37,628 for non-vested share-based awards to be recognized over a period of approximately four years.
Options
During
2004, the Board of Directors of the Company adopted a stock option plan (the “Plan”) and authorized up to 4,000,000
shares to be issued under the Plan. In April 2009, the Company’s Board of Directors authorized an increase in the number
of shares to be issued under the Plan to 10,000,000 shares 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 June 30, 2020,
there are 2,251,729 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 5,000,000 shares which are all available as of June 30, 2020. In 2019, the
Board of Directors adopted an additional stock option plan with provides for 50,000,000 shares which are all available as of June
30, 2020. The Plan is intended to permit stock options granted to employees to qualify as incentive stock options under Section
422 of the Internal Revenue Code of 1986, as amended (“Incentive Stock Options”). All options granted under the Plan
that are not intended to qualify as Incentive Stock Options are deemed to be non-qualified options. Stock options are granted
at an exercise price equal to the fair market value of the Company’s common stock on the date of grant, typically vest over
periods up to 4 years and are typically exercisable up to 10 years.
There
were no options granted during the six months ended June 30, 2020.
The
following table summarizes all stock option activity of the Company for the six months ended June 30, 2020:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Contractual
|
|
|
|
|
of
Shares
|
|
|
Price
|
|
|
Life
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2019
|
|
|
27,983,271
|
|
|
$
|
0.20
|
|
|
|
3.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(100,000
|
)
|
|
|
0.68
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
June 30, 2020
|
|
|
27,883,271
|
|
|
$
|
0.20
|
|
|
|
2.97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excercisable,
June 30, 2020
|
|
|
27,033,271
|
|
|
$
|
0.21
|
|
|
|
3.13
|
|
As
of June 30, 2020, there was no aggregate intrinsic value on the Company’s outstanding options. As of June 30, 2019, the
aggregate intrinsic value of the Company’s outstanding options was approximately $2,000. The aggregate intrinsic value will
change based on the fair market value of the Company’s common stock.
Warrants
Warrants
are issued to third parties as payment for services, debt financing compensation and conversion and in conjunction with the issuance
of common stock. The fair value of each common stock warrant issued for services is estimated on the date of grant using the Black-Scholes
option pricing model.
The
following table represents the Company’s warrant activity for the six months ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
of
Shares
|
|
|
Fair
Value
|
|
|
Exercise
Price
|
|
|
Life
(Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
December 31, 2019
|
|
|
14,237,646
|
|
|
|
|
|
|
$
|
0.09
|
|
|
|
3.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(19,595
|
)
|
|
|
-
|
|
|
|
1.58
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
June 30, 2020
|
|
|
14,218,051
|
|
|
|
|
|
|
|
0.09
|
|
|
|
3.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
June 30, 2020
|
|
|
14,218,051
|
|
|
|
|
|
|
$
|
0.09
|
|
|
|
3.03
|
|
|
NOTE
13 -
|
RELATED
PARTY TRANSACTIONS
|
Officers
and Directors
Per
Steven Rotman’s Employment agreement dated July 22, 2019, 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 six months ended June 30, 2020, the Company expensed approximately
$228,000 related to this employment agreement. As of June 30, 2020, the Company had a stock subscription payable balance
of $577,000, or approximately 22,294,000 shares to be issued in the future and $30,000 of reimbursable expenses
payable.
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 June 30, 2020, the Company had a stock subscription payable
balance of $42,000, for approximately 850,000 shares related to this party for services incurred and expensed in 2019.
Blue
Oar Consulting, Inc.
This
entity is owned by Gregory Rotman, who is the son of the Company’s CEO, Steven Rotman. Blue Oar Consulting, Inc. (“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
Blue Oar’s consulting agreement, it 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 six months ended June 30, 2020, the Company expensed
approximately $252,000 related to the consulting agreement. As of June 30, 2020, the Company had a stock subscription payable
balance of $492,000, or approximately 26,287,000 shares and a balance of $90,000 in accounts payable related to this related
party.
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 13.
During
the six months ended June 30, 2020, 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 an 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 and denied the motion for summary judgment as moot.
The
Company subsequently filed an amended answer with counterclaims. The affirmative defenses collectively preclude the relief sought.
The counterclaims asserted are: (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.
Robert
LaChapelle Class Action
On
March 13, 2020, Robert LaChapelle, a former employee of Rotmans Furniture, the Company’s majority owned subsidiary, on behalf
of himself and all others similarly situated, filed a class action complaint against Rotmans and two of its prior owners (including
Steve Rotman, President of the Company) in the Worcester Superior Court alleging non-payment of overtime pay and Sunday premium
pay pursuant to the Massachusetts Blue Laws (Ch. 136), the Massachusetts Overtime Law (Chapter 151, § 1A), and the Massachusetts
Payment of Wages Law (Chapter 149 §§148 and 150). Specifically, LaChapelle has alleged that Rotmans failed to pay him
and other sales people who were paid on a commission-only basis overtime pay at a rate of least 1.5 times the basic minimum wage
or premium pay (also at 1.5 times the basic minimum wage) for hours they worked on Sundays. Rotmans is in the process of investigating
these claims to determine whether it may be liable to the members of the putative class for unpaid overtime and Sunday pay and,
if so, the approximate amount of such amounts.
Eric
Maas Lawsuit
The
Company and members of its Board of Directors, and certain employees and consultants, have been added as defendants in the case
Maas v. Zymbe, LLC, et. al. The complaint was recently moved from Superior Court of the State of California to Federal District
Court in California. The amended complaint alleges various employment, contract, and tort claims, including defamation, arising
out of a dispute over the quality and utility of consulting and other services provided by Mr. Eric Maas, including through his
dealings with Mr. Jason Leaf and Mr. Gregory Rotman. The original litigation was filed in 2017.
|
NOTE
15 -
|
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 six months ended June 30, 2020, the Company made approximately 13% of its purchases from one major vendor. The Company owed
its major vendor approximately $80,000 at June 30, 2020. There were no significant vendor concentrations during the six months
ended June 30, 2019.
The
provision (benefit) for income taxes for the six months ended June 30, 2020 and 2019 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:
|
|
|
Six
Months Ended
|
|
|
|
|
June
30,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
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 June 30, 2020 and December 31, 2019 are as follows:
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
NOL
carryforwards
|
|
$
|
5,729,000
|
|
|
$
|
5,490,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Less
valuation allowance
|
|
|
(5,729,000
|
)
|
|
|
(5,490,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
taxes are caused primarily by net operating loss carryforwards. For federal income tax purposes, the Company has a net operating
loss carryforward of approximately $27,200,000 as of June 30, 2020, of which approximately $18,400,000 expires beginning in 2024
and $8,800,000 which can be carried forward indefinitely. For state income tax purposes, the Company has a net operating loss
carryforward of approximately $18,300,000 and $8,800,000 as of June 30, 2020 in Georgia and Massachusetts, respectively, which
expires beginning in 2023.
In
addition, as of June 30, 2020 Rotmans has a net operating loss carryforward of approximately $2,800,000 for federal income tax
purposes of which $1,810,000 expires beginning in 2029 and $990,000 can be carried forward indefinitely. Rotmans has a state operating
loss carryforward of approximately $1,900,000 which expires beginning in 2022.
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
17 -
|
PROFIT
SHARING PLAN
|
The
Company sponsors a qualified 401(k) profit sharing plan covering all eligible employees. The plan permits participants to make
tax-deferred contributions to the plan by salary reduction. Company contributions are discretionary and are determined annually
by the Board of Directors.
There
were no Company contributions in 2020. Participant and Company contributions are limited to amounts allowed under the Internal
Revenue Code.
The
Company offers no post-retirement benefits other than the plan discussed above and no significant post-employment benefits.
|
NOTE
18 -
|
ACQUISITION
OF ROTMANS
|
On
July 18, 2019, the Company acquired 58% of the outstanding shares of common stock of Rotmans, the largest furniture and flooring
store in New England for an aggregate purchase price of $2,030,000. The consideration is to be paid in 25% in term notes payable
over 4 to 8 years and 75% in notes convertible to common stock (see Note 8). The Company and Rotmans are exploring a number of
initiatives relating to environmentally friendly product development and distribution that will utilize the access to the capital
markets afforded by this combination.
The
following unaudited pro forma information presents a summary of the Company’s combined operating results for the three and
six months ended June 30, 2019, as if the acquisition and the related financing transactions had occurred on January
1, 2019. The following pro forma financial information is not necessarily indicative of the Company’s operating results
as they would have been had the acquisition been effected on the assumed date, nor is it necessarily an indication of trends in
future results for a number of reasons, including, but not limited to, differences between the assumptions used to prepare the
pro forma information, basic shares outstanding and dilutive equivalents, cost savings from operating efficiencies, potential
synergies, and the impact of incremental costs incurred in integrating the businesses.
|
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
|
June
30, 2019
|
|
|
June
30, 2019
|
|
|
Total
revenues
|
|
$
|
7,245,231
|
|
|
$
|
13,980,160
|
|
|
Loss
from operations
|
|
$
|
1,399,709
|
|
|
$
|
3,905,076
|
|
|
Net
loss
|
|
$
|
1,290,976
|
|
|
$
|
4,978,800
|
|
|
Net
loss attributable to Vystar
|
|
$
|
1,290,976
|
|
|
$
|
4,657,428
|
|
|
Basic
and dilated loss per share
|
|
$
|
0.00
|
|
|
$
|
0.01
|
|
|
NOTE
19 -
|
SUBSEQUENT
EVENTS
|
The
Company has evaluated subsequent events through the date of the filing of its Form 10-Q with the Securities and Exchange Commission.
On
July 1, 2020, 130 preferred shares were converted into 44,357 shares of common stock.
On July 7, 2020, the Company entered into
a stock subscription agreement to issue 10,000,000 shares of common stock for $0.015 per share to a consultant for legal services.
On July 27, 2020, the Company issued
4,000,000 shares of common stock to a Director for 2019 board fees accrued and included in stock subscription payable in the accompanying
balance sheet as of June 30, 2020 and December 31, 2019.
On August 5, 2020, the Company issued 8,941,878
shares of common stock to a third-party consultant for marketing and public relations services. The consultant will provide 30
hours of services per month for a six month period ending in September 2020.
In addition, the Company has received $415,000
for 27,666,735 shares of common stock to be issued.
