OVERVIEW
Vystar LLC , the predecessor to the Company, was formedFebruary 2, 2000 , as aGeorgia limited liability company byTravis W. Honeycutt . Operations under the LLC entity were focused substantially on the research, development and testing of the Vytex® Natural Rubber Latex ("NRL") process, as well as attaining intellectual property rights. In 2003, the Company reorganized asVystar Corporation , aGeorgia corporation, at which time all assets and liabilities of the limited liability company became assets and liabilities ofVystar Corporation , including all intellectual property rights, patents and trademarks. We are the creator and exclusive owner of the innovative technology to produce Vytex NRL. This technology reduces antigenic protein in natural rubber latex products to virtually undetectable levels in both liquid NRL and finished latex products. The process also removes many of the naturally occurring non-rubber particles superfluous to end product function, resulting in a cleaner latex base material. We have introduced Vytex NRL, our "ultra-low protein" natural rubber latex, throughout the worldwide marketplace that uses NRL or latex substitutes as a component of manufactured products. Natural rubber latex is used in an extensive range of products including balloons, textiles, footwear and clothing (threads), adhesives, foams, furniture, carpet, paints, coatings, protective equipment, sporting equipment, and especially health care products such as condoms, surgical and exam gloves. We produceVytex through licensing agreements and have introduced Vytex NRL into the supply channels with aggressive, targeted marketing campaigns directed to the end users. We transitioned from a development stage company to the operating stage during the last quarter of 2009. During the period of 2010 to 2015, our financial condition and results of operations have experienced substantial fluctuations as we provided introductory pricing in 2010 and then began to switch to a licensing rather than a toll model in 2011. Our licensing model will continue in 2019 for the raw material business and we will continue our focus in 2019 onward on the licensing contracts associated with the foam and furniture offerings. Accordingly, the financial condition and results of operations reflected in our historical financial statements are not expected to be indicative of our future financial condition and results of operations. We believe that the key for increased Vytex NRL product acceptance is to focus on companies seeking solutions to production challenges or ways to differentiate their product offering.Vystar's technical team has been successful in developing customized formulations to meet specific manufacturer needs. Some of these formulations will become new line extensions.Vystar is becoming less of a raw material provider and more of a technology innovator through its technical consultation and formulation activities. In addition to this technology focus, we are determined to have the "made withVytex " claim added to products made using various forms of Vytex NRL. To help drive this effort, we're focusing on products that benefit from Vytex NRL low non-rubber features. As part of this effort, we are working with a licensee to launch a line of foam core products used in various bedding products including pillows, mattresses and mattress toppers. InJanuary 2015 ,Vystar announced that it had entered into an exclusive agreement withNHS Holdings, LLC ("NHS") to distribute mattresses, mattress toppers and pillows made with its multi-patented Vytex NRL raw material. NHS is a distribution company led bySteven Rotman of Rotmans, who as ofDecember 18, 2017 is the CEO ofVystar , that focuses on innovative, sustainably sourced, eco-friendly material and technologies for use in furnishings and other markets. Our Vytex NRL fits the needs of this unique new distributor, which has already attracted such firms as mattress manufacturer Gold Bond, that was formed in 1899 to manufacture and then distribute mattresses, toppers and pillows along with a plan to reach specific segments ofthe United States by targeting other manufacturers.Vystar has focused on these segments since 2015 and will continue into 2019 as we display at furniture and mattress conventions and attend and sell at sleep products meetings such as the ISPA 2016 (International Sleep Products Association ) held inOrlando, FL , the ISPA 2017 inTampa, FL and the ISPA 2018 inCharlotte, NC .Vystar will also continue to develop specialty versions of Vytex NRL after presenting to theInternational Latex Conference inAkron, OH inJuly 2016 and 2017 and sending out samples for lab trials.Vystar is currently producingVytex thread samples for an entry into the thread marketplace. InSeptember 2016 , the Vystar Board of Directors voted to end theJanuary 2015 agreement with NHS and replace it with a global exclusive for foam manufactured withVytex and sold into the home furnishings industry. This change reflects the global nature of the mattress, topper and pillow businesses. In April of 2018,Vystar acquired the assets of NHS executing on the first part of the Company's vision to move into direct product offerings made from Vytex®latex. NHS was the exclusiveU.S. distributor ofVystar's Vytex® natural rubber latex foam to manufacturers for use in over 200 home furnishings products, including mattresses, toppers, pillows and upholstery, sold through multiple channels. This acquisition providesVystar with roll packing and cutting equipment to support our bedding manufacturing partners, while lowering the cost ofVytex to the manufacturer by eliminating the middleman. 31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued) OVERVIEW (Continued)
Now unified under the Vytex brand, we anticipate developing additional product offerings and solidifying partnerships with multiple major manufacturing partners throughout the home furnishings industry. We anticipate our new offerings will include cushions and padding for use in seating and other products which we believe will achieve higher margins.
In May of 2018,Vystar acquired substantially all of the assets of UV Flu Technologies, Inc. ("UV Flu"), formerly traded on the OTC under the ticker UVFT, whose patented ViraTech™ UV light air purification technology destroys greater than 99% of airborne bacteria, viruses and other microorganisms and virtually eliminates concentrations of odors and volatile organic compounds ("VOCs"). As part ofVystar's mission to offer eco-friendly, sustainable materials and products that create a better environment for consumers and workers throughout the product lifecycle, UV Flu is an excellent counterpart to ourVytex materials andVytex bedding products.Vystar products will help create a perfect natural sleep environment starting withVytex bedding made from the purest latex in the world and UV Flu's RxAir™ air purifier ensuring every breath is free of harmful pathogens, VOCs and odors. UV Flu products 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 independentEPA - 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.
UV Flu's product line includes:
? RxAir™ Residential Filterless Air Purifier
? UV400 ™ FDA cleared Class II Filterless Air Purifier
? RX3000™ Commercial FDA cleared Class II Air Purifier
Vystar acquired all UV Flu intellectual property and multiple patents, product lines, tooling, FDA clearances, research data, websites and other assets related to the business for the purchase price of$975,000 or 27,918,000 shares ofVystar restricted common stock which may not be assigned or sold by UV Flu
for 12 months.Vystar will continue production of UV Flu product lines with BOI, a world-class manufacturer.Vystar plans to sell RxAir residential and commercial units via distributors, online and through retail channels.Vystar has been selling the RxAir units after receiving a substantial number of units by container in the first quarter. In addition, master distributors and manufacturers representatives have signed contracts withVystar . The first large scale distributor order was placed and paid for inMay 2019 .Vystar is assembling the distribution network to relaunch sales of UV400 and Rx3000 units to the healthcare and medical markets, which UV Flu had ceased due to a lack of sales force, distribution and cash flow constraints. Once production and sales are firmly re-established,Vystar expects that the air purification products will produce margins of approximately 75%. UV Flu's products have world class engineering, are made to the highest quality standards and are extremely effective in settings ranging from homes to offices, healthcare facilities, salons, restaurants, and nursing homes. 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 byEPA - and FDA-certified laboratories, the RxAir has been proven to destroy greater than 99% of bacteria and viruses and reduce concentrations of odors and 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 ofVystar Corp. For more information, visit http://www.RxAir.com. In the first quarter,Vystar also made huge strides in enhancingVystar's large patent portfolio, continuing the outstanding work from previous management. Today,Vystar has 28 patents encompassing many continents.Vystar will be adding significant resources in the near term to enforce and prosecute infringers of our patents ensuringVystar has the ability to fully collect on its proprietaryVytex investment. 32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued) OVERVIEW (Continued) AboutFEC
In May of 2019,Vystar Corporation executed a patent assignment to purchase the assets ofFluid Energy Conversion Inc. , ("FEC"), which consists primarily ofU.S. and foreign rights to US Patent No. 7,897,121. The assets were purchased for 2,500,000 shares of common stock ofVystar Corporation (current approximate value of$100,000 ).FEC is a global green energy company whose patented and proprietary technologies harness sound energy in unique ways to destroy bacteria and viruses, improve water processing and irrigation, and enhance chemical reactions.FEC has married the science of sound energy, called sono- chemistry, with molecular fluid mechanics for the development of applications to more effectively kill pathogens, improve combustion efficiency, overcome the issues of hardwater mineral build up, and enhance vaporization of liquids.FEC's science and technology has been proven in multiple studies with major corporations. Currently,FEC technology R&D is underway on the following initiatives:
?
reduce size and cost of
?
energy in a highly proprietary manner.
?
and control dosage.
?
development in metering, energy, water purification, and medical uses.
? A water filtration enhancement device in prototype stage to improve dialysis
efficiency for those affected by renal failure. About Rotmans OnJuly 18, 2019 , the Company acquired a controlling interest in Rotmans for$2,030,000 , comprised of 25% in notes payable over 4-8 years and 75% in notes convertible into common shares. Rotmans and the Company 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 transaction.
Rotmans, the largest furniture and flooring store inNew England and one of the largest independent furniture retailers in theU.S. , encompassing over 200,000 square feet inWorcester, Mass. , and employing 150 people, was founded and has been under the leadership of the Rotman family for the past 50 years. Rotmans is expected to add approximately$30 million annually toVystar's top line revenue and enableVystar to capitalize on the infrastructure already in place for accounting, retail sales facilities and staff, customer service, warehousing, and delivery. Additionally, it will offer significant marketing and advertising opportunities for all ofVystar's brands to Rotmans' thousands of existing customers. The acquisition is expected to dramatically increaseVystar shareholder value and liquidity through improved access to capital markets as well as lay the groundwork for future eco-friendly initiatives. As CEO of both Rotmans andVystar ,Steven Rotman will provide continuity of management and customer- focused values for Rotmans andVystar . During the third quarter of 2019, the Company focused on the completion of the Rotmans acquisition and subsequent integration of the Company's sales, marketing, warehousing, and accounting functions. New systems, controls, and procedures are being added as well as a host of additional staff and software. The Company has invested significantly in the completion of the merger and has committed a considerable amount of staff resources, most of which is a one-time cost. We believe the combined capabilities of our two organizations create an opportunity to amplify the authentic and special brands we have built and accelerate the pursuit of our vision to build the most innovative and inspirational home furnishings brand. Together, we will create a dramatic path toward long term growth and value for our brand, people, customers, and suppliers. We are thrilled to add this prestigious brand toVystar's platform, as it not only positionsVystar as an authority in one of the most important and profitable rooms of the home - the bedroom - but also creates a showcase forVystar . There are very few opportunities to acquire a well-managed, growing company such as Rotmans, especially givenVystar's previous size. This partnership represents a key opportunity to drive long-term growth and value creation for our shareholders. 33
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued) RESULTS OF OPERATIONS Comparison of the Three Months EndedSeptember 30, 2019 with the Three Months EndedSeptember 30, 2018 Three Months Ended September 30, 2019 2018 $ Change % Change CONSOLIDATED Revenue$ 6,040,201 $ 187,543 $ 5,852,658 3,120.7 % Cost of revenue 3,378,220 182,937 3,195,283 1,746.7 % Gross profit (loss) 2,661,981 4,606 2,657,375 57,693.8 % Operating expenses: General and administrative 3,871,282 477,705 3,393,577 710.4 % Loss from operations (1,209,301 ) (473,099 ) (736,202 ) 155.6 % Other income (expense): Loss on settlement of debt (339,875 ) - (339,875 ) 100.0 % Interest expense (195,142 ) (476,847 ) 281,705 -59.1 % Change in fair value of derivative liabilities - (95,365 ) 95,365 -100.0 % Other income 7,956 - 7,956 100.0 % Total other expense, net (527,061 ) (572,212 ) 45,151 -7.9 % Net loss (1,736,362 ) (1,045,311 ) (691,051 ) 66.1 % Net loss attributable to noncontrolling interest 63,802 - 63,802 100.0 %
Net loss attributable to
Revenues Revenues for the three months endedSeptember 30, 2019 and 2018 from the Company were$6,040,201 and$187,543 , respectively, for an increase of$5,852,658 or 3,120.7%. The significant increase in revenues was due to an increase in operations as a whole due to multiple acquisitions sinceMarch 31, 2018 . The Company reported a significant increase in gross income to$2,661,981 for the three-month period endedSeptember 30, 2019 compared to gross income of$4,606 for the three-month period endedSeptember 30, 2018 , an increase of$2,657,375 . The cost of revenue for the three months endedSeptember 30, 2019 and 2018 was$3,378,220 and$182,937 , respectively, an increase of 1,746.7%. The increase is due to the greater inventory needs primarily from the acquisitions of Rotmans, UV Flu and NHS. Operating Expenses The Company's operating expenses consist of general and administrative expenses. General and administrative expenses consist primarily of compensation and support costs for management and administrative staff, and for other general and administrative costs, including professional fees related to accounting, finance, and legal services as well as other operating expenses. The Company's operating expenses were$3,871,282 and$477,705 for the three months endedSeptember 30, 2019 and 2018, respectively, an increase of$3,393,577 or 710.4%. The increase is mainly due to accounting and legal fees related to shareholder note conversions and the Rotmans transaction. Operating expenses included patents, latex consultants, accounting fees, and employee expenses. 34
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
Other Income (Expense) Other expense for the three months endedSeptember 30, 2019 was$527,061 , which primarily consisted of a loss on settlement of convertible notes payable of$339,875 and interest expense of$195,142 . This compares to other expense of$572,212 , for the three months endedSeptember 30, 2018 , which includes interest expense of$476,847 and change in the fair value of derivative liabilities of$95,365 . The reason for the decrease in other expense for the three months endedSeptember 30, 2019 was related to prior financings. Net Loss
Net loss attributable toVystar was$1,672,560 and$1,045,311 for the three months endedSeptember 30, 2019 and 2018, respectively, an increase of$627,249 . The larger net loss the Company experienced in the quarter endedSeptember 30, 2019 versus the same period in 2018 was primarily attributable to accounting and legal fees related to shareholder note conversions and the Rotmans transaction. Comparison of the Nine Months EndedSeptember 30, 2019 with the Nine Months EndedSeptember 30, 2018 Nine Months Ended September 30, 2019 2018 $ Change % Change CONSOLIDATED Revenue$ 6,417,431 $ 250,516 $ 6,166,915 2,461.7 % Cost of revenue 3,789,186 251,402 3,537,784 1,407.2 % Gross profit (loss) 2,628,245 (886 )
2,629,131 -296,741.6 %
Operating expenses:
General and administrative 6,823,395 2,970,664 3,852,731 129.7 % Loss from operations (4,195,150 ) (2,971,550 ) (1,223,600 ) 41.2 % Other income (expense): Loss on settlement of debt (327,433 ) - (327,433 ) 100.0 % Interest expense (335,208 ) (579,597 ) 244,389 -42.2 % Change in fair value of derivative liabilities (1,044,250 ) (95,365 ) (948,885 ) 995.0 % Other income 7,802 326,237 (318,435 ) -97.6 % Total other expense, net (1,699,089 ) (348,725 ) (1,350,364 ) 387.2 % Net loss (5,894,239 ) (3,320,275 ) (2,573,964 ) 77.5 % Net loss attributable to noncontrolling interest 63,802 - 63,802 100.0 %
Net loss attributable to
75.6 % Revenues Revenues for the nine months endedSeptember 30, 2019 and 2018 from the Company were$6,417,431 and$250,516 , respectively, for an increase of$6,166,915 , or 2,461.7%. The increase in revenues was due to an increase in operations as a whole due to multiple acquisitions sinceMarch 31, 2018 . For the Company, gross profit increased from a gross loss of$886 for the nine months endedSeptember 30, 2018 to gross profit of$2,628,245 for the nine months endedSeptember 30, 2019 , an increase of$2,629,131 . Cost of revenue for the nine months endedSeptember 30, 2019 and 2018 was$3,789,186 and$251,402 , respectively, an increase of$3,537,784 . The increase is mainly due accounting and legal fees related to the greater inventory needs primarily from the acquisitions of UV Flu, NHS, and Rotmans. 35
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
RESULTS OF OPERATIONS (Continued)
Operating Expenses The Company's operating expenses consist of general and administrative expenses. General and administrative expenses consist primarily of compensation and support costs for management and administrative staff, and for other general and administrative costs, including professional fees related to accounting, finance, and legal services as well as other operating expenses. The Company's operating expenses were$6,823,395 and$2,970,664 for the nine months endedSeptember 30, 2019 and 2018, respectively, an increase of$3,852,731 or 129.7% due primarily to accounting and legal fees related to shareholder note conversions and the Rotmans transaction. Operating expenses included patents, latex consultants, accounting fees, and employee expenses. Other Income (Expense)
Other expense for the nine months endedSeptember 30, 2019 was$1,699,089 , which consisted of interest expense of$335,208 , loss on settlement of convertible notes payable of$327,433 , change in fair value of derivative liabilities of$1,044,250 and other income of$746 . This compares to other expense of$348,725 for the nine months endedSeptember 30, 2018 , which includes$326,237 related to forgiveness of debt and interest expense of$579,597 . The reason for the increase in other expense for the nine months endedSeptember 30, 2019 was due to a loss recognized on the conversion of debt instruments into shares of common stock, in addition to the increase in the fair value of derivative liabilities related to the convertible notes payable. The decrease in interest expense for the nine months endedSeptember 30, 2019 was due to the settlement of the CMA note in the third quarter. Net Loss
Net loss attributable toVystar was$5,830,437 and$3,320,275 for the nine months endedSeptember 30, 2019 and 2018, respectively, an increase of$2,510,162 or 75.6%. The larger net loss the Company experienced in the nine months endedSeptember 30, 2019 versus the same period in 2018 was primarily attributable to the unusual and infrequent loss recognized from fair value changes to the derivative liabilities and the loss on settlement of debt.
LIQUIDITY AND CAPITAL RESOURCES
The Company's financial statements are prepared using the accrual method of accounting in accordance withU.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. AtSeptember 30, 2019 , the Company had cash of$64,233 and a deficit in working capital of approximately$3.3 million . Further, atSeptember 30, 2019 , the accumulated deficit amounted to approximately$39.2 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. Management plans to finance future operations using cash on hand, increased revenue fromVytex license fees that now also include the Company's association with foam cores made fromVytex 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, including purchasing, marketing, inventory control, advertising, accounting, warehousing and customer service. There can be no assurances that we will be able to achieve projected levels of revenue in 2019 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 2020, 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. The Company's future expenditures will depend on numerous factors, including: the rate at which we can introduce and license Vytex NRL raw material and the foam cores made fromVytex 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; and the success of our efforts to reduce expenses in our retail furniture business. 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. 36
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
Sources and Uses of Cash For the nine months endedSeptember 30, 2019 and 2018, net cash used in operations was$1,090,903 and$1,071,437 , respectively. The negative cash flow from operations for the nine months endedSeptember 30, 2019 and 2018 resulted primarily from accounting and legal fees related to the NHS, UV Flu,FEC and Rotmans transactions.
Net cash used in investing activities of$10,019 for the nine months endedSeptember 30, 2019 was for costs associated with patent and trademark fees and website development costs compared to net cash used in investing activities of$4,423 for the nine months endedSeptember 30, 2018 for costs related to patent and trademark fees.
Net cash provided by financing activities of$1,115,092 for the nine months endedSeptember 30, 2019 consisted of mainly equity and debt arrangements. Net cash provided by financing activities for the nine months endedSeptember 30, 2018 was$1,253,550 , which included equity and debt arrangements.
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 theSecurities 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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