UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2017

 

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

 

For the transition period from ____________________to____________________

 

Commission File Number 000-53754

 

---

 

VYSTAR CORPORATION

(Exact Name of Registrant as Specified in its Charter)

 

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

 

2480 Briarcliff Rd, #6 

Suite 159
Atlanta, GA 30329

---

 (Address of Principal Executive Offices, Zip Code)

 

(866) 674-5238

---

(Registrant’s telephone number including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES ☒   NO ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☒   NO ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☒
(Do not check if a smaller reporting company)	Emerging growth company ☐

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)  YES ☐ NO ☒

 

As of August 14, 2017, there were 127,118,132 shares of the Registrant’s common stock, par value $0.0001 per share, outstanding.

 

 

INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS

 

In addition to historical information, this Form 10-Q contains statements relating to our future results (including certain projections and business trends) that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are subject to the “safe harbor” created by those sections. The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the financial statements and the related notes thereto included in this Quarterly Report on Form 10-Q (this “Report”). This Report contains certain forward-looking statements and the Company’s future operating results could differ materially from those discussed herein. Our disclosure and analysis included in this Report concerning our operations, cash flows and financial position, including, in particular, the likelihood of our success in expanding our business and raising debt and capital securities include forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expect”, “anticipate”, “intend”, “plan”, “believe”, “estimate”, “may”, “project”, “will likely result”, and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to certain risks, uncertainties, and assumptions, including prevailing market conditions and are more fully described under “Part I, Item 1A – Risk Factors” of our Form 10-K for the year ended December 31, 2016. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. In any event, these and other crucial factors, including those set forth in Item 1A – “Risk Factors” of our Form 10-K for the year ended December 31, 2016 may cause actual results to differ materially from those indicated by our forward-looking statements.

 

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

 

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

 

 

Vystar Corporation 

Form 10-Q for the Quarter Ended June 30, 2017 

 

Index

 

	Part I.  Financial Information
Item 1.	Financial Statements		1
	Balance Sheets at June 30, 2017 (unaudited) and December 31, 2016		1
	Statements of Operations for the Three Months and Six Months Ended June 30, 2017 and 2016 (unaudited)		2
	Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016 (unaudited)		3
	Notes to Financial Statements (unaudited)		4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		9
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		15
Item 4.	Controls and Procedures		15
	Part II.  Other Information
Item 1.	Legal Proceedings		15
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		15
Item 3.	Defaults Upon Senior Securities		16
Item 4.	Mine Safety Disclosures		16
Item 5.	Other Information		16
Item 6.	Exhibits		16
SIGNATURES			17

 

 

Part I.       FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

 

VYSTAR CORPORATION  

BALANCE SHEETS 

		June 30, 2017				December 31 2016
ASSETS
CURRENT ASSETS
Cash		$	66,054			$	36,282
Accounts receivable, net of allowance for uncollectible amount of $0 at June 30, 2017 and December 31, 2016, respectively			1,781				17,370
Prepaid expenses			38,866				41,300
TOTAL CURRENT ASSETS			106,701				94,952
OTHER ASSETS
Intangible assets, net			131,722				139,562
TOTAL ASSETS		$	238,423			$	234,514
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Related party line of credit		$	1,499,875			$	1,499,875
Accounts payable			485,521				488,784
Accrued compensation			2,000				2,917
Shareholder notes payable			591,529				595,837
Accrued expenses			265,534				231,080
TOTAL CURRENT LIABILITIES			2,844,459				2,818,493
Shareholder notes payable			198,461				239,231
TOTAL LIABILITIES		$	3,042,920			$	3,057,724
STOCKHOLDERS’ DEFICIT
Preferred stock, $0.0001 par value, 15,000,000 shares authorized; 13,828 issued and outstanding at June 30, 2017 and December 31, 2016 respectively			1				1
Common stock, $0.0001 par value, 250,000,000 shares authorized; 124,819,919 and 114,951,594 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively			12,482				11,495
Additional paid-in capital			24,623,429				23,979,943
Accumulated deficit			(27,440,409	)			(26,814,649	)
TOTAL STOCKHOLDERS’ DEFICIT			(2,804,497	)			(2,823,210	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT		$	238,423			$	234,514

 

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

 

 

VYSTAR CORPORATION

STATEMENTS OF OPERATIONS 

(unaudited)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2017				2016				2017				2016
REVENUE		$	3,087			$	2,793			$	6,323			$	7,623
COST OF REVENUE			6,610				6,305				10,220				12,973
Gross Margin			(3,523	)			(3,512	)			(3,897	)			(5,350	)
OPERATING EXPENSES
General and administrative, including non-cash share-based compensation of $32,977 and $154,441 for the three months ended June 30, 2017 and 2016, respectively and $214,502 and $233,964 for the six months ended June 30, 2017 and 2016, respectively			254,481				316,638				531,783				631,591
Total Operating Expenses			254,481				316,638				531,783				631,591
LOSS FROM OPERATIONS			(258,004	)			(320,150	)			(535,680	)			(636,941	)
OTHER INCOME (EXPENSE)
Interest income			—				—				—				1
Other income			—				—				—				35
Interest expense			(42,728	)			(61,805	)			(85,233	)			(101,454	)
Total Other Income (Expense)			(42,728	)			(61,805	)			(85,233	)			(101,418	)
LOSS FROM CONTINUING OPERATIONS			(300,732	)			(381,955	)			(620,913	)			(738,359	)
INCOME (LOSS) FROM DISCONTINUED OPERATIONS			(1,330	)			53,160				(4,847	)			75,044
NET LOSS		$	(302,062	)		$	(328,795	)		$	(625,760	)		$	(663,315	)
BASIC AND DILUTED LOSS PER SHARE:
Net loss per share		$	(0.00	)		$	(0.00	)		$	(0.01	)		$	(0.01	)
Basic and Diluted Weighted Average Number of Common Shares Outstanding			122,305,757				105,790,975				119,854,369				102,672,286

 

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

 

 

VYSTAR CORPORATION

STATEMENTS OF CASH FLOWS 

(unaudited)

 

		Six months Ended June 30,
		2017				2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(625,760	)		$	(663,315	)
Adjustments to reconcile net loss to cash used in operating activities
Share-based compensation			214,502				233,964
Allowance for uncollectible accounts receivable			—				(42,868	)
Depreciation			—				278
Amortization of intangible assets			7,840				7,840
(Increase) decrease in assets
Accounts receivable			15,589				(4,810	)
Prepaid expenses			2,434				154,309
Increase (decrease) in liabilities
Accounts payable			4,336				(92,919	)
Accrued compensation and expenses			36,331				34,752
Net cash used in operating activities			(344,728	)			(372,769	)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock, net of costs			374,500				570,000
Exercise of warrants/options			—				53,500
Net cash provided by financing activities			374,500				623,500
NET INCREASE (DECREASE) IN CASH			29,772				250,731
CASH - BEGINNING OF YEAR			36,282				29,059
CASH - END OF PERIOD		$	66,054			$	279,790
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID DURING THE PERIOD FOR
Interest		$	48,023			$	44,905
Shareholder Notes Converted to Common Stock		$	55,470			$	—

 

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

 

 

VYSTAR CORPORATION

NOTES TO FINANCIAL STATEMENTS

 

NOTE 1

DESCRIPTION OF BUSINESS

 

Vystar Corporation (“Vystar”, the “Company”, “we”, “us”, or “our”) is the creator and exclusive owner of the innovative technology to produce Vytex® Natural Rubber Latex (“NRL”). Our global multi-patented technology reduces antigenic and total protein in natural rubber latex products to virtually undetectable levels. Vytex NRL, our “ultra-low protein” natural rubber latex has been introduced throughout the worldwide marketplace that uses NRL or latex substitutes as a raw material for end products. Natural rubber latex or latex substitutes are used in an extensive range of products including balloons, textiles, footwear and clothing (threads), adhesives, foams (mattresses, pillows, mattress toppers, etc.), furniture (foam and adhesives), carpet, paints, coatings, protective equipment, sporting equipment, and, especially health care products such as condoms, surgical and exam gloves, among others. Our challenge has been that a manufacturer’s conversion from the use of standard latex or synthetic raw material to Vytex NRL involves a protracted sales cycle ranging from eighteen to thirty-six months. Additionally, in the past, our primary method of distribution was via toll manufacturing. We now have several licensing agreements in place for global distribution that have allowed us to focus on and transition to sales and marketing with a technical oversight.

 

Vystar has expanded into the consumer arena with an introduction into the mattress, mattress topper and pillow arenas aligning with key foam manufacturers, mattress, mattress toppers and pillow producers, and furniture stores in specific areas of the Unites States. On January 22, 2015, Vystar announced the signing of an exclusive domestic distribution agreement with Worcester, MA based Nature’s Home Solutions (NHS) who sources eco-friendly materials and technologies for use in furnishings and other markets. In September 2016, the Vystar Board of Directors voted to end the January 2015 NHS agreement and replace it with a global exclusive for foam manufactured with Vytex and sold into the home furnishings industry. This change reflects the global nature of the mattress, topper and pillow businesses, the need for local warehousing, and access to container loads of foam cores and pillows for domestic, European and Asian manufacturers.

 

NOTE 2

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles of the United States of America (“GAAP”) for interim financial information.  Accordingly, certain information and footnotes required by GAAP for complete financial statements may be condensed or omitted.  These interim financial statements should be read in conjunction with our audited financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission (“SEC”).  In the opinion of Vystar management, these financial statements contain all adjustments (which comprise only normal and recurring accruals) necessary to present fairly the financial position and results of operations as of and for the three-month and six-month periods ended June 30, 2017 and 2016.

 

Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures.  Although these estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future, actual results could differ from these estimates. Examples include valuation allowances for deferred tax assets, provisions for bad debts, and fair values of share-based compensation.

 

Concentration of Credit Risk

 

Certain financial instruments potentially subject the Company to concentrations of credit risk.  These financial instruments consist primarily of cash and accounts receivable.  Cash held in banks in many cases exceeds the Federal Deposit Insurance Corporation, or FDIC, insurance limits.  While we monitor our cash balances on a regular basis and adjust the balances as appropriate, these balances could be impacted if the underlying financial institutions fail.  To date, we have experienced no loss or lack of access to our cash; however, we can provide no assurances that access to our cash will not be impacted by adverse conditions in the financial markets.

 

Loss Per Share

 

Because the Company reported a net loss for the six-month periods ended June 30, 2017 and 2016, common stock equivalents, including stock options and warrants, were anti-dilutive; therefore, the amounts reported for basic and diluted loss per share were the same.  Excluded from the computation of diluted loss per share were options outstanding to purchase 8,298,271 shares and 9,218,271 shares of common stock for the six months ended June 30, 2017 and 2016, respectively, as their effect would be anti-dilutive.  Warrants to purchase 16,436,835 and 18,014,582 shares of common stock for the six months ended June 30, 2017 and 2016, respectively, were also excluded from the computation of diluted loss per share as their effect would be anti-dilutive.

 

Revenues

 

The Vytex segment derives revenue from license fees of Vytex NRL raw material to manufacturers and distributors of rubber and rubber-end products such as the foam used in the pillows and mattresses. Revenue is recognized when the licensee confirms payment and pays Vystar.

 

 

Fair Value of Financial Instruments

 

The Company’s financial instruments consist of cash, accounts receivable, accounts payable, accrued expenses, line of credit and shareholder notes payable.  The carrying values of all the Company’s financial instruments approximate fair value because of their short maturities. In addition to the short maturities, the carrying amounts of our line of credit and shareholder notes payable approximate fair value because the interest rates at June 30, 2017 approximate market interest rates for the respective borrowings.

 

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

 

Valuation inputs are classified in the following hierarchy:

 

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

 

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

 

NOTE 3

LIQUIDITY AND GOING CONCERN

 

The Company’s financial statements are prepared using the accrual method of accounting in accordance with 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 its inception.  At June 30, 2017, the Company had cash of $66,054 and a deficit in working capital of $2,737,758.  Further, at June 30, 2017, the accumulated deficit amounted to $27,440,409.  As a result of the Company’s history of losses and financial condition, there is substantial doubt about the ability of the Company to continue as a going concern.

 

A successful transition to attaining profitable operations is dependent upon obtaining sufficient financing to fund the Company’s planned expenses and achieving a level of revenue adequate to support the Company’s cost structure. Management plans to finance future operations through the use of cash on hand, increased revenue from Vytex division license fees, our credit facility, stock warrant exercises from existing shareholders, raising capital through private placements of capital stock and debt.

 

The Company’s future expenditures will depend on numerous factors, including: the rate at which the Company can introduce and license Vytex NRL to manufacturers; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; market acceptance of the Company’s products and services; revenue from the licensing agreement with NHS Holdings, LLC; and competing technological developments. 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.

 

There can be no assurances that the Company will be able to achieve its projected level of revenue in 2017 and beyond. If the Company is unable to achieve its projected revenue and is not able to obtain alternate additional financing of equity or debt, the Company would need to significantly reorient its operations during 2017, which could have a material adverse effect on the Company’s ability to achieve its business objectives and as a result may require the Company to file for bankruptcy or cease operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities that might be necessary should the Company be forced to take any such actions.

 

NOTE 4

DISCONTINUED OPERATIONS

 

As part of the Company’s strategy to focus on realizing the potential of the Vytex foam business in the pillow and mattress markets as well as part of the Company’s cost reduction plan, the Company made the decision in May 2016 to discontinue the operations of the Kiron division acquired in June 2013.

 

The Kiron division revenue was $0 and $26,957 for the three-month period ended June 30, 2017 and 2016, respectively and $130 and $76,450 for the six-month period ended June 30, 2017 and 2016, respectively. Gains (Losses) from discontinued operations were $(1,330) and $53,160 for the three-month period ended June 30, 2017 and 2016, respectively and $(4,847) and $75,044 for the six-month period ended June 30, 2017 and 2016, respectively.

 

 

NOTE 5

PROPERTY AND EQUIPMENT

 

Property and equipment consists of the following:

 

		June 30, 2017				December 31, 2016
Furniture, fixtures and equipment		$	8,522			$	8,522
Accumulated depreciation			(8,522	)			(8,522	)
		$	—			$	—

 

Depreciation expense for the three months ended June 30, 2017 and 2016 was $0 and $278, respectively. Depreciation expense for the six months ended June 30, 2017 and 2016 was $0 and $278, respectively.

 

NOTE 6

INTANGIBLE ASSETS

 

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

 

Intangible assets are as follows:

 

		June 30, 2017				December 31, 2016
Patents		$	238,551			$	238,551
Trademarks & trade name			9,072				9,072
Subtotal			247,623				247,623
Accumulated amortization			(115,901	)			(108,061	)
Intangible assets, net		$	131,722			$	139,562

 

Amortization expense for the three months ended June 30, 2017 and 2016 was $3,920. Amortization expense for the six months ended June 30, 2017 and 2016 was $7,840.

 

NOTE 7

INCOME TAXES

 

There is no income tax benefit recorded for the losses for the three and six months ended June 30, 2017 and 2016 since management has determined that the realization of the net deferred tax asset is not assured and has created a valuation allowance for the entire amount of the net deferred tax asset.

 

NOTE 8

NOTES PAYABLE AND LOAN FACILITY

 

Related Party Line of Credit (CMA Note Payable)

 

On April 29, 2011, the Company executed with CMA Investments, LLC, a Georgia limited liability company (“CMA”), a line of credit with a principal amount of up to $800,000 (the “CMA Note”). CMA is a limited liability company of which three of the directors of the Company (“CMA directors”) were initially the members. Pursuant to the terms of the CMA Note, the Company may draw up to a maximum principal amount of $800,000. Interest, is computed at LIBOR plus 5.25% (6.50% at June 30, 2017), on amounts drawn and fees. The weighted average interest rate in effect on the borrowings for the six months ended June 30, 2017 was 5.25%.

 

Other terms of the CMA Note include:

 

	●	The Note is unsecured;
	●	No payments of principal are due until the second anniversary of the Note, at which time all outstanding principal is due and payable; and
	●	As compensation to the directors for providing the Note, the Company issued warrants to purchase 2,600,000 shares of the Company’s common stock to the CMA Directors at $0.45 per share, which was the closing price of the Company’s stock on April 29, 2011, which vest 20% immediately and 10% upon each draw by the Company of $100,000 under the Note. Because the warrants were issued and valued prior to the receipt of funds under this loan, no discount could be recorded and, accordingly, the value of the warrants was capitalized as a financing cost. The costs are being amortized on a straight-line basis over the term of the Note.

 

 

On September 14, 2011, the Company’s Board of Directors approved increasing the line of credit with CMA by $200,000 to a maximum principal amount of $1,000,000 and the Company’s Chairman and Chief Executive Officer became a member of CMA. As compensation to the CMA Directors for increasing the amount available under the CMA Note, the Board of Directors approved modifying the exercise price for the 2,600,000 compensatory stock purchase warrants previously issued to the Directors from $0.45 to $0.27 per share, which was the closing price of the Company’s common stock on that date and the Company also issued warrants to purchase an additional 1,600,000 shares of the Company’s stock at $0.27 per share, which was the closing price of the Company’s common stock on September 14, 2011, which vest upon the original terms of the CMA Note. The costs incurred in the modification of the exercise price of the 2,600,000 compensatory stock purchase warrants issued on April 29, 2011 and the additional 1,600,000 warrants issued on September 14, 2011 are being amortized on a straight-line basis over the remaining term of the CMA Note.

 

On November 2, 2012, the Board of Directors approved an increase in the CMA line of credit from $1,000,000 to $1,500,000. As compensation to the CMA Directors for increasing the amount available under the CMA Note, warrants to purchase an additional 2,100,000 shares of the Company’s stock at $0.35 per share were issued and recorded as deferred financing cost to be amortized through interest expense over the remaining term of the CMA Note. There was no amortization of the financing costs associated with the CMA Note for the three and six months ended June 30, 2017 and June 30, 2016.

 

On April 29, 2013, the maturity date of the CMA Note was extended to April 29, 2014. As compensation to the CMA Directors for extending the maturity date of the CMA Note, the Board of Directors approved modifying the exercise price for the 6,300,000 compensatory stock purchase warrants previously issued to the Directors to $0.10 per share and the CMA Directors forfeited 630,000 of the warrants. Amortization of the financing costs associated with extending the CMA Note was amortized through interest expense.

 

On April 30, 2014, the maturity date of the CMA Note was extended to April 30, 2015. No consideration was awarded the CMA members based on this extension.

 

On April 29, 2015, the maturity date of the CMA Note was extended to April 29, 2016. No consideration was awarded the CMA members based on this extension. The note is currently due on demand.

 

Shareholder Notes Payable

 

The following table summarizes the shareholder notes payable:

 

		June 30, 2017				December 31, 2016
Shareholder notes		$	789,990			$	835,068
Accrued Interest			257,935				231,080
Total Shareholder Notes & Accrued Interest			1,047,925				1,066,148
Less: Accrued Interest			(257,935	)			(231,080	)
Less: Current Portion			(591,529	)			(595,837	)
Total long-term debt		$	198,461			$	239,231

 

Such notes are (i) unsecured, (ii) bear interest at an annual rate ranging from five percent (5%) to ten percent (10%) per annum, and (iii) are convertible into shares of common stock at a conversion rate ranging between $0.05 and $0.10 of principal and interest for each such share.

 

The current average conversion price for the above referenced Shareholder and Promissory Notes with an outstanding balance as of June 30, 2017 of $1,101,211 including accrued interest, is approximately $0.055 per share or 18,975,069 shares of the Company’s common stock. The face value of the Shareholder Notes at June 30, 2017 is $789,990.

 

NOTE 9

STOCKHOLDERS’ EQUITY

 

Common Stock and Warrants

 

As part of the November 2016 Private Placement Memorandum, the Company issued 7,490,000 shares of common stock to fifteen (15) accredited investors during the period from January 1, 2017 to June 30, 2017. Total gross proceeds of the issuances were $374,500. No commissions were paid. The shares of common stock were offered and sold in reliance upon exemptions from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Regulation D promulgated thereunder.

 

On March 15, 2017, the Company issued 400,000 common shares as compensation under the Company’s Business Development Agreement with FMW Media Works Corporation and 750,000 common shares as compensation under the Company’s Business Development Agreement with Joseph Savanyo.

 

On April 9, 2017, the Company issued 118,919 common shares as a result of a cashless exercise of outstanding warrants.

 

On April 25, 2017, the Company issued 1,109,406 common shares as a result of a partial conversion of a Shareholder Note and accrued interest.

 

 

On May 22, 2017, the Company signed a sales and marketing agreement with Anazca, LLC issuing restricted common shares as goals are achieved.

 

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 $10.00 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 six-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.

 

At June 30, 2017, the 13,828 shares of outstanding preferred stock had accumulated undeclared dividends of approximately $42,820, and could be converted into 3,622,001 shares of common stock, at the option of the holder.

 

NOTE 10

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 $32,977 and $154,441 of stock-based compensation expense for the three-month period ended June 30, 2017 and 2016, respectively, and $214,502 and $233,964 of stock-based compensation expense for the six-month period ended June 30, 2017, and 2016, respectively related to employee and board member stock options and common stock and warrants issued to nonemployees.  As of June 30, 2017, $156,190 of unrecognized compensation expense related to non-vested share-based awards remains to be recognized over a period of approximately four years.

 

Options and Warrants

 

The Company used the Black-Scholes option pricing model to estimate the grant-date fair value of option and warrant awards granted. The following assumptions were used for warrant awards during the six months ended June 30, 2017:

 

●

Expected Dividend Yield – because we do not currently pay dividends, the expected dividend yield is zero;

●

Expected Volatility in Stock Price – volatility based on our own 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.

 

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, 2017, there were 618,427 shares of common stock reserved for issuance under the Plan. In 2014, the Board adopted an additional stock option plan which provides for an additional 5,000,000 shares which are all available as of December 31, 2016. 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-month period ended June 30, 2017. The following table summarizes all stock option activity of the Company for the period.

 

			Number of Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Life  (Years)
Outstanding, December 31, 2016				9,418,271			$	0.16				4.43
Granted				—
Exercised				—
Expired				1,120,000
Outstanding, June 30, 2017				8,298,271			$	0.16				4.32
Exercisable, June 30, 2017				6,533,271			$	0.20				5.61

 

 

Warrants

 

Warrants are issued to employees for expenses and for compensation in lieu of cash as well as to third parties as payment for services and in conjunction with the issuance of common stock.  The fair value of each common stock warrant issued for services is estimated on the date of grant using the Black-Scholes option pricing model.

 

The weighted-average assumptions used in the option pricing model for stock warrant grants were as follows:

 

		2017
Expected Dividend Yield			0.00	%
Expected Volatility in Stock Price			152.67	%
Risk-Free Interest Rate			2.00	%
Expected Life of Stock Awards – Years			6.83

 

The following table represents the Company’s warrant activity for the six months ended June 30, 2017:

 

			Number of Shares				Weighted Average Grant Date Fair Value				Weighted Average Exercise Price				Weighted  Average  Remaining Contractual  Life  (Years)
Outstanding, December 31, 2016				16,122,332							$	0.10				6.10
Granted				1,182,503			$	0.14			$	0.14				6.46
Exercised				(200,000	)						$	0.05
Forfeited				(668,000	)						$	0.14
Expired				—
Outstanding, June 30, 2017				16,436,835							$	0.10				5.28
Exercisable, June 30, 2017				16,140,474							$	0.10				5.61

 

The Company issued 1,182,503 warrants for services during the six months ended June 30, 2017 at exercise prices from $0.10 to $0.17 per share, exercisable over a period of five to ten years from the grant date. All of the warrants with the exception of 362,219 vested immediately with the 362,219 warrants vesting one-eleventh per month over an eleven-month period. The total amount of the fair value of this grant was $50,000 and is recorded as noncash share-based compensation expense as vesting occurs. The fair value of the warrants was calculated as of the date of the grant utilizing the Black-Scholes option pricing model and assumptions as detailed above.

 

ITEM 2.

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

 

OVERVIEW

 

Vystar Corporation (“Vystar”, the “Company”, “we”, “us”, or “our”) is the creator and exclusive owner of the innovative technology to produce Vytex® Natural Rubber Latex (“NRL”). Our global multi-patented technology reduces antigenic and total protein in natural rubber latex products to virtually undetectable levels. Vytex NRL, our “ultra-low protein” natural rubber latex has been introduced throughout the worldwide marketplace that uses NRL or latex substitutes as a raw material for end products. Natural rubber latex or latex substitutes are used in an extensive range of products including balloons, textiles, footwear and clothing (threads), adhesives, foams (mattresses, pillows, mattress toppers, etc.), furniture (foam and adhesives), carpet, paints, coatings, protective equipment, sporting equipment, and, especially health care products such as condoms, surgical and exam gloves, among others. Our challenge has been that a manufacturer’s conversion from the use of standard latex or synthetic raw material to Vytex NRL involves a protracted sales cycle ranging from eighteen to thirty-six months. Additionally, in the past, our primary method of distribution was via toll manufacturing. We now have several licensing agreements in place for global distribution that have allowed us to focus on and transition to sales and marketing with a technical oversight.

 

 

Natural rubber latex is an agricultural product produced from the sap of the rubber tree, Hevea brasiliensis. According to the most recent data available and obtained on the International Rubber Study Group web site (www.rubberstudy.com) and dated January 6, 2015: the total world rubber demand increased at 1.8% and 4.1% in 2015 and 2016 respectively, growing below the long-term growth rate of 3.7% under the IMF Scenario to 29.1 million tonnes in 2015 and to 30.3 million tonnes in 2016.

 

World Natural Rubber (NR) demand increased by 3.1% in 2015 under the IMF Scenario and by 4.4% in 2016. The world total NR consumption was 12.3 million tonnes in 2015, 12.9 million tonnes in 2016 and is expected to increase to 16.5 million tonnes in 2023. World Synthetic Rubber (SR) demand was 16.8 million tonnes in 2015 and 17.5 million tonnes in 2016 under the IMF Scenario. In 2023, the demand for SR will be 21.5 million tonnes. The outlook for NR supply is positive, sufficient to meet the demand of the industry for all forecast years under all three scenarios. Almost 60% of global consumption is by the world’s tire manufacturing industry, with the remainder going into the ‘general rubber products’ sector; many thousands of different goods are manufactured by this sector, serving many industries, including transport, construction, health, mining, apparel, foam, etc.

 

Substantially all of the latex processors are located in Southeast Asia, India, Africa and Latin America and are owned by local groups or large multinational corporations. This future demand is awakening interest in other areas of the world where the climate is suitable, particularly in Guatemala, where focus now shifts to certifications from the Forestry Stewardship Council and Rainforest Alliance, as a specialty latex. In addition to the resurgence of Central and South America in natural rubber latex production, countries such as Vietnam and Cambodia have launched major efforts to meet the needs of the global liquid natural rubber latex market. Vietnam is now a major processor of our Vytex NRL and several trial runs of the specialty offerings discussed below that are in place for manufacturer trials and we now have two producers in Guatemala, one starting the trial phase.

 

Our initial product portfolio included Vytex NRL in high ammonia (HA) and low ammonia (LA) formulations. New specialized formulations are projected to come to market over the next year with trials in ultra-low ammonia, pre-vulcanized and low nitrosamine versions currently taking place. Vystar has used its technology to work with customers to solve production issues and provide them with a point of difference and guidance as research using Vytex has headed into directions previously thought to be off-limits to natural rubber latex. It appears to be the removal of the vast majority of the proteins, the carotenoids and the non-rubbers that affords Vytex NRL this opportunity.

 

Board of Directors Member and Research & Development Director Ranjit K. Matthan, Ph.D., revealed ongoing developments in the formulation of Vytex NRL with reduced or no ammonia and nitrosamines at the International Latex Conference (ILC) session titled “Advances in Environmentally Friendly Ultra Low Protein Natural Rubber Specialty Latices” on August 12, 2015. The significant advances in aluminum hydroxide-treated Vytex NRL properties and applications are potential game-changers for the issues of volatile organic content and nitrosamines for some critical latex products, such as balloons, catheters, condoms, and other medical devices, as well as enabling cleaner and more sustainable work environments. The expanded Vystar product grades make it applicable in a wider range of latex products with the advantage of improved environmental impact through reduced leachables/extractables. The advances deliver a simplified, sustainable, totally safe raw material that Vystar can offer for several applications without reservations about nitrosamines. Production scale up of all three newer versions of Vytex NRL is currently being targeted as well as sample fulfillment.

 

Recently at the 2017 Nuremberg Toy Show (Speilwarenmesse) Vytex NRL was a targeted product for manufacturers of balloons, masks, etc. On the main page of the European Balloons and Party Council web site is a Yahoo video still plus a recent press release that discusses the benefits of Vytex NRL in items such as balloons. As there is a new proposal for limits on protein content of balloons by virtue of an EN listing, Vytex has now gone in to full pre-vulcanized testing to start the sampling process in this very large European manufacturing market (Italy, Austria, Spain, etc.) for balloons and has already spread to areas in Central and South America.

 

Over the course of several years, our technical groups have presented technical papers of varying topics that still hold relevance. Vytex NRL is produced at the latex processor level and can be integrated into the current processing environments without additional capital equipment investment. The protein removal and modification process that leads to Vytex NRL allows manufacturers to lower manufacturing costs with the benefit of reduced protein levels. Reduced leaching times and resulting reductions in energy, water and material handling consumption can lead to realized cost savings.

 

Also, “Eco-Friendly Manufacturing of High Performance Latex using Ultra Low Antigenic Protein Latex” reviewed some of the learnings Vystar had made since commercializing Vytex NRL. Among these discoveries were: improved air and helium retention in balloons; reduced leaching needs for some dipped products; truer colors for dyed dipped products (such as balloons); and low latex odor in foams, which has now led to unique research into areas previously considered off-limits to NRL. Vystar published and presented a paper, “Further Development of Vytex® Natural Rubber Latex Leads to Strong Niche Market Advances”, that added additional learnings related to slow release (memory) foam formulations and other technical improvements helping customers solve their new product development challenges.

 

Vystar has transitioned from toll manufacturing agreements to licensing agreements that eliminate the need to maintain a costly infrastructure along with the other investment and regulatory compliance costs to develop and operate a processing or manufacturing facility. All of these costs are or will be borne by our manufacturing and distribution contractors and/or customers. This means we must show the NRL producers and product manufacturers the economic value proposition of including Vytex NRL in their product lines, hence the technical paper presentations we have made and continue to make. In addition, as an all-natural raw material, Vytex NRL puts the main component in gloves and other products back in the environmentally friendly arena.

 

 

Increased interest in the exam glove arena has put Vystar in the enviable position of needing glove manufacturers to work with to handle the expected transition of healthcare companies, clinics and non-medical uses. Vystar is currently working with an American manufacturing facility to handle some of these needs as they prepare for production start-up. Other glove manufacturers are also being sought.

 

To implement our licensing model, in March 2010 we signed a licensing agreement with Pica de Hule Natural, a division of Grupo Agroindustrial de Occidente (“Occidente”), located in Guatemala. Occidente is the largest processor of natural rubber latex in Latin America and the largest exporter serving more than 15 countries. Under the agreement, Occidente will manufacture, sell and market Vytex NRL throughout Latin America as well as supply Vytex NRL to North America and Europe. This agreement was continued in 2016 for an additional 5 years.

 

In October 2010, we signed a second licensing agreement with KA Prevulcanized Latex (KAPVL) to manufacture and sell Vytex NRL in the SAARC region which includes India, Pakistan, Sri Lanka, Bangladesh, Bhutan and Nepal. India is the second largest consumer of concentrated latex behind China. In 2014, this agreement ended and we did not renew.

 

In addition, in January 2009, we entered into a Distribution Agreement with Centrotrade Minerals & Metals, US and Centrotrade Deutschland, GmbH, Germany, a leading global distributor of latex raw materials, to create a worldwide distribution network that will further enhance our ability to cost effectively reach and service manufacturer customers in these key manufacturing areas. This provides an expansive distribution network that facilitates both the licensing and toll manufacturing models and can assist with various processors in taking their products to market. On December 19, 2012, we amended our agreement with Centrotrade to expand Vytex NRL distribution rights to the world’s largest NRL consuming markets in Southeast Asia, specifically Malaysia and Thailand. Under this new license agreement, Centrotrade controls production scheduling of Vytex NRL, inventory in Thailand, sales, pricing and customer financing, while Vystar will focus on marketing, customized product development, as noted above, and support activities. Vystar currently has no exclusive areas under contract as RCMA, a Dutch based distributor was added in 2016.

 

The paper entitled, “The Non-Enzymatic Deproteinization of Natural Rubber Latex (DPNRL) Enabling the Greater Versatility in End Product Applications” discussed improvements that extend beyond the ultra-low allergenicity of the DPNRL and include improved color, absence of rubber odor, and improved physicochemical attributes. Improved air and helium retentions results were reported. The potential to extend applications into other non-conventional areas other than latex end products was discussed and we are currently in the retail test market stages for the United States based manufacturing of mattresses, pillows and toppers to key furniture stores and buying groups, primarily in the Northeastern United States and signed a 5-year renewable agreement in January 2015 with Nature’s Home Solutions (NHS) to exclusively distribute these products in the United States. In September 2016, the Vystar Board of Directors voted to end the January 2015 NHS agreement and replace it with a global exclusive for foam manufactured with Vytex and sold into the home furnishings industry. This change reflects the global nature of the mattress, topper and pillow businesses, the need for local warehousing, and access to container loads of foam cores and pillows for domestic, European and Asian manufacturers.

 

Samples have been presented to the manufacturers and feedback has been very positive with names such as Gold Bond, King Coil (Natura and Laura Ashley) and SpringAir (Nature’s Rest) adding Vytex to their current offerings. A similar trial occurred in October 2016 in Thailand focusing on specific densities and pillows, and a meeting with a Belgian foam maker using a unique drying concept occurred in May 2016 with discussions ongoing. In addition, working with NHS and a large Vietnamese foam manufacturer, Lien A, the group attended the International Sleep Products Association (ISPA) in Orlando in March 2016 a select group attended the ISPA technical show in March 2017 in Tampa. The significance of ISPA is the focus on components for use with major mattress and pillow manufacturers, which takes Vytex foam to an additional audience. NHS sees steady increased exponential growth throughout the remainder of 2017 and the companies, combined with Lien A, have structured the needed supply chain.

 

Pricing of materials in the rubber and latex industries continues to fluctuate. Prices of centrifuged latex, thus Vytex, have risen throughout 2016 and in to early 2017 due to various factors such as floods in southern Thailand, removal of older tress and replanting which is a seven-year process, newer plantations coming online, etc.

 

Working through distribution with global manufacturers, Vystar secured a commitment from a major manufacturer of dielectric gloves qualifying Vytex to run on a full production line with potential to move to other lines and more of their international locations. Licensing discussions began in November 2016 and has now expanded to full container shipments with additional manufacturing plants set to come on throughout 2017. We are also expanding our usage of Vytex with a worldwide manufacturer of cold seal adhesives to complement the current business in sports shoes and starting a re-trial with a large domestic adhesive company in second quarter 2017.

 

With the introduction of several new versions of Vytex at the ILC meeting mid-2015, we secured several trials with toy manufacturers arena who desire the lowest levels of nitrosamine and protein per European standards. This affects European balloon manufacturers as well as those selling balloons in the European markets. Also, as an alternative raw material has ceased production, a catheter manufacturer is now trialing Vytex for their internal balloons with results now being evaluated. Vystar has also progressed well in pilot line trials with a major women’s apparel retailer.

 

A small trial is commencing with a start-up American manufacturer of exam gloves, using Vytex, as requested by a major outpatient provider of services. The dipping process for the exam gloves will progress in the next months to provide samples for early evaluation with center-wide trials to start upon approval. As the USFDA 510k allowance for an exam glove containing Vytex is for an un-powdered glove, we are well positioned to manage expectations for those requiring an exam glove without powder with a lower antigenic protein content with two trials currently in place.

 

 

RESULTS OF OPERATIONS

 

Comparison of the Three Months Ended June 30, 2017 with the Three Months Ended June 30, 2016

 

		Three Months Ended June 30,																								Continuing								Consolidated
		2017												2016												$ change				% change				$ change				% change
		Continuing				Discontinued				Consolidated				Continuing				Discontinued				Consolidated
Revenue, net		$	3,087			$	—			$	3,087			$	2,793			$	26,957			$	29,750			$	294				10.5	%		$	(26,663	)			(89.6	%)
Cost of revenue			6,610				—				6,610				6,305				3,889				10,194				(305	)			(4.8	%)			3,584				35.2	%
Gross margin			(3,523	)			—				(3,523	)			(3,512	)			23,068				19,556				(11	)			0.3	%			(23,079	)			(118.0	%)
Operating Expenses
General and administrative			254,481				1,330				255,811				316,638				(25,777	)			290,861				(62,157	)			(19.6	%)			(35,050	)			(12.1	%)
Total operating expenses			254,481				1,330				255,811				316,638				(25,777	)			290,861				(62,157	)			(19.6	%)			(35,050	)			(12.1	%)
Profit (Loss) from Operations			(258,004	)			(1,330	)			(259,334	)			(320,150	)			48,845				(271,305	)			62,146				19.4	%			11,971				4.4	%
Interest expense			(42,728	)			—				(42,728	)			(61,805	)			4,315				(57,490	)			19,077				(30.9	%)			14,762				(25.7	%)
Total Other Income/Expense			(42,728	)			—				(42,728	)			(61,805	)			4,315				(57,490	)			19,077				30.9	%			14,762				25.7	%
Net loss		$	(300,732	)		$	(1,330	)		$	(302,062	)		$	(381,955	)		$	53,160			$	(328,795	)		$	81,223				21.3	%		$	26,733				8.1	%

 

Revenues

 

Revenues for the three months ended June 30, 2017 and 2016 from the Company were $3,087 and $29,750, respectively, for a decrease of $26,663 or 89.6%. The decrease in revenues from operations was due to the elimination of the Kiron division. Revenues for the three months ended June 30, 2017 and 2016 from the Company’s continuing operations were $3,087 and $2,793, respectively, for an increase of $294 or 10.5%.  The increase in revenues from continuing operations was due to increased Vytex sales in the industrial glove market. 

 

For the Company, gross margin fell from $19,556 for the period ended June 30, 2016 to a gross loss of $3,523 for the period ended June 30, 2017, a decrease of $23,079 or 118.0%.  Gross margin from continuing operations for the three months ended June 30, 2017 and 2016 was ($3,523) and ($3,512), respectively, for a decrease of $11 or 0.3%.  Cost of revenue for the three months ended June 30, 2017 and 2016 was $6,610 and $6,305 respectively a decrease of $305 or 4.8%.

 

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 $255,811 and $290,861 for the three months ended June 30, 2017 and 2016, respectively, for a decrease of $35,050 or 12.1%. This was primarily the result of a reduction in third-party contracted expenses. The Company’s operating expenses from continuing operations were $254,481 and $316,638 for the three months ended June 30, 2017 and 2016, respectively, for a decrease of $62,157 or 19.6%.

 

Other Income (Expense)

 

Other income (expense) for the three months ended June 30, 2017 consisted of interest expense of $42,728. This compares to net interest expense of $57,490 for the three months ended June 30, 2016. The decrease in interest expense for the quarter ended June 30, 2017 versus the same quarter in 2016 was attributable to reduction in the interest expense on the outstanding Shareholder Notes.

 

 

Net Loss

 

Net loss was $302,062 and $328,795 for the three months ended June 30, 2017 and 2016, respectively, a decrease of $26,733 or 8.1% in the net loss. The smaller net loss the Company experienced in the quarter ended June 30, 2017 versus the same period in 2016 was primarily attributable to a reduction in third-party contract services.

 

Comparison of the Six Months Ended June 30, 2017 with the Six Months Ended June 30, 2016

 

		Six Months Ended June 30,																								Continuing								Consolidated
		2017												2016												$ change				% change				$ change				% change
		Continuing				Discontinued				Consolidated				Continuing				Discontinued				Consolidated
Revenue, net		$	6,323			$	130			$	6,453			$	7,623			$	76,451			$	84,074			$	(1,300	)			(17.1	%)		$	(77,621	)			(92.3	%)
Cost of revenue			10,220				20				10,240				12,973				33,860				46,833				2,753				21.2	%			36,593				78.1	%
Gross margin			(3,897	)			110				(3,787	)			(5,350	)			42,591				37,241				1,453				(27.2	%)			(41,028	)			(110.2	%)
Operating Expenses
General and administrative			531,783				4,919				536,702				631,591				(29,858	)			601,733				(99,808	)			(15.8	%)			(65,031	)			(10.8	%)
Total operating expenses			531,783				4,919				536,702				631,591				(29,858	)			601,733				(99,808	)			(15.8	%)			(65,031	)			(10.8	%)
Profit (Loss) from Operations			(535,680	)			(4,809	)			(540,489	)			(636,941	)			72,449				(564,492	)			101,261				15.9	%			24,003				4.3	%
Other income			—				—				—				36				—				36			$	(36	)			(100.0	%)		$	(36	)			(100.0	%)
Interest expense			(85,233	)			(38	)			(85,271	)			(101,454	)			2,595				(98,859	)			16,221				(16.0	%)			13,588				(13.7	%)
Total Other Income/Expense			(85,233	)			(38	)			(85,271	)			(101,418	)			2,595				(98,823	)			16,185				16.0	%			13,552				13.7	%
Net loss			(620,913	)		$	(4,847	)		$	(625,760	)		$	(738,359	)		$	75,044			$	(663,315	)		$	117,446				15.9	%		$	37,555				5.7	%

 

Revenues

 

Revenues for the six months ended June 30, 2017 and 2016 from the Company were $6,453 and $84,074 respectively, for a decrease of $77,621 or 92.3%. The decrease in revenues from operations was due to the closing of Kiron. Revenues for the six months ended June 30, 2017 and 2016 from the Company’s continuing operations were $6,323 and $7,623 respectively, for a decrease of $1,300 or 17.1%.  The decrease in revenues from continuing operations was due to the drop in raw latex prices and the resultant drop in Vytex licensing fees.  

 

For the Company, gross margin fell from $37,421 for the period ended June 30, 2016 to a gross loss of $3,787 for the period ended June 30, 2017, a decrease of $41,028 or 110.2%.  Gross margin from continuing operations for the three months ended June 30, 2017 and 2016 was ($3,897) and ($5,350) respectively, for a decrease of $1,453 or 27.2%.  Cost of revenue for the three months ended June 30, 2017 and 2016 was $10,220 and $12,973 respectively, a decrease of $2,753 or 21.2%.

 

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 $536,702 and $601,733 for the six months ended June 30, 2017 and 2016, respectively, for a decrease of $65,031 or 10.8%. This was primarily the result of the reduction in third-party contracted services. The Company’s operating expenses from continuing operations were $531,783 and $631,591 for the six months ended June 30, 2017 and 2016, respectively, for a decrease of $99,808 or 15.8%.

 

 

Other Income (Expense)

 

Other income (expense) for the six months ended June 30, 2017 consisted of interest expense of $85,271. This compares to interest expense of $98,859 for the six months ended June 30, 2016. The decrease in interest expense for the period ended June 30, 2017 versus the same period in 2016 was attributable to a decrease in interest expense associated with outstanding Shareholder Notes.

 

Net Loss

 

Net loss was $620,760 and $663,315 for the six months ended June 30, 2017 and 2016, respectively, a decrease of $37,555 or 5.7% in the net loss. The smaller net loss the Company experienced in the period ended June 30, 2017 versus the same period in 2016 was primarily a reduction in third-party contract services.

 

LIQUIDITY AND CAPITAL RESOURCES

 

The Company’s financial statements are prepared using the accrual method of accounting in accordance with 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 its inception.  At June 30, 2017, the Company had cash of $66,054 and a deficit in working capital of $2,737,758.  Further, at June 30, 2017, the accumulated deficit amounted to $27,440,409.  As a result of the Company’s history of losses and financial condition, there is substantial doubt about the ability of the Company to continue as a going concern.

 

A successful transition to attaining profitable operations is dependent upon obtaining sufficient financing to fund the Company’s planned expenses and achieving a level of revenue adequate to support the Company’s cost structure. Management plans to finance future operations through the use of cash on hand, increased revenue from Vytex division license fees, our credit facility, stock warrant exercises from existing shareholders, raising capital through private placements of capital stock and debt.

 

The Company’s future expenditures will depend on numerous factors, including: the rate at which the Company can introduce and license Vytex NRL to manufacturers; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; market acceptance of the Company’s products and services; and competing technological developments. 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.

 

There can be no assurances that the Company will be able to achieve its projected level of revenue in 2017 and beyond. If the Company is unable to achieve its projected revenue and is not able to obtain alternate additional financing of equity or debt, the Company would need to significantly reorient its operations during 2017, which could have a material adverse effect on the Company’s ability to achieve its business objectives and as a result may require the Company to file for bankruptcy or cease operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities that might be necessary should the Company be forced to take any such actions.

 

Sources and Uses of Cash

 

For the six months ended June 30, 2017 and 2016, net cash used in operations was $344,728 and $372,769 respectively.  The negative cash flow for the six months ended June 30, 2017 resulted primarily from the net loss of $625,760, offset by non-cash charges related to non-cash share-based compensation expense of $214,502, and a decrease in accounts receivable of $15,589, and an increase in accrued expenses of $36,331. The negative cash flow for the six months ended June 30, 2016 resulted primarily from the net loss of $663,315 and a decrease in allowance for uncollectible accounts receivable of $42,868 offset by non-cash charges related to non-cash share-based compensation expense of $233,964 and prepaid expenses of $154,309.

 

For the six months ended June 30, 2017 and 2016, the company had no investing activity.

 

Net cash provided by financing activities for the six months ended June 30, 2017 was $374,500 from the sale of common stock. Net cash provided by financing activities for the six months ended June 30, 2016 was $570,000 in proceeds from the sale of common stock and $53,500 from the exercise of warrants.

 

Off-Balance Sheet Arrangements

 

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

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

 

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

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

None

 

ITEM 4.

CONTROLS AND PROCEDURES

 

 (A)     Evaluation of disclosure controls and procedures

 

Our management, including our principal executive and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2017.  Our disclosure controls and procedures are designed to provide reasonable assurance that the information required to be disclosed in this quarterly report on Form 10-Q has been appropriately recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and principal financial officer, to allow timely decisions regarding required disclosure.  Based on that evaluation, our principal executive officer and principal financial officer has concluded that our disclosure controls and procedures are effective to the reasonable assurance level.

 

(B)     Changes in internal control over financial reporting

 

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

 

There were no changes in our internal control over financial reporting that occurred during the first six months of 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II.  OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

 

None

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

Set forth below is information regarding shares of common stock, warrants and options to purchase common stock issued by the Company for the six months ended June 30, 2017, that were not registered under the Securities Act of 1933, as amended (the “Securities Act”). Also included is the consideration, if any, received by the Company for such shares, warrants and options and information relating to the section of the Securities Act, or rule of the Securities and Exchange Commission, under which exemption from registration was claimed.

 

(a)       Common Stock Financings

 

From December 31, 2016 through June 30, 2017, the Company issued 7,490,000 shares of common stock at $0.05 per share for $374,500. The Company also issued 118,919 shares of common stock as a result of a non-cash warrant exercise and 1,109,406 shares of common stock as a result of a shareholder note and accrued interest conversion.

 

(b)       Stock Option Grants

 

From December 31, 2016 through June 30, 2017, the Company did not grant any stock options.

 

(c)      Application of Securities Laws and Other Matters

 

No underwriters were involved in the foregoing sales of securities. The securities described in section (a) of this Item 2 were issued to investors in reliance upon the exemption from the registration requirements of the Securities Act, as set forth in Section 4(2) under the Securities Act and Regulation D promulgated thereunder, as applicable, relative to sales by an issuer not involving any public offering, to the extent an exemption from such registration was required.

 

 

All of the foregoing securities are deemed restricted securities for purposes of the Securities Act. All certificates representing the issued shares of common stock, warrants and options described in this Item 2 included appropriate legends setting forth that the securities had not been registered and the applicable restrictions on transfer.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

 None

 

ITEM 4.

MINE SAFETY DISCLOSURES

 

 Not applicable

 

ITEM 5.

OTHER INFORMATION

 

 None

 

ITEM 6.

EXHIBITS

 

Exhibit Index

 

Number		Description
31.1 *		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 *		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 *		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	VYSTAR CORPORATION
Date:  August 14, 2017	By:	/s/ William R. Doyle
		William R. Doyle
		President, Chief Executive Officer, Chief Financial Officer and Director