Vystar Corp - FORM 10-Q

Attached files

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EX-32 - Vystar Corp	ex32.htm
EX-31 - Vystar Corp	ex31.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2021

[ ]	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.)

725 Southbridge St

Worcester, MA 01610

(Address of Principal Executive Offices, Zip Code)

(508) 791-9114

(Registrant’s telephone number including area code)

Securities registered pursuant to Section 12(b) of the Exchange Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
NONE		NONE		NONE

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES [X] NO [ ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES [X] 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 [X]
(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 [X]

Class		Outstanding as of May 17, 2021
Preferred Stock, $0.0001 par value per share		8,698 shares
Common Stock, $0.0001 par value per share		1,264,072,966 shares

INFORMATION RELATING TO FORWARD-LOOKING STATEMENTS

In addition to historical information, this Form 10-Q contains statements relating to our future results (including certain projections and business trends) that are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and are subject to the “safe harbor” created by those sections. The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the financial statements and the related notes thereto included in this Quarterly Report on Form 10-Q (this “Report”). This Report contains certain forward-looking statements and the Company’s future operating results could differ materially from those discussed herein. Our disclosure and analysis included in this Report concerning our operations, cash flows and financial position, including, in particular, the likelihood of our success in expanding our business and raising debt and capital securities include forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “expect”, “anticipate”, “intend”, “plan”, “believe”, “estimate”, “may”, “project”, “will likely result”, and similar expressions are intended to identify forward-looking statements. Such forward-looking statements are subject to certain risks, uncertainties, and assumptions, including prevailing market conditions and are more fully described under “Part I, Item 1A - Risk Factors” of our Form 10-K for the year ended December 31, 2020. 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, 2020 may cause actual results to differ materially from those indicated by our forward-looking statements.

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

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

VYSTAR CORPORATION

FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2021

INDEX

Part I. Financial Information

Item 1.	Financial Statements:

	Condensed Consolidated Balance Sheets at March 31, 2021 (unaudited) and December 31, 2020	4

	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2021 (unaudited) and 2020 (unaudited)	5

	Condensed Consolidated Statements of Stockholders’ Deficit for the Three Months Ended March 31, 2021 (unaudited) and 2020 (unaudited)	6-7

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2021 (unaudited) and 2020 (unaudited)	8

	Notes to Condensed Consolidated Financial Statements (unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34

Item 4.	Controls and Procedures	34

Part II. Other Information

Item 1.	Legal Proceedings	36

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 3.	Defaults Upon Senior Securities	36

Item 4.	Mine Safety Disclosures	36

Item 5.	Other Information	36

Item 6.	Exhibits	36

SIGNATURES		37

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VYSTAR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

	March 31,			December 31,
	2021			2020
	(Unaudited)
ASSETS
Current assets:
Cash	$	1,195,859		$	620,539
Accounts receivable		432,110			236,106
Inventories		5,795,668			6,546,481
Investments - equity securities, at fair value		141,629			127,910
Prepaid expenses and other		685,204			565,550
Deferred commission costs		98,723			106,954

Total current assets		8,349,193			8,203,540

Property and equipment, net		1,550,878			1,631,651

Operating lease right-of-use assets		8,894,378			9,199,730

Finance lease right-of-use assets, net		684,849			730,761

Other assets:
Intangible assets, net		1,742,180			1,835,987
Goodwill		460,301			460,301
Inventories, long-term		369,936			438,161
Deferred commission costs, net of current portion		112,614			134,213
Other		26,253			26,253

Total other assets		2,711,284			2,894,915

Total assets	$	22,190,582		$	22,660,597

LIABILITIES AND STOCKHOLDERS’ DEFICIT

Current liabilities:
Accounts payable	$	3,250,910		$	4,830,143
Accrued expenses		2,222,337			3,422,796
Stock subscription payable		1,578,494			2,589,556
Operating lease liabilities - current maturities		1,125,000			1,095,500
Finance lease liabilities - current maturities		159,000			172,900
Shareholder, convertible and contingently convertible notes payable and accrued interest - current maturities		1,057,957			1,046,059
Related party debt - current maturities		323,000			1,258,000
Unearned revenue		1,295,995			1,904,256
Derivative liabilities		1,895,700			1,766,700

Total current liabilities		12,908,393			18,085,910

Long-term liabilities:
Term notes		1,402,900			1,402,900
Operating lease liabilities, net of current maturities		6,212,490			6,515,103
Finance lease liabilities, net of current maturities		548,154			577,192
Unearned revenue, net of current maturities		442,141			523,515
Related party debt, net of current maturities and debt discount		3,694,996			2,314,934

Total long-term liabilities		12,300,681			11,333,644

Total liabilities		25,209,074			29,419,554

Stockholders’ deficit:
Convertible preferred stock, $0.0001 par value 15,000,000 shares authorized; 8,698 and 13,698 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively (liquidation preference of $68,008 and $100,698 at March 31, 2021 and December 31, 2020 , respectively)		1			1
Common stock, $0.0001 par value, 1,500,000,000 shares authorized; 1,264,102,966 and 1,199,931,717 shares issued at March 31, 2021 and December 31, 2020, respectively, and 1,264,072,966 and 1,199,901,717 shares outstanding at March 31, 2021 and December 31, 2020, respectively		126,408			119,990
Additional paid-in capital		42,996,326			41,233,471
Accumulated deficit		(47,795,057	)		(48,713,184	)
Common stock in treasury, at cost; 30,000 shares		(30	)		(30	)

Total Vystar stockholders’ deficit		(4,672,352	)		(7,359,752	)

Noncontrolling interest		1,653,860			600,795

Total stockholders’ deficit		(3,018,492	)		(6,758,957	)

Total liabilities and stockholders’ deficit	$	22,190,582		$	22,660,597

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

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended
	March 31,
	2021			2020

Revenue	$	12,868,119		$	5,932,238

Cost of revenue		6,076,840			2,932,614

Gross profit		6,791,279			2,999,624

Operating expenses:
Salaries, wages and benefits		1,949,139			1,454,074
Share-based compensation		204,696			154,368
Agent fees		1,251,873			-
Professional fees		20,183			292,696
Advertising		865,178			446,695
Rent		316,615			293,171
Service charges		224,516			183,577
Depreciation and amortization		192,009			243,923
Other operating		796,413			781,673

Total operating expenses		5,820,622			3,850,177

Operating income (loss)		970,657			(850,553	)

Other income (expense):
Gain on settlement of debt, net		1,247,635			-
Interest expense, net		(175,847	)		(604,714	)
Change in fair value of derivative liabilities		(129,000	)		-
Other income, net		57,747			(23,056	)

Total other expense, net		1,000,535			(627,770	)

Net income (loss)		1,971,192			(1,478,323	)

Net loss (income) attributable to noncontrolling interest		(1,053,065	)		110,946

Net income (loss) attributable to Vystar	$	918,127		$	(1,367,377	)

Income (loss) per share:
Basic	$	0.00		$	(0.00	)
Diluted	$	0.00		$	(0.00	)

Weighted average number of common shares outstanding:
Basic		1,241,705,734			1,105,732,080
Diluted		1,241,905,734			1,105,732,080

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

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE THREE MONTHS ENDED MARCH 31, 2021

(Unaudited)

	Attributable to Vystar
	Number					Number										Number						Total
	of					of				Additional						of						Vystar					Total
	Preferred			Preferred		Common		Common		Paid-in			Accumulated			Treasury			Treasury			Stockholders’			Noncontrolling		Stockholders’
	Shares			Stock		Shares		Stock		Capital			Deficit			Shares			Stock			Deficit			Interest		Deficit

Ending balance December 31, 2020		13,698		$	1		1,199,931,717	$	119,990	$	41,233,471		$	(48,713,184	)		(30,000	)	$	(30	)	$	(7,359,752	)	$	600,795	$	(6,758,957	)

Common stock issued for services							49,371,733		4,938		1,399,154												1,404,092					1,404,092

Common stock issued for settlement of related party payable							11,364,904		1,136		334,129												335,265					335,265

Share based compensation - options											4,916												4,916					4,916

Common stock issued for cash received in prior period							1,666,667		167		24,833												25,000					25,000

Preferred stock conversion		(5,000	)				1,767,945		177		(177	)											-					-

Net income		-			-		-		-		-			918,127			-			-			918,127			1,053,065		1,971,192

Ending balance March 31, 2021		8,698		$	1		1,264,102,966	$	126,408	$	42,996,326		$	(47,795,057	)		(30,000	)	$	(30	)	$	(4,672,352	)	$	1,653,860	$	(3,018,492	)

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

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

FOR THE THREE MONTHS ENDED MARCH 31, 2020

(Unaudited)

	Attributable to Vystar
	Number				Number									Number						Total
	of				of				Additional					of						Vystar						Total
	Preferred		Preferred		Common		Common		Paid-in		Accumulated			Treasury			Treasury			Stockholders’			Noncontrolling			Stockholders’
	Shares		Stock		Shares		Stock		Capital		Deficit			Shares			Stock			Deficit			Interest			Deficit

Ending balance December 31, 2019		13,828	$	1		1,105,762,080	$	110,573	$	38,436,607	$	(41,104,967	)		(30,000	)	$	(30	)	$	(2,557,816	)	$	1,325,272		$	(1,232,544	)

Share based compensation - options										5,562											5,562						5,562

Net loss		-		-		-		-		-		(1,367,377	)		-			-			(1,367,377	)		(110,946	)		(1,478,323	)

Ending balance March 31, 2020		13,828	$	1		1,105,762,080	$	110,573	$	38,442,169	$	(42,472,344	)		(30,000	)	$	(30	)	$	(3,919,631	)	$	1,214,326		$	(2,705,305	)

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

VYSTAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three Months Ended
	March 31,
	2021			2020
Cash flows from operating activities:
Net income (loss)	$	1,971,192		$	(1,478,323	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Gain on settlement of debt, net		(1,247,635	)		-
Share-based compensation		204,696			154,368
Depreciation		96,019			139,684
Bad debts		3,245			5,317
Amortization of intangible assets		95,990			104,239
Noncash lease expense		78,151			32,166
Unamortized term debt issuance costs		-			(14,208	)
Amortization of debt discount		4,667			315,875
Change in fair value of derivative liabilities		129,000			-
Gain on sale of property and equipment		(112	)		-
Net unrealized (gain) loss on available-for-sale investments		(13,719	)		50,422
(Increase) decrease in assets:
Accounts receivable		(199,249	)		(6,946	)
Inventories		819,038			242,971
Prepaid expenses and other		98,596			291,504
Deferred commission costs		29,830			10,087
Increase (decrease) in liabilities:
Accounts payable		(1,399,233	)		278,065
Accrued expenses and interest payable		(1,143,166	)		(289,705	)
Unearned revenue		(689,635	)		(26,306	)

Net cash used in operating activities		(1,162,325	)		(190,790	)

Cash flows from investing activities:
Acquisition of property and equipment		(16,434	)		-
Proceeds from the sale of property and equipment		1,300			-
Patents and trademark fees		(2,183	)		(3,683	)

Net cash used in investing activities		(17,317	)		(3,683	)

Cash flows from financing activities:
Net repayments on line of credit		-			(249,977	)
Proceeds from issuance of term debt		1,402,900			808,500
Repayment of term debt		-			(40,852	)
Repayment of finance lease obligations		(42,938	)		(42,462	)
Proceeds from the issuance of notes - related parties		395,000			50,000

Net cash provided by financing activities		1,754,962			525,209

Net increase in cash		575,320			330,736

Cash - beginning of period		620,539			72,355

Cash - end of period	$	1,195,859		$	403,091

Cash paid during the period for:
Interest	$	113,912		$	224,433

Non-cash transactions:
Common stock issued for accrued compensation	$	1,404,092		$	-
Common stock issued for settlement of related party payable		335,265			-
Prepaid expenses with common stock		291,000			-
Common stock issued for cash received in prior period		25,000			-
Common stock issued for preferred stock		177			-

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

VYSTAR CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - DESCRIPTION OF BUSINESS

Nature of Business

Vystar Corporation (“Vystar”, the “Company”, “we,” “us,” or “our”) is based in Worcester, Massachusetts. The Company uses patented technology to produces a line of innovative air purifiers, which destroy viruses and bacteria through the use of ultraviolet light. Vystar is also the creator and exclusive owner to produce Vytex^® Natural Rubber Latex (“NRL”) currently being used primarily in various bedding products. In addition, Vystar has a majority ownership in Murida Furniture Co., Inc. dba Rotmans Furniture (“Rotmans”), one of the largest independent furniture retailers in the U.S.

NOTE 2 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The condensed consolidated financial statements of the Company and the accompanying notes included in this Quarterly Report on Form 10-Q are unaudited. In the opinion of management, all adjustments necessary for the fair presentation of the condensed consolidated financial statements have been included. Such adjustments are of a normal, recurring nature. The condensed consolidated financial statements, and the accompanying notes, are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and do not contain certain information included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. Therefore, the interim condensed consolidated financial statements should be read in conjunction with that Annual Report on Form 10-K.

The Company has evaluated subsequent events through the date of the filing of its Form 10-Q with the Securities and Exchange Commission. Other than those events disclosed in Note 18, the Company is not aware of any other significant events that occurred subsequent to the balance sheet date but prior to the filing of this report that would have a material impact on the Company’s financial statements.

Basis of Consolidation

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned or controlled operating subsidiaries. All significant intercompany accounts and transactions have been eliminated.

COVID-19

In December 2019, a novel coronavirus (“COVID-19”) emerged and has subsequently spread worldwide. The World Health Organization declared COVID-19 a pandemic resulting in federal, state, and local governments mandating various restrictions, including travel restrictions, restrictions on public gatherings, stay at home orders and advisories and quarantining of people who may have been exposed to the virus. On March 24, 2020, Massachusetts required all non-essential businesses to close their physical workplaces. As a result, the Rotmans showroom, offices and warehouse temporarily closed. During that time, associates worked remotely where possible. The Company reopened on June 10, 2020 and continues to monitor developments, including government requirements and recommendations.

The COVID-19 pandemic has caused, among other things, interruptions to our supply chains and suppliers, including problems with inventory availability with price volatility and higher cost of products and international freight due to the high demand of products and low supply for an unpredictable period of time.

The pandemic continues to cause economic disruption. Although our showroom has reopened, some business segments remain closed or are operating on a reduced scale. The COVID-19 pandemic is complex and continues to evolve with sporadic resurgences, new virus variants and the vaccine rollout. We cannot reasonably estimate the duration of COVID-19 and its impact on Vystar. Accordingly, the estimates and assumptions made as of March 31, 2021 could change in subsequent interim reports, and it is reasonably possible that such changes could be significant (although the potential effects cannot be measured at this time).

Segment Reporting

Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions on how to allocate resources and assess performance. The Company’s chief operating decision maker is the chief executive officer. The Company and the chief executive officer view the Company’s operations and manage its business as one reportable segment with different operating segments.

Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying disclosures. Significant estimates made by management include, among others, allowance for obsolete inventory, the allocation of purchase price related to acquisitions, the recoverability of long-lived assets, valuation and impairment of intangible assets, fair values of right of use assets and lease liabilities, valuation of derivative liabilities, share-based compensation and other equity issuances. Although these estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future, actual results could differ from these estimates.

Fair Value of Financial Instruments

The Company’s financial instruments consist principally of cash, accounts receivable, investments - equity securities, accounts payable, accrued expenses and interest payable, shareholder notes payable, long-term debt and unearned revenue. The carrying values of all the Company’s financial instruments approximate or equal fair value because of their short maturities and market interest rates or, in the case of equity securities, being stated at fair value.

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

Valuation inputs are classified in the following hierarchy:

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

Highest priority is given to Level 1 inputs and the lowest priority to Level 3 inputs. Acceptable valuation techniques include the market approach, income approach, and cost approach. In some cases, more than one valuation technique is used. The derivative liabilities were recognized at fair value on a recurring basis through the date of the settlement and March 31, 2021 and are level 3 measurements. There have been no transfers between levels during the three months ended March 31, 2021.

Acquisitions

Amounts paid for acquisitions are allocated to the assets acquired and liabilities assumed based on their estimated fair value at the date of acquisition. The fair value of identifiable intangible assets is based on valuations that use information and assumptions provided by management. Identifiable intangible assets with finite lives are amortized over their useful lives. Acquisition-related costs, including, legal, accounting, and other costs, are capitalized in asset acquisitions and for business combinations are expensed in the periods in which the costs are incurred. The results of operations of acquired assets are included in the financial statements from the acquisition date.

Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents include all liquid investments with a maturity date of less than three months when purchased. Cash equivalents also include amounts due from third-party financial institutions for credit and debit card transactions which typically settle within five days. Restricted cash represents cash balances restricted as to withdrawal or use and are included in prepaid expenses and other on the condensed consolidated balance sheets.

Accounts Receivable

Accounts receivable are stated at the amount management expects to collect from outstanding balances. The Company routinely sells, without recourse, trade receivables resulting from retail furniture sales to two financial institutions at an average service charge of 1% in 2021. Amounts sold during the first quarter of 2021 were approximately $2,717,000. Retail furniture receivables retained by the Company are generally collateralized by the merchandise sold, represent valid claims against debtors for sales arising on or before the balance sheet date and are reduced to their estimated net realizable value. In addition, the Company grants credit to Vystar customers without requiring collateral. The amount of accounting loss for which Vystar is at risk in these unsecured accounts receivable is limited to their carrying value. Management provides for uncollectible amounts through a charge to earnings and a credit to an allowance for doubtful accounts based upon its assessment of the current status of individual accounts. Balances that are still outstanding after management has performed reasonable collection efforts are written off through a charge to the allowance and a credit to accounts receivable. As of March 31, 2021 and December 31, 2020, the Company considers accounts receivable to be fully collectible and no allowance for doubtful accounts was recorded.

Inventories

Inventories include those costs directly attributable to the product before sale. Inventories consist primarily of finished goods of furniture, mattresses, RxAir purifier units, foam toppers and pillows and are carried at net realizable value, which is defined as selling price less cost of completion, disposal and transportation. The Company evaluates the need to record write-downs for inventory on a regular basis. Appropriate consideration is given to obsolescence, slow-moving and other factors in evaluating net realizable values. Inventories not expected to be sold within 12 months are classified as long-term.

Prepaid Expenses and Other

Prepaid expenses and other include restricted cash, amounts related to prepaid insurance policies, which are expensed on a straight-line basis over the life of the underlying policy, and other expenses.

Investments - Equity Securities

Marketable equity securities have been categorized as available-for-sale and, as a result, are stated at fair value. Unrealized gains and losses are reflected in the statement of operations. The Company periodically reviews the available-for-sale securities for other than temporary declines in fair value below cost and more frequently when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. As of March 31, 2021, the Company believes the cost of the available-for-sale securities was recoverable in all material respects.

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation is provided over the estimated useful lives of the assets, generally 5 to 10 years, using straight-line and accelerated methods.

Expenditures for major renewals and betterments are capitalized, while routine repairs and maintenance are expensed as incurred. When property items are retired or otherwise disposed of, the asset and related reserve accounts are relieved of the cost and accumulated depreciation, respectively, and the resultant gain or loss is reflected in earnings. As of March 31, 2021, the net balance of property and equipment is $1,550,878 with accumulated depreciation of $682,038. As of December 31, 2020, the net balance of property and equipment is $1,631,651 with accumulated depreciation of $587,081.

Intangible Assets

Patents represent legal and other fees associated with the registration of patents. The Company has fifteen issued patents with the United States Patent and Trade Office (“USPTO”) as well as seventeen international Patent Cooperation Treaty (“PCT”) patents. Patents are carried at cost and are being amortized on a straight-line basis over their estimated useful lives, typically ranging from 9 to 20 years.

The Company has trademark protection for “Vystar”, “Vytex”, and “RxAir” among others. Trademarks are carried at cost and since their estimated life is indeterminable, no amortization is recognized. Instead, they are evaluated annually for impairment.

Customer relationships, tradename and marketing related intangibles are carried at cost and are being amortized on a straight-line basis over their estimated useful lives, typically ranging from 5 to 10 years.

Our intangible assets are reviewed for impairment annually or more frequently as warranted by events of changes in circumstances.

Long-Lived Assets

We review our long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be fully recoverable. We evaluate assets for potential impairment by comparing estimated future undiscounted net cash flows to the carrying amount of the assets. If the carrying amount of the assets exceeds the estimated future undiscounted cash flows, impairment is measured based on the difference between the carrying amount of the assets and fair value. Assets to be disposed of would be separately presented in the condensed consolidated balance sheet and reported at the lower of the carrying amount or fair value less costs to sell and are no longer depreciated. The assets and liabilities of a disposal group classified as held-for-sale would be presented separately in the appropriate asset and liability sections of the condensed consolidated balance sheet, if material. During the three months ended March 31, 2021 and 2020, we did not recognize any impairment of our long-lived assets.

Goodwill

Goodwill reflects the cost of an acquisition in excess of the fair values assigned to identifiable net assets acquired. Goodwill is not amortized, rather, it is subject to a periodic assessment for impairment by applying a fair value-based test. We perform our annual impairment test at the end of each calendar year, or more frequently if events or changes in circumstances indicate the asset might be impaired.

Accounting for acquisitions requires us to recognize, separately from goodwill, the assets acquired and the liabilities assumed at their acquisition-date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition-date fair values of the assets acquired and the liabilities assumed. While we use best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, the estimates are inherently uncertain and subject to refinement.

The impairment model permits, and we utilize, a simplified approach for determining goodwill impairment. In the first step, we evaluate the recoverability of goodwill by estimating the fair value of our reporting unit using multiple techniques, including an income approach using a discounted cash flow model and a market approach. Based on an equal weighting of the results of these two approaches, a conclusion of fair value is estimated. The fair value is then compared to the carrying value of our reporting unit. If the fair value of a reporting unit is less than its carrying value, the Company recognizes this amount as an impairment loss. Impairment losses, limited to the carrying value of goodwill, represent the excess of the carrying amount of goodwill over its implied fair value.

Convertible Notes Payable

Borrowings are recognized initially at the principal amount received. Borrowings are subsequently carried at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized as interest expense in the statements of operations over the period of the borrowings using the effective interest method.

Derivatives

The Company evaluates its debt instruments or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under the relevant sections of Accounting Standards Codification (“ASC”) Topic 815-40, Derivative Instruments and Hedging: Contracts in Entity’s Own Equity. The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative instrument and is marked-to-market at each balance sheet date and recorded as a liability. In the event the fair value is recorded as a liability, the change in fair value is recorded in the statements of operations as other income or other expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815-40 are reclassified to a liability account at the fair value of the instrument on the reclassification date.

The Company applies the accounting standard that provides guidance for determining whether an equity-linked financial instrument, or embedded feature, is indexed to an entity’s own stock. The standard applies to any freestanding financial instrument or embedded features that have the characteristics of a derivative, and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. From time to time, the Company has issued notes with embedded conversion features. Certain of the embedded conversion features contain price protection or anti-dilution features that result in these instruments being treated as derivatives for accounting purposes. Accordingly, as of March 31, 2021, the Company has classified all conversion features as derivative liabilities and has estimated the fair value of these embedded conversion features using a Monte Carlo simulation model.

Unearned Revenue

Unearned revenue consists of customer advance payments, deposits on sales of undelivered merchandise and deferred warranty revenue on self-insured stain protection warranty coverage.

Changes to unearned revenue during the three months ended March 31, 2021 and 2020 are summarized as follows:

	2021			2020

Balance, beginning of the period	$	2,427,771		$	2,500,572

Customer deposits received		10,953,412			4,930,536

Warranty coverage purchased		-			98,309

Gift cards purchased		-			2,500

Revenue earned		(11,643,047	)		(5,057,651	)

Balance, end of the period	$	1,738,136		$	2,474,266

Income (Loss) Per Share

The Company presents basic and diluted income (loss) per share. Because the Company reported a net loss for the first quarter of 2020, common stock equivalents, including stock options and warrants, were anti-dilutive; therefore, the amounts reported for basic and dilutive loss per share were the same. Excluded from the computation of diluted income (loss) per share were options to purchase 27,224,938 and 27,983,271 shares of common stock for the three months ended March 31, 2021 and 2020, respectively, as their effect would be anti-dilutive. Warrants to purchase 13,549,571 and 14,237,315 shares of common stock for the three months ended March 31, 2021 and 2020, respectively, were also excluded from the computation of diluted income (loss) per share as their effect would be anti-dilutive. Warrants to purchase 200,000 shares of common stock for the three months ended March 31, 2021 were included in the computation of diluted income per share. In addition, preferred stock convertible to 3,099,750 and 4,661,180 shares of common stock for the three months ended March 31, 2021 and 2020, respectively, were excluded from the computation of diluted income (loss) per share as their effect would be anti-dilutive.

Revenue

Our principal activities from which we generate our revenue are product sales. Revenue is measured based on considerations specified in a contract with a customer. A contract exists when it becomes a legally enforceable agreement with a customer. The contract is based on either the acceptance of standard terms and conditions at the retail store and on the websites for e-commerce customers, or the execution of terms and conditions contracts with retailers and wholesalers. These contracts define each party’s rights, payment terms and other contractual terms and conditions of the sale.

Consideration is typically paid prior to shipment via credit card or check when our products are sold direct to consumers, which is typically within 1 to 2 days or approximately 30 days from the time control is transferred when sold to wholesalers, distributors and retailers. We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience and, in some circumstances, published credit and financial information pertaining to the customer.

A performance obligation is a promise in a contract to transfer a distinct product to the customer, which for us is transfer of finished goods to our customers. Performance obligations promised in a contract are identified based on the goods that will be transferred to the customer that are both capable of being distinct and are distinct in the context of the contract, whereby the transfer of the goods is separately identifiable from other promises in the contract. We have concluded the sale of finished goods and related shipping and handling are accounted for as the single performance obligation.

The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation. The transaction price is determined based on the consideration to which we will be entitled to receive in exchange for transferring goods to the customer. We issue refunds to retail, e-commerce and print media customers, upon request, within 30 days of delivery. We estimate the amount of potential refunds at each reporting period using a portfolio approach of historical data, adjusted for changes in expected customer experience, including seasonality and changes in economic factors. For retailers, distributors and wholesalers, we do not offer a right of return or refund and revenue is recognized at the time products are shipped to customers. In all cases, judgment is required in estimating these reserves. Actual claims for returns could be materially different from the estimates. As of March 31, 2021 and December 31, 2020, reserves for estimated sales returns totaled $115,000 and $55,000, respectively, and are included in the accompanying condensed consolidated balance sheets as accrued expenses.

We recognize revenue when we satisfy a performance obligation in a contract by transferring control over a product to a customer when product is shipped based on fulfillment by the Company. The Company considers fulfillment when it passes all liability at the point of shipping through third party carriers or in-house delivery services. Delivery fees are charged to customers and are included in revenue in the accompanying condensed consolidated statements of operations and the costs associated with these deliveries are included in operating expenses in the accompanying condensed consolidated statements of operations through January 20, 2020. All subsequent delivery costs are included in revenues as a third-party delivery service was engaged beginning January 21, 2020. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer, are excluded from revenue. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of revenue in the accompanying condensed consolidated statements of operations.

The Company also defers revenues for separately-priced stain protection warranty coverage for which it is ultimately self-insured. Revenue is recognized from the extended warranty sales on a straight-line basis over the respective contract term. The extended warranty terms primarily range from three to five years from the date of delivery. The Company ended this warranty program during 2020 but continues to amortize the previously contracted warranties over their original terms. The Company switched to a separately-priced stain protection warranty serviced by a third-party when the store reopened in June 2020. At March 31, 2021 and December 31, 2020, deferred warranty revenue was approximately $810,000 and $920,000, respectively, and is included in unearned revenue in the accompanying consolidated balance sheets. During the three months ended March 31, 2021, the Company recognized total revenues of approximately $110,000 related to deferred warranty revenue arrangements. During the three months ended March 31, 2020, the Company recorded total proceeds of approximately $98,000 and recognized total revenues of approximately $134,000 related to deferred warranty revenue arrangements. Commission costs in obtaining extended warranty contracts are capitalized and recognized as expense on a straight-line basis over the period of the warranty contract. At March 31, 2021 and December 31, 2020, deferred commission costs were approximately $211,000 and $241,000, respectively, and are included in the accompanying condensed consolidated balance sheets. All other costs, such as costs of services performed under the contract, general and administrative expenses, and advertising costs are expensed as incurred.

Cost of Revenue

Cost of revenue consists primarily of product and freight costs and fees paid to online retailers.

Research and Development

Research and development costs are expensed when incurred. Research and development costs include all costs incurred related to the research, development and testing. For the three months ended March 31, 2021 and 2020, Vystar’s research and development costs were not significant.

Advertising Costs

Advertising costs, which include television, radio, newspaper, digital and other media advertising, are expensed upon first showing. Advertising costs were approximately $865,000 and $447,000 for the three months ended March 31, 2021 and 2020, respectively.

Share-Based Compensation

The fair value of stock options is estimated on the grant date using the Black-Scholes option pricing model, based on weighted average assumptions. Expected volatility is based on historical volatility of our common stock. The Company has elected to use the simplified method described in the Securities and Exchange Commission Staff Accounting Bulletin Topic 14C to estimate the expected term of employee stock options. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant. The value of restricted stock awards is determined using the fair value of the Company’s common stock on the date of grant. The Company accounts for forfeitures as they occur. Compensation expense is recognized on a straight-line basis over the requisite service period of the award.

Income Taxes

Vystar recognizes income taxes on an accrual basis based on a tax position taken or expected to be taken in its tax returns. A tax position is defined as a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets or liabilities. Tax positions are recognized only when it is more likely than not (i.e., likelihood of greater than 50%), based on technical merits, that the position would be sustained upon examination by taxing authorities. Tax positions that meet the more likely than not threshold will be measured using a probability-weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. A valuation allowance is established to reduce deferred tax assets if all, or some portion, of such assets will more likely than not be realized. Should they occur, interest and penalties related to tax positions are recorded as interest expense. No such interest or penalties have been incurred for the three months ended March 31, 2021 and 2020.

The Company remains subject to income tax examinations from Federal and state taxing jurisdictions for 2017 through 2020.

Concentration of Credit Risk

Certain financial instruments potentially subject the Company to concentrations of credit risk. These financial instruments consist primarily of cash and accounts receivable. Cash held in operating accounts may exceed the Federal Deposit Insurance Corporation, or FDIC, insurance limits. While the Company monitors cash balances in our operating accounts on a regular basis and adjust the balances as appropriate, these balances could be impacted if the underlying financial institutions fail. To date, the Company has experienced no loss or lack of access to our cash; however, the Company can provide no assurances that access to our cash will not be impacted by adverse conditions in the financial markets. Credit concentration risk related to accounts receivable is mitigated as customer credit is checked prior to the sales.

Other Risks and Uncertainties

The Company is exposed to risks pertinent to the operations of a retailer, including, but not limited to, the ability to acquire new customers and maintain a strong brand as well as broader economic factors such as interest rates and changes in customer spending patterns.

Recent Accounting Pronouncements

In May 2021, 1he FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40), which addresses issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options. This amendment is effective for all entities, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the effects, if any, of the adoption of ASU 2021-04 guidance on the Company’s financial position, results of operations and cash flows.

In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40). The new ASU eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. The amendments in the ASU are effective for public business entities that meet the definition of an SEC filer, excluding entities eligible to be smaller reporting companies as defined by the SEC, for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Board also specified that an entity should adopt the guidance as of the beginning of its annual fiscal year and is not permitted to adopt the guidance in an interim period. The Company is still evaluating the effect the adoption will have on its financial statements.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, as part as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. ASU 02019-12 removes certain exceptions to the general principle of ASC 740 in order to reduce the cost and complexity of its application. ASU 2019-12 is effective for public business entities for annual reporting periods beginning after December 15, 2020, and interim periods within those reporting periods. Early adoption is permitted in any interim or annual period, with any adjustments reflected as of the beginning of the fiscal year of adoption. The Company has adopted ASU 2019-12 and it did not have a material impact on its financial statements..

NOTE 3 - LIQUIDITY AND GOING CONCERN

The Company’s financial statements are prepared using the accrual method of accounting in accordance with U.S. GAAP and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. However, the Company has incurred significant losses and experienced negative cash flow since inception. At March 31, 2021, the Company had cash of $1,195,859 and a deficit in working capital of approximately $4.6 million. Further, at March 31, 2021 the accumulated deficit amounted to approximately $47.8 million. We use working capital to finance our ongoing operations, and since those operations do not currently cover all our operating costs, managing working capital is essential to our Company’s future success. Because of this history of losses and financial condition, there is substantial doubt about the Company’s ability to continue as a going concern.

A successful transition to attaining profitable operations is dependent upon obtaining sufficient financing to fund the Company’s planned expenses and achieving a level of revenue adequate to support the Company’s cost structure. Management plans to finance future operations using cash on hand, increased revenue from RxAir air purification units, Vytex license fees, proceeds received from the second round of financing under the Paycheck Protection Program and stock issuances to new and existing shareholders. The Company has also focused the efforts of key internal employees on the goal of creating efficiencies in each department in our retail furniture business, including purchasing, marketing, inventory control, advertising, accounting, warehousing and customer service.

There can be no assurances the Company will be able to achieve projected levels of revenue in 2021 and beyond. If the Company is not able to achieve projected revenue and obtain alternate additional financing of equity or debt, the Company would need to significantly curtail or reorient operations during 2021, which could have a material adverse effect on the ability to achieve the business objectives, and as a result, may require the Company to file bankruptcy or cease operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities that might be necessary should the Company be forced to take any such actions.

The Company’s future expenditures will depend on numerous factors, including: the rate at which the Company can introduce RxAir air purification units and license Vytex NRL raw materials to manufacturers, and subsequently retailers; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; market acceptance of the Company’s products, services and competing technological developments; the Company’s ability to successfully realize synergies through the integration of the merged companies, acquire new customers and maintain a strong brand; the success of our efforts to reduce expenses in our retail furniture business; and broader economic factors such as interest rates and changes in customer spending patterns. As the Company expands its activities and operations, cash requirements are expected to increase at a rate consistent with revenue growth after the Company has achieved sustained revenue generation.

NOTE 4 - INVESTMENTS – EQUITY SECURITIES

Cost and fair value of investments - equity securities are as follows:

			Gross			Gross		Fair
	Cost		Unrealized Losses			Unrealized Gains		Value

March 31, 2021	$	141,225	$	-		$	404	$	141,629

December 31, 2020	$	141,225	$	(13,315	)	$	-	$	127,910

Unrealized holding gains (losses) on available-for-sale securities were approximately $14,000 and $(50,000) in the first quarter of 2021 and 2020, respectively, and have been included in other income (expenses) in the accompanying condensed statements of operations. Investments represent equity securities in a publicly traded company.

NOTE 5 - PROPERTY AND EQUIPMENT

Property and equipment, net consists of the following:

	March 31,			December 31,
	2021			2020

Furniture, fixtures and equipment	$	1,383,180		$	1,385,430
Tooling and testing equipment		338,572			338,572
Parking lots		365,707			365,707
Leasehold improvements		96,291			79,857
Motor vehicles		49,166			49,166

		2,232,916			2,218,732
Accumulated depreciation		(682,038	)		(587,081	)

Property and equipment, net	$	1,550,878		$	1,631,651

Depreciation expense for the three months ended March 31, 2021 and 2020 was $96,019 and $139,684, respectively.

NOTE 6 - INTANGIBLE ASSETS

Intangible assets consist of the following:

							Amortization
	March 31,			December 31,			Period
	2021			2020			(in Years)
Amortized intangible assets:
Customer relationships	$	210,000		$	210,000			6 - 10
Proprietary technology		610,000			610,000			10
Tradename and brand		1,050,000			1,050,000			5 - 10
Marketing related		380,000			380,000			5
Patents		361,284			359,101			6 - 20
Noncompete		50,000			50,000			5

Total		2,661,284			2,659,101
Accumulated amortization		(928,176	)		(832,186	)

Intangible assets, net		1,733,108			1,826,915
Indefinite-lived intangible assets:
Trademarks		9,072			9,072

Total intangible assets	$	1,742,180		$	1,835,987

Amortization expense for the three months ended March 31, 2021 and 2020 was $95,990 and $104,239, respectively.

Estimated future amortization expense for finite-lived intangible assets is as follows:

	Amount

Remaining in 2021	$	287,971
2022		383,961
2023		377,350
2024		278,125
2025		129,261
Thereafter		276,440

Total	$	1,733,108

NOTE 7 - LEASES

The Company leases equipment, a showroom, offices and warehouse facilities. These leases expire at various dates through 2024 with options to extend to 2031.

The table below presents the lease costs for the three months ended March 31, 2021 and 2020:

	Three Months Ended
	March 31,
	2021		2020

Operating lease cost	$	396,052	$	394,348

Finance lease cost:

Amortization of right-of-use assets		45,912		47,561
Interest on lease liabilities		9,488		11,690

Total lease cost	$	451,452	$	453,599

During the three months ended March 31, 2021 and 2020, the Company recognized sublease income of approximately $42,000 and $27,000, respectively, which in included in other income (expense), net in the accompanying condensed consolidated statements of operations.

Our leases generally do not provide an implicit rate, and therefore we use our incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate we would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of the lease. We used incremental borrowing rates as of the implementation date for operating leases that commenced prior to that date.

The following table presents other information related to leases:

	Three Months Ended
	March 31,
	2021			2020

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows used for operating leases	$	375,911		$	372,884
Financing cash flows used for financing leases		52,427			54,152

Assets obtained in exchange for operating lease liabilities		-			-

Assets obtained in exchange for finance lease liabilities		-			75,739

Weighted average remaining lease term:
Operating leases		8.7 years			9.5 years
Finance leases		4.8 years			5.7 years

Weighted average discount rate:
Operating leases		5.55	%		5.53	%
Finance leases		5.16	%		5.16	%

The future minimum lease payments required under operating and financing lease obligations as of March 31, 2021 having initial or remaining non-cancelable lease terms in excess of one year are summarized as follows:

	Operating Leases			Finance Leases			Total

Remainder of 2021	$	1,233,870		$	153,118		$	1,386,988
2022		1,117,377			150,943			1,268,320
2023		878,807			150,142			1,028,949
2024		870,000			140,002			1,010,002
2025		870,000			139,080			1,009,080
Thereafter		4,350,000			68,395			4,418,395

Total undiscounted lease liabilities		9,320,054			801,680			10,121,734
Less: imputed interest		(1,982,564	)		(94,526	)		(2,077,090	)

Net lease liabilities	$	7,337,490		$	707,154		$	8,044,644

As of March 31, 2021, the Company does not have additional operating and finance leases that have not yet commenced.

NOTE 8 - NOTES PAYABLE AND LOAN FACILITY

Letter of Credit

The Company entered into a $125,000 letter of credit agreement with Fidelity Co-operative Bank in November 2020. The pledged collateral of a $125,000 cash deposit account is included in prepaid expenses and other. The letter of credit was required pursuant to an agreement with a third-party financial institution for customer financing.

Advances

On May 29, 2020, Rotmans entered into a sale promotion consulting agreement with a national furniture sales event company. Under the agreement, Rotmans appointed the third-party as its exclusive agent to assist with a high-impact sale. Before the sale, the agent advanced the Company funds of approximately $2,300,000 to pay off a bank line of credit and certain other vendors. The agent will be reimbursed for the advance from the proceeds of the sale. In addition, the agent has a senior first priority security interest and lien in Rotmans inventories and other assets until all obligations and liabilities are satisfied. Profits of the sale will be distributed according to the specific terms of the agreement which has been tentatively extended through May 2021. The outstanding balance of the advance is approximately $678,000 as of March 31, 2021 and is included in accounts payable in the accompanying consolidated balance sheet. The Company may owe additional amounts to the agent at the end of the sale. These amounts have not been recorded as they are dependent upon the results of the sale and not known at this time.

Term Notes

On April 16, 2020, Rotmans received $1,402,900 in loan funding from the Paycheck Protection Program (the “PPP”), established pursuant to the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and administered by the U.S. Small Business Administration (“SBA”). The unsecured loan (the “PPP Loan”) was evidenced by a promissory note of the Company dated April 16, 2020 (the “Note”) in the principal amount of $1,402,900 with United Community Bank (the “Bank”), the lender. Under the terms of the Note and the PPP Loan, interest accrues on the outstanding principal at the rate of 1.0% per annum. The term of the Note was two years, though it may be payable sooner in connection with an event of default under the Note. On January 24, 2021, the PPP loan was fully forgiven by the SBA.

On February 2, 2021, Rotmans received an additional $1,402,900 in PPP loan funding from the SBA. The terms of the Note are the same as the original PPP Loan.

Shareholder, Convertible and Contingently Convertible Notes Payable

The following table summarizes shareholder, convertible and contingently convertible notes payable:

	March 31,			December 31,
	2021			2020

Shareholder, convertible and contingently convertible notes	$	951,895		$	951,895
Accrued interest		106,062			94,164

		1,057,957			1,046,059

Less: current maturities		(1,057,957	)		(1,046,059	)

	$	-		$	-

Shareholder Convertible Notes Payable

During the year ended December 31, 2018, the Company issued shareholder contingently convertible notes payable (the “Notes”), some of which were for contract work performed by other entities in lieu of compensation and expense reimbursement, totaling approximately $335,000. The Notes are (i) unsecured, (ii) bear interest at an annual rate of five percent (5%) per annum from date of issuance, and (iii) are convertible at the Company’s option post April 19, 2018. The Notes mature one year from issuance but may be extended one (1) additional year by the Company. If converted, the Notes plus accrued interest are convertible into shares of the Company’s common stock at the prior twenty (20) day average closing price with a 50% discount. The outstanding balance of all of these Notes of as December 31, 2020 and 2019 is $338,195. The Notes matured in January 2020 and continue to accrue interest until settlement.

During the year ended December 31, 2019, the Company issued certain contingently convertible promissory notes in varying amounts to existing shareholders which totaled $613,700. The face amount of the note represents the amount due at maturity along with the accrued interest. The amount can be converted into shares of the Company’s stock, at the option of the Company, based on the average closing price for the trailing 20 days prior to conversion and carrying a 35% to 50% discount. These notes can be converted only after an acceleration event which involves a symbol change, uplisting, or reverse stock split and such conversion is in the control of the Company. All of these notes are outstanding as of March 31, 2021.

Based on the variable conversion price of these notes, the Company recorded the embedded conversion features as derivative liabilities, which amounted to $456,700 and $491,700 at March 31, 2021 and December 31, 2020, respectively.

Related Party Debt

The following table summarizes related party debt:

	March 31,			December 31,
	2021			2020

Rotman Family convertible notes	$	1,832,707		$	1,832,707
Rotman Family nonconvertible notes		1,950,500			1,555,500
Accrued interest		234,789			189,394
Debt discount		-			(4,667	)

		4,017,996			3,572,934
Less: current maturities		(255,000	)		(1,258,000	)

	$	3,762,996		$	2,314,934

Rotman Family Convertible Notes

The Company issued contingently convertible notes to several members of the Rotman Family during 2019 and 2020. These notes are unsecured, and bear interest at an annual rate at five percent (5%) or eight percent (8%) per annum from date of issuance. These notes can be converted only after an acceleration event which involves a symbol change, or reverse stock split and such conversion is in the control of the Company. If converted, the notes plus accrued interest are convertible into shares of the Company’s common stock at a 20-day average closing price at a 50% discount. The Steven and Gregory Rotman July 2019 notes plus accrued interest are convertible into shares of the Company’s common stock at the average of the five lowest closing prices in the 90-day period prior to conversion with a 50% discount.

The following table summarizes the Rotman Family Convertible Notes:

				Carrying Amount
		Principal		March 31,		December 31,
	Issue Date	Amount		2021		2020
Steven Rotman 8.00% note due July 2024	07/18/19	$	105,000	$	119,700	$	117,600
Gregory Rotman 8.00% note due July 2024	07/18/19		55,207		62,951		61,847
Steven Rotman 5.00% note due July 2027	07/18/19		1,102,500		1,196,672		1,182,890
Bernard Rotman 5.00% note due July 2023	07/18/19		420,000		455,875		450,625
Steven Rotman 5.00% note due December 2021	12/19/19		100,000		106,458		105,207
Steven Rotman 5.00% note due February 2022	02/02/20		50,000		52,708		52,083

		$	1,832,707		1,994,364		1,970,252

Debt Discount					-		(4,667	)

				$	1,994,364	$	1,965,585

Based on the variable conversion price for all of these convertible notes, the Company recorded the embedded conversion features as derivative liabilities, which amounted to $1,439,000 and $1,275,000 at March 31, 2021 and December 31, 2020, respectively.

Rotman Family Nonconvertible Notes

During the three months ended March 31, 2021, Steven Rotman advanced the Company funds totaling $395,000. The Company formalized the advances and issued a promissory note to Steven Rotman. The note bears interest at an annual rate of five percent (5%) and is due no later than March 31, 2023. The face amount of the notes represents the amount due at maturity along with accrued interest.

In addition, the maturity date of advances made in 2020 has been extended to December 2022.

The following table summarizes the Rotman Family Nonconvertible Notes:

				Carrying Amount
				March 31,		December 31,
	Issue Date	Principal Amount		2021		2020
Steven Rotman 5.00% note due July 2027	07/18/19	$	367,500	$	398,890	$	394,297
Bernard Rotman 5.00% note due July 2023	07/18/19		140,000		151,958		150,208
Steven Rotman 5.00% note due December 2022	08/24/20		75,000		77,260		76,323
Steven Rotman 5.00% note due December 2022	09/01/20		100,000		102,902		101,653
Steven Rotman 5.00% note due December 2022	09/08/20		145,000		149,068		147,256
Steven Rotman 5.00% note due December 2022	09/15/20		200,000		205,416		202,917
Steven Rotman 5.00% note due December 2022	09/21/20		75,000		76,969		76,031
Steven Rotman 5.00% note due December 2022	10/02/20		50,000		51,250		50,625
Steven Rotman 5.00% note due December 2022	10/08/20		40,000		41,000		40,500
Steven Rotman 5.00% note due December 2022	10/15/20		48,000		49,200		48,600
Steven Rotman 5.00% note due December 2022	10/20/20		50,000		51,250		50,625
Steven Rotman 5.00% note due December 2022	11/02/20		70,000		71,750		70,875
Steven Rotman 5.00% note due December 2022	11/13/20		35,000		35,876		35,438
Steven Rotman 5.00% note due December 2022	11/18/20		35,000		35,876		35,438
Steven Rotman 5.00% note due December 2022	11/20/20		65,000		66,626		65,813
Steven Rotman 5.00% note due December 2022	12/22/20		60,000		61,500		60,750
Steven Rotman 5.00% note due March 2023	01/21/21		35,000		35,340		-
Steven Rotman 5.00% note due March 2023	01/27/21		40,000		40,356		-
Steven Rotman 5.00% note due March 2023	02/03/21		50,000		50,396		-
Steven Rotman 5.00% note due March 2023	02/26/21		100,000		100,500		-
Steven Rotman 5.00% note due March 2023	03/19/21		100,000		100,181		-
Steven Rotman 5.00% note due March 2023	03/25/21		70,000		70,068		-

		$	1,950,500	$	2,023,632	$	1,607,349

Approximate maturities for the succeeding years are as follows:

Remainder of 2021	$	255,000
2022		1,191,000
2023		938,000
2024		217,000
2025		36,000
Thereafter		1,380,996

	$	4,017,996

NOTE 9 - DERIVATIVE LIABILITIES

As of March 31, 2021 and December 31, 2020, the Company had a $1,895,700 and $1,766,700, respectively, derivative liability balance on the condensed consolidated balance sheet and recorded a loss from change in fair value of derivative liabilities of $129,000 for the three months ended March 31, 2021, respectively. The derivative liability activity comes from the convertible notes payable. The Company analyzed the conversion features and warrants of the various note agreements for derivative accounting consideration under ASC 815-15 “Derivatives and Hedging” and determined that the embedded conversion features should be classified as a derivative because the exercise price of these Convertible notes are subject to a variable conversion rate. The Company has determined that the conversion feature is not considered to be solely indexed to the Company’s own stock and is therefore not afforded equity treatment. In accordance with ASC 815, the Company has bifurcated the conversion feature of the notes and recorded a derivative liability.

The embedded derivatives for the notes are carried on the Company’s condensed consolidated balance sheet at fair value. The derivative liability is marked-to-market each measurement period and any unrealized change in fair value is recorded as a component of the condensed consolidated statement of operations and the associated fair value carrying amount on the consolidated balance sheet is adjusted by the change. The Company fair values the embedded derivative using a lattice-based valuation model or Monte Carlo simulation.

The following table summarizes the derivative liabilities included in the condensed consolidated balance sheet at March 31, 2021 and December 31, 2020:

Fair Value of Embedded Derivative Liabilities:

	2021		2020

Balance, beginning of the period	$	1,766,700	$	1,499,800

Initial measurement of liabilities		-		28,000

Change in fair value		129,000		238,900

Balance, end of the period	$	1,895,700	$	1,766,700

NOTE 10 - STOCKHOLDERS’ DEFICIT

Cumulative Convertible Preferred Stock

On May 2, 2013, the Company began a private placement offering to sell up to 200,000 shares of the Company’s 10% Series A Cumulative Convertible Preferred Stock. Under the terms of the offering, the Company offered to sell up to 200,000 shares of preferred stock at $10 per share for a value of $2,000,000. The preferred stock accumulates a 10% per annum dividend and was convertible at a conversion price of $0.075 per common share at the option of the holder after a nine-month holding period. The conversion price was lowered to $0.05 per common share for those holders who invested an additional $25,000 or more in the Company’s common stock in the aforementioned September 2014 Private Placement. The preferred shares have full voting rights as if converted and have a fully participating liquidation preference.

As of March 31, 2021, the 8,698 shares of outstanding preferred stock had undeclared dividends of approximately $68,000 and could be converted into 3,099,750 shares of common stock, at the option of the holder.

As of December 31, 2020, the 13,698 shares of outstanding preferred stock had undeclared dividends of approximately $101,000 and could be converted into 4,801,840 shares of common stock, at the option of the holder.

Common Stock and Warrants

During the three months ended March 31, 2021, the Company issued 1,666,667 shares under equity purchase agreements for cash proceeds totaling $25,000. Included in stock subscription payable at March 31, 2021, is $283,000 received under common stock subscription agreements for 18,866,668 shares during the year ended December 31, 2020.

During the three months ended March 31, 2021, 1,767,945 shares of common stock were issued for the conversion of 5,000 shares of preferred stock for principal and interest totaling $88,397.

NOTE 11 - REVENUES

The following table presents our revenues disaggregated by each major product category and service for the three months ended March 31, 2021 and 2020:

	Three Months Ended March 31,
	2021				2020
			% of				% of
	Net Sales		Net Sales		Net Sales		Net Sales
Merchandise:
Case Goods
Bedroom Furniture	$	780,233		6.0	$	861,123		14.5
Dining Room Furniture		768,548		6.0		522,114		8.8
Occasional		1,952,829		15.2		960,379		16.2
		3,501,610		27.2		2,343,616		39.5
Upholstery		4,400,170		34.2		1,617,547		27.3
Mattresses and Toppers		1,789,456		13.9		1,071,327		18.0
Broadloom, Flooring and Rugs		1,320,223		10.3		406,879		6.9
Warranty		265,772		2.1		98,309		1.7
Air Purification Units		1,159,286		9.0		66,334		1.1
Accessories and Other		431,602		3.3		328,226		5.5
	$	12,868,119		100.0	$	5,932,238		100.0

NOTE 12 - SHARE-BASED COMPENSATION

Generally accepted accounting principles require share-based payments to employees, including grants of employee stock options, warrants, and common stock to be recognized in the income statement based on their fair values at the date of grant, net of estimated forfeitures.

In total, the Company recorded $204,696 and $154,368 of stock-based compensation for the three months ended March 31, 2021 and 2020, respectively, including shares to be issued related to consultants and board member stock options and common stock and warrants issued to non-employees. Included in stock subscription payable is accrued stock-based compensation of $1,191,744 and $2,177,806 at March 31, 2021 and December 31, 2020, respectively.

The Company used the Black-Scholes option pricing model to estimate the grant-date fair value of option and warrant awards:

	●	Expected Dividend Yield - because the Company does not currently pay dividends, the expected dividend yield is zero;
	●	Expected Volatility in Stock Price - volatility based on the Company’s trading activity was used to determine expected volatility;
	●	Risk-free Interest Rate - reflects the average rate on a United States Treasury Bond with a maturity equal to the expected term of the option; and
	●	Expected Life of Award - because we have minimal experience with the exercise of options or warrants for use in determining the expected life of each award, we used the option or warrant’s contractual term as the expected life.

In total for the three months ended March 31, 2021 and 2020, the Company recorded $4,916 and $5,562, respectively, of share-based compensation expense related to employee and Board Members’ stock options. The unrecognized compensation expense as of March 31, 2021 was $22,143 for non-vested share-based awards to be recognized over a period of approximately three years.

Options

During 2004, the Board of Directors of the Company adopted a stock option plan (the “Plan”) and authorized up to 4,000,000 shares to be issued under the Plan. In April 2009, the Company’s Board of Directors authorized an increase in the number of shares to be issued under the Plan to 10,000,000 shares and to include the independent Board Members in the Plan in lieu of continuing the previous practice of granting warrants each quarter to independent Board Members for services. At March 31, 2021, there are 2,251,729 shares of common stock available for issuance under the Plan. In 2014, the Board of Directors adopted an additional stock option plan which provides for an additional 5,000,000 shares which are all available as of March 31, 2021. In 2019, the Board of Directors adopted an additional stock option plan with provides for 50,000,000 shares which are all available as of March 31, 2021. 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 three months ended March 31, 2021 and 2020, respectively.

The following table summarizes all stock option activity of the Company for the three months ended March 31, 2021:

						Weighted
				Weighted		Average
				Average		Remaining
	Number			Exercise		Contractual
	of Shares			Price		Life (Years)

Outstanding, December 31, 2020		27,874,938		$	0.19		2.47

Exercisable, December 31, 2020		27,124,938		$	0.19		2.59

Granted		-			-		-

Exercised		-			-		-

Forfeited		(650,000	)		0.05		-

Outstanding, March 31, 2021		27,224,938		$	0.19		2.27

Exercisable, March 31, 2021		26,474,938		$	0.20		2.38

As of March 31, 2021 and 2020, the aggregate intrinsic value of the Company’s outstanding options was approximately $1,000. The aggregate intrinsic value will change based on the fair market value of the Company’s common stock.

Warrants

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

The following table represents the Company’s warrant activity for the three months ended March 31, 2021:

								Weighted
						Weighted		Average
				Weighted		Average		Remaining
	Number			Average		Exercise		Contractual
	of Shares			Fair Value		Price		Life (Years)

Outstanding, December 31, 2020		14,205,912				$	0.08		2.53

Granted		-			-		-		-

Exercised		-			-		-		-

Forfeited		(559,805	)		-		0.14		-

Expired		-			-		-		-

Outstanding, March 31, 2021		13,646,107				$	0.08		2.37

Exercisable, March 31, 2021		13,646,107				$	0.08		2.37

NOTE 13 - RELATED PARTY TRANSACTIONS

Officers and Directors

Per Steven Rotman’s Employment agreement dated July 22, 2019, as amended, he is to be paid $125,000 per year in cash, $10,417 per month in shares based on a 20-day average price at a 50% discount to market, $5,000 per month in cash for expenses as well as access to a Company provided vehicle and health and life insurance. During the three months ended March 31, 2021, the Company expensed approximately $104,000 related to this employment agreement. As of March 31, 2021, the Company had a stock subscription payable balance of $758,000, or approximately 27,152,000 shares to be issued in the future and $75,000 of reimbursable expenses payable related to this party. In addition, 6,666,667 shares are owed to this party under a stock subscription agreement dated in July 2020 for $100,000.

Designcenters.com

This entity is owned by Jamie Rotman, who is the daughter of the Company’s CEO, Steven Rotman. Designcenters.com (“Design”) provided bookkeeping and management services to the Company through July 2019. In exchange for such services, the Company had entered into a consulting agreement with the related party entity. As of March 31, 2021, the Company had a stock subscription payable balance of $42,000, for approximately 850,000 shares related to this party for services incurred and expensed in 2019.

Blue Oar Consulting, Inc.

This entity is owned by Gregory Rotman, who is the son of the Company’s CEO, Steven Rotman. Blue Oar Consulting, Inc. (“Blue Oar”) provides business consulting services to the Company. In exchange for such services, the Company has entered into a consulting agreement with the related party entity.

Per the consulting agreement, Blue Oar is to be paid $15,000 per month in cash for expenses, and $12,500 per month to be paid in shares based on a 20-day average at a 50% discount to market. During the three months ended March 31, 2021, the Company expensed approximately $114,000 related to the consulting agreement and issued 30,038,400 shares of common stock for 2020 services. In addition, the Company issued 11,364,904 shares of common stock to settle its accounts payable balance of $180,000 in February 2021. In connection with the settlement, a loss of $155,265 was incurred. As of March 31, 2021, the Company had a stock subscription payable balance of $69,000, or approximately 2,078,000 shares and a balance of $45,000 in accounts payable related to this related party. In addition, 4,666,667 shares are owed to this party under a stock subscription agreement dated in July 2020 for $70,000.

Fluid Energy Conversion Inc.

In May of 2019, the Company acquired the assets of Fluid Energy Conversion Inc. (“FEC”) for 2,500,000 shares of common stock. FEC is owned by Dr. Bryan Stone, one of the Company’s directors. The assets consist of a patent on the Hughes Reactor, which has the ability to control, enhance and focus energy in flowing liquids and gases. Included in subscription stock payable at March 31, 2021 is $103,750 representing the value of the 2,500,000 shares on the purchase date.

NOTE 14 - COMMITMENTS

Employment and Consulting Agreements

The Company has entered into employment and consulting agreements with certain of our officers, employees, and affiliates. For employees, payment and benefits would become payable in the event of termination by us for any reason other than cause, or upon change in control of our Company, or by the employee for good reason.

There is currently one employment agreement in place with the CEO, Steven Rotman. See compensation terms in Note 13.

During the three months ended March 31, 2021, the Company entered into various service agreements with consultants for financial reporting, advisory, and compliance services.

Litigation

From time to time, the Company is party to certain legal proceedings that arise in the ordinary course and are incidental to our business. Future events or circumstances, currently unknown to management, will determine whether the resolution of pending or threatened litigation or claims will ultimately have a material effect on our consolidated financial position, liquidity or results of operations in any future reporting periods.

EMA Financial

On February 19, 2019, EMA Financial, Inc. filed a lawsuit in the Southern District of New York against the Company. The lawsuit alleged various breaches of an underlying convertible promissory note and stock purchase agreement and sought four claims for relief: (i) specific performance to enforce a stock conversion and contractual obligations; (ii) breach of contract; (iii) permanent injunction to enforce the stock conversion and contractual obligations; and (iv) legal fees and costs of the litigation. The complaint was filed with a motion seeking: (i) a preliminary injunction seeking an immediate resolution of the case through the stock conversion; (ii) a consolidation of the trial with the preliminary injunctive hearing; and (iii) summary judgment on the first and third claims for relief.

The Company filed an opposition to the motion and upon oral argument the motion for injunctive relief was denied. The Court issued a decision permitting a motion for summary judgment to proceed and permitted the Company the opportunity to supplement its opposition papers together with the plaintiff who was also provided opportunity to submit reply papers. On April 5, 2019, the Company filed the opposition papers as well as a motion to dismiss the first and third causes of action in the complaint. On March 13, 2020, the Court granted the Company’s motion dismissing the first and third claims for relief and denied the motion for summary judgment as moot.

The Company subsequently filed an amended answer with counterclaims. The affirmative defenses if granted collectively preclude the relief sought. In addition, Vystar filed counterclaims asserting: (a) violation of 10(b)(5) of the Securities and Exchange Act; (b) violation of Section 15(a)(1) of the Exchange Act (failure to register as a broker-dealer); (c) pursuant to the Uniform Declaratory Judgment Act, 28 U.S.C. §§ 2201, the Company requests the Court to declare: (i) pursuant to Delaware law, the underlying agreements are unconscionable; (ii) the underlying agreements are unenforceable and/or portions are unenforceable, such as the liquidated damages sections; (iii) to the extent the agreement is enforceable, Vystar in good faith requests the Court to declare the legal fee provisions of the agreements be mutual (d) unjust enrichment; (e) breach of contract (in the alternative); and (f) attorneys’ fees.

On June 10, 2020, EMA filed a motion for summary judgment as to its remaining claims for relief and a motion to dismiss the Company’s affirmative defenses and counterclaims. The Company opposed the motion on July 10, 2020, and the same was fully submitted to the Court on July 28, 2020; the parties await the Court’s decision on the motions.

Payment of Wages Actions

On March 13, 2020, Robert LaChapelle, a former employee of Rotmans Furniture, the Company’s majority owned subsidiary, on behalf of himself and all others similarly situated, filed a class action complaint against Rotmans and two of its prior owners (including Steve Rotman, President of the Company) in the Worcester Superior Court alleging non-payment of overtime pay and Sunday premium pay pursuant to the Massachusetts Blue Laws (Ch. 136), the Massachusetts Overtime Law (Chapter 151, § 1A), and the Massachusetts Payment of Wages Law (Chapter 149 §§148 and 150). Specifically, LaChapelle has alleged that Rotmans failed to pay him and other sales people who were paid on a commission-only basis overtime pay at a rate of least 1.5 times the basic minimum wage or premium pay (also at 1.5 times the basic minimum wage) for hours they worked on Sundays. The parties settled with the named Plaintiffs, Robert LaChapelle and certain other employees, each on an individual basis, for a de minimus amount which was paid in March 2021. Plaintiffs’ counsel then filed a Stipulation of Dismissal of the Plaintiffs’ Complaint with prejudice. The settlement was included in operating expenses for the year ended December 31, 2020. However, after settlement, three additional former employees made similar claims and the Company is reviewing the matter.

Stock Subscription Payable

At March 31, 2021 and December 31, 2020, the Company recorded $1,578,494 and $2,589,556, respectively, of stock subscription payable related to common stock to be issued. The following summarizes the activity of stock subscription payable during the period ended March 31, 2021 and December 31, 2020:

	Amount			Shares

Balance, January 1, 2020	$	1,150,125			31,439,401
Additions, net		1,640,631			71,991,955
Issuances, net		(201,200	)		(4,000,000	)

Balance, December 31, 2020		2,589,556			99,431,356
Additions, net		418,030			13,810,214
Issuances, net		(1,429,092	)		(51,038,400	)

Balance, March 31, 2021	$	1,578,494			62,203,170

NOTE 15 - MAJOR CUSTOMERS AND VENDORS

Major customers and vendors are defined as a customer or vendor from which the Company derives at least 10% of its revenue and cost of revenue, respectively.

During the three months ended March 31, 2021, the Company made approximately 22% of its purchases from one major vendor. The Company owed its major vendor approximately $415,000 at March 31, 2021.

During the three months ended March 31, 2020, the Company made approximately 15% of its purchases from one major vendor. The Company owed its major vendor approximately $185,000 at March 31, 2020.

NOTE 16 - INCOME TAXES

The provision (benefit) for income taxes for the three months ended March 31, 2021 and 2020 assumes a 21% effective tax rate for federal income taxes. A reconciliation of the federal statutory income tax rate and the effective income tax rate as a percentage of income before income taxes is as follows:

	Three Months Ended
	March 31,
	2021			2020

Federal statutory income tax rate		(21.0	)%		(21.0	)%

Change in valuation allowance on net operating loss carryforwards		21.0			21.0

Effective income tax rate		0.0	%		0.0	%

Deferred tax assets as of March 31, 2021 and December 31, 2020 are as follows:

	2021			2020

NOL carryforwards	$	6,890,000		$	6,715,000

Less valuation allowance		(6,890,000	)		(6,715,000	)

Deferred tax assets	$	-		$	-

Deferred taxes are caused primarily by net operating loss carryforwards. For federal income tax purposes, the Company has a net operating loss carryforward of approximately $32,800,000 as of March 31, 2021, of which approximately $18,400,000 expires beginning in 2024 and $14,400,000 which can be carried forward indefinitely. For state income tax purposes, the Company has a net operating loss carryforward of approximately $18,300,000 and $14,200,000 as of March 31, 2021 in Georgia and Massachusetts, respectively, which expires beginning in 2023.

In addition, as of March 31, 2021, Rotmans has a net operating loss carryforward of approximately $3,100,000 for federal income tax purposes of which $710,000 expires beginning in 2029 and $2,390,000 can be carried forward indefinitely. Rotmans has a state operating loss carryforward of approximately $2,200,000 which expires beginning in 2022.

Pursuant to Internal Revenue Code Section 382, the future realization of our net operating loss carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that may have occurred previously or that could occur in the future.

NOTE 17 - PROFIT SHARING PLAN

The Company sponsors a qualified 401(k) profit sharing plan covering all eligible employees. The plan permits participants to make tax-deferred contributions to the plan by salary reduction. Company contributions are discretionary and are determined annually by the Board of Directors.

There were no Company contributions in 2021 and 2020. Participant and Company contributions are limited to amounts allowed under the Internal Revenue Code.

The Company offers no post-retirement benefits other than the plan discussed above and no significant post-employment benefits.

NOTE 18 - SUBSEQUENT EVENTS

On April 2, 2021, Greg Rotman advanced the Company $100,000 for working capital. The advance bears interest at an annual rate of five percent (5%). Repayment terms have not been finalized as of this date.

ITEM 2.

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

OVERVIEW

This analysis of our results of operations should be read in conjunction with the accompanying financial statements. This Report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. Statements that are predictive in nature and that depend upon or refer to future events or conditions are forward-looking statements. Although we believe that these statements are based upon reasonable expectations, we can give no assurance that projections will be achieved. Please refer to the discussion of forward-looking statements included in Part I of this Report.

About RxAir

RxAir promotes a healthy lifestyle through the use of its innovative, patented ViraTech air purification technology, thereby improving the quality of life of each and every customer. Independently tested by EPA- 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 of Vystar Corp. For more information, visit http://www.RxAir.com.

The Company’s RxAir product line use 48 inches of high-intensity germicidal UV lamps that destroy bacteria, viruses and other germs instead of just trapping them, setting it apart from ordinary air filtration units. RxAir is one of the few UV air purifiers that have been proven in independent EPA- and FDA- certified testing laboratories to destroy on the first pass 99.6% of harmful airborne viruses and bacteria. In addition to inactivating airborne viruses that cause influenza (flu) and colds, RxAir’s device disarms the airborne pathogens that cause MRSA (staph), strep (whooping cough), tuberculosis (TB), measles, pneumonia and a myriad of other antibiotic-resistant and viral infections.

The RxAir product line includes:

	●	RxAir® Residential Filterless Air Purifier
	●	RX400 ™ FDA cleared Class II Filterless Air Purifier
	●	RX3000™ Commercial FDA cleared Class II Air Purifier

Vystar produces the RxAir product line with a new world-class manufacturer and an expert U.S. engineer with a full understanding of the RxAir technology. Vystar sells RxAir residential and commercial units through multiple distributors and the Company’s website. Once distribution channels are firmly established, Vystar expects the air purification products will produce margins of approximately 70%.

Since the onset of the COVID-19 global pandemic the population of the United States has searched for answers to the aspect of the virus being transmissible both airborne and upon infected skin contacting body membranes. RxAir has proven to be a viable option for both individual purchasers as well as groups whose members and/or employees could be a safe return to “prior normalcy” whatever that definition is. Additionally, Vystar has contracted with numerous school districts and state education departments to supply units on a broad scale. Accompanying those opportunities are also various modes of distribution through established national distributors.

With the ongoing variants associated with COVID-19 and the potential for a future outbreak of a different version of COVID, Vystar remains poised to produce additional units to combat airborne illnesses as deemed appropriate based on need and efficacy.

About Rotmans

Rotmans, one of the largest independent furniture retailers in the U.S., encompassing over 170,000 square feet in Worcester, Mass., and employing approximately 80 people, was founded and has been under the leadership of the Rotman family for the past 50 years. Rotmans is expected to add approximately $20 million annually to Vystar’s top line revenue and enable Vystar to capitalize on the infrastructure already in place for accounting, retail sales facilities and staff, customer service, warehousing, and delivery. Significant marketing and advertising opportunities are available for all of Vystar’s brands to Rotmans’ thousands of existing customers. As CEO of both Rotmans and Vystar, Steven Rotman provides continuity of management and customer-focused values for the Company.

With the end of the high impact closing to remodel sale in the foreseeable future, management is focusing its efforts on creating a more efficient, streamlined store with an enhanced web presence.

About Vytex

Vytex is a multi-patented latex raw material in which the allergy causing proteins are reduced to a level that falls at or below detection based on ASTM approved test methods. Vytex has been available as a raw material commercially for ten years and through that time has a dedicated group of manufacturers who use it in end products such as electrical gloves, condoms, adhesives, etc. Ironically, most use Vytex as it’s better for their manufacturing process as an easier to use raw material and not for protein properties. As of mid-2020 Vystar and the Indian Rubber Manufacturers Research Association’s (IRMRA) have been actively collaborating to develop viscoelastic deproteinized natural rubber (DPNR) variants having properties for expanding applications in specific new arenas such as green tires, biodegradable and other unique bioelastoplast product lines that desire a new approach. Additionally, this research, while slowed by the COVID-19 pandemic, has also shown attributes with extra low ammonia offerings that are desired.

Towards the end of 2020, Vystar entered into a Market Development and Distribution Agreement with Corrie MacColl, Ltd. (CMC Global) to produce, develop and manage the Vytex product and supply lines. This agreement will allow Vystar to expand the market for its Natural Rubber Latex products and has garnered much attention across a broad range of industries including liquid Vytex as well as the newly developed dry rubber Vytex. The International Latex Conference that will be held virtually July 20 to 22, 2021 offered the joint companies a plenary session entitled.”Innovations and Sustainability in Natural Rubber Latex - The New Paradigm” which will air on July 20^th at 10am eastern.

As CMC Global’s Cameroon plantations and processing facilities come out of wintering, Vytex will be produced there on a semi-exclusive basis.

About FEC

Vystar is looking to Fluid Energy as it moves forward in its quest for a cleaner and safer environment. The Company is planning to improve its air purifying by using the ultrasonic technology of Fluid Energy and combining it with its leading UV-C technology. The designs and prototypes are in development. This ultrasonic technology is applied into water products with the same goal. We have working prototypes for our water product targets that have tested beyond expectation for bacterial killing and flow metering. We will begin soon evaluating our ability to eradicate hard water pollution that fouls pools, fountains, and pumps. These products will move us toward living more safely and cleanly in our environment.

Additional Notes

In anticipation of the success of the RxAir spin-off, we may entertain this concept in our other divisions.

Impact of COVID-19 on Our Business

The COVID-19 pandemic has resulted in significant economic disruption and adversely impacted our business. We closed the Rotmans showroom on March 24, 2020. At that time, most of our team members were furloughed. During this period, we paid the cost of enrolled health benefits of those furloughed. We successfully reopened the showroom on June 10, 2020. We continue to work closely with local authorities and follow the guidance of the Centers for Disease Control and Prevention (“CDC”), implementing enhanced cleaning measures, social distancing and the utilization of face masks for the safety of team members, customers and communities.

It has caused, among other things, interruptions in our supply chains and suppliers, including potential problems with inventory availability and the potential result of the volatility or higher cost of product and international freight due to the high demand of products and low supply for an unpredictable period of time.

The COVID-19 pandemic is complex and continues to evolve with sporadic resurgences, new virus variants and the vaccine rollout. At this time, we cannot reasonably estimate the duration of the pandemic and its influence on consumers and our business.

RESULTS OF OPERATIONS

Comparison of the Three Months Ended March 31, 2021 with the Three Months Ended March 31, 2020

	Three Months Ended March 31,
	2021			2020			$ Change			% Change

	CONSOLIDATED

Revenue	$	12,868,119		$	5,932,238		$	6,935,881			116.9	%

Cost of revenue		6,076,840			2,932,614			3,144,226			107.2	%

Gross profit		6,791,279			2,999,624			3,791,655			126.4	%

Operating expenses:
Salaries, wages and benefits		1,949,139			1,454,074			495,065			34.0	%
Share-based compensation		204,696			154,368			50,328			32.6	%
Agent fees		1,251,873			-			1,251,873			100.0	%
Professional fees		20,183			292,696			(272,513	)		-93.1	%
Advertising		865,178			446,695			418,483			93.7	%
Rent		316,615			293,171			23,444			8.0	%
Service charges		224,516			183,577			40,939			22.3	%
Depreciation and amortization		192,009			243,923			(51,914	)		-21.3	%
Other operating		796,413			781,673			14,740			1.9	%

Total operating expenses		5,820,622			3,850,177			1,970,445			51.2	%

Income (loss) from operations		970,657			(850,553	)		1,821,210			-214.1	%

Other income (expense):
Interest expense		(175,847	)		(604,714	)		428,867			-70.9	%
Change in fair value of derivative liabilities		(129,000	)		-			(129,000	)		100.0	%
Gain on settlement of debt, net		1,247,635			-			1,247,635			100.0	%
Other income (expense), net		57,747			(23,056	)		80,803			-350.5	%

Total other income (expense), net		1,000,535			(627,770	)		1,628,305			-259.4	%

Net income (loss)		1,971,192			(1,478,323	)		3,449,515			-233.3	%

Net (income) loss attributable to noncontrolling interest		(1,053,065	)		110,946			(1,164,011	)		-1049.2	%

Net income (loss) attributable to Vystar	$	918,127		$	(1,367,377	)	$	2,285,504			-167.1	%

Revenues

Revenues for the three months ended March 31, 2021 and 2020 were $12,868,119 and $5,932,238, respectively, for an increase of $6,935,881 or 117%. The increase in revenues was due to the high impact closing to remodel sale at Rotmans and an increase in sales of the RxAir units. Our revenues in the first quarter of 2020 were impacted in March as information and news coverage concerning the COVID-19 pandemic increased. Our showroom was closed on March 24, 2020.

The Company reported a significant increase in gross profit to $6,791,279 for the three-month period ended March 31, 2021 compared to gross profit of $2,999,624 for the three-month period ended March 31, 2020, an increase of $3,791,655 or 126%. The increase in gross profit was primarily due to a change in purchasing which started when the store reopened in May 2020 and the reduction of special offers. Merchandise is being purchased in large quantities from fewer vendors. This quarter results also include the margins of RxAir units.

The cost of revenue for the three months ended March 31, 2021 and 2020 was $6,076,840 and $2,932,614, respectively, an increase of 107%.

Operating Expenses

The Company’s operating expenses consist primarily of compensation and support costs for management and administrative staff, and for other general and administrative costs, including professional fees related to accounting, finance, and legal services as well as advertising, rent and other operating expenses. The Company’s operating expenses were $5,820,622 and $3,850,177 for the three months ended March 31, 2021 and 2020, respectively, an increase of $1,970,445 or 51%. The increase was due in part to fees incurred under an agreement with a third-party agent to assist the Company with the high-impact sale at Rotmans.

Other Income (Expense)

Other income for the three months ended March 31, 2021 was $1,000,535, which consisted of interest expense of $175,847, gain on settlement of debt, net of $1,247,635, change in fair value of derivative liabilities of ($129,000) and other income of $57,747. Included in gain on settlement of debt, net is PPP loan forgiveness of $1,402,900. This compares to other expense of $627,770 for the three months ended March 31, 2020, which consisted of interest expense of $604,714, and other expense of $23,056.

Net Income (Loss)

Net income (loss) was $918,127 and ($1,367,377) for the three months ended March 31, 2021 and 2020, respectively, an increase of $2,285,504 or 167%. Net income in the quarter ended March 31, 2021 versus net loss in the same period in 2020 was due to increased sales and margins from the operations of Rotmans and a significant increase in sales of air purification products. The Company’s high impact closing to remodel sale was a tremendous success. The PPP loan forgiveness also contributed to the net income.

LIQUIDITY AND CAPITAL RESOURCES

The Company’s financial statements are prepared using the accrual method of accounting in accordance with U.S. GAAP and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. However, we have incurred significant losses and experienced negative cash flow since inception. At March 31, 2021, the Company had cash of $1,195,859 and a deficit in working capital of approximately $4.6 million. Further, at March 31, 2021, the accumulated deficit amounted to approximately $47.8 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, as well as increased revenue from RxAir air purifier sales and Vytex license fees. The Company will also raise capital with common stock subscription issuances. The current agreement with a national sales event company has allowed Rotmans to meet its financial obligations and provided the Company flexibility and time needed to develop a new retail furniture sale model.

There can be no assurances that we will be able to achieve projected levels of revenue in 2021 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 2021, which could have a material adverse effect on our ability to achieve our business objectives, and as a result, may require the Company to file bankruptcy or cease operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts classified as liabilities that might be necessary should the Company be forced to take any such actions.

Our future expenditures will depend on numerous factors, including: the rate at which we can introduce RxAir products and license Vytex NRL raw material and the foam cores made from Vytex to manufacturers and subsequently retailers; the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, along with market acceptance of our products, and services and competing technological developments. As we expand our activities and operations, our cash requirements are expected to increase at a rate consistent with revenue growth after we achieve sustained revenue generation.

Sources and Uses of Cash

Net cash used in operating activities was $1,162,325 for the three months ended March 31, 2021 as compared to net cash used in operating activities of $190,790 for the three months ended March 31, 2020. During the three months ended March 31, 2021, cash used in operations was primarily due to net income and the reduction of accounts payable, accrued expenses and customer deposits and non-cash related add-back of share-based compensation expense, depreciation, amortization, gain on settlement of debt, net and change in fair value of derivative liabilities.

The Company had cash used in investing activities of $17,317 during the three months ended March 31, 2021 as compared to $3,683 for the three months ended March 31, 2020.

Net cash provided by financing activities was $1,754,962 during the three months ended March 31, 2021, as compared to cash provided of $525,209 during the three months ended March 31, 2020. During the three months ended March 31, 2021, cash was provided by PPP loan proceeds of $1,402,900, related party term debt in the amount of $395,000 offset by finance lease obligations repayment of $42,938.

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

The Company’s Chief Executive Officer and Chief Financial Officer (the “Certifying Officer”) is responsible for establishing and maintaining disclosure controls and procedures for the Company. Although the Certifying Officer has designed such disclosure controls and procedures to ensure that material information is made known to them, particularly during the period in which this report was prepared, certain material weaknesses occurred during the period ended March 31, 2021 and subsequent to period end. The Certifying Officer has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e) (the “Rules”) under the Securities Exchange Act of 1934 (or “Exchange Act”) as of the end of the period covered by this Quarterly Report and is working on improving controls with an outside CPA firm and dedicated internal resources.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f) and 15d - 15(f) under the Securities Exchange Act of 1934). Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those policies and procedures that: (i) in reasonable detail accurately and fairly reflect our transactions; (ii) provide reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; (iii) provide reasonable assurance that our receipts and expenditures are made in accordance with management authorization; and (iv) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting, however well designed and operated, can provide only reasonable, and not absolute, assurance that the controls will prevent or detect misstatements. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there is only the reasonable assurance that our controls will succeed in achieving their goals under all potential future conditions.

Management, under the supervision and with the participation of our Chief Executive Officer and our acting Chief Financial Officer, conducted an evaluation of our internal control over financial reporting as of March 31, 2021, based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) 2013. Based on our evaluation under the COSO framework, management concluded that our internal control over financial reporting was not effective as of March 31, 2021. Such conclusion was reached based on the following material weaknesses noted by management:

	a)	We have a lack of segregation of duties due to the small size of the Company.

	b)	The Company did not maintain reasonable control over records underlying transactions necessary to permit preparation of the Company’s financial statements.

	c)	Lack of controls that provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposal of the Company’s assets that could have a material effect on the financial statements.

	d)	Lack of a formal CFO position who can devote significant attention to financial reporting resulted in multiple audit adjustments.

	e)	Lack of a functioning audit committee, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures. Management believes the lack of a functioning audit committee results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future period.

Management expects to strengthen internal control during 2021 by developing stronger business and financial processes for accounting for transactions such as warrant/stock issuances, which will enhance internal control for the Company.

PART II. OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

The Company is subject to legal proceedings and claims that have not been fully resolved and have arisen in the ordinary course of business. See the discussion of pending legal proceedings in Note 14 of the Notes to Condensed Consolidated Financial Statements.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

During the three months ended March 31, 2021, the Company issued 1,666,667 shares of common stock subscribed under a stock subscription agreement dated in July 2020 for $25,000. Other issuances in the quarter were in connection with share based compensation, a settlement of a related party payable and preferred stock conversion. There were no current sales of unregistered securities.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable

ITEM 5.

OTHER INFORMATION

None

ITEM 6.

EXHIBITS

Exhibit Index

Number		Description

31.1 *		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

101.INS		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: May 17, 2021	By:	/s/ Steven Rotman
		Steven Rotman
		President, Chief Executive Officer, Chief Financial Officer and Director

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