VYSTAR CORP MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

VYSTAR CORP MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)




This analysis of our results of operations should be read in conjunction with
the accompanying financial statements, including notes thereto, contained in
Item 8 of this Report. 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.


Overview



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




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Vystar produces the RxAir product line with a world-class manufacturer and an
expert U.S. engineer with a full understanding of the RxAir technology. Vystar
sells RxAir residential and commercial units via distributors, online and
through retail channels. Vystar is assembling the distribution network to
relaunch sales of RX400 and RX3000 units to the healthcare and medical markets,
which UV Flu had ceased due to a lack of sales force, distribution and cash flow
constraints. Once sales are firmly re-established, Vystar expects that the air
purification products will produce margins of approximately 70%.



About Rotmans


Rotmans, the largest furniture and flooring store in New England and one of the
largest independent furniture retailers in the U.S., encompassing over 170,000
square feet in Worcester, Mass., and employing approximately 50 people, was
founded and has been under the leadership of the Rotman family for the past 50
years. Rotmans adds 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. Steven Rotman and a group of dedicated employees provide continuity
of management and customer-focused values for the Company.



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.



In addition, the COVID-19 pandemic has caused, among other things, interruptions
in our supply chains and suppliers, including problems with inventory
availability, higher cost of products and international freight due to the high
demand of products and low supply during this volatile period of time.



The COVID-19 pandemic is complex and continues to evolve with the emergence and
spread of variants. At this point, we cannot reasonably estimate the duration
and severity of the pandemic and its impact on our business, results of
operations, financial position and cash flows.



Management Objectives


The COVID-19 pandemic has raised awareness of airborne disease transmission and
consumers' desire to reduce their risk of infection through the use of air
purifiers. The Company has pivoted its resources to meeting the demand for air
purifiers by adding additional distributors to the RxAir sales network and
contracting the development of the next generation RxAir Ultraviolet-C light air
purifiers.


Vystar and the Indian Rubber Manufacturers Research Association's ("IRMRA") are
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.



Vystar entered into a Market Development and Distribution Agreement with Corrie
MacColl 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.



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Critical Accounting Policies and Estimates




Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with U.S. generally accepted accounting principles. As such, we are required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. By their nature, these estimates and judgments are subject
to an inherent degree of uncertainty. Our management reviews its estimates on an
on-going basis. We base our estimates and assumptions on historical experience,
knowledge of current conditions and our understanding of what we believe to be
reasonable that might occur in the future considering available information.
Actual results may differ from these estimates, and material effects on our
operating results and financial position may result.



We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our financial
statements.

Fair Value Inputs Related to Share-based and Other Equity Compensation

Generally accepted accounting principles require all share-based payments,
including grants of employee stock options, stock grants and warrants, to be
recognized in the financial statements based on their fair values. We compute
the value of option awards granted by utilizing the Black-Scholes valuation
model based upon their expected lives, expected volatility, expected dividend
yield, and the risk-free interest rate. The value of the awards is then
straight-line expensed over the service period of the awards. Issuance in shares
of common stock is valued using the closing market price on the measurement
date.



Inventories


Inventories include those costs directly attributable to the product before
sale. Inventories consist primarily of finished goods of furniture, mattresses,
RxAir purifiers, 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
inventories on a regular basis. Approximate 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.



Revenue


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.
Consideration is typically paid prior to shipment via credit card or check when
our products are sold direct to consumers, which is typically within a 1 to 2
days or approximately 30 days from the time control is transferred when sold to
wholesalers, distributors and retailers. 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. We assess our
estimates of expected returns at each financial reporting date.



Valuation and Impairment of Intangible and Long-Lived Assets

We perform an impairment assessment of intangible assets including goodwill
annually or more frequently as warranted by events or changes in circumstances.
We review long-lived assets such as property and equipment for impairment
whenever events or changes in circumstances indicate the carrying value may not
be recoverable. If the total of the estimated undiscounted future cash flows is
less than the carrying value of the assets, an impairment loss is recognized for
the excess of the carrying value over the fair value of the long-lived assets.
The Company recorded a loss on impairment in 2021 and 2020 of $245,050 and
$240,350, respectively, related to the discontinuation of NHS proprietary
technology and customer relationships in 2021 and the NHS tradename in 2020.



Accounting for Derivative Financial Instruments

The Company evaluates stock options, stock warrants, notes payable 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 ASC 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 that the fair value is recorded as a liability, the
change in fair value is recorded in the statement 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 815-40
are reclassified to a liability account at the fair value of the instrument
on
the reclassification date.



Leases


The Company has adopted and implemented ASC 842, Leases, where the Company
recognized right-of use assets and lease liabilities. For leases in which the
acquiree is a lessee, the Company measured the lease liability at the present
value of the remaining lease payments, as if the acquired lease were a new lease
at the acquisition date. The Company measured the right-of-use asset at the same
amount as the lease liability as adjusted to reflect favorable and unfavorable
terms of the lease when compared with market terms.



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RESULTS OF OPERATIONS


Year ended December 31, 2021 compared to year ended December 31, 2020



                                                         Year Ended December 31,
                                          2021             2020           $ Change        % Change
                                                               CONSOLIDATED

Revenue                               $ 27,647,879     $ 20,979,243     $  6,668,636            31.8 %

Cost of revenue                         13,505,600       10,005,075        3,500,525            35.0 %

Gross profit                            14,142,279       10,974,168        3,168,111            28.9 %

Operating expenses:
Salaries, wages and benefits             4,491,864        5,105,668         (613,804 )         -12.0 %
Share-based compensation                   822,070        1,031,850         (209,780 )         -20.3 %
Agent fees                               4,273,308        1,388,598        2,884,710           207.7 %
Professional fees                          588,137          983,764         (395,627 )         -40.2 %
Advertising                              2,174,005        1,808,115          365,890            20.2 %
Rent                                     1,165,978        1,243,949          (77,971 )          -6.3 %
Service charges                            574,669          523,124           51,545             9.9 %
Depreciation and amortization              738,083          795,241          (57,158 )          -7.2 %
Loss on impairment                         245,050          240,350            4,700             2.0 %
Other operating                          3,454,410        2,697,090          757,320            28.1 %

Total operating expenses                18,527,574       15,817,749        2,709,825            17.1 %

Loss from operations                    (4,385,295 )     (4,843,581 )        458,286            -9.5 %

Other income (expense):
Interest expense                          (721,869 )     (1,845,916 )      1,124,047           -60.9 %
Change in fair value of derivative
liabilities                                 53,600         (238,900 )        292,500          -122.4 %
Gain (loss) on settlement of debt,
net                                      2,688,100       (1,497,061 )      4,185,161          -279.6 %
Other income, net                          724,779           92,764          632,015           681.3 %

Total other income (expense), net        2,744,610       (3,489,113 )      6,233,723          -178.7 %

Net loss                                (1,640,685 )     (8,332,694 )      6,692,009           -80.3 %

Net (income) loss attributable to
noncontrolling interest                 (1,056,647 )        724,477       

(1,781,124 ) -245.8 %

Net loss attributable to Vystar $ (2,697,332 ) $ (7,608,217 ) $ 4,910,885

           -64.5 %




Revenues


Consolidated revenues for the year ended December 31, 2021 and 2020 were
$27,647,879 and $20,979,243, respectively, for an increase of $6,668,636 or
31.8%. The increase in revenues from operations was principally due to the
success of the high impact closing to remodel sale at Rotmans which took place
in the first quarter of 2021.

Consolidated gross profit for the year ended December 31, 2021 and 2020 was
$14,142,279 and $10,974,168, respectively, for an increase of $3,168,111 or
28.9%. Consolidated cost of revenue for year ended December 31, 2021 and 2020
was $13,505,600 and $10,005,075, respectively, an increase of $3,500,525 or 35%.
The increase in gross profit and cost of revenue was primarily due to increased
revenues, continued change in purchasing and the reduction of special offers.
Merchandise is being purchased in large quantities from fewer vendors.



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Operating Expenses



The Company's operating expenses consist primarily of compensation and support
costs for management, sales and administrative staff, agent fees and for other
general and administrative costs, including professional fees related to
accounting, finance, and legal services as well as other operating expenses such
as advertising and occupancy costs. The Company's consolidated operating
expenses was $18,527,574 and $15,817,749 for the year ended December 31, 2021
and 2020, respectively, for an increase of $2,709,825 or 17.1%. The increase in
operating expenses was primarily due to fees incurred under an agreement with a
third-party agent to assist the Company with a high-impact sale at Rotmans.


Other Income (Expense)



Other income (expense) for the year ended December 31, 2021 and 2020 was
$2,744,610 and ($3,489,113), respectively, for a net increase of $6,233,723 or a
reduction in expense of 178.7%. Increases in other income (expense) in 2021
included reduction of interest expense of $1,124,047, gain (loss) on settlement
of debt of $4,185,161, an increase in change in value of derivative liabilities
of $292,500 and an increase in other income of $632,015.



Net Loss



Net loss for the year ended December 31, 2021 and 2020 was $1,640,685 and
$8,332,694, respectively, for a decrease in net loss of $6,692,009 or 80.3%. Net
loss in 2021 and 2020 includes net (income) loss attributable to noncontrolling
interest of ($1,056,647) and $724,477, respectively. The smaller net loss the
Company experienced in the year ended December 31, 2021 versus the same period
in 2020 was attributable to increased operating efficiencies and COVID-19
programs mainly the Paycheck Protection Program loans forgiven of $2,805,800 and
Employee Retention Credits of $771,287.



LIQUIDITY AND CAPITAL RESOURCES

The Company's financial statements are prepared using the accrual method of
accounting in accordance with accounting principles generally accepted in the
United States of America 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 December 31, 2021, the
Company had cash of $151,175 and a deficit in working capital of $8,306,611. For
the year ended December 31, 2021, the Company had a net loss of $1,640,685 and
an accumulated deficit of $51,410,516. For the year ended December 31, 2020, the
Company had a net loss of $8,332,694 and the accumulated deficit amounted to
$48,713,184. 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.



Net cash used in operating activities was $2,864,142 for the year ended December
31, 2021 as compared to $2,262,940 for the year ended December 31, 2020. During
the year ended December 31, 2021, cash used in operations was primarily due to
the net loss for the year of $1,640,685 net of non-cash related add-back of
share-based compensation, depreciation and amortization.



The Company had $371,431 cash provided by investing activities during the year
ended December 31, 2021 as compared to $133,878 cash used in investing
activities for the year ended December 31, 2020. During the year ended December
31, 2021, cash provided by investing activities was related to the sales of
property and equipment and investments.



Net cash provided by financing activities was $2,023,347 during the year ended
December 31, 2021, as compared to cash provided of $2,945,002 during the year
ended December 31, 2020. During 2021, cash was provided from the proceeds in
notes payable in the amount of $2,225,939 net of repayments of finance leases in
the amount of $202,592. During 2020, cash was provided from the proceeds in
notes payable in the amount of $3,309,400, repayments on notes payable and
finance leases in the amount of $967,938, net repayments on line of credit of
$210,200, $456,490 in proceeds from common stock issuances, advances from stock
subscription payable of $308,000 and proceeds from stock subscription receivable
of $49,250.



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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, that now also
include the Company's association with foam cores made from Vytex used in
mattresses, mattress toppers and pillows.



There can be no assurances that we will be able to achieve projected levels of
revenue in 2022 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 2022, 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 for bankruptcy or cease operations.
The financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or amounts
classified as liabilities that might be necessary should the Company be forced
to take any such actions.



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.



Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements.

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