RISK FACTORS

 

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below before making an investment decision. Our business, prospects, financial condition or operating results could be harmed by any of these risks, as well as other risks not currently known to us or that we currently consider immaterial. As a result, you may lose all or part of your investment. Before deciding whether to invest in our common stock you should also refer to the other information contained in this prospectus, including our consolidated financial statements and the related notes.

 

Risks Related to Our Business

 

We have had very limited revenues in our history.  

 

We have had very limited revenues in our history. While we anticipate that additional revenues will be generated by the first quarter of 2009, such revenues, if any, will not be sufficient for the Company to become profitable. We expect to make significant future expenditures to develop and expand our business. We may incur significant losses in the future for a number of reasons, including due to the other risks described in this prospectus, and we may encounter unforeseen expenses, difficulties, complications and delays and other unknown events. Accordingly, we may not be able to achieve or maintain profitability, and we may incur significant losses for the foreseeable future.

Vystar is a development stage company.

 

Vystar is a development stage company with limited operating experience. Vystar is in the early stages of implementing a business plan which is new to Vystar, its directors, officers and employees. The financial success of Vystar and the ultimate value, if any, of our common stock will be dependent upon the soundness of this business concept and the ability of management of the Company to successfully and profitably execute that concept.

 

The lack of an operations history eliminates your ability to use standard methods of company valuation, such as price/earnings ratio analysis or present value of cash flows analysis, to appropriately value the Company and an investment therein. The value of your investment in the common stock will significantly decline, or even become worthless, if our business is not successful.

 

Operating results could fluctuate and differ considerably from our financial forecasts.

 

Our business model is based on assumptions derived from (i) the experience of the principals of the Company, and (ii) third party market information and analysis. There are no assurances that these assumptions will prove to be valid for our future operations or plans.

 

Our operating results may fluctuate significantly as a result of a variety of factors, including:

 

Our business is totally dependent on market demand for, and acceptance of, the Vytex TM Natural Rubber Latex process.  

 

We expect to derive most of our revenue from the sales of our Vytex TM Natural Rubber Latex raw material to various manufacturers of rubber and rubber end products using NRL and/or their distributors. We will pay natural rubber latex processors a fee for the service of manufacturing and creating Vytex NRL for us under our toll manufacturing agreement. Conversely, Vystar will collect a fee under the licensing model. Our Vytex NRL product is new and operates within broad, diverse and rapidly changing markets. As a result, widespread acceptance and use of product is critical to our future growth and success. If the market for our product fails to grow or grows more slowly than we currently anticipate, demand for our product could be negatively affected.

 

Assertions by a third party that our process infringes its intellectual property, whether or not correct, could subject us to costly and time-consuming litigation or expensive licenses.  

 

There is frequent litigation based on allegations of infringement or other violations of intellectual property rights. As we face increasing competition and become increasingly visible as an operating company, the possibility of intellectual property rights claims against us may grow.

 

Any intellectual property rights claim against us or our customers, with or without merit, could be time-consuming, expensive to litigate or settle and could divert management attention and financial resources. An adverse determination also could prevent us from offering our process, require us to pay damages, require us to obtain a license or require that we stop using technology found to be in violation of a third party’s rights or procure or develop substitute services that do not infringe, which could require significant resources and expenses.

 

The market in which we will participate is competitive and if we do not compete effectively, our operating results may be harmed.  

 

The markets for our product are competitive and rapidly changing. With the introduction of new technologies and market entrants, we expect competition to intensify in the future. In addition, pricing pressures and increased competition generally could result in reduced sales, reduced margins or the failure of our services to achieve or maintain widespread market acceptance.

While early interest was strong in a new innovative product in the natural rubber latex industry, pricing and regulatory approvals remain a key selling factor especially in the exam glove arena. There is no manufacturer signed to date that has accepted Vytex NRL into its product mix.

 

While Vytex NRL is currently in the early stages of 510(k) application with the FDA for condoms and exam gloves, there is no assurance that either or both will be awarded approval.

 

In order for Vytex to be used in medical device applications, the manufacturer of the end product must submit an application to the FDA.  If the device is classified by the FDA as Class II (i.e., condoms, surgical gloves, and most non-cardiac and non-renal/dialysis catheters) and in some cases Class I (i.e., exam gloves), a 510(k) application must be filed with the FDA seeking clearance to market the device based on the fact that there is at least one other predicate or similar device already marketed.  If the product is classified as a class III product (i.e., most cardiac and renal/dialysis catheters, certain adhesives and other in vivo devices), or is otherwise a new device with no predicate on the market already, then the manufacturer of the end product must submit a Pre-Market Approval (“PMA”) application seeking approval by the FDA to market the device.  The PMA approval process is much more in depth and lengthy and requires a greater degree of clinical data and FDA review than does a 510(k) clearance process.

Since Vytex is a raw material and not an end-product, Vystar is not the entity that files with the FDA for any clearance or approval to market a device.  Instead, the end-product manufacturers who will be selling and marketing the device(s) must submit applications and seek the FDA clearance or approval depending upon the device classification.  Vystar’s role in this process is only as a background support to the manufacturers to supply information and any technical or test data regarding the Vytex raw material if and to the extent needed.

An American manufacturer of condoms has been engaged in production work and has completed required testing for using Vytex NRL in their condom line and will be initiating the same with exam gloves by first quarter 2009. In the meantime, the same manufacturer will proceed with a production run of a straight dipped exam glove and proceed with the 510(k) application for the exam glove with the FDA. We have no assurance that the products will provide acceptable test results and even if they do, there is no certainty that the FDA will approve the applications.

 

Vystar will seek to have lower protein claims than what is currently on the market today and will ultimately seek to have latex warnings removed from all FDA-regulated products, but it cannot guarantee that either of such actions will be approved by the FDA.

 

The FDA scrutinizes heavily any and all claims categorizing the protein levels and other claims of a NRL product. Currently, the FDA has allowed claims only stating the level of less than 50 micrograms/gram of total extractable proteins pursuant to only one of two FDA-recognized standards. Vystar intends to claim protein levels pursuant to both of the two FDA-recognized standards, which will result in claiming the lowest level of antigenic proteins for a Hevea NRL product currently on the market. There is no guarantee that the FDA will allow these claims.

 

Additionally, for many years, the FDA has required warnings on products containing latex due to the latex allergy issue that exists. Vystar plans on petitioning the FDA to have that label removed from products manufactured with Vytex NRL, by filing a Citizen’s Petition. Such Petition is likely to require clinical test results indicating acceptable allergic reactions associated with Vytex NRL. There are no assurances that the FDA will grant that request.

 

Manufacturers are implementing trials of Vytex NRL in their facilities but final data are not yet available from all these manufacturers on its viability for their particular environments.

 

Samples of Vytex NRL have been made available to several natural rubber latex and latex substitute end product manufacturers. Since the completion of the Vytex NRL Standard Operating Procedures (SOPs), Vystar has toll manufactured several one-tonne production runs at Revertex Malaysia. Manufacturers that have signed a sampling agreement with us have been provided with samples of Vytex NRL for validating its use in their manufacturing processes. To date, only a small number of manufacturers have completed those runs so feedback is minimal at this point. Although most feedback received to date is positive, there is no assurance that such feedback will continue to be satisfactory.

Risks Related to this Distribution and Ownership of Our Common Stock.

 

The offering price of the common stock and warrants in our recently completed private placement was set arbitrarily.

 

In our recently completed private placement, we issued 1,189,000 shares of our common stock and 594,500 warrants to purchase our common stock, at an aggregate price of $2.00 per share and accompanying warrants. This price was set arbitrarily and there should be no implication from such pricing that the common stock now has or ever will have a market value of $2.00 per share or that such stock could ever be sold for $2.00 per share or at any price. Earlier offerings of our common stock were at prices from $1.00 to $1.50 per share of common stock, together with warrants to purchase shares of our common stock at an exercise price of $.50 per share.

 

Our failure to raise additional capital or generate the cash flows necessary to expand our operations and invest in our services could reduce our ability to compete successfully.

 

While we currently do not need to raise additional capital, it is likely we will need to raise additional funds in the latter part of 2009, and we may not be able to obtain such additional financing on favorable terms, if at all. If we raise additional equity financing, our shareholders may experience significant dilution of their ownership interests, and the per share value of our common stock could decline. If we engage in debt financing, we may be required to accept terms that restrict our ability to incur additional indebtedness and force us to maintain specified liquidity or other ratios. If we need additional capital and cannot raise it on acceptable terms, we may not be able to, among other things:

 

·

continue to expand our sales and marketing organizations;

 

·

expand our operations, in the United States or internationally;

 

·

hire, train and retain employees; or

 

·

respond to competitive pressures or unanticipated working capital requirements.

 

The distribution of our common stock to the UCM Stockholders will be a taxable event resulting in taxable income to such Stockholders.

 

The distribution will constitute a dividend to the UCM Stockholders, taxable as ordinary income, to the extent the distribution is treated as paid out of UCM’s current or accumulated earnings and profits (as computed for federal income tax purposes).

 

After the completion of this distribution and resale offering, we do not expect to declare any dividends in the foreseeable future.

 

After the completion of this distribution and resale offering, we do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future. Consequently, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our common stock.

 

There is no assurance that any significant public market for our shares of Common Stock will develop after the completion of this distribution of common stock to the UCM stockholders.

 

While we   intend to apply for approval for our shares of common stock to be traded on the OTC Bulletin Board, there is no assurance that such approval will be granted or that there will be any significant public market for our common stock even if such approval is granted. Much of our common stock that has been previously issued privately and will not be eligible for public resale under SEC Rule 144 for three months after Vystar becomes a fully-reporting company under the 1934 Act.