Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains certain forward-looking statements that involve risk and uncertainties. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those set forth under the section titled “Risk Factors,” and other documents we file with the SEC. Historical results are not necessarily indicative of future results.
Overview
We have put in place a business model in which we may derive future income from licensing and selling natural bioactive ingredients including algal biomass and products that may be derived from or are initially based on the algal biomass. We expect that these planned new products will likely be sold or licensed to much larger, better-financed human and animal pharma companies, and to food, dietary supplement, and skin care manufacturers. The anticipated income streams are to be generated from a) sales of algal biomass or extracts thereof, and b) license payments in the form of royalties and / or other contractual payments for licensed natural bioactive ingredients. Our manufacturing strategy is to create contract manufacturers for our non-licensed products which products will be sold by us to animal food, dietary supplement, and medical food processors and/or name-brand marketers. Further, we expect to license our bioactive molecules as lead compounds or templates for synthetic variants intended for therapeutic applications.
For our Wellmetrix, subsidiary, the Company’s board of directors (the “Board”) and management agreed to halt active product development and instead focus on prospective out-licensing of the existing IP, consisting of a patent and several patents pending. An ongoing commitment to patent prosecution and maintenance of the existing patent portfolio has been approved by the Board.
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Financial Overview
General and Administrative Expenses
General and administrative expenses consist primarily of personnel-related costs for personnel in functions not directly associated with research and development activities, professional fees and consultant expenses, and other overhead spending. Personnel related costs include cash compensation, benefits, and stock-based compensation expenses. Professional fees and consultant expenses consist primarily of legal fees relating to corporate matters, intellectual property costs, professional fees for consultants assisting with regulatory, and financial matters. Other overhead spending includes cost to support information technology, rent, insurances, public company listing, and supplies.
We anticipate that our general and administrative expenses will significantly increase in the future to support our continued research and development activities, potential commercialization of our product candidates, hiring of additional personnel, legal and professional services, and other public company related costs.
Research and Development
Research and development expenses are incurred in developing our product candidates, compensation and benefits for research and development employees, including stock-based compensation, research related overhead expenses, cost of laboratory supplies, clinical trial and related clinical manufacturing expenses, costs related to regulatory operations, fees paid to research consultants and other outside expenses. Research and development costs are expensed as incurred and costs incurred by third parties are expensed as the contracted work is performed.
We expect our research and development expenses to significantly increase over the next several years as we continue to develop product candidates targeting additional pharma and algal biomass applications. These additional activities will increase the need to conduct preclinical testing and clinical trials and will depend on the duration, costs and timing to complete our preclinical programs and clinical trials.
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Interest Expense
Interest expense primarily consists of interest costs related to our convertible notes and for interest on short term debt, as discussed in detail below.
Other Income
Other income consists of proceeds derived from activity outside of normal operating activity, including the forgiveness of the paycheck protection program loan in 2021.
Results of Operations
Comparison of Year Ended December 31, 2022 and 2021
The following table summarizes our results of operations for the year ended December 31, 2022 and 2021:
Year ended December 31,
Revenue: $ - $ -
Total revenue $ - $ -
Costs and expenses:
Other income (expense):
Gain on forgiveness of debt and accrued interest - 122,520
General and Administrative Expenses
General and administrative expenses were $6.5 million for the 12 months ended December 31, 2022, which is about $200,000 lower than the approximately $6.7 million for the comparable prior period, explained by the following changes: a decrease of $1.4 million in salary expense ($900,000 non-cash decrease due to stock options issued to employees and roughly $500,000 decrease in cash compensation), and an increase in overhead expense of $1.2 million (including $460,000 increase in insurance, $660,000 increase in legal and accounting fees, and $450,000 increase in board of directors fees; these increases were partially offset by a reduction in travel and other expenses of $120,000).
Research and Development Expenses
For the 12 months ended December 31, 2022, we incurred $2.2 million in net R&D expenses, as compared to $2.0 million for the comparable period in 2021.
Of these expenses, all $2.2 million for 2022 and $2.0 million for 2021 are costs associated with research relating to our biotech and agtech businesses. Of these costs in 2022, $1.5 million is for salary and other internal costs, an increase of approximately $700,000 from the prior year. The increase is fully explained by higher stock related compensation costs. Third party research and development spending of $1.4 million was $250,000 lower than the prior year due to fewer third-party research studies. For the year ending December 31, 2022, the Company recognized a reduction in gross research and development spending of roughly $775,000 to account for the amortization of the spending obligation created through the complete funding of the Participation Agreements, roughly $220,000 higher than the amount research and development was reduced in 2021. (See Note 9: Deferred R&D Obligations - Participation Agreements)
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December 31, December 31,
Subject to the availability of funding, we expect our R&D costs to grow as we work to complete the research in the development of natural bioactive compounds for use as dietary supplements and food ingredients, as well as biologics for medicinal and pharmaceutical applications in humans and animals. The Company’s scientific efforts presently are focused on the licensing products for healthy immune response in livestock and growing of our proprietary algal culture in commercial scale facilities.
Liquidity and Capital Resources
Historical Capital Resources
As of December 31, 2022, our principal source of liquidity consisted of cash deposits of $1.8 million. We expect to continue to incur significant expenses and increasing operating and net losses for the foreseeable future until and unless we generate an adequate level of revenue from potential commercial sales to cover expenses.
We anticipate that our expenses will increase substantially as we develop and seek to commercialize our product candidates and continue to pursue pre-clinical and clinical trials, seek regulatory approvals, manufacture product candidates, hire additional staff, add operational, financial and management systems and continue to operate as a public company.
Our source of cash to date has been proceeds from the issuances of notes, common stock with and without warrants and unsecured loans, and the entry into Participation Agreements, the terms of which are further described below. See also “Funding Requirements and Outlook” below.
June 2021 Underwritten Public Offering
On May 27, 2021, we entered into an Underwriting Agreement relating to the issuance and sale of 2,760,000 Units, at a price to the public of $5.00 per Unit. In addition, under the terms of the Underwriting Agreement, we granted the Underwriter an option, exercisable for 45 days, to purchase up to an additional 414,000 shares of common stock and/or 414,000 2021 Warrants, in any combination thereof, on the same terms. The base offering closed on June 2, 2021, and the sale of 150,000 shares of common stock subject to the Underwriter’s overallotment option closed on July 2, 2021. The gross proceeds from this offering were approximately $14.5 million prior to deducting underwriting discounts and other offering expenses payable by us.
Convertible Notes
On June 2, 2021, pursuant to the terms of several Debt Extension and Conversion Agreements with holders of our 11% convertible debt, a total of $7,538,556 comprised of outstanding principal of $4,940,342 and interest of $2,598,214 of our convertible notes were automatically converted into 942,322 shares of common stock at $8.00 per share.
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Deferred R&D Obligations - Participation Agreements
From April 13, 2020, through May 14, 2021, the Company entered into twenty-one License Co-Development - Participation Agreements (the “Participation Agreements”) with certain accredited investors (“Participants”) for an aggregate of $2,985,000. The Participation Agreements provide for the issuance of warrants to such Participants and allows the Participants to participate in the fees (the “Fees”) from licensing or selling bioactive ingredients or molecules derived from ZIVO’s algae cultures. Specifically, ZIVO has agreed to provide to the Participants a 44.775% “Revenue Share” of all license fees generated by ZIVO from any licensee.
The Participation Agreements allow the Company the option to buy back the right, title and interest in the Revenue Share for an amount equal to the amount funded plus a forty percent (40%) premium, if the option is exercised less than 18 months following execution, and for either forty (40%) or fifty percent (50%) if the option is exercised more than 18 months following execution. Pursuant to the terms of twelve of the Participation Agreements, the Company may not exercise its option until it has paid the Participants a revenue share equal to a minimum of thirty percent (30%) of the amount such Participant’s total payment amount. Pursuant to the terms of the one of the Participation Agreements, the Company may not exercise its option until it has paid the Participant a revenue share equal to a minimum of one hundred forty percent (140%) of the amount such Participant’s total payment amount. Five of the Participation Agreements have no minimum threshold payment. Once this minimum threshold is met, the Company may exercise its option by delivering written notice to a Participant of its intent to exercise the option, along with repayment terms of the amount funded, which may be paid, in the Company’s sole discretion, in one lump sum or in four (4) equal quarterly payments. If the Company does not make such quarterly payments timely for any quarter, then the Company shall pay the prorate Revenue Share amount, retroactive on the entire remaining balance owed, that would have been earned during such quarter until the default payments have been made and the payment schedule is no longer in default.
Unsecured Loans
From January 1, 2021 to December 31, 2022, the Company received gross proceeds of $819,100 in unsecured loans. As of December 31, 2022, no principal and accrued interest remained outstanding under such loans.
Private Placements
Between January 1, 2021 and December 31, 2022, we entered into Subscription Agreements with accredited investors pursuant to which we, in private placements, issued and sold an aggregate of 144,128 shares of common stock for gross proceeds in the amount of $1,564,969.
Paycheck Protection Program Loan
In connection with the 2020 Coronavirus Aid, Relief, and Economic Security (“CARES Act”), the Company received loan funding of approximately $121,700 under the Paycheck Protection Program (“PPP”), which was forgiven by the U.S. Small Business Administration on September 9, 2021.
Funding Requirements and Outlook
At December 31, 2022, we had approximately $1.8 million in cash deposits.
Management has noted the existence of substantial doubt about our ability to continue as a going concern. Additionally, our independent registered public accounting firm included explanatory paragraphs in the reports on our financial statements as of and for the years ended December 31, 2022 and 2021, respectively, noting the existence of substantial doubt about our ability to continue as a going concern. Our existing cash may not be sufficient to fund our operating expenses through at least twelve months from the date of this filing. To continue to fund operations, we will need to secure additional funding through public or private equity or debt financings, through collaborations or partnerships with other companies or other sources. We may not be able to raise additional capital on terms acceptable to us, or at all. Any failure to raise capital when needed could compromise our ability to execute on our business plan. If we are unable to raise additional funds, or if our anticipated operating results are not achieved, we believe planned expenditures may need to be reduced in order to extend the time period that existing resources can fund our operations. If we are unable to obtain the necessary capital, it may have a material adverse effect on our operations and the development of our technology, or we may have to cease operations altogether.
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Our material cash requirements relate to the funding of our ongoing product development. See “Item 1-Business-Clinical Development and Regulatory Pathway-Clinical Experience, Future Development and Clinical Trial Plans” in this Report for a discussion of design, development, pre-clinical and clinical activities that we may conduct in the future, including expected cash expenditures required for some of those activities, to the extent we are able to estimate such costs.
The development of our product candidates is subject to numerous uncertainties, and we could use our cash resources sooner than we expect. Additionally, the process of development is costly, and the timing of progress in pre-clinical tests and clinical trials is uncertain. Our ability to successfully transition to profitability will be dependent upon achieving further regulatory approvals and achieving a level of product sales adequate to support our cost structure. We cannot assure you that we will ever be profitable or generate positive cash flow from operating activities.
Cash Flows
Cash Flows from Operating Activities. During the 12 months ended December 31, 2022, our operating activities used $7.1 million in cash, an increase of cash used of roughly $300,000 from the comparable prior period. The approximate $300,000 increase in cash used by operating activities was primarily attributable to the following (all of which are approximated): a $10,000 decrease in net loss, a decrease in non-cash expenses of $350,000 (a decrease of stock issued for services of $310,000, an increase in of gain on forgiveness of debt of $123,000, and an increase in amortization of lease liability of $60,000), and $100,000 lower use of cash for changes in assets and liabilities ($85,000 less cash from issuance of deferred R&D obligations, $220,000 of amortization of deferred R&D obligations, a net increase in accounts payable and accrued liabilities of $190,000, and lower lease related liabilities and prepaid expenses of $70,000).
Cash Flows from Investing Activities. During the 12 months ended December 31, 2022 and 2021, there were no investing activities.
Cash Flows from Financing Activities. During the 12 months ended December 31, 2022, we generated no cash from financing activities, compared to $15.6 million provided in the prior year.
We estimate that we would require approximately $5 million in cash over the next 12 months in order to fund our basic operations, excluding our R&D initiatives. Based on this cash requirement, we have a near term need for additional funding to continue to develop our products and intellectual property. Historically, we have had substantial difficulty raising funds from external sources. If we are unable to raise the required capital, we will be forced to curtail our business operations, including our R&D activities. The following table shows a summary of our cash flows for the periods indicated:
Twelve months ended December 31,
Net cash provided by (used in):
Investing activities - -
Net increase (decrease) in cash and cash equivalents $ (7,102,612 ) $ 8,764,013
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Critical Accounting Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of the balance sheets and the reported amounts of revenue and expenses during the reporting periods. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances at the time such estimates are made. Actual results may differ materially from our estimates and judgments under different assumptions or conditions. We periodically review our estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates are reflected in our financial statements prospectively from the date of the change in estimate.
While our significant accounting policies are more fully described in the notes to our financial statements appearing elsewhere in this Report, we believe the following are the critical accounting policies used in the preparation of our financial statements that require significant estimates and judgments.
Fair Value of Financial Instruments
We account for fair value measurements of assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring or nonrecurring basis adhering to the Financial Accounting Standards Board (“FASB”) fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
As of December 31, 2022 and December 31, 2021, fair values of cash, prepaid, other assets, accounts payable and accrued expenses approximated their carrying values because of the short-term nature of these assets or liabilities. We elected to account for the convertible notes while they were outstanding on a fair value basis under ASC 825 to comprehensively value and streamline the accounting for the embedded conversion options. The fair value of these convertible notes were based on both the fair value of our common stock, discount associated with the embedded redemption features, and cash flow models discounted at current implied market rates evidenced in recent arms-length transactions representing expected returns by market participants for similar instruments and are based on Level 3 inputs.
Premium Conversion Derivatives
We evaluate all conversion and redemption features contained in a debt instrument to determine if there are any embedded derivatives that require separation from the host debt instrument. An embedded derivative that requires separation is bifurcated from its host debt instrument and a corresponding discount to the host debt instrument is recorded. The discount is amortized and recorded to interest expense over the term of the host debt instrument using the straight-line method which approximates the effective interest method. The separated embedded derivative is accounted for separately on a fair market value basis. We record the fair value changes of a separated embedded derivative at each reporting period in the consolidated statements of comprehensive loss as a fair value change in derivative and warrant liabilities.
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Stock-Based Compensation
We account for share‐based compensation in accordance with the provisions of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC 718), Compensation - Stock Compensation. Accordingly, compensation costs related to equity instruments granted are recognized at the grant‐date fair value. The Company records forfeitures when they occur. Share‐based compensation arrangements to non‐employees are accounted for in accordance with the applicable provisions of ASC 718.
Recent Accounting Pronouncements
See “Note 4 - Summary of Significant Accounting Policies” in this Report regarding the impact of certain recent accounting pronouncements on our financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Not required for smaller reporting companies.
Item 8. Financial Statements and Supplementary Data.
Reference is made to the Consolidated Financial Statements, the Reports thereon, and the Notes thereto, commencing on page F-1 of this report, which Consolidated Financial Statements, Reports, Notes and data are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Incorporated by reference to “Proposal No. 2 - Ratification of Independent Registered Public Accounting Firm” in the Registrant’s 2023 Proxy Statement to be filed within 120 days after the Registrant’s fiscal year end.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding disclosure. The Chief Executive Officer and the Chief Financial Officer, as our principal financial and accounting officer, have reviewed the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K and, based on their evaluation, have concluded that the disclosure controls and procedures were not effective as of such date due to material weaknesses in internal control over financial reporting, described below.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control over financial reporting is a process designed under the supervision of our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not detect or prevent misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
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Management utilized the criteria established in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to conduct an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2022. As previously reported, we identified material weaknesses that continued to exist at December 31, 2022. In addition, in connection with the audit of our consolidated financial statements for the year ended December 31, 2022, we identified additional material weaknesses in internal control over financial reporting, as described below.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Material Weaknesses in Internal Control Over Financial Reporting
Management has determined that the Company had the following material weaknesses in its internal control over financial reporting:
Control Environment, Risk Assessment, and Monitoring
Management did not design and maintain appropriate entity-level controls impacting the control environment, risk assessment procedures, and monitoring activities to prevent or detect material misstatements to the consolidated financial statements. These deficiencies were attributed to: (i) lack of structure and responsibility, insufficient number of qualified resources, and inadequate oversight and accountability over the performance of controls, (ii) ineffective identification and assessment or risks impacting internal control over financial reporting, and (iii) ineffective evaluation and determination as to whether the components of internal control were present and functioning.
Control Activities and Information and Communication
These material weaknesses contributed to the following additional material weaknesses within certain business processes and the information technology environment:
Based on the assessment and identification of the material weaknesses described above, management has concluded that, as of December 31, 2022, our internal control over financial reporting was not effective and could lead to a material misstatement of account balances or disclosures. Accordingly, management has concluded that these control deficiencies constitute material weaknesses.
However, after giving full consideration to these material weaknesses, and the additional analyses and other procedures that we performed to ensure that our consolidated financial statements included in this Annual Report on Form 10-K were prepared in accordance with U.S. GAAP, our management has concluded that our consolidated financial statements present fairly, in all material respects, our financial position, results of operations and cash flows for the periods disclosed in conformity with U.S. GAAP.
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Remediation
Management has been implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weaknesses are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions include:
Changes in Internal Control Over Financial Reporting
Except for the material weaknesses discussed above, there was no other change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Incorporated by reference to “Proposal No. 1 - Election of Directors - Management,” “Information with Respect to the Board of Directors,” and “Management” in the Registrant’s 2023 Proxy Statement to be filed within 120 days after the Registrant’s fiscal year end.
Item 11. Executive Compensation
Incorporated by reference to “Executive Compensation” in the Registrant’s 2023 Proxy Statement to be filed within 120 days after the Registrant’s fiscal year end.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Incorporated by reference to “Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters” in the Registrant’s 2023 Proxy Statement to be filed within 120 days after the Registrant’s fiscal year end.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Incorporated by reference to “Certain Relationships and Related Transactions”and “Proposal No. 1 - Election of Directors”in the Registrant’s 2023 Proxy Statement to be filed within 120 days after the Registrant’s fiscal year end.
Item 14. Principal Accountant Fees and Services
Incorporated by reference to “Proposal No. 2 - Ratification of Independent Registered Public Accounting Firm” in the Registrant’s 2023 Proxy Statement to be filed within 120 days after the Registrant’s fiscal year end. Information about aggregate fees billed to us by our principal accountant, BDO USA, LLP (PCAOB ID No. 243) will be included under the caption “Independent Auditor Fees” in the 2023 Proxy Statement, and that information is incorporated by reference herein.
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PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) (1) (2) Financial Statements.
Financial Statements begin on page F-1 of this report.
All schedules have been omitted because they are not applicable or the required information is included in the Consolidated Financial Statements or Notes thereto.
(3) Exhibits.
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
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21.1* Subsidiaries of the Registrant
23.1* Consent of BDO USA, LLP
101.INS* Inline XBRL Instance Document
101.SCH* Inline XBRL Taxonomy Extension Schema Document
101.CAL* Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB* Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE* Inline XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF* Inline XBRL Taxonomy Extension Definition Linkbase Document
* Filed herewith.
**Furnished herewith.
+ Indicates a management contract or compensatory plan.
†Certain schedules and exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. A copy of any omitted schedule and/or exhibit will be furnished to the SEC upon request.
Item 16. Form 10-K Summary.
None.
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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.
ZIVO BIOSCIENCE, INC.
By: /s/ Keith R. Marchiando
Keith R. Marchiando
Chief Financial Officer, and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ John B. Payne
John B. Payne,
Chief Executive Officer, President and Director
By: /s/ Keith R. Marchiando
Keith R. Marchiando
Chief Financial Officer, and Secretary
By: /s/ Christopher D. Maggiore
Christopher D. Maggiore,
Director
By: /s/ Nola E. Masterson
Nola E. Masterson,
Director
By: /s/ Alison A. Cornell
Alison A. Cornell,
Director
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Zivo Bioscience, Inc.
Bloomfield Hills, Michigan
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Zivo Bioscience, Inc. and subsidiaries (the “Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows for each of the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has suffered recurring losses and negative cash flows from operations that raise substantial doubt about its ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Stock-Based Compensation
As discussed in Notes 2, 4 and 10 to the Company’s consolidated financial statements, the Company accounts for stock-based compensation in accordance with ASC 718, which requires compensation to be measured based on the grant-date fair value of the equity-based award and recognized as an expense over the requisite service period. The Company determines the fair value of common stock option awards using the Black Scholes option pricing model. As a result of these awards, the Company recorded expenses of $2.7 million during the year ended December 31, 2022.
We identified the Company’s estimated grant date fair value of common stock option awards as a critical audit matter. The Company identified certain errors, constituting a material weakness, in the determination of the estimated grant date fair value of common stock option awards. Auditing the Company’s revised estimated grant date fair value of these awards was especially challenging due to the increased auditor effort required.
The primary procedures we performed to address this critical audit matter included:
/s/ BDO USA, LLP
We have served as the Company’s auditor since 2022.
Troy, Michigan
March 14, 2023
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ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
ASSETS
CURRENT ASSETS:
PROPERTY AND EQUIPMENT, NET - -
OTHER ASSETS:
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT):
CURRENT LIABILITIES:
Current portion of long-term operating lease 99,259 15,178
Deferred R&D obligations - participation agreements 525,904 1,106,320
Accrued liabilities - payroll and directors fees 398,176 467,215
LONG TERM LIABILITIES:
Long-term operating lease, net of current portion 105,919 -
Total long-term liabilities 105,919 -
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY (DEFICIT):
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) $ 2,123,019 $ 8,990,178
The accompanying notes are an integral part of these consolidated financial statements.
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ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year endedDecember 31,2022 For the year endedDecember 31,2021
REVENUE:
Service Revenue $ - $ -
Total Revenues $ - $ -
COSTS AND EXPENSES:
OTHER INCOME (EXPENSE):
Gain of forgiveness of debt and accrued interest - 122,520
Interest expense - related parties - (188,605 )
BASIC AND DILUTED LOSS PER SHARE $ (0.93 ) $ (1.15 )
WEIGHTED AVERAGE
The accompanying notes are an integral part of these consolidated financial statements.
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ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE PERIOD JANUARY 1, 2021 THROUGH DECEMBER 31, 2022
Additional
Common Stock Paid in Accumulated
Shares Amount Capital Deficit Total
Issuance of warrants pursuant to the participation agreements 55,697 55,697
Common stock issued on cashless warrant exercise 54,361 54 (54 ) -
Fractional Shares from Split (99 ) -
Underwriting and other expenses for public offering (1,697,828 ) (1,697,828 )
Warrants sold as part of the public offering 4,240 4,240
Additional
Common Stock Paid in Accumulated
Shares Amount Capital Deficit Total
The accompanying notes are an integral part of these consolidated financial statements.
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ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended For the Year Ended
December 31, December 31,
Cash flows from operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Stock issued for services rendered - 32,775
Gain on forgiveness of debt and accrued interest - (122,520 )
Employee and director equity-based compensation expense 2,692,462 2,970,027
Changes in assets and liabilities:
Security deposits (29,058 ) -
Advanced payments for R&D obligations - participation agreements 85,304
Cash flows from investing activities:
Net cash (used) in investing activities $ - $ -
Cash Flow from Financing Activities:
Proceeds from sale of common stock warrants - participation agreements - 55,697
Proceeds from public sale of common stock - 15,644,507
Expenses related to public offering - (1,697,828 )
Proceeds from sale of common stock, related party - 50,000
Proceeds from sales of common stock - 1,514,970
Net cash provided by financing activities $ - $ 15,567,346
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $ - $ -
The accompanying notes are an integral part of these consolidated financial statements.
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Supplemental Schedule of Non-Cash Investing and Financing Activities:
For the Year Ended December 31, 2022:
During the year ended December 31, 2022, the Company had no non-cash financing transactions.
During the year ended December 31, 2022, the Company had non-cash investing activities in the amount of $241,694 related to ROU assets obtained in exchange for ROU liabilities.
For the Year Ended December 31, 2021:
During the year ended December 31, 2021, a related party applied the proceeds of a Loan Payable in the principal amount of $9,000, against an investment in a Participation Agreement.
During the year ended December 31, 2021, warrants to purchase 139,100 shares of the Company’s common stock were exercised on a “cashless” basis resulting in the issuance of 54,361 shares of common stock.
On June 2, 2021, pursuant to the terms of several Debt Extension and Conversion Agreements with holders of our 11% convertible debt, a total of $7,538,557 comprised of outstanding principal of $4,940,342 and interest of $2,598,215 of our convertible notes were automatically converted into 942,322 shares of common stock at $8.00 per share. See “Note 7 - Convertible Debt” for additional information.
On September 9, 2021, the Company received a Notification of Paycheck Protection Program Forgiveness Payment letter from the SBA confirming that the full amount of the principal, $121,700, and accrued interest, $1,653, were forgiven by the SBA. The Company recognized the forgiveness of debt principal of $121,700 and the 2020 accrued interest of $820 as an Other Income of $122,520.
The accompanying notes are an integral part of these consolidated financial statements.
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ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS
The business model of Zivo Bioscience, Inc. and its subsidiaries (Health Enhancement Corporation, HEPI Pharmaceuticals, Inc., Zivo Bioscience, LLC, Wellmetrix, LLC, WellMetris, LLC, Zivo Biologic, Inc., ZIVOLife, LLC, and Zivo Zoologic, Inc. (collectively the “Company”)) is to derive future income from licensing and selling natural bioactive ingredients derived from their proprietary algae cultures to animal, human and dietary supplement and medical food manufacturers.
NOTE 2 - REVISION OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
Equity-Based Compensation
Errors were identified in the historical financial statements related to the valuation and expense of equity-based compensation for management and the members of the Company’s board of directors. The Company accounts for stock-based compensation in accordance with ASC 718. Under the provisions of ASC 718, stock-based compensation cost is estimated at the grant date based on the award’s fair value and is recognized as expense over the requisite service period. At the date of grant, the Company determines the fair value of the stock option award using the Black Scholes option pricing model.
The Company made errors in the application of the Black Scholes option valuation model by applying an inappropriate methodology in determining the expected term of granted options. Based on the limited history relating to exercises of options, the Company determined that the best method for determining the expected life of an option grant is the simplified method. After recalculating the valuations and reviewing the periodic reported expense for all the options issued as equity-based compensation, the Company concluded that, in aggregate, it had overstated the equity-based compensation. In accordance with SEC Staff Accounting Bulletin No. 99, Materiality, and SEC Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements; the Company evaluated the change and has determined that the related impact was not material to any previously presented financial statements. As such the Company corrected the error in the consolidated financial statements for the year ended December 31, 2021.
The impact of the revision on the Company’s previously released financial statements that are referenced in this form 10-K are reflected in the following tables.
CONSOLIDATED BALANCE SHEET as of December 31, 2021
As Previously
Reported Adjustment As Revised
CONSOLIDATED STATEMENTS OF OPERATIONS for the Year Ended December 31, 2021
As Previously
Reported Adjustment As Revised
BASIC AND DILUTED LOSS PER SHARE $ (1.20 ) $ 0.05 $ (1.15 )
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As Previously
Reported Adjustment As Revised
CONSOLIDATED STATEMENT OF CASH FLOWS for the Year Ended December 31, 2021
As Previously
Reported Adjustment As Revised
NOTE 3 - GOING CONCERN
The Company has incurred net losses since inception, experienced negative cash flows from operations for the year ended December 31, 2022 and has an accumulated deficit of $115.8 million. The Company has historically financed its operations primarily through the issuance of common stock, warrants, and debt.
The Company expects to continue to incur operating losses and net cash outflows until such time as it generates a level of revenue to support its cost structure. There can be no assurance that the Company will achieve profitable operations, and, if achieved, whether it will be sustained on a continued basis.
The Company intends to fund ongoing activities by utilizing its current cash on hand and by raising additional capital through equity or debt financings. There can be no assurance that the Company will be successful in raising that additional capital or that such capital, if available, will be on terms that are acceptable to the Company. If the Company is unable to raise sufficient additional capital, the Company may be compelled to reduce the scope of its operations and planned capital expenditures.
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These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. The Company’s consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and satisfaction of liabilities in the ordinary course of business; no adjustments have been made relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company not continue as a going concern.
NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Zivo Bioscience, Inc. and its wholly-owned subsidiaries, Health Enhancement Corporation, HEPI Pharmaceuticals, Inc., Wellmetrix, LLC, Wellmetris, LLC, Zivo Bioscience, LLC, Zivo Biologic, Inc., ZIVOLife, LLC, and Zivo Zoologic, Inc. All significant intercompany transactions and accounts have been eliminated in consolidation.
Accounting Estimates
The Company’s consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, which require management 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 reported amount of revenues and expenses during the reporting period. Due to the inherent uncertainty involved in making estimates, actual results could differ from those estimates. Management uses its best judgment in valuing these estimates and may, as warranted, solicit external professional advice and other assumptions believed to be reasonable.
Cash
For the purpose of the statements of cash flows, cash equivalents include time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less. The Company maintains cash and cash equivalents balances at financial institutions and are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At times, balances in certain bank accounts may exceed the FDIC insured limits. At December 31, 2022 and 2021, the Company did not have any cash equivalents.
Property and Equipment
Property and equipment consist of furniture and office equipment and are carried at cost less allowances for depreciation and amortization. Depreciation and amortization are determined by using the straight-line method over the estimated useful lives of the related assets. Repair and maintenance costs that do not improve service potential or extend the economic life of an existing fixed asset are expensed as incurred.
Leases
ASC 842, Leases, requires the recognition of a right-of-use (“ROU”) and a corresponding lease liability on the balance sheet. ROU assets represent the right to use an underlying asset over the lease term and lease liabilities represent the obligation to make lease payments resulting from the lease agreement. ROU assets and lease liabilities are recognized on commencement of the lease agreement.
ROU assets are included within operating lease right-of-use assets, and the corresponding operating lease liabilities are recorded as current portion of long-term operating lease, and within long-term liabilities as long-term operating lease, net of current portion on the Company’s Consolidated Balance Sheets as of December 31, 2022 and December 31, 2021.
Lease assets and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Generally, we do not consider any additional renewal periods to be reasonably certain of being exercised, as comparable locations could generally be identified within the same trade areas for comparable lease rates. Because the Company's leases do not provide an implicit rate of return, the Company used its incremental borrowing rate in determining the present value of lease payments. We have elected the practical expedient not to separate lease and nonlease components for all of our building leases.
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Revenue Recognition
Revenue is recognized in accordance with ASC 606, which utilizes five steps to determine whether revenue can be recognized and to what extent: (i) identify the contract with a customer; (ii) identify the performance obligation(s); (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) determine the recognition period. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, Revenue from Contracts with Customers, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
Significant judgments exercised by management include the identification of performance obligations, and whether such promised goods or services are considered distinct. The Company evaluates promised goods or services on a contract-by-contract basis to determine whether each promise represents a good or service that is distinct or has the same pattern of transfer as other promises. A promised good or service is considered distinct if the customer can benefit from the good or service independently of other goods/services either in the contract or that can be obtained elsewhere, without regard to contract exclusivity, and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contact. If the good or service is not considered distinct, the Company combines such promises and accounts for them as a single combined performance obligation.
Research and Development
Research and development (“R&D”) costs are expensed as incurred. The Company’s R&D costs, including internal expenses, consist of clinical study expenses as it relates to the biotech business and the development and growing of algae as it relates to the agtech business. External clinical studies expenses were approximately $1.4 million and $1.6 million for the years ended December 31, 2022 and 2021, respectively. Internal expenses, composed of staff salaries compose approximately $1.5 million and $800,000 for the years ended December 31, 2022 and 2021, respectively. These costs were offset by the amortization of the R&D obligation of $774,025 and $555,745 for the years ending December 31, 2022 and 2021, respectively; $193,610 of the year ended December 31, 2022 and $150,805 for the year ended December 31, 2021 of the amortization amount was attributable to related parties (see “Note 9 - Deferred R&D Obligations - Participation Agreements”).
Income Taxes
The Company follows the authoritative guidance for accounting for income taxes. Deferred income taxes are determined using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The tax effects of temporary differences that gave rise to the deferred tax assets and deferred tax liabilities at December 31, 2022 and 2021 were primarily attributable to net operating loss carry forwards. Since the Company has a history of losses, and it is more likely than not that some portion or all of the deferred tax assets will not be realized, a full valuation allowance has been established. In addition, utilization of net operating loss carry-forwards is subject to a substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code. The annual limitation may result in the expiration of net operating loss carry-forwards before utilization.
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Stock Based Compensation
The Company accounts for stock-based compensation in accordance with FASB ASC 718, Compensation - Stock Compensation. Under the provisions of FASB ASC 718, stock-based compensation cost is estimated at the grant date based on the award’s fair value and is recognized as expense over the requisite service period. The Company, from time to time, issues common stock or grants common stock options to its employees, consultants and board members. At the date of grant, the Company determines the fair value of the stock option award and recognizes compensation expense over the requisite service period. Issuances of common stock are valued at the closing market price on the date of issuance and the fair value of any stock option or warrant awards is calculated using the Black Scholes option pricing model and employing the simplified term method as the Company does not have a historical basis to determine the term. The Company records forfeiture of options when they occur.
During 2022 and 2021, options were granted to employees, directors and consultants of the Company. As a result of these grants, the Company recorded expenses of $2.7 million during the year ended December 31, 2022, approximately $500,000 of this expense was for R&D and $2.2 million was attributed to G&A. During the year ending December 31, 2021 the Company recorded expenses of $3.0 million, approximately $300,000 of this expense was for R&D and $2.7 million was attributed to G&A.
The fair value of options and warrants were estimated on the date of grant using the Black-Scholes option-pricing model based on the following weighted average assumptions:
Year Ended December 31,
Expected dividends 0 % 0 %
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including the expected stock price volatility. In considering the expected term of the options, the Company employs the simplified method. The Company uses this method as it does not have a history of option exercises to establish a robust estimated term based on experience. The simplified term is used for the determination of expected volatility as well as the identification of the risk free rate.
Income (Loss) Per Share
Basic loss per share is computed by dividing the Company’s net loss by the weighted average number of shares of common stock outstanding during the period presented. Diluted loss per share is based on the treasury stock method and includes the effect from potential issuance of common stock such as shares issuable pursuant to the exercise of options and warrants and conversions of debentures. Potentially dilutive securities as of December 31, 2022, consisted of 53,546 shares of common stock from convertible debentures and related accrued interest and 6,267,602 shares of common stock underlying outstanding options and warrants. Potentially dilutive securities as of December 31, 2021, consisted of 53,076 shares of common stock from convertible debentures and related accrued interest and 7,250,206 shares of common stock underlying outstanding options and warrants. For 2022 and 2021, diluted and basic weighted average shares were the same, as potentially dilutive shares are anti-dilutive.
Segment Reporting
The Company’s Chief Executive Officer, who is considered to be the chief operating decision maker (CODM), reviews financial information presented on a consolidated basis, accompanied by information about operating segments for purposes of making operating decisions and assessing financial performance. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the CODM in deciding how to allocate resources and in assessing performance. The Company operates solely in the United States.
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Fair Value of Financial Instruments
We account for fair value measurements of assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring or nonrecurring basis adhering to the Financial Accounting Standards Board (“FASB”) fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
As of December 31, 2022 and 2021, fair values of cash, prepaid, other assets, accounts payable and accrued expenses approximated their carrying values because of the short-term nature of these assets or liabilities. As of December 31, 2022 and 2021 the fair value of the convertible notes approximated their carrying value.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents. The Company has historically maintained cash balances at financial institutions which exceed the current FDIC limit of $250,000 at times during the year.
The Company has not experienced losses on these accounts and management believes the Company is not exposed to significant risks on such account.
Recently Adopted Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The standard is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company adopted this ASU beginning January 1, 2023. The Company has determined there is no impact of this standard on its financial statements.
In May 2021, the FASB issued ASU No. 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): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This update provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. This update is effective for fiscal years beginning after December 15, 2021. The Company has determined there is no impact of this standard on its financial statements.
Recent Accounting Pronouncements Not Yet Adopted
In August 2020, the FASB issued ASU No. 2020-06 ("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) (“ASU 2020-06”). ASU 2020-06 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, ASU 2020-06 modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2021 (or December 15, 2023 for companies who meet the SEC definition of Smaller Reporting Companies), and interim periods within those fiscal years. The amendment is to be adopted through either a fully retrospective or modified retrospective method of transition. Early adoption is permitted. The Company is currently evaluating the impact of this standard on its financial statements and related disclosures.
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NOTE 5 - LEASES
On December 17, 2020, the Company entered into a 25 1⁄2 month lease agreement for a facility that contains office, warehouse, lab and R&D space in Ft. Myer, Florida. The lease agreement commenced on December 17, 2020 and ends on January 31, 2023. The lease agreement provided for a total rent of $54,993 over the period. Occupancy of the property commenced on December 17, 2020, and there was a 6-week rent holiday and a commencement date of February 1, 2021. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. Rent is $3,291 per month from January 15, 2021 to January 31, 2022 and $1,154 from February 1, 2022 to January 31, 2023. On June 5, 2022, the Company exercised an option to extend the lease through December 31, 2024. The lease extension rent is $2,261 per month for calendar year 2023, and $2,300 per month for calendar year 2024, and totals an additional rent obligation of $54,743 of rent over the extension period.
On January 14, 2022, the Company entered into a 34-month sublease agreement for a 4,843 square-foot office in Bloomfield Hills, Michigan. The Company moved its headquarters to this location. The agreement commenced on January 29, 2022 and ends on November 30, 2024. The agreement provided for a total rent of $232,464. Occupancy of the property commenced on January 29, 2022, there was a three-month rent holiday with a rent commencement date of April 29, 2022. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. Rent is $7,265 per month from commencement to November 30, 2022, $7,466 from November 30, 2022 to November 30, 2023, and $7,668 from November 30, 2023 to the lease end date.
The balances for our operating lease where we are the lessee are presented as follows within our consolidated balance sheet:
Operating leases:
Liabilities:
Current portion of long-term operating lease $ 99,259 $ 15,178
Long-term operating lease, net of current portion 105,918 -
The components of lease expense are as follows within our consolidated statement of operations:
For the Year ended
Other information related to leases where we are the lessee is as follows:
For the Year ended
Weighted-average remaining lease term:
Operating leases 1.94 Years 1.08 Years
Discount rate:
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Supplemental cash flow information related to leases where we are the lessee is as follows:
For the Year ended
Non-cash investment in ROU asset 241,694 -
As of December 31, 2022, the maturities of our operating lease liability are as follows:
Year Ended: Operating Lease
Total minimum lease payments $ 228,889
Present value of lease obligations $ 205,178
Less: Current portion 99,259
Long-term portion of lease obligations $ 105,919
NOTE 6 - LOAN PAYABLE, RELATED PARTIES
HEP Investments, LLC
During the year ended December 31, 2021, the Company and HEP Investments, LLC (“HEP”, or “HEP Investments”) agreed to exchange the $9,000 in related party debt into an equal investment of $9,000 in the Participation Agreements (see “Note 9 - Deferred R&D Obligations - Participation Agreements”). This agreement eliminated any remaining third-party debt with HEP Investments. As of December 31, 2021, there were no Loans Payable to related parties.
NOTE 7 - CONVERTIBLE DEBT
HEP Investments, LLC - Related Party
On December 2, 2011, the Company and HEP Investments entered into the following documents, effective as of December 1, 2011, as amended through May 16, 2018: (i) a Loan Agreement under which the HEP Investments agreed to advance up to $20,000,000 to the Company, subject to certain conditions, (ii) an 11% Convertible Secured Promissory Note in the principal amount of $20,000,000 (“Convertible Note”) (of which a total of $18,470,640 was funded, with a total of $14,380,298 converted into 1,796,287 shares of common stock, leaving a balance advanced of $4,090,342 as of December 31, 2020), (iii) a Security Agreement, under which the Company granted HEP Investments a security interest in all of its assets, (iv) warrants issued to HEP Investments to purchase 20,833 shares of common stock at an exercise price of $9.60 per share (including a cashless exercise provision) which expired September 30, 2016, (v) a Registration Rights Agreement with respect to all the shares of common stock issuable to HEP Investments in connection with the Loan Agreement, in each case subject to completion of funding of the full $20,000,000 called for by the Loan Agreement, and (vi) an Intellectual Property security agreement under which the Company and its subsidiaries granted HEP Investments a security interest in all their respective intellectual properties, including patents, in order to secure their respective obligations to HEP Investments under the Convertible Note and related documents. The Convertible Note was originally convertible into the Company’s common stock at $8.00 per share. In addition, the Company’s subsidiaries guaranteed the Company’s obligations under the Convertible Note. On March 31, 2021, HEP Investments entered into a “Debt Extension and Conversion Agreement” with the Company providing that the Convertible Notes, including principal and accrued interest, would automatically convert into shares of common stock upon consummation of an underwritten public offering of the Company’s common stock.
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On June 2, 2021, in accordance with the Debt Extension and Conversion Agreement, all of the outstanding debt and accrued interest for the Convertible Notes was automatically converted into common stock of the Company. The principal amount of $4,090,342 and the accrued interest to June 2, 2021, of $2,161,845 totaled $6,252,187; this total amount was converted into 781,524 shares of common stock (calculated at $8.00 per share). As of December 31, 2022, the Company had no further remaining financial obligations to the HEP Investments under the terms of the Loan Agreement, the Convertible Note or the Registration Rights Agreement. Additionally, as of the conversion of the total outstanding principal and accrued interest balance, HEP Investments no longer retains a security interest in the Company’s intellectual property or other assets.
In January 2019, and in connection with the Convertible Note, HEP Investments entered into a life insurance policy for Andrew Dahl, our former Chief Executive Officer. On February 23, 2021, the Company and HEP Investments entered into a Letter Agreement in which the Company agreed to pay certain premiums of $2,565 per month under the life insurance policy while payments under the Convertible Note remained outstanding. Upon conversion of the Convertible Notes on June 2, 2021, the Company immediately stopped paying the premiums under the life insurance policy.
Paulson Investment Company, LLC - Related Debt
The Company previously entered into a Placement Agent Agreement with Paulson Investment Company, LLC (“Paulson”). The Placement Agent Agreement provided that Paulson could provide up to $2 million in financings to “accredited investors”. The Company received gross proceeds of $1,250,000 in connection with loans received from the “New Lenders”. Each loan included (i) a Loan Agreement, (ii) a Convertible Secured Promissory Note (“New Lenders Notes”) in the principal amount of the loan, (iii) a Security Agreement under which the Company granted the New Lenders a security interest in all of its assets and (iv) an Intercreditor Agreement with HEP Investments whereby HEP Investments and the New Lenders agree to participate in all collateral on a pari passu basis. The New Lender Notes had a two-year term and matured September 2018 ($600,000) and October 2018 ($650,000). Paulson received a 10% cash finance fee for monies invested in the Company in the form of convertible debt, along with 5-year warrants, exercisable at $8.00 per share, all the warrants have expired as of December 31, 2021. The New Lenders Notes were convertible into the Company’s common stock at $8.00 per share.
In May 2021, each of the remaining New Lenders entered into a Debt Extension and Conversion Agreement with the Company. These agreements provided that the New Lender Notes, including principal and accrued interest, would automatically convert into shares of common stock upon consummation of an underwritten public offering of the Company’s common stock.
On June 2, 2021, in accordance with the Debt Extension and Conversion Agreement between the remaining New Lenders and the Company, all of the remaining outstanding debt and accrued interest for the New Lenders Notes were automatically converted to common stock. The remaining principal amount of $850,000 and the accrued interest to June 2, 2021, of $436,369 totaled $1,286,369; this total amount was converted into 160,798 shares of common stock at $8.00 per share. As of December 31, 2021, the Company had no further remaining financial obligations to the New Lenders under the terms of the New Lenders Notes. All security interests of the New Lenders in the Company’s assets have been terminated.
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Other Debt
The Company’s 1% convertible debentures allow for rolling 30-day extensions until notice is given by the lender to the Company to the contrary. As of December 31, 2022, that agreement is still in place.
NOTE 8 - NOTE PAYABLE
Paycheck Protection Program Loan
On May 7, 2020, the Company received $121,700 in loan funding from the Paycheck Protection Program (the “PPP”) established pursuant to the recently enacted Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”) and administered by the U.S. Small Business Administration (“SBA”). The unsecured loan (the “PPP Loan”) is evidenced by a promissory note of the Company, dated April 29, 2020 (the “Note”) in the principal amount of $121,700 with Comerica 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 could have been payable sooner in connection with an event of default under the Note.
The CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed. Under the PPP, the Company was eligible to apply for forgiveness for all or a part of the PPP Loan. The amount of loan proceeds eligible for forgiveness, as amended, was based on a formula that takes into account a number of factors, including: (i) the amount of loan proceeds that are used by the Company during the covered period after the loan origination date for certain specified purposes including payroll costs, interest on certain mortgage obligations, rent payments on certain leases, and certain qualified utility payments, provided that at least 60% of the loan amount is used for eligible payroll costs; (ii) the Company maintaining or rehiring employees, and maintaining salaries at certain levels; and (iii) other factors established by the SBA. Subject to the other requirements and limitations on loan forgiveness, only that portion of the loan proceeds spent on payroll and other eligible costs during the covered period will qualify for forgiveness.
In August 2021, the Company applied to the SBA for forgiveness of the outstanding loan principal and accrued interest under the CARES Act. On September 9, 2021, the Company received a Notification of Paycheck Protection Program Forgiveness Payment letter from the SBA confirming that the full amount of the principal, $121,700, and accrued interest, $1,653, were forgiven by the SBA. The Company recognized the forgiveness of debt principal of $121,700 and the 2020 accrued interest of $820 as an Other Income of $122,520, the remaining interest due for the PPP Loan in 2021 through the forgiveness date of $833 was booked to offset the 2021 interest expense. The Company’s PPP loan and application for forgiveness of loan amounts remain subject to review and audit by SBA for compliance with program requirements.
Short Term Loan
On February 21, 2022, the Company entered into a short-term, unsecured loan agreement to finance a portion of the Company’s directors’ and officers’ insurance premiums. The note in the amount of $628,600 carried a 4.15% annual percentage rate and was paid down in nine equal payments of $71,058 beginning in March 2022. The loan was fully paid off, and there was no remaining principal balance as of December 31, 2022.
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NOTE 9 - DEFERRED R&D OBLIGATIONS - PARTICIPATION AGREEMENTS
The Company entered into twenty-one (21) License Co-Development Participation Agreements (the “Participation Agreements”) with certain investors (“Participants”) for aggregate proceeds of $2,985,000. The Participation Agreements provide for the issuance of warrants to such Participants and allows the Participants to participate in the fees (the “Fees”) from licensing or selling bioactive ingredients or molecules derived from ZIVO’s algae cultures. Specifically, ZIVO has agreed to provide to the Participants a 44.78% “Revenue Share” of all license fees generated by ZIVO from any licensee (See the Table below).
According to the terms of the Agreements, and pursuant to ASC 730-20-25 the Company has bifurcated the proceeds of $2,985,000 as follows: 1) the 106,315 warrants sold were attributed a value of $953,897 based on the Black Scholes pricing model using the following assumptions: volatilities ranging from 129.13% to 154.26%; annual rate of dividends 0%; discount rates ranging from 0.26% to 0.87%, and recorded as Additional Paid In Capital; 2) the remaining $2,031,103 was recorded as Deferred R&D Obligation - Participation Agreements. Since the Company believes there is an obligation to perform pursuant to ASC 730-20-25, the Deferred R&D Obligation will be amortized ratably based on expenses incurred as the Company develops the technology for bioactive ingredients or molecules (including its TLR4 Inhibitor molecule) derived from the Company’s algae cultures. In the year ending December 31, 2022, the Company recognized $774,025 as a contra R&D expense related to personnel and third-party expenses to develop the subject technology. $193,610 of this total contra R&D expense was attributed to deferred R&D obligations funded by a related party. As of December 31, 2022, the remaining R&D obligation was $701,331, of which $175,427 was attributed to a related party. In the prior year ending December 31, 2021, the Company recognized $555,745 as a contra R&D expense related to personnel and third-party expenses to develop the subject technology. $150,805 of this total contra R&D expense was attributed to deferred R&D obligations funded by a related party. As of December 31, 2021, the remaining R&D obligation was $1,475,357, of which $369,037 was attributed to a related party.
The Participation Agreements allow the Company the option to buy back the right, title and interest in the Revenue Share for an amount equal to the amount funded plus a forty percent (40%) premium, if the option is exercised less than 18 months following execution, and for either forty (40%) or fifty percent (50%) if the option is exercised more than 18 months following execution. Pursuant to the terms of twelve of the Participation Agreements, the Company may not exercise its option until it has paid the Participants a revenue share equal to a minimum of thirty percent (30%) of the amount such Participant’s total payment amount. Pursuant to the terms of one of the Participation Agreements, the Company may not exercise its option until it has paid the Participant a revenue share equal to a minimum of one hundred forty percent (140%) of such Participant’s total payment amount. Five of the Participation Agreements have no minimum threshold payment. Once this minimum threshold is met, the Company may exercise its option by delivering written notice to a Participant of its intent to exercise the option, along with repayment terms of the amount funded, which may be paid, in the Company’s sole discretion, in one lump sum or in four (4) equal quarterly payments. If the Company does not make such quarterly payments timely for any quarter, then the Company shall pay the prorated Revenue Share amount, retroactive on the entire remaining balance owed, that would have been earned during such quarter until the default payments have been made and the payment schedule is no longer in default. See below a summary of the Participation Agreements:
Warrants Term Buy-back Buy-back
Minimum Premium % Premium %
Agreement Date of Amount Exercise Revenue Payment pre-18 post 18
# Funding Funded Price Share Threshold mos. mos.
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Certain of the Participation Agreements are owned by related parties. Participation Agreements numbers 8, 14, and 19 totaling $265,000 are owned by HEP Investments, Participation Agreement 21 in the amount of $45,000 is owned by MKY MTS LLC an entity controlled by the owners of HEP Investments, and Participation Agreement 13 in the amount of $500,000 is owned by an investment company owned by a significant shareholder Mark Strome (“Strome”).
NOTE 10 - STOCKHOLDERS’ EQUITY (DEFICIT)
Recapitalization - Reverse Stock Split
On May 27, 2021, the Company filed a certificate of amendment to its articles of incorporation with the Secretary of State of the State of Nevada (the “Certificate of Amendment”) to (i) effectuate a reverse stock split (the “Reverse Stock Split”) of its issued and outstanding shares of common stock and treasury shares on a 1-for-80 basis and (ii) decrease the number of total authorized shares of common stock of the Company from 1,200,000,000 to 150,000,000 shares.
As of the Effective Time, every 80 shares of issued and outstanding common stock were converted into one share of common stock. No fractional shares were issued in connection with the Reverse Stock Split. Instead, a holder of record of old common stock as of immediately prior to the Effective Time who would otherwise have been entitled to a fraction of a share was entitled to receive cash in lieu thereof.
The Company’s transfer agent, Issuer Direct Corporation acted as the exchange agent for the Reverse Stock Split. The Reverse Stock Split did not alter the par value of the Company’s common stock or modify any voting rights or other terms of the common Stock. In addition, pursuant to their terms, a proportionate adjustment was made to the per share exercise price and number of shares issuable under all of the Company’s outstanding stock options and warrants to purchase shares of common Stock, and the number of shares authorized and reserved for issuance pursuant to the Company’s equity incentive plan will be reduced proportionately.
All issued and outstanding common stock and per share amounts contained in the financial statements have been retroactively adjusted to reflect this Reverse Stock Split for all periods presented. In addition, a proportionate adjustment was made to the per share exercise price and the number of shares issuable upon the exercise of all outstanding stock options, restricted stock units and warrants to purchase shares of common stock. A proportionate adjustment was also made to the number of shares reserved for issuance pursuant to the Company’s equity incentive compensation plans to reflect the Reverse Stock Split.
Board of Directors Fees
On October 12, 2021, our Board of Directors approved the Non-Employee Director Compensation Policy. Pursuant to that policy, the Board granted to each of the four non-employee directors $50,000 in value of common stock options. The Company used the Black Scholes option pricing model to determine the number of shares that would derive a value of $50,000 for each non-employee director. The Black Scholes pricing model use the following assumptions: term of 10 years; volatility 142.54%; annual rate of dividends 0%; discount rate 1.59%. The model yielded an award grant of 45,664 total options, 11,416 for each of the four non-employee directors. In addition, the Board granted Ms. Cornell a pro rata number of options for her tenure from February 2, 2021, through October 11, 2021; a grant of 7,660 shares valued at $33,549 using the same Black Scholes assumptions.
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On July 28, 2022, our Board of Directors awarded options pursuant to the Non-Employee Director Compensation Policy. The Board granted to each of the three non-employee directors $50,000 in value of common stock options. The Company used the Black Scholes option pricing model to determine the number of shares that would derive a value of $50,000 for each non-employee director. The Black Scholes pricing model used the following assumptions: term of 5.31 years; volatility 120.99%; annual rate of dividends 0%; discount rate 2.69%. The model yielded an award grant of 47,391 total options, 15,797 for each of the three non-employee directors.
On December 16, 2022, our Board of Directors awarded options to each of the three non-employee directors of $10,000 in value of common stock options. The Company used the Black Scholes option pricing model to determine the number of shares that would derive a value of $10,000 for each non-employee director. The Black Scholes pricing model used the following assumptions: term of 5 years; volatility 116.42%; annual rate of dividends 0%; discount rate 3.61%. The model yielded an award grant of 12,732 total options, 4,244 for each of the three non-employee directors.
On December 19, 2022, our Board of Directors appointed Ms. Alison Cornell as lead independent director. In recognition of that appointment the Board of Directors awarded to Ms. Cornell $300,000 in value of common stock options. The Company used the Black Scholes option pricing model to determine the number of shares that would derive a value of $300,000 for the lead independent director. The Black Scholes pricing model used the following assumptions: term of 5 years; volatility 116.47%; annual rate of dividends 0%; discount rate 3.70%. The model yielded an award grant of 139,444 total options.
The Company recorded directors’ fees of $1,155,722 and $710,481 (as adjusted) for the years ended December 31, 2022 and 2021, respectively, representing the cash fees paid or accrued and the expense associated with the common stock options described above.
Stock Based Compensation
On January 1, 2021, in connection with his appointment as the Company’s Chief Financial Officer, Mr. Marchiando received a stock option award issued pursuant to the 2019 Plan to purchase 162,500 shares of the Company’s common stock, with an exercise price of $11.20 per share. Vesting of these options shall be as follows: 37,500 shares vested immediately upon grant of the option award, and 15,625 shares will vest on each 6 month anniversary of January 1, 2021.
The Company, on June 15, 2021, issued 5,000 shares of unregistered common stock to CorProminence, LLC (d/b/a COREir) for services in accordance with the consulting agreement between COREir and the Company (See “Note 11 - Commitments and Contingencies”). The shares were valued at the market price on June 15, 2021, $4.48 per share for a total expense of $22,400. On October 15, 2021, the Company, per its consulting agreement with CorProminence, LLC (dba COREir), issued an additional 2,500 shares of common stock to CorProminence, LLC. The shares were valued on October 15, 2021, at $4.15 per share for a total expense in the aggregate of $10,375.
On October 21, 2021, the Board of directors granted options under its 2021 equity incentive plan (the “2021 Plan”) to purchase 924,000 shares of common stock to several directors and officers of the Company. The options have a term of ten years and 260,000 shares granted to board members vest over one year, and the 664,000 shares granted to the officers vest over three years. The options were valued at $3,476,392 using the Black Scholes pricing model relying on the following assumptions: volatility 141.38%; annual rate of dividends 0%; discount rate 1.68%.
On February 22, 2022, the Board of directors granted options under its 2021 equity incentive plan (the “2021 Plan”) to purchase 172,500 shares of common stock to certain employees of the Company. The options have a term of ten years and vest over three years. The options were valued at $493,536 using the Black Scholes pricing model relying on the following assumptions: simplified term of 5.75 years; volatility 130.18%; annual rate of dividends 0%; discount rate 1.88%.
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On August 29, 2022, the Board of directors granted options under its 2021 equity incentive plan (the “2021 Plan”) to purchase 173,000 shares of common stock to certain employees of the Company. The options have a term of ten years and vest over three years. The options were valued at $590,896 using the Black Scholes pricing model relying on the following assumptions: simplified term of 5.75 years; volatility 121.19%; annual rate of dividends 0%; discount rate 3.25%.
Stock Issuances
During the year ended December 31, 2021, the Company issued 139,664 shares for proceeds of $1,514,969 to investors in private placements. In addition, during this same period, a related party purchased 4,464 shares of the Company’s common stock at $11.20 per share for proceeds of $50,000.
On June 2, 2021, the Company completed its public offering of common stock and common stock warrants. The Company issued 2,760,000 units at $5.00 (each unit consisting of one share of the Company’s common stock and one warrant (“registered warrant”) with an exercise price $5.50 per share) for gross proceeds of $13,804,240, and net proceeds of $12,181,602 after related underwriting and other costs of $1,622,638.
On July 2, 2021, the underwriter of the June 2021 Offering exercised its overallotment option and purchased an additional 150,000 shares of the Company’s common stock at $4.99 per share for gross proceeds of $748,500, and net proceeds of $673,159 after related underwriting and other costs of $75,191.
Stock Warrants Exercised
During the twelve months ended December 31, 2021, warrants to purchase 139,100 shares of the Company’s common stock were exercised on a “cashless” basis resulting in the issuance of 54,361 shares of common stock.
In September 2021, two groups of the Company’s registered warrants were exercised resulting in the Company issuing 198,503 shares of common stock. The exercise price of the registered warrants was $5.50 per share, resulting in gross cash proceeds to the Company of $1,091,767.
Sale of Common Stock Warrants
During the twelve months ending December 31, 2021, and in connection with the Participation Agreements (see “Note 9 - Deferred R&D Obligation - Participation Agreements”), the Company sold warrants to purchase 5,626 shares of common stock for $55,697. The warrants were valued based on the Black Scholes pricing model relying on the following assumptions: volatility 129.13% to 140.20%; annual rate of dividends 0%; discount rate 0.41% to 0.87%.
On June 2, 2021, the Company completed its public offering of common stock and warrants. As part of the transaction, the Company sold 414,000 warrants (“registered warrants”) with an exercise price of $5.50 per share, from the overallotment option that was exercised by the underwriter for $4,140. Additionally, the Company issued the underwriter 8% of the number of shares of common stock in the offering in 220,800 unregistered warrants for shares of common stock, for an aggregate price to the Company of $100. These warrants are exercisable 180 days after the offering date and expire five years after the first day they are exercisable. The warrants were valued at $946,675 based on the Black Scholes pricing model relying on the following assumptions: volatility 132.46%; annual rate of dividends 0%; discount rate 0.80%. This was recognized by the company as an underwriting cost and was accounted for as an offset to funds raised.
2021 Equity Incentive Plan
On October 12, 2021, after approval from the stockholders at the Company’s 2021 annual meeting of stockholders, the Company adopted the 2021 Plan for the purpose of enhancing the Company’s ability to attract and retain highly qualified directors, officers, key employees and other persons and to motivate such persons to improve the business results and earnings of the Company by providing an opportunity to acquire or increase a direct proprietary interest in the operations and future success of the Company. The 2021 Plan is administered by the compensation committee of the Board who will, amongst other duties, have full power and authority to take all actions and to make all determinations required or provided for under the 2021 Plan. Pursuant to the 2021 Plan, the Company may grant options, share appreciation rights, restricted shares, restricted share units, unrestricted shares and dividend equivalent rights. The 2021 Plan has a duration of 10 years.
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Subject to adjustment as described in the 2021 Plan, the aggregate number of shares of common stock available for issuance under the 2021 Plan is initially set at 1,000,000 shares; this number is automatically increased each January 1st by an amount equal to 5% of the number of common stock shares outstanding at that date. As of December 31, 2022, 1,327,407 options have been issued under the 2021 Plan, and 143,576 shares remained available for issuance.
2019 Omnibus Long-Term Incentive Plan
Prior to the adoption of the 2021 Equity Incentive Plan, the Company maintained a 2019 Omnibus Long-Term Incentive Plan (the “2019 Plan”). Following the approval by the shareholders of the 2021 Equity Incentive Plan, no additional awards have been or will be made under the 2019 Plan. As of December 31, 2022, 781,250 stock options had been issued under the 2019 Plan with terms between 5 years and 10 years, of which 362,500 remained outstanding.
Common Stock Options
A summary of the status of the Company’s options issued under the Company’s equity incentive plans is presented below. As of December 31, 2022 there is no intrinsic value in any of the Company's outstanding options as the market price of the Company's common stock is in all cases lower than the exercise price of options.
Options outstanding and exercisable by price range as of December 31, 2022 were as follows:
Outstanding Options Exercisable Options
As of December 31, 2022, total compensation cost related to non-vested awards not yet recognized is $1,061,925; and the weighted-average period over which it is expected to be recognized is 0.79 years.
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Common Stock Warrants - Unregistered
A summary of the status of the Company’s unregistered warrants is presented below.
Cancelled - - - -
Unregistered warrants outstanding and exercisable by price range as of December 31, 2022 were as follows:
Outstanding Warrants Exercisable Warrants
Common Stock Warrants - Registered
A summary of the status of the Company’s registered warrants is presented below:
Outstanding, beginning of year 2,975,497 $ 5.50 - $ -
Cancelled - - - -
Expired - - - -
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Registered warrants outstanding and exercisable by price range as of December 31, 2022, were as follows:
Outstanding Registered Warrants Exercisable Registered Warrants
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Employment Agreements
At December 31, 2022, the Company had compensation agreements with its President / Chief Executive Officer, and Chief Financial Officer.
Corporate Advisory Agreement
In August 2021, the Company entered into an agreement with an Investment Opportunity Provider (IOP). The IOP has been engaged as an exclusive financial advisor in connection with a proposed transaction involving the creation of a ZIVO Photobioreactor Facility (“Phase 1”) and additional Photobioreactor Facilities (“Phase 3”). The Company has agreed to pay the IOP, upon the completion of Phase 1, a fee of 6% of the aggregate value of the transaction (50% in cash, and 50% in equity) and upon the completion of Phase 3, a fee of 3% of the aggregate value of the transaction in cash. As of December 31, 2022, in connection with this agreement, no successful transactions have taken place.
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Investor / Public Relations
On February 15, 2021, the Company signed a consulting agreement with CorProminence, LLC (dba COREir) to provide us with investor relations and public relations services. The COREir agreement includes a provision to issue to COREir on the four (4) month anniversary of the effective date, or as soon thereafter as is practically possible, 10,000 authorized restricted shares of common stock of the Company, of which 5,000 shares shall vest immediately upon receipt, 2,500 shall vest on the eight (8) month anniversary of the contract effective date and 2,500 shares shall vest on the twelve (12) month anniversary of the effective date of the COREir agreement. In addition, the agreement requires the Company to pay COREir $15,000 per month, plus out of pocket expenses, for their consulting services.
On October 15, 2021, the Company, per its consulting agreement with CorProminence, LLC (dba COREir), issued 2,500 shares of common stock to CorProminence, LLC. The shares were valued on October 15, 2021, at $4.15 per share for a total expense in the aggregate of $10,375. On October 31, 2021, the Company informed CorProminence LLC that it was immediately terminating the consulting agreement. Under the termination clause of the agreement, the Company may be liable for an additional 2,500 shares to be issued to CorProminence.
Legal Contingencies
On April 13, 2022, AEGLE Partners, 2 LLC (“AEGLE”) initiated an arbitration in Michigan against the Company with the American Arbitration Association. AEGLE asserted claims related to a certain Supply Chain Consulting Agreement entered into between AEGLE and the Company in 2019 (as amended from time to time, the “Agreement”), and a disagreement between AEGLE and the Company regarding whether AEGLE is entitled to payment of certain fees and warrants pursuant to the Agreement. AEGLE's complaint seeks, among other things, three times the payment of such alleged fees and warrants and recovery of AEGLE's costs and expenses. We believe that the claims made by AEGLE in its complaint are without merit and we intend to vigorously defend ourselves against them. Arbitration in this matter is scheduled to begin in April 2023.
We may become a party to litigation in the normal course of business. In the opinion of management, there are no legal matters involving us that would have a material adverse effect upon our financial condition, results of operation or cash flows.
NOTE 12 - RELATED PARTY TRANSACTIONS
Loan Payable - Related Party
See “Note 6 - Loan Payable, Related Parties” for disclosure of loans payable to related parties.
Employment Agreement
See “Note 11 - Commitments and Contingencies” for disclosure of the employment agreements with the Chief Executive Officer and current and Chief Financial Officer.
Building Lease
In January 2022 the Company terminated its agreement for the rental of its office space from M&M Keego Center LLC, an entity controlled by an immediate family member of a principal shareholder.
Stock Issuances
On June 2, 2021, the Company completed its public offering of units consisting of common stock and warrants. Two of the Company’s directors participated in the offering; Chris Maggiore purchased 100,000 units, and Alison Cornell purchased 15,000 units.
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NOTE 13 - INCOME TAXES
The following table presents the components of net loss before income taxes:
Years Ended December 31,
There was no income tax for the years ended December 31, 2022 and December 31, 2021. The Company’s tax expense differs from the “statutory” tax expense for the years ended December 31, 2022, and 2021 as noted below:
For the Years Ended December 31,
Apportioned state income taxes (131,407 ) 1.5 % - 0.0 %
Return to provision adjustments (1,515 ) 0.0 % - 0.0 %
Other non-deductible items - 0.0 % (21,692 ) 0.2 %
Total income tax provision $ - 0.0 % $ - 0.0 %
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards. The tax effects of significant items comprising the Company’s deferred taxes were as follows:
For the Years Ended December 31,
Deferred tax assets/(liabilities)
State net operating loss carryforwards 74,353 -
Other deferred tax assets (liabilities) (180 ) -
Total deferred income taxes $ - $ -
During 2022, immaterial errors were identified in deferred taxes related to certain federal and state net operating losses (NOLs). The 2021 amounts in the tables above have been adjusted which resulted in the reduction of the federal net operating loss carryforwards, the state net operating loss carryforwards, stock-based compensation, and Section 174 research and experimental expenditures as of December 31, 2021 within gross deferred tax assets as previously disclosed by approximately $11.0 million, $3.1 million, $400,000, and $100,000, respectively, with a corresponding decrease in the valuation allowance of $14.6 million. Corresponding adjustments were made to the rate reconciliation table including an adjustment to the apportioned state income taxes by approximately $(400,000) for the year ended December 31, 2021.
ASC 740 Income Taxes requires that the tax benefit of net operating losses (“NOLs”), temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is “more likely than not.” Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carryforward period. Management believes that realization of the deferred tax assets arising from the above-mentioned future tax benefits from operating loss carryforwards is currently not more likely than not and, accordingly, has provided a valuation allowance. The valuation allowance increased by $1.7 million for the year ended December 31, 2022 and increased by $2.1 million for the year ended December 31, 2021.
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As of December 31, 2022 and 2021 the Company’s deferred tax asset contains the tax effect of approximately $36.2 million and $31.7 million of Federal NOLs, respectively. The Federal NOLS' generated prior to December 31, 2017 were written off of the deferred tax asset, while NOLs generated subsequent to this date remain. Under the new Tax Cuts and Jobs Act, all Federal NOLs incurred after December 31, 2017 are carried forward indefinitely for Federal tax purposes.
Total expiring operating losses (incurred prior to December 31, 2017) - -
In the ordinary course of its business the Company incurs costs that, for tax purposes, may be qualified research expenditures within the meaning of IRC Code Sec. 41 and are, therefore, may be eligible for the Increasing Research Activities credit under IRC Code Sec. 41. The Company has not claimed a credit pursuant to IRC Code Sec. 41 on its federal returns, i.e. no deferred tax asset on the books.
As of December 31, 2022, the Company has no uncertain tax positions. It is the Company’s policy to account for interest and penalties related to uncertain tax positions as interest expense and general and administrative expense, respectively in its statements of operations. No interest or penalties have been recorded related to the uncertain tax positions.
It is not expected that there will be a significant change in uncertain tax positions in the next 12 months. The Company is subject to U.S. federal and state income tax as well as to income tax in multiple state jurisdictions. In the normal course of business, the Company is subject to examination by tax authorities. As of the date of the financial statements, there are no tax examinations in progress. The statute of limitations for tax years ended after December 31, 2018, are open for federal and state tax purposes.
The 2017 Tax Act amended Section 174 of the Internal Revenue Code which affects the Federal tax treatment of research and experimental (R&E) expenditures. Preceding this law change, R&E expenditures were expensed as incurred for Federal Income Tax purposes. In taxable years beginning after December 31, 2021, R&E expenditures must be capitalized and amortized over 5 years for expenditures incurred in the United States, or 15 years for expenditures incurred outside the United States. Due to the nature of the Company’s operations, R&E expenditures are a significant portion of total expenditures. The Company calculated an estimated amount for income tax provision purposes based on guidance available to determine the capitalized amount.
NOTE 14 - SUBSEQUENT EVENTS
2021 Plan Evergreen Provision
Under the 2021 Plan, the shares reserved automatically increase on January 1st of each year, for a period of not more than ten years from the date the 2020 Plan is approved by the stockholders of the Company, commencing on January 1, 2022, and ending on (and including) January 1, 2029, by an amount equal to 5% of the shares of common stock outstanding as of December 31st of the preceding calendar year. Notwithstanding the foregoing, the Board of Directors may act prior to January 1st of a given year to provide that there will be no January 1st increase in the share reserve for such year or that the increase in the share reserve for such year will be a lesser number of shares of common stock than would otherwise occur pursuant to the preceding sentence. On January 1, 2023, 470,983 shares were added to the 2021 Plan as a result of the evergreen provision.
Nasdaq Compliance
On November 22, 2022, the Company received written notice from Nasdaq stating that the Company no longer complied with the minimum stockholders’ equity requirement under Nasdaq Listing Rule 5550(b)(1) for continued listing on The Nasdaq Capital Market. On January 6, 2023, the Company submitted its compliance plan to Nasdaq.
On January 11, 2023, Nasdaq notified the Company that it had determined to grant the Company an extension until May 22, 2023 to regain compliance. There can be no assurance that the Company will be successful in implementing its plan to regain compliance with the minimum stockholders’ equity requirement.
Short Term Loan
On February 14, 2023, the Company entered into a short unsecured loan agreement to finance a portion of the Company's directors' and officers', and employment practices liability insurance premiums. The note in the amount of $605,600 carries a 8.4% annual percentage rate and will be paid down in nine equal monthly payments of $69,666 beginning on March 10, 2023.