Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements involve known and unknown risks, uncertainties and other factors which may cause our or our industry’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to statements regarding:
· | our ability to raise the funds we need to continue our operations; |
· | our goal to generate revenues and become profitable; |
· | regulation of our product; |
· | market acceptance of our product and derivatives thereof; |
· | the results of current and future testing of our product; |
· | the anticipated performance and benefits of our product; |
· | the ability to generate licensing fees; and |
· | our financial condition or results of operations. |
In some cases, you can identify forward-looking statements by terms such as “may”, “will”, “should”, “could”, “would”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “projects”, “predicts”, “potential” and similar expressions intended to identify forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as otherwise required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained in this report to reflect any change in our expectations or any change in events, conditions or circumstances on which any of our forward-looking statements are based. We qualify all of our forward-looking statements by these cautionary statements.
Overview:
We are a research and development company operating in both the biotech and agtech sectors, with an intellectual property portfolio comprised of proprietary algal and bacterial strains, biologically active molecules and complexes, production techniques, cultivation techniques and patented or patent-pending inventions for applications in human and animal health.
We believe that our proprietary algal culture and materials derived therefrom show promise in benefiting both animal and human health, primarily through inflammation-modulating and immune-boosting properties. Overall, our efforts have been centered around two potential value-creating initiatives; the first being the identification of bioactive extracts or novel bioactive molecules from our proprietary algal culture to treat various diseases, and second, the utilization of our proprietary algal culture in its whole form as a food product to leverage its nutritional value.
Biotech - ZIVO Product Candidates
ZIVO is developing bioactive compounds derived from its proprietary algal culture, targeting human and animal diseases, such as poultry coccidiosis, bovine mastitis, human cholesterol, and canine osteoarthritis. As part of its strategy, ZIVO will continue to seek strategic partners for late stage development, regulatory preparation and commercialization of its products in key global markets.
Review of isolated active materials derived from our proprietary algal culture and their potential treatment applications led us to identify a product candidate for treating coccidiosis in broiler chickens as the best option for most rapidly generating significant revenue because coccidiosis is a global poultry industry issue, and because the clinical testing cycle for chickens is shorter than for other species. Most of the global animal health companies have products for the coccidiosis market; however, they are mostly antibiotic- or ionophore-based with essentially no new technology having been introduced in the last 60 years.
Agtech - ZIVO’s Algal Biomass
ZIVO’s algal biomass is currently produced in Peru. ZIVO’s algal biomass contains Vitamin A, protein, iron, important fatty acids, non-starch polysaccharides and other micronutrients that position the product as a viable functional food ingredient and nutritional enhancement for human and animal use and as a viable functional ingredient for skin care products.
Through our direction and technology, a site in Peru has been successful in consistently producing our proprietary algae. Our team has been working toward building commercial-scale algae ponds using a ZIVO proprietary design, and we are in the middle of a project to grow our algae in a penultimate scale pond. Once we are successful at this scale, we plan, in the first quarter of 2023, to invest in full commercial-scale ponds and product processing equipment.
The Company currently has contracts for the sale of its algal biomass, however, no sales have been made pursuant to these contracts at this time and we don’t expect any sales to be made until we expand production of our algal biomass.
Additional Indications
Pending additional funding, ZIVO may also pursue the following indications:
Biotech:
| o | Bovine Mastitis: ZIVO is developing a treatment for bovine mastitis derived from its proprietary algal culture and the bioactive agents contained within. |
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| o | Canine Joint Health: Studies have indicated the potential of a chondroprotective property when a compound fraction was introduced into ex vivo canine joint tissues. |
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| o | Human Immune Modulation: Early human immune cell in vitro and in vivo studies have indicated that one of the isolated and characterized biologically active molecules in the Company’s portfolio may serve as an immune modulator with potential application in multiple disease situations. |
Agtech:
| o | Human Food Ingredient: The self-affirmed GRAS process was completed for ZIVO algal biomass in late 2018 to validate its suitability for human consumption as an ingredient in foods and beverages. |
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| o | Skin Health: ZIVO is developing its algal biomass as a skin health ingredient, with topical skin product testing started in the third quarter of 2020, and clinical efficacy claim studies planned for ingestible and topical products. |
Results of Operations for the three months ended March 31, 2023 and 2022
The following table summarizes ZIVO’s operating results for the periods indicated
| | Quarter ended March 31, | |
| | 2023 | | | 2022 | |
Total revenues | | - | | | $ | - | |
Costs and expenses: | | | | | | | |
Research and development | | | 401,797 | | | | 679,773 | |
General and administrative | | | 1,568,377 | | | | 1,346,742 | |
Total costs and expenses | | | 1,970,174 | | | | 2,026,515 | |
Loss from operations | | | (1,970,174 | ) | | | (2,026,515 | ) |
Other expense | | | | | | | | |
Interest expense | | | 2,968 | | | | 1,805 | |
Total other expense | | | 2,968 | | | | 1,805 | |
Net loss | | $ | (1,973,142 | ) | | $ | (2,028,320 | ) |
Net Sales
The Company had no sales during the three months ended March 31, 2023 and 2022.
Cost of Sales
The Company had no cost of sales during the three months ended March 31, 2023 and 2022.
General and Administrative Expenses.
General and administrative expenses were approximately $1.6 million for the three months ended March 31, 2023, as compared to approximately $1.3 million for the comparable prior period. The $300,000 increase versus the same quarter last year was primarily driven by a $200,000 increase in labor expenses, no change in professional fees and $100,000 increase in other overhead. Labor related increases of $200,000 included $180,000 higher salary expense and higher non-cash equity-based compensation of $60,000 due to the prior year favorable effects of the termination of the Company's CEO in the quarter ended March 31, 2022, partially offset by $40,000 lower payroll tax and benefits expense. Professional services were unchanged; including lower non-cash directors fees of $250,000, consultants of $70,000, offset by higher legal and accounting fees of $120,000, and offering related expenses of $200,000. Other overhead increased by $100,000 almost fully explained by an increase in D&O insurance premiums versus the prior year.
Research and Development Expenses
For the three months ended March 31, 2023, ZIVO incurred roughly $400,000 in R&D expenses, as compared to roughly $680,000 for the comparable period in 2022. All of these expenses were associated with research relating for our biotech and agtech businesses. In the quarter ended March 31, 2023, the Company’s research and development spending included roughly $125,000 of amortization of deferred R&D obligations for the participation agreements; there was no amortization of deferred R&D in the prior year period. (See Note 5: Deferred R&D Obligations - Participation Agreements)
In the quarter ended March 31, 2023, excluding this amortization, the Company had gross R&D spending of approximately $530,000; a $290,000 decrease in spending from the first quarter of 2022. Of these costs in 2023, $330,000 is for salary related cost, decrease of approximately $185,000 from the prior year. The decrease is fully explained by lower stock related compensation costs. Third party research and development spending and other expenses of $190,000 was about $110,000 lower from the prior year.
| | Quarter ended March 31, 2023 | | | Quarter ended March 31, 2022 | |
Labor and other internal expenses | | $ | 333,359 | | | $ | 515,478 | |
External research expenses | | | 193,468 | | | | 301,143 | |
Total gross R&D expenses | | | 526,827 | | | | 816,621 | |
Less contra-expense for amortization of deferred R&D obligation - participation agreements | | | (125,030 | ) | | | (136,848 | ) |
Research and development | | $ | 401,797 | | | $ | 679,773 | |
Subject to the availability of funding, the Company expects its 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 are focused on the metabolic aspects of oxidation and inflammation, with a parallel program to validate and license products for healthy immune response.
Capital Resources
As of March 31, 2023, our principal source of liquidity consisted of cash of $208,601. The Company expects 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. The sources of cash to date have been limited proceeds from the issuances of notes with warrants, common stock with and without warrants and unsecured loans, with the terms of our most recent financings described below.
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.
Funding Requirements
Management has noted 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.
Our material cash requirements relate to the funding of our ongoing product development. 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 three months ended March 31, 2023, our operating activities used $2.1 million in cash, a decrease of cash used of roughly $700,000 from the comparable prior period when the Company used approximately $2.9 million for operating activities. For the quarter ended March 31, 2023, the Company invested $180,000 less in prepaid expenses primarily for directors’ and officers’ insurance, spent $500,000 less by increasing accrued liabilities, $300,000 in increasing accounts payable and $50,000 on other cash related items.
Cash Flows from Investing Activities. During the three months ended March 31, 2023 and 2022, there were no investing activities.
Cash Flows from Financing Activities. During the three months ended March 31, 2023, our financing activities generated approximately $540,000, a decrease of approximately $20,000 from the comparable prior period when the Company generated approximately $560,000 from financing activities. The Company, in the quarter ended March 31, 2023, received net proceeds of $605,600 from the establishment of a short-term loan, this represented a $23,000 decrease in net loan proceeds from the first quarter of 2022.
We estimate that we would require approximately $4 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:
| | Three months ended March 31, | |
| | 2023 | | | 2022 | |
Net cash provided by (used in): | | | | | | |
Operating activities | | $ | (2,128,973 | ) | | $ | (2,861,649 | ) |
Investing activities | | | - | | | | - | |
Financing activities | | | 538,311 | | | | 558,756 | |
Net increase (decrease) in cash and cash equivalents | | $ | (1,590,662 | ) | | $ | (2,302,893 | ) |
Item 4.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 the material weaknesses identified as of December 31, 2022 and described below, continue to exist as of March 31, 2023.
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:
· | Management did not design and maintain appropriate information technology general controls in the areas of user access, vendor management controls, and segregation of duties, including controls over the recording and review of journal entries, related to certain information technology systems that support the Company’s financial reporting process. |
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· | Management did not design, implement, and retain appropriate documentation of formal accounting policies, procedures, and controls across substantially all of the company's business processes over; (i) the financial reporting process, including management review controls over key disclosures and financial statement support schedules, (ii) the monthly financial close process, including journal entries and account reconciliations and (iii) the completeness and accuracy of information used by control owners in the operation of certain controls, to achieve timely, complete, accurate financial accounting, reporting. |
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· | Management did not design and implement controls over the accounting, classification, and application of United States Generally Accounting Principles (“US GAAP”) relating to income taxes, stock-based compensation, and deferred research and development obligations - participation agreements accounting. Specifically: |
| · | Management did not identify controls over the review of the tax provision, including the valuation analysis related to deferred tax assets, considerations for uncertain tax positions, the preparation of the income tax footnote and required disclosures and selecting and applying accounting policies; |
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| · | Management did not identify controls over the accounting and classification of deferred research and development obligations - participation agreements; and |
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| · | Management did not identify controls over the valuation of stock-based compensation for option awards to employees and members of the board of directors. |
Based on the assessment and identification of the material weaknesses described above, management has concluded that, as of March 31, 2023, 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.
Remediation Plans
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:
· | Developing a training program and educating control owners concerning the principles of the Internal Control - Integrated Framework (2013) issued by COSO; |
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· | Implementing a risk assessment process by which management identifies risks of misstatement related to all account balances; |
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· | Developing internal controls documentation, including comprehensive accounting policies and procedures over financial processes and related disclosures; |
· | Enhancing policies and procedures to retain adequate documentary evidence for certain management review controls over certain business processes including precision of review and evidence of review procedures performed to demonstrate effective operation of such controls; |
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· | Engaging outside resources for complex accounting matters and drafting and retaining position papers for all complex, non-recurring transactions; |
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· | Developing monitoring activities and protocols that will allow us to timely assess the design and the operating effectiveness of controls over financial reporting and make necessary changes to the design of controls, if any |
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· | Segregating key functions within our financial and information technology processes supporting our internal controls over financial reporting; |
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· | Reassessing and formalizing the design of certain accounting and information technology policies relating to security and change management controls, including user access reviews, including assessing the need for implementing a more robust information technology system; |
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· | Continuing to enhance and formalize our accounting, business operations, and information technology policies, procedures, and controls to achieve complete, accurate, and timely financial accounting, reporting and disclosures. |
Changes in Internal Control Over Financial Reporting
Except for the remediation actions 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.