ZIVO BIOSCIENCE(ZIVO) - 2023 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Zivo Bioscience, Inc.'s unaudited financial statements reflect decreased cash, increased liabilities, and ongoing net losses, indicating substantial doubt about its going concern ability - The company has incurred net losses since inception, experienced negative cash flows from operations, and has an accumulated deficit of $119,848,244, raising substantial doubt about its ability to continue as a going concern within one year[22][24] Condensed Consolidated Balance Sheet The condensed consolidated balance sheet details assets, liabilities, and equity changes between June 30, 2023, and December 31, 2022 Condensed Consolidated Balance Sheet Highlights (June 30, 2023 vs. December 31, 2022) | Metric | June 30, 2023 ($) | December 31, 2022 ($) | Change ($) | Percentage Change (%) | | :-------------------------------- | :------------ | :---------------- | :----- | :------------------ | | Cash | $21,067 | $1,799,263 | $(1,778,196) | -98.83% | | Total current assets | $530,075 | $1,901,679 | $(1,371,604) | -72.13% | | Total assets | $710,330 | $2,123,019 | $(1,412,689) | -66.54% | | Total Current Liabilities | $3,804,242 | $2,027,722 | $1,776,520 | 87.61% | | Total Liabilities | $3,855,162 | $2,133,641 | $1,721,521 | 80.68% | | Total stockholders' equity (deficit) | $(3,144,832) | $(10,622) | $(3,134,210) | 29506.78% | Condensed Consolidated Statements of Operations The condensed consolidated statements of operations detail revenues, expenses, and net loss for the three and six months ended June 30, 2023, and 2022 Condensed Consolidated Statements of Operations Highlights (Three Months Ended June 30) | Metric | June 30, 2023 ($) | June 30, 2022 ($) | Change ($) | Percentage Change (%) | | :-------------------------- | :------------ | :------------ | :----- | :------------------ | | Product revenue | $4,050 | $0 | $4,050 | N/A | | Total revenues | $4,050 | $0 | $4,050 | N/A | | Gross margin | $3,349 | $0 | $3,349 | N/A | | General and Administrative | $1,385,102 | $1,629,553 | $(244,451) | -15.00% | | Research and Development | $442,113 | $438,048 | $4,065 | 0.93% | | Total costs and expenses | $1,827,215 | $2,067,601 | $(240,386) | -11.63% | | Net loss | $(2,070,572) | $(2,071,839) | $1,267 | -0.06% | | Basic and Diluted Loss Per Share | $(0.22) | $(0.22) | $0 | 0.00% | Condensed Consolidated Statements of Operations Highlights (Six Months Ended June 30) | Metric | June 30, 2023 ($) | June 30, 2022 ($) | Change ($) | Percentage Change (%) | | :-------------------------- | :------------ | :------------ | :----- | :------------------ | | Product revenue | $4,050 | $0 | $4,050 | N/A | | Total revenues | $4,050 | $0 | $4,050 | N/A | | Gross margin | $3,349 | $0 | $3,349 | N/A | | General and Administrative | $2,953,478 | $2,976,295 | $(22,817) | -0.77% | | Research and Development | $843,910 | $1,117,821 | $(273,911) | -24.50% | | Total costs and expenses | $3,797,388 | $4,094,116 | $(296,728) | -7.25% | | Net loss | $(4,043,714) | $(4,100,159) | $56,445 | -1.38% | | Basic and Diluted Loss Per Share | $(0.43) | $(0.44) | $0.01 | -2.27% | Condensed Consolidated Statement of Changes in Stockholders' Equity (Deficit) The condensed consolidated statement of changes in stockholders' equity (deficit) outlines changes for the six months ended June 30, 2023 Stockholders' Equity (Deficit) Changes (Six Months Ended June 30, 2023) | Metric | December 31, 2022 ($) | June 30, 2023 ($) | | :------------------------------------ | :---------------- | :------------ | | Common Stock Amount | $9,420 | $9,420 | | Additional Paid in Capital | $115,784,488 | $116,693,992 | | Accumulated Deficit | $(115,804,530) | $(119,848,244) | | Total Stockholders' Equity (Deficit) | $(10,622) | $(3,144,832) | - Employee and director equity-based compensation for the six months ended June 30, 2023, totaled $469,911, and warrants issued with a related party note contributed $439,593 to additional paid-in capital[17] Condensed Consolidated Statement of Cash Flows The condensed consolidated statement of cash flows details operating, investing, and financing activities for the six months ended June 30, 2023, and 2022 Condensed Consolidated Statement of Cash Flows Highlights (Six Months Ended June 30) | Cash Flow Activity | June 30, 2023 ($) | June 30, 2022 ($) | Change ($) | | :-------------------------------- | :------------ | :------------ | :----- | | Net cash (used in) operating activities | $(3,114,640) | $(4,167,377) | $1,052,737 | | Net cash from by investing activities | $0 | $0 | $0 | | Net cash provided by financing activities | $1,336,444 | $349,222 | $987,222 | | Increase/(Decrease) in Cash | $(1,778,196) | $(3,818,155) | $2,039,959 | | Cash at End of Period | $21,067 | $5,083,720 | $(5,062,653) | - Financing activities in H1 2023 were significantly boosted by $1,000,000 in proceeds from a related party note payable, contributing to a $987,222 increase in cash provided by financing activities compared to the prior year[19] Notes to Condensed Consolidated Financial Statements This section provides detailed notes to the condensed consolidated financial statements, covering accounting policies, leases, debt, equity, and subsequent events NOTE 1 - BASIS OF PRESENTATION This note explains the basis of financial statement presentation, addressing the company's going concern status despite its accumulated deficit and negative operating cash flows - The financial statements are prepared on a going concern basis, despite the company's accumulated deficit of $119,848,244 and negative operating cash flows, indicating substantial doubt about its ability to continue operations without additional funding[22][24] NOTE 2 - NEW ACCOUNTING STANDARDS This note details the adoption of new accounting standards, specifically ASU 2020-06, and its impact on the financial statements - The company adopted ASU 2020-06 effective January 1, 2023, which simplifies accounting for convertible instruments, but its adoption had no impact on the condensed consolidated financial statements or diluted earnings per share for the reported periods[25] NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note summarizes the company's significant accounting policies, including those for stock-based compensation and warrants - Stock-based compensation expense for the three months ended June 30, 2023, was $227,808, and for the six months ended June 30, 2023, was $469,911, with 65,268 options granted to directors in the three-month period[28] Black-Scholes Option-Pricing Model Assumptions (Six Months Ended June 30) | Assumption | 2023 | 2022 | | :------------------ | :----- | :----- | | Expected volatility | 112.28% | 130.18% | | Expected dividends | 0 | 0 | | Expected term | 5.3 years | 5.8 years | | Risk free rate | 3.88% | 1.88% | - Warrants are accounted for in accordance with FASB ASC 815, with fair value determined at issuance using the Black-Scholes model and recognized as a component of stockholders' equity, not subject to remeasurement[30][31] NOTE 4 - LEASES This note details the company's operating lease agreements, including locations, terms, and associated financial balances and expenses - The company has two operating lease agreements: a facility in Ft. Myers, Florida, extended through December 31, 2024, and an office in Bloomfield Hills, Michigan, ending November 30, 2024, which serves as its headquarters[36][37] Operating Lease Balances (June 30, 2023 vs. December 31, 2022) | Metric | June 30, 2023 ($) | December 31, 2022 ($) | | :---------------------------------- | :------------ | :---------------- | | Operating lease right-of-use asset | $145,241 | $189,282 | | Current portion of long-term operating lease | $106,687 | $99,259 | | Long-term operating lease, net of current portion | $50,920 | $105,918 | | Total Lease Liabilities | $157,607 | $205,177 | - Operating lease expense for the three months ended June 30, 2023, was $27,236, and for the six months ended June 30, 2023, was $54,471[38] NOTE 5 - DEBT This note provides details on the company's debt instruments, including short-term loans and a promissory note issued to its CEO - A short-term, unsecured loan of $605,600 was entered into on February 14, 2023, with an 8.4% annual rate, and a principal balance of $336,444 as of June 30, 2023[41] - On April 3, 2023, the company issued a $1 million, 10% promissory note and a warrant to purchase 390,000 shares to its CEO, with the note maturing on October 2, 2023. The effective interest rate on the note, including debt discount amortization, was 48.96% as of June 30, 2023[42][43][46] Payne Bridge Loan Balance Sheet Information (June 30, 2023) | Metric | Amount ($) | | :-------------------------- | :------- | | Short Term Loan | $1,000,000 | | Less: Unamortized debt discount | $(224,680) | | Carrying value of Term Loan | $775,320 | NOTE 6 - STOCKHOLDERS' EQUITY (DEFICIT) This note details changes in stockholders' equity, including information on stock options, warrants, and their exercise prices - As of June 30, 2023, 1,392,675 options have been issued under the 2021 Equity Incentive Plan, with 549,291 shares remaining available for issuance. The 2019 Omnibus Long-Term Incentive Plan is no longer issuing new awards[49][50] Common Stock Options Summary (June 30, 2023 vs. June 30, 2022) | Metric | June 30, 2023 | June 30, 2022 | | :-------------------------- | :------------ | :------------ | | Outstanding, beginning of year | 1,689,907 | 1,721,074 | | Issued | 65,268 | 172,500 | | Outstanding, end of period | 1,755,175 | 1,131,949 | | Weighted Average Exercise Price (end of period) | $5.93 | $7.48 | Unregistered Warrants Summary (June 30, 2023 vs. June 30, 2022) | Metric | June 30, 2023 | June 30, 2022 | | :-------------------------- | :------------ | :------------ | | Outstanding, beginning of year | 1,602,198 | 2,553,635 | | Issued | 390,000 | - | | Expired | (598,518) | (28,591) | | Outstanding, end of period | 1,393,680 | 2,525,044 | | Weighted Average Exercise Price (end of period) | $6.53 | $7.57 | - As of June 30, 2023, there is no intrinsic value in any outstanding options as the market price of common stock is lower than all exercise prices[51] NOTE 7 - COMMITMENTS AND CONTINGENCIES This note addresses the company's commitments and contingencies, including the settlement of an arbitration matter - The company settled an arbitration matter with AEGLE Partners, 2 LLC on April 20, 2023, for an immaterial amount, related to a Supply Chain Consulting Agreement[57] NOTE 8 - INCOME TAX This note discusses the company's income tax position, including the valuation allowance against its net deferred tax asset - The company has recorded a full valuation allowance against its net deferred tax asset, as it does not expect to realize it, resulting in an expected income tax expense of $0 for 2023[59][60] NOTE 9 – SUBSEQUENT EVENTS This note discloses significant events occurring after the reporting period, specifically a registered direct offering and private placement - On June 30, 2023, the company completed a registered direct offering and concurrent private placement, closing on July 5, 2023, which generated approximately $4,000,000 in gross proceeds (net proceeds of $3,634,963). This included the sale of 1,030,000 common shares, pre-funded warrants for 468,130 shares, and Series A and B Common Warrants for 1,498,130 shares each[62][73] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition and operational results, highlighting initial commercial revenue, R&D, and capital raising efforts, addressing ongoing losses and funding needs - The company is a research and development entity focused on biotech and agtech, leveraging proprietary algal and bacterial strains for applications in human and animal health, including product candidates for poultry coccidiosis and functional food ingredients[65][66][69] - ZIVO recorded its first commercial revenue of $4,050 from sales of dried algal biomass product as a human food or food ingredient during the three and six months ended June 30, 2023, compared to $0 in the prior year periods[76][84] - The company continues to face substantial doubt about its ability to continue as a going concern, requiring additional funding through equity or debt financings to support operations and product development, with an estimated $2.0 million needed for basic operations over the next 12 months, excluding R&D[95][96][101] Special Note Regarding Forward-Looking Statements This note cautions readers about forward-looking statements, which involve inherent risks and uncertainties regarding future funding, profitability, and product regulation - The report contains forward-looking statements regarding funding, profitability, product regulation, market acceptance, testing results, licensing fees, and financial condition, which involve known and unknown risks and uncertainties[63][68] Overview This overview describes ZIVO's biotech and agtech operations, focusing on developing bioactive compounds from algal culture and producing algal biomass - ZIVO operates in biotech and agtech, developing bioactive compounds from proprietary algal culture for human and animal diseases (e.g., poultry coccidiosis, bovine mastitis, human cholesterol, canine osteoarthritis) and producing algal biomass as a functional food ingredient and for skin care[65][66][69][74] - The company is focusing on a product candidate for coccidiosis in broiler chickens due to its potential for rapid revenue generation and the global market need for non-antibiotic solutions[67] - ZIVO's algal biomass is produced in Peru, with efforts underway to scale up to commercial-scale ponds for its branded product, Zivolife™, targeting the North American green powder food market[69][70][71] Results of Operations for the Three Months Ended June 30, 2023 and 2022 This section analyzes operational results for the three months ended June 30, 2023, and 2022, focusing on revenue, expenses, and net loss Key Financials (Three Months Ended June 30) | Metric | 2023 ($) | 2022 ($) | Change ($) | % Change | | :-------------------------- | :----- | :----- | :----- | :------- | | Total revenue | $4,050 | $0 | $4,050 | N/A | | Cost of goods sold | $701 | $0 | $701 | N/A | | Gross margin | $3,349 | $0 | $3,349 | N/A | | General and Administrative | $1,385,102 | $1,629,553 | $(244,451) | -15.00% | | Research and Development | $442,113 | $438,048 | $4,065 | 0.93% | | Net loss | $(2,070,572) | $(2,071,839) | $1,267 | -0.06% | - The decrease in General and Administrative expenses by approximately $250,000 was primarily due to a $100,000 reduction in labor-related expenses (lower non-cash compensation) and $180,000 lower professional services (including $140,000 less in directors' fees), partially offset by a $30,000 increase in other overhead[78] - Research and Development expenses remained relatively flat, with a slight increase of $4,065. Gross R&D spending increased by $40,000, driven by a $60,000 increase in third-party research studies, offset by a $20,000 decrease in internal labor costs (lower non-cash compensation)[79][80] Results of Operations for the Six Months Ended June 30, 2023 and 2022 This section analyzes operational results for the six months ended June 30, 2023, and 2022, focusing on revenue, expenses, and net loss Key Financials (Six Months Ended June 30) | Metric | 2023 ($) | 2022 ($) | Change ($) | % Change | | :-------------------------- | :----- | :----- | :----- | :------- | | Total revenue | $4,050 | $0 | $4,050 | N/A | | Cost of goods sold | $701 | $0 | $701 | N/A | | Gross margin | $3,349 | $0 | $3,349 | N/A | | General and Administrative | $2,953,478 | $2,976,295 | $(22,817) | -0.77% | | Research and Development | $843,910 | $1,117,821 | $(273,911) | -24.50% | | Net loss | $(4,043,714) | $(4,100,159) | $56,445 | -1.38% | - General and Administrative expenses remained stable year-over-year. A $200,000 reduction in professional fees (including $400,000 lower directors' fees and $100,000 less in consultant spending) was largely offset by a $100,000 increase in labor-related costs (higher salary, lower non-cash compensation) and $70,000 in other overhead (insurance, filing fees)[86] - Research and Development expenses decreased by approximately $270,000, primarily due to a $180,000 decrease in internal labor costs (lower non-cash compensation) and a $50,000 decrease in third-party R&D spending[88][89] Capital Resources This section details the company's capital resources, cash position, and critical need for additional funding through equity, debt, or collaborations - As of June 30, 2023, ZIVO's cash balance was $21,067. The company anticipates significant ongoing expenses and operating losses, necessitating additional funding through equity or debt financings, or collaborations[91][95] - A June 30, 2023, registered direct offering and private placement, which closed on July 5, 2023, generated approximately $3.7 million in net proceeds, but the company still estimates a need for approximately $2.0 million in cash over the next 12 months for basic operations, excluding R&D[92][101] - The company has Participation Agreements with investors, providing a 44.775% 'Revenue Share' of license fees from bioactive ingredients, with buy-back options for the company under specific terms[93][94] Critical Accounting Policies and Significant Judgments and Estimates This section outlines the company's critical accounting policies and the significant judgments and estimates involved in preparing its financial statements - The company's financial statements rely on estimates and judgments, particularly for fair value measurements (classified into Level 1, 2, or 3 hierarchy), complex financial instruments (evaluating embedded derivatives), and stock-based compensation[102][104][108][109] - Fair values of cash, prepaid expenses, accounts payable, and accrued expenses approximate their carrying values due to their short-term nature. Convertible notes were accounted for on a fair value basis using Level 3 inputs[107] Item 3. Quantitative and Qualitative Disclosures About Market Risk As a smaller reporting company, Zivo Bioscience, Inc. is not required to provide quantitative and qualitative disclosures about market risk - This item is not applicable for smaller reporting companies[111] Item 4. Controls and Procedures Management concluded disclosure controls and procedures were ineffective as of June 30, 2023, due to material weaknesses in internal control over financial reporting, with remediation underway - The CEO and CFO concluded that disclosure controls and procedures were not effective as of June 30, 2023, due to material weaknesses identified as of December 31, 2022, which continue to exist[113] - Material weaknesses include inadequate entity-level controls (control environment, risk assessment, monitoring), ineffective information technology general controls (user access, vendor management, segregation of duties), and insufficient formal accounting policies and controls over financial reporting, monthly close, and completeness/accuracy of information[114][115][116] - Specific control deficiencies were noted in accounting for income taxes, stock-based compensation, and deferred research and development obligations[116] - Remediation efforts include developing training, implementing a risk assessment process, enhancing documentation of accounting policies and procedures, engaging outside resources for complex accounting, and improving monitoring activities and segregation of duties[118] Evaluation of Disclosure Controls and Procedures This section details the evaluation of disclosure controls and procedures, concluding their ineffectiveness due to identified material weaknesses - The CEO and CFO determined that disclosure controls and procedures were not effective as of June 30, 2023, due to persistent material weaknesses[113] Material Weaknesses in Internal Control Over Financial Reporting This section identifies specific material weaknesses in internal control over financial reporting, including entity-level controls, IT general controls, and accounting policies - Identified material weaknesses include deficiencies in entity-level controls (control environment, risk assessment, monitoring), information technology general controls (user access, vendor management, segregation of duties), and lack of formal accounting policies and controls across business processes[114][115][116] - Specific accounting control weaknesses were found in income taxes, stock-based compensation, and deferred research and development obligations[116] Remediation Plan This section outlines the company's remediation plan to address identified material weaknesses in internal control over financial reporting - The company is implementing measures such as COSO framework training, a risk assessment process, comprehensive accounting policies, enhanced documentation for management review controls, engaging external resources for complex accounting, and improving monitoring activities and segregation of duties[118] Changes in Internal Control Over Financial Reporting This section reports on changes in internal control over financial reporting during the quarter, noting no material changes beyond remediation efforts - No other material changes in internal control over financial reporting occurred during the quarter ended June 30, 2023, apart from the described remediation measures[118] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is not currently involved in any other material legal proceedings or aware of any pending or threatened legal actions - The company is not currently involved in any other material legal proceedings and is unaware of any pending or threatened legal actions[119] Item 1A. Risk Factors No material changes to risk factors have occurred since the Annual Report on Form 10-K for the year ended December 31, 2022 - No material changes to risk factors have occurred since the Annual Report on Form 10-K for the year ended December 31, 2022[120] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's unregistered sales of equity securities and the use of proceeds, including the June 2023 Registered Direct Offering - On June 30, 2023, the company sold 1,030,000 shares of common stock and pre-funded warrants for 468,130 shares, along with Series A and B Common Warrants for 1,498,130 shares each, to a single institutional investor. Gross proceeds were approximately $4,000,000[62][73] Item 3. Defaults upon Senior Securities This item is not applicable to the company - This item is not applicable[123] Item 4. Mine Safety Disclosures This item is not applicable to the company - This item is not applicable[124] Item 5. Other Information No other information is reported under this item - No other information is reported[125] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, debt instruments, and various agreements - The exhibits include organizational documents (Articles of Incorporation, By-laws), debt instruments (Note, Warrants), and various agreements (Subscription Agreement, Securities Purchase Agreement), along with required certifications[126] SIGNATURES The report is signed by the Chief Executive Officer and Chief Financial Officer on August 14, 2023, certifying its submission - The report was signed by John B. Payne, CEO, and Keith R. Marchiando, CFO, on August 14, 2023[131]