ZIVO BIOSCIENCE(ZIVO) - 2023 Q4 - Annual Report

PART I. Business ZIVO BIOSCIENCE, INC. is a research and development company operating in both the biotech and agtech sectors, focusing on proprietary algal and bacterial strains for human and animal health applications Overview - ZIVO is a research and development company in biotech and agtech, holding an intellectual property portfolio of proprietary algal and bacterial strains and related technologies for human and animal health applications[22] - The company's strategy is centered on two initiatives: identifying bioactive extracts/molecules from proprietary algal culture to treat diseases and utilizing whole algal culture as a nutritional food product[23][27] Biotech (Therapeutic) Business Strategy - The biotech strategy aims to develop bioactive extracts from proprietary algal culture for human and animal diseases, seeking strategic partners for late-stage development and commercialization[27][28] - The primary focus is on treating coccidiosis in broiler chickens, driven by the disease's global prevalence, the lack of effective non-antibiotic alternatives, and a shorter clinical testing cycle[29] - ZIVO's coccidiosis product candidate is an innovative non-antibiotic immune modulator that augments the chicken's immune system, addressing industry and consumer concerns about residual antibiotics[30][31][33] Coccidiosis Product Candidate - ZIVO's coccidiosis product candidate has demonstrated multiple benefits in studies, including improved digestive health, reduced incidence of key food-borne illness pathogens without antibiotics, and reduced mortality in broiler chickens[32][34] Agtech (Nutrition) Business Strategy - The nutrition business strategy prioritizes developing cost-effective, commercial-scale growing technology for its proprietary algal culture, which is a high-protein (over 50%) nutritional product[34][35] - A collaboration with Grupo Alimenta in Peru has achieved continuous production of high-quality dried algae, with plans to reach 100,000 kg/year capacity by late 2025[36] - Commercial shipments of dried green algae powder for human consumption under the Zivolife™ brand began in June 2023, distributed by ZWorldwide, Inc. in the North American green powder food market[38] Additional Indications - Additional biotech indications include bovine mastitis, canine joint health (potential chondroprotective effect), and human immune modulation (potential application in multiple disease situations)[39][41] - Additional agtech indications include companion animal food ingredients (leveraging GRAS status), skin health ingredients (topical and ingestible), and New Dietary Ingredient (NDI) applications for human dietary supplements[40][41] Our Market Opportunity - The animal health market for vaccines, phytogenics, eubiotics, drugs, and feed additives is substantial, with annual market sizes ranging from $753 million to $11.8 billion in recent years[42] - Key therapeutic market opportunities include poultry gut health (coccidiosis, driven by consumer/regulatory pressure for non-antibiotic alternatives), bovine mastitis (affecting 1.5 million US dairy cows annually, current treatments are antibiotic-based), and canine joint health (over 20% prevalence of osteoarthritis in pet dogs)[43][44][45] - The human immune modification market is vast, with antibiotics, eubiotics, autoimmune, and antidiabetic markets ranging from $37.9 billion to $110 billion, indicating significant potential for immune modulators[46] - The human functional food ingredients market is growing due to demand for healthy, plant-based proteins and microbiome-enhancing foods, aligning with ZIVO's algal biomass product[47] Clinical Development and Regulatory Pathway - ZIVO's dried algal biomass has achieved self-affirmed Generally Regarded as Safe (GRAS) status for human food applications in the U.S., allowing commercialization with a consumption limit of up to nine grams per day[49] - For poultry gut health, 21 clinical trials have been conducted, with the most recent 42-day coccidiosis challenge study demonstrating statistically significant reductions in intestinal damage and improved Feed Conversion Ratio (FCR) comparable to market-leading commercial ionophores[51][53] - The USDA's Center for Veterinary Biologics (CVB) has claimed jurisdiction for reviewing ZIVO's immune-modulating biologic for treating coccidiosis in broiler chickens, which is a significant milestone that de-risks the regulatory path and suggests a favorable timeline to approval compared to FDA[54][55] Potential Additional Indications - For bovine mastitis, ZIVO has conducted multiple in vitro/ex vivo experiments and four clinical trials, with plans for further validation studies[56] - Canine joint health development includes in vitro inflammatory experiments, two in vivo mouse trials, and two ex vivo canine hip joint tissue experiments, with additional ex vivo and in vivo studies planned[57] - Human immune modulation studies involve six in vitro experiments using human immune cells with a proprietary TLR4 inhibitor, with further in vitro testing planned[57] - For human consumption, ZIVO is reviewing GRAS status for updates and studies to increase the allowable daily intake (ADI), and planning studies to support skin health/anti-aging claims for NDI applications[57] Competition and Functional Equivalents - The animal health industry is highly competitive, with major players like HuvePharma, Elanco, Zoetis, and Phibro dominating the poultry gut health market with conventional anticoccidial compounds[58][59] - Competition in bovine mastitis includes branded antibiotic solutions (ToDay™, Masti-Clear), homeopathic options (Amoxi-Mast™), topical treatments, and vaccines (Lysigin, Spectramast LC™)[60] - The human immune modulation market includes companies developing TLR4 inhibitors, with Eritoran and Resatorvid as lead candidates, some already in clinical trials[62] - For human food and food ingredients, ZIVO competes with established microalgae and green powder businesses (e.g., Earthrise, Cyanotech, AG1) and large food technology innovators (e.g., DSM, Cargill, Nestle)[63] Material Agreements - On April 3, 2023, ZIVO entered a Subscription Agreement with its CEO for a $1 million 10% promissory note (Payne Note) and warrants to purchase 65,000 shares of common stock[65] - On June 30, 2023, ZIVO engaged Maxim Group LLC as a placement agent for securities offerings, agreeing to pay a 7.0% cash fee and reimburse expenses up to $105,000[68] - ZIVOLife LLC entered a Distribution Agreement with ZWorldwide, Inc. in September 2022, granting exclusive worldwide rights to sell Zivolife™ product for human use, amended in July 2023 to include purchase commitments of entire supply for 18 months and at least 2,000 kg/month for five years[69][70] - In July 2023, ZIVOLife LLC signed a binding Contract Manufacturing Term Sheet with Alimenta Algae SA, committing to purchase all Zivolife™ product produced by Alimenta, with Alimenta securing financing for capacity expansion[71][72] - On July 5, 2023, ZIVO closed a Securities Purchase Agreement with an institutional investor, selling 171,666 shares of common stock and 78,021 pre-funded warrants for approximately $4 million gross proceeds[73] - On November 16, 2023, ZIVO entered a Subscription Agreement with HEP Investments, LLC for a $150,000 10% promissory note, which was repaid in full on December 5, 2023[74] Intellectual Property - ZIVO relies on a combination of patents, trademarks, copyrights, and trade secrets to protect its intellectual property, including proprietary algal and bacterial strains, biologically active molecules, and production techniques[75] - The company holds multiple U.S. patents (e.g., U.S. Patent No. 7,807,622, 8,586,053, 8,791,060, 9,486,005, 10,161,928, 10,166,270, 10,232,028, 10,765,732, 10,842,179, 11,065,287) covering its proprietary algal culture, phyto-percolate compositions for disease treatment, immune modulation, and wellness monitoring[76][79] - ZIVO also has granted Canadian and European patents (e.g., CA3014897, CA2631773, EP2538951, EP3258948, EP3897188) for nutritional support, disease treatment, and controlling coccidiosis and necrotic enteritis in poultry[79][84] - Numerous patent applications are currently under prosecution in various countries for agents improving gut health, algal feed ingredients for coccidiosis/necrotic enteritis, use of specific microbes in disease prevention, enhancement of vaccine efficacy, immune priming, and maturation of immune/metabolic processes[83][85][86][87][89][90][91][92][93][94][95] - The company has registered trademarks for "ZIVO" and "ZIVO Bioscience" in the US and China[95] Government Regulation - ZIVO's dried algal biomass has self-affirmed GRAS status for human use, allowing commercialization as a food ingredient, with an updated dossier in 2023[98][100][101] - The contract manufacturer, Alimenta Algae in Peru, has passed food safety and cGMP audits by Peruvian authorities and an FDA-certified third party, meeting requirements for importing food products into the U.S. via the FDA Foreign Supplier Verification Program (FSVP)[103][104] - For dietary supplements, ZIVO is required to file a New Dietary Ingredient (NDI) Notification, which necessitates conducting at least one human study to support health benefits or claims[105][106] - The company markets products with structure/function claims based on known composition and published studies, adhering to cGMP standards and supported by toxicology reports[108][109] - For companion animal feed ingredients, specie-specific safety and health data are required, with plans to obtain GRAS affirmation, similar to human applications[113][114] Employees - As of December 31, 2023, ZIVO had 8 full-time employees covering various functions, supplemented by independent contractors[116] Corporate Information - Zivo Bioscience, Inc. was incorporated in Nevada on March 28, 1983, and changed its name to Zivo Bioscience, Inc. on October 14, 2014, with the trading symbol ZIVO effective November 10, 2014[117] Risk Factors ZIVO faces substantial risks, including a history of operating losses and going concern uncertainty, requiring significant additional financing. Operational risks stem from reliance on a single algae grower and distributor, agricultural vulnerabilities, and dependence on key personnel Risks Relating to Our Business - ZIVO has a history of operating losses, with a net loss of $7.8 million in 2023 and an accumulated deficit of $123.6 million, raising substantial doubt about its ability to continue as a going concern[125][127][296] - The company requires substantial additional financing to fund ongoing research, development, and commercialization efforts, with current cash balances insufficient for 12 months of operations[127][128][213] - ZIVO's algae production is subject to agricultural risks like weather, disease, and contamination, which are unpredictable and can interrupt production[130][131] - The company relies on a single contract manufacturer in Peru for algae production and a single distributor for marketing, posing material adverse risks if these relationships are terminated or disrupted[135][136] - ZIVO is highly dependent on its executive team (CEO, CFO) and key scientific personnel, and faces challenges in attracting and retaining qualified individuals[138][139] - Preclinical and clinical trial results are not necessarily predictive of future outcomes, and delays or unfavorable results could significantly harm product development and profitability[141][142][143] - Increased regulatory scrutiny of nutritional supplements and new regulations could impose additional restrictions, increase costs, or require product reformulation[145][146] - Cybersecurity incidents could disrupt operations, compromise confidential information, and damage business relationships[148][150] Risks Relating to Our Intellectual Property - ZIVO's success depends on obtaining and enforcing patents and protecting trade secrets, but there's no assurance that pending patent applications will be granted or that existing patents will provide adequate protection or competitive advantage[155] - The company may incur significant time and money protecting or enforcing its patents, designing around others' patents, or licensing third-party rights, which could harm its business[156] - Claims of intellectual property infringement by or against ZIVO, regardless of merit, could consume management time, result in costly litigation, or delay product shipments[157][158] Risks Related to Our Common Stock - ZIVO's common stock was delisted from Nasdaq on November 27, 2023, and now trades on OTCQB, which may affect liquidity and lead to a decline in market price due to thin trading volume[159][160] - The market price and trading volume of ZIVO's securities are volatile and can be affected by trial results, regulatory actions, financial performance, financing efforts, litigation, and general economic conditions[161] - Management identified material weaknesses in internal controls over financial reporting as of December 31, 2023, due to an ineffective overall control environment, potentially leading to material misstatements and loss of investor confidence[163][165][166] - As a smaller reporting company and non-accelerated filer, ZIVO is subject to scaled disclosure requirements and is not required to provide an auditor attestation of internal controls, which may make it more challenging for investors to analyze its financial prospects[168][169][170] - Raising additional funds through debt or equity financing could result in dilution for existing stockholders and potentially cause the stock price to decline[172][175] Unresolved Staff Comments This item is not required for smaller reporting companies - Not required for smaller reporting companies[179] Cybersecurity ZIVO relies on third-party computer systems and software for its operations and data security, lacking in-house IT personnel. Management believes this is a prudent and cost-effective approach given the company's size and low cyber-risk profile Risk Management and Strategy - ZIVO relies on standard operating systems and software from established third parties (Microsoft 365, QuickBooks, Paylocity) for cybersecurity, without in-house IT personnel[180] - Management believes this reliance on experienced third-party providers is prudent and cost-effective given the company's current size and relatively low cyber-risk profile[180] Governance - The board of directors stays informed on data privacy and information security issues[182] Properties ZIVO leases its principal executive office (4,800 sq ft) in Bloomfield Hills, MI, and a laboratory and office (2,700 sq ft) in Fort Myers, FL. Existing facilities are considered adequate for current needs, with sufficient options available for future expansion - ZIVO leases its principal executive office (4,800 sq ft) in Bloomfield Hills, MI, and a laboratory/office (2,700 sq ft) in Fort Myers, FL[183][184] - Existing facilities are deemed adequate for current needs, with future expansion options believed to be commercially reasonable[183] Legal Proceedings On April 20, 2023, ZIVO settled an arbitration initiated by AEGLE Partners, 2 LLC for $13,000, related to a Supply Chain Consulting Agreement. The company may face other claims in the normal course of business, but management believes no current legal matters would have a material adverse effect - ZIVO settled an arbitration with AEGLE Partners, 2 LLC for $13,000 on April 20, 2023, related to a Supply Chain Consulting Agreement[185] - Management believes no existing or future legal proceedings in the ordinary course of business will have a material adverse effect on the company's financial condition, results of operations, or cash flows[186] Mine Safety Disclosures This item is not applicable to the company - Not applicable[187] PART II. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities ZIVO's common stock trades on OTCQB under "ZIVO," and its public warrants trade on OTC Markets' Pink Sheets under "ZIVOW." As of March 14, 2024, there were approximately 209 holders of record. The company has never paid cash dividends and does not anticipate doing so, planning to retain earnings for business expansion - ZIVO's common stock is quoted on OTCQB (symbol "ZIVO"), and public warrants on OTC Markets' Pink Sheets (symbol "ZIVOW")[189] - As of March 14, 2024, there were approximately 209 holders of record of common stock[190] - The company has not paid cash dividends since inception and does not anticipate paying any in the foreseeable future, intending to retain earnings for business expansion[191] Reserved This item is reserved - This item is reserved[192] Management's Discussion and Analysis of Financial Condition and Results of Operations ZIVO's business model aims to generate income from licensing and selling natural bioactive ingredients derived from algae cultures. In 2023, the company reported its first commercial revenue of $27,650, with a net loss of $7.8 million, an improvement from $8.7 million in 2022. General and administrative and R&D expenses decreased. ZIVO's liquidity remains a concern, with only $274,380 in cash as of December 31, 2023, and a need for substantial additional funding. Cash flows from operations improved, but financing activities were crucial for capital. Critical accounting estimates involve fair value measurements and stock-based compensation Overview - ZIVO's business model focuses on licensing and selling natural bioactive ingredients from proprietary algae cultures to animal and human health, food, dietary supplement, and skin care manufacturers[193] - Anticipated income streams include sales of algal biomass/extracts and license payments (royalties/contractual payments) for bioactive ingredients and fractions[193][194] - The manufacturing strategy involves using contract manufacturers for non-licensed products and licensing bioactive fractions/molecules as lead compounds for therapeutic applications[194] Financial Overview - General and administrative expenses, comprising personnel, professional fees (legal, IP, regulatory, financial), and overhead, are expected to increase significantly to support R&D, commercialization, and public company operations[195][196] - Research and development expenses, expensed as incurred, include personnel, lab supplies, clinical trials, regulatory operations, and consultant fees, and are projected to increase substantially with further product development[197][198] - Interest expense primarily relates to convertible notes and short-term debt[199] Results of Operations Results of Operations Summary (Year Ended December 31) | Metric | 2023 ($) | 2022 ($) | Change (2023 vs 2022) ($) | | :-------------------------------- | :----------- | :----------- | :-------------------- | | Total Revenue | $27,650 | $0 | +$27,650 | | Total Cost of Goods Sold | $16,040 | $0 | +$16,040 | | Gross Margin | $11,610 | $0 | +$11,610 | | General and Administrative Expenses | $5,897,594 | $6,491,704 | -$594,110 | | Research and Development Expenses | $1,377,028 | $2,240,270 | -$863,242 | | Total Costs and Expenses | $7,274,622 | $8,731,974 | -$1,457,352 | | Loss from Operations | $(7,263,012) | $(8,731,974) | +$1,468,962 | | Total Interest and Other (Expense), net | $(514,172) | $(13,319) | -$500,853 | | Net Loss | $(7,777,184) | $(8,745,293) | +$968,109 | - Commercial revenue of $27,650 was recorded in 2023 from sales of dried algal biomass, a significant increase from $0 in 2022[202] - General and administrative expenses decreased by approximately $600,000 in 2023 compared to 2022, primarily due to a $750,000 non-cash decrease in stock options for employees and an $820,000 decrease in directors' fees, partially offset by increases in cash compensation, accounting, and legal fees[204] - Research and development expenses decreased by $0.8 million in 2023 to $1.4 million, mainly due to lower internal costs ($325,000 decrease) and reduced third-party research spending ($610,000 decrease), along with a $701,332 reduction from amortization of deferred R&D obligations[205][206] Liquidity and Capital Resources Cash and Liquidity (As of December 31) | Metric | 2023 ($) | 2022 ($) | | :-------------------- | :----------- | :----------- | | Cash Deposits | $274,380 | $1,799,263 | - ZIVO has incurred significant expenses and operating losses since inception, leading to substantial doubt about its ability to continue as a going concern[207][213][296][299] - The company's historical cash sources include proceeds from notes, common stock issuances (with/without warrants), unsecured loans, and Participation Agreements[209] - In 2023, ZIVO received $2,384,200 in unsecured loans (fully repaid) and $4,640,000 from private placements of common stock[210][211] - ZIVO estimates a need for approximately $5 million in cash over the next 12 months for basic operations (excluding R&D) and faces a near-term need for additional funding[219] Cash Flows Cash Flows Summary (Year Ended December 31) | Activity | 2023 ($) | 2022 ($) | | :------------------------------------ | :------------- | :------------- | | Net cash used in operating activities | $(5,799,893) | $(7,102,612) | | Net cash used in investing activities | $0 | $0 | | Net cash provided by financing activities | $4,275,010 | $0 | | Net increase (decrease) in cash and cash equivalents | $(1,524,883) | $(7,102,612) | | Cash at end of period | $274,380 | $1,799,263 | - Cash used in operating activities decreased by approximately $1.3 million in 2023 to $5.8 million, driven by a $900,000 decrease in net loss, a $1.3 million decrease in non-cash expenses, and a $1.7 million increase from changes in assets and liabilities (accrued liabilities, accounts payable)[216][219] - Financing activities generated $4.3 million in 2023, primarily from a $3.6 million private placement of stock and warrants and $640,000 from other private placements of common stock[218][219] - The company's cash balance decreased by $1.5 million in 2023, ending the year at $274,380[219] Critical Accounting Estimates - Critical accounting estimates involve fair value measurements of financial instruments, particularly convertible notes, which use Level 3 unobservable inputs[222][223][318][319] - The company evaluates complex financial instruments for embedded derivatives, separating and accounting for them at fair market value[225] - Stock-based compensation is recognized at grant-date fair value using the Black-Scholes option pricing model, which requires subjective assumptions like expected volatility and term[226][313][314] Recent Accounting Pronouncements - ZIVO adopted ASU 2016-13 (Measurement of Credit Losses on Financial Instruments) and ASU 2020-06 (Debt with Conversion and Other Options) effective January 1, 2023[321][322] - Neither ASU 2016-13 nor ASU 2020-06 had a material impact on the company's financial statements or diluted earnings per share for the year ended December 31, 2023[321][322] Quantitative and Qualitative Disclosures about Market Risk This item is not required for smaller reporting companies - Not required for smaller reporting companies[228] PART III. Financial Statements and Supplementary Data This section refers to the Consolidated Financial Statements, Reports, and Notes starting on page F-1 of the report - Consolidated Financial Statements, Reports, and Notes are incorporated by reference, starting on page F-1[229] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Information regarding changes in and disagreements with accountants on accounting and financial disclosure is incorporated by reference from the Registrant's 2023 Proxy Statement - Information is incorporated by reference from the 2023 Proxy Statement regarding the ratification of the independent registered public accounting firm[230] Controls and Procedures ZIVO's management concluded that its disclosure controls and procedures were not effective as of December 31, 2023, due to identified material weaknesses in internal control over financial reporting. These weaknesses stem from an ineffective overall control environment, deficiencies in IT general controls, and inadequate formal accounting policies and controls over complex areas like income tax and stock-based compensation. Management is actively implementing remediation measures, including training, risk assessment, documentation, and segregation of duties Evaluation of Disclosure Controls and Procedures - As of December 31, 2023, ZIVO's disclosure controls and procedures were deemed ineffective due to material weaknesses in internal control over financial reporting[231] Management's Report on Internal Control Over Financial Reporting - Management is responsible for establishing and maintaining adequate internal control over financial reporting[232] - An assessment using the COSO framework as of December 31, 2023, identified material weaknesses, leading to the conclusion that internal control over financial reporting was not effective[234][238] Material Weaknesses in Internal Control Over Financial Reporting - Material weaknesses include ineffective entity-level controls impacting the control environment, risk assessment, and monitoring activities[237] - Deficiencies exist in information technology general controls (user access, vendor management, segregation of duties) and the design/maintenance of formal accounting policies, procedures, and controls across business processes[238] - Specific control weaknesses were identified in the accounting, classification, and application of US GAAP for income taxes (valuation analysis, footnote preparation), stock-based compensation (valuation of options), and deferred research and development obligations[238] Remediation - Remediation actions include developing training, implementing risk assessment, creating internal controls documentation, enhancing management review policies, engaging external resources for complex accounting, segregating key functions, and reassessing IT security and change management controls[244] Changes in Internal Control Over Financial Reporting - No other material changes in internal control over financial reporting occurred during the quarter, apart from the identified material weaknesses[241] Other Information This item reports that there is no other information to disclose - None[242] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[243] Directors, Executive Officers and Corporate Governance Information regarding Directors, Executive Officers, and Corporate Governance is incorporated by reference from the Registrant's 2024 Proxy Statement - Information regarding Directors, Executive Officers, and Corporate Governance is incorporated by reference from the 2024 Proxy Statement[245] Executive Compensation Information regarding Executive Compensation is incorporated by reference from the Registrant's 2024 Proxy Statement - Information regarding Executive Compensation is incorporated by reference from the 2024 Proxy Statement[246] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters is incorporated by reference from the Registrant's 2024 Proxy Statement - Information regarding Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters is incorporated by reference from the 2024 Proxy Statement[247] Certain Relationships and Related Transactions, and Director Independence Information regarding Certain Relationships and Related Transactions, and Director Independence is incorporated by reference from the Registrant's 2024 Proxy Statement - Information regarding Certain Relationships and Related Transactions, and Director Independence is incorporated by reference from the 2024 Proxy Statement[248] Principal Accountant Fees and Services Information about aggregate fees billed by BDO USA, P.C. is incorporated by reference from the "Independent Auditor Fees" caption in the 2024 Proxy Statement - Information about aggregate fees billed by the principal accountant, BDO USA, P.C., is incorporated by reference from the "Independent Auditor Fees" caption in the 2024 Proxy Statement[249] PART IV. Exhibits and Financial Statement Schedules This section lists the financial statements and supplementary data, noting that all schedules are omitted as the information is included elsewhere. It also provides a detailed list of exhibits, including articles of incorporation, by-laws, warrant forms, incentive plans, and various agreements, along with certifications and XBRL documents - Financial statements begin on page F-1, and all schedules are omitted as the required information is included in the Consolidated Financial Statements or Notes[251][252] - A detailed list of exhibits is provided, including corporate governance documents, warrant forms, equity incentive plans, and various agreements (e.g., Supply Chain, Employment, Placement Agent, Distribution, Securities Purchase)[254][255][256][257] Form 10-K Summary This item reports that there is no Form 10-K Summary - None[259] SIGNATURES The report is signed by the Chief Financial Officer, Chief Executive Officer, President, and Directors, dated March 15, 2024 - The report is signed by the Chief Financial Officer, Chief Executive Officer, President, and Directors, dated March 15, 2024[261][262] Report of Independent Registered Public Accounting Firm BDO USA, P.C. issued an unqualified opinion on ZIVO's consolidated financial statements for 2023 and 2022, affirming fair presentation in accordance with GAAP. However, the report includes an explanatory paragraph highlighting substantial doubt about the company's ability to continue as a going concern due to recurring losses. The auditor also identified the accounting treatment for Private Placement Warrants as a critical audit matter, requiring complex judgment and specialized skills Opinion on the Consolidated Financial Statements - BDO USA, P.C. issued an unqualified opinion, stating that the consolidated financial statements for 2023 and 2022 present fairly, in all material respects, the financial position, results of operations, and cash flows in conformity with GAAP[263] Going Concern Uncertainty - The auditor's report includes an explanatory paragraph regarding substantial doubt about ZIVO's ability to continue as a going concern, citing recurring losses and negative cash flows from operations[264] Basis for Opinion - The audit was conducted in accordance with PCAOB standards, assessing risks of material misstatement and evaluating accounting principles and estimates[266][267] - The auditor was not engaged to perform an audit of internal control over financial reporting and thus expresses no opinion on its effectiveness[266] Critical Audit Matter - The critical audit matter identified was the assessment of the accounting treatment for Private Placement Warrants (issued in 2023) as equity or liability[269][270] - This assessment required challenging and complex auditor judgment due to the complexity of warrant features, interpretation of agreement terms, and application of accounting guidance, necessitating specialized skills and knowledge[270] - Audit procedures included inspecting agreements, evaluating management's technical accounting analyses, and utilizing specialized professionals[271] ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS The consolidated balance sheets show ZIVO's financial position as of December 31, 2023, and 2022. Total assets decreased from $2.1 million in 2022 to $0.56 million in 2023, primarily due to a significant drop in cash. Total liabilities increased from $2.1 million to $2.76 million, driven by higher accounts payable and accrued liabilities. Stockholders' deficit worsened from $(10,622) to $(2.2) million Consolidated Balance Sheet Highlights (As of December 31) | Metric | 2023 ($) | 2022 ($) | Change (2023 vs 2022) ($) | | :------------------------------------ | :----------- | :----------- | :-------------------- | | ASSETS: | | | | | Cash | $274,380 | $1,799,263 | $(1,524,883) | | Total current assets | $425,377 | $1,901,679 | $(1,476,302) | | Total assets | $555,715 | $2,123,019 | $(1,567,304) | | LIABILITIES: | | | | | Accounts payable | $993,090 | $490,670 | +$502,420 | | Accrued liabilities – employee bonus | $1,148,770 | $398,176 | +$750,594 | | Total current liabilities | $2,761,558 | $2,027,722 | +$733,836 | | Total liabilities | $2,761,558 | $2,133,641 | +$627,917 | | STOCKHOLDERS' (DEFICIT): | | | | | Accumulated deficit | $(123,581,714) | $(115,804,530) | $(7,777,184) | | Total stockholders' (deficit) | $(2,205,843) | $(10,622) | $(2,195,221) | - Total assets decreased by $1.57 million from $2.12 million in 2022 to $0.56 million in 2023, primarily driven by a $1.52 million decrease in cash[274] - Total liabilities increased by $0.63 million from $2.13 million in 2022 to $2.76 million in 2023, largely due to increases in accounts payable and accrued employee bonuses[276] - The accumulated deficit grew by $7.78 million to $123.58 million in 2023, resulting in a total stockholders' deficit of $(2.21) million[278] ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS The consolidated statements of operations show a net loss of $7.78 million in 2023, an improvement from $8.75 million in 2022. The company generated its first product revenue of $27,650 in 2023. Gross margin was $11,610. Operating loss decreased, but total other expense increased significantly due to amortization of debt discount and higher interest expenses Consolidated Statements of Operations Highlights (Year Ended December 31) | Metric | 2023 ($) | 2022 ($) | Change (2023 vs 2022) ($) | | :------------------------------------ | :----------- | :----------- | :-------------------- | | Product revenue | $27,650 | $0 | +$27,650 | | Total Cost of Goods Sold | $16,040 | $0 | +$16,040 | | Gross Margin | $11,610 | $0 | +$11,610 | | General and administrative | $5,897,594 | $6,491,704 | -$594,110 | | Research and development | $1,377,028 | $2,240,270 | -$863,242 | | Loss from operations | $(7,263,012) | $(8,731,974) | +$1,468,962 | | Total Other Expense | $(514,172) | $(13,319) | -$500,853 | | Net Loss | $(7,777,184) | $(8,745,293) | +$968,109 | | Basic and Diluted Loss Per Share ($) | $(4.60) | $(5.57) | +$0.97 | - Net loss improved by $0.97 million, from $(8.75) million in 2022 to $(7.78) million in 2023[281] - Product revenue of $27,650 was recognized in 2023, with a corresponding cost of goods sold of $16,040, resulting in a gross margin of $11,610[281] - Loss from operations decreased by $1.47 million, while total other expense increased significantly due to amortization of debt discount ($439,594) and higher interest expenses[281] ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE PERIOD JANUARY 1, 2022 THROUGH DECEMBER 31, 2023 The consolidated statement of stockholders' equity (deficit) shows a significant increase in accumulated deficit from $(107.06) million at January 1, 2022, to $(123.58) million at December 31, 2023. Total stockholders' deficit worsened from $(10,622) in 2022 to $(2.21) million in 2023, despite capital raises from stock and warrant issuances Consolidated Statement of Stockholders' Equity (Deficit) Highlights | Metric | Jan 1, 2022 ($) | Dec 31, 2022 ($) | Dec 31, 2023 ($) | | :------------------------------------ | :------------ | :------------- | :------------- | | Common Stock (Amount) | $1,570 | $1,570 | $2,383 | | Additional Paid-in Capital | $113,099,876 | $115,792,338 | $121,373,488 | | Accumulated Deficit | $(107,059,237) | $(115,804,530) | $(123,581,714) | | Total Stockholders' (Deficit) | $6,042,209 | $(10,622) | $(2,205,843) | - The accumulated deficit increased by $7.78 million in 2023, reaching $(123.58) million, reflecting the net loss for the year[285] - Total stockholders' deficit worsened from $(10,622) at December 31, 2022, to $(2,205,843) at December 31, 2023, despite proceeds from private offerings and stock sales[285] ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Cash flows from operating activities used $5.8 million in 2023, an improvement from $7.1 million used in 2022. Investing activities were zero in both years. Financing activities generated $4.3 million in 2023, primarily from private placements of registered securities and direct sales of common stock, compared to zero in 2022. Overall, cash decreased by $1.5 million in 2023, ending the year with $274,380 Consolidated Statements of Cash Flows Highlights (Year Ended December 31) | Activity | 2023 ($) | 2022 ($) | | :------------------------------------ | :------------- | :------------- | | Net cash used in operating activities | $(5,799,893) | $(7,102,612) | | Net cash used in investing activities | $0 | $0 | | Net cash provided by financing activities | $4,275,010 | $0 | | Net increase (decrease) in cash and cash equivalents | $(1,524,883) | $(7,102,612) | | Cash at end of period | $274,380 | $1,799,263 | - Cash used in operating activities decreased by $1.3 million in 2023, reflecting a lower net loss and favorable changes in working capital[216][219] - Financing activities provided $4.3 million in 2023, primarily from private placements of registered securities ($3.6 million) and direct sales of common stock ($0.64 million)[218][219] - The company's cash balance decreased by $1.5 million in 2023, ending the year at $274,380[219] NOTE 1 - DESCRIPTION OF BUSINESS Zivo Bioscience, Inc. and its subsidiaries aim to generate future income by licensing and selling natural bioactive ingredients derived from proprietary algae cultures to manufacturers in animal, human, dietary supplement, and medical food sectors - ZIVO's business model is to derive income from licensing and selling natural bioactive ingredients from proprietary algae cultures to animal, human, and dietary supplement/medical food manufacturers[295] NOTE 2 - BASIS OF PRESENTATION ZIVO's financial statements are prepared on a going concern basis despite recurring losses and negative cash flows, which raise substantial doubt about its ability to continue operations. The company also effected a 1-for-6 reverse stock split in October 2023, retroactively adjusting all share and per-share information Going Concern - ZIVO has incurred net losses and negative operating cash flows since inception, with an accumulated deficit of $123.6 million, leading to substantial doubt about its ability to continue as a going concern[296][297][299] - The company plans to fund ongoing activities through current cash and additional equity or debt financings, but success is not assured[298] Stock Split - On October 26, 2023, ZIVO completed a 1-for-6 reverse stock split of its common stock, which also proportionately decreased authorized shares and retroactively adjusted all share and per-share information[300] NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines ZIVO's significant accounting policies, including principles of consolidation, reliance on accounting estimates, cash and cash equivalents management, lease accounting (ROU assets and liabilities), revenue recognition under ASC 606, expensing of R&D costs, deferred income taxes with a full valuation allowance, stock-based compensation using Black-Scholes, income (loss) per share calculations, single-segment reporting, warrant classification, fair value measurements using the FASB hierarchy, and concentrations of credit risk. The company also adopted new accounting standards (ASU 2016-13 and ASU 2020-06) in 2023 with no material impact Principles of Consolidation - The consolidated financial statements include Zivo Bioscience, Inc. and its wholly-owned subsidiaries, with intercompany transactions eliminated[300] Accounting Estimates - Financial statements require management to make estimates and assumptions in accordance with GAAP, which may differ from actual results[301] Cash - Cash equivalents include highly liquid debt instruments with original maturities of three months or less[302] - Cash balances at financial institutions may exceed FDIC insured limits, but no losses have been experienced[320] Leases - ZIVO recognizes ROU assets and lease liabilities for operating leases on the balance sheet, based on the present value of lease payments using its incremental borrowing rate[303][305] - The company has elected the practical expedient not to separate lease and nonlease components for its building leases[305] Revenue Recognition - Revenue is recognized in accordance with ASC 606, using a five-step model, when performance obligations are satisfied and control of the product is transferred, typically at a single point in time[306] - Management exercises judgment in identifying distinct performance obligations within contracts[307] Research and Development - R&D costs are expensed as incurred, including internal (salaries) and external clinical study expenses for biotech and agtech[309] - R&D costs are offset by the amortization of deferred R&D obligations from Participation Agreements[309] Income Taxes - Deferred income taxes are determined using the asset and liability method, with a full valuation allowance established due to a history of losses and uncertainty of realizing deferred tax assets[310][311] - Utilization of net operating loss carry-forwards is subject to annual limitations due to "change in ownership" provisions[312] Stock Based Compensation - Stock-based compensation is recognized at grant-date fair value using the Black-Scholes option pricing model, with the simplified term method used for expected term due to lack of historical data[313][314] Income (Loss) Per Share - Basic loss per share is calculated by dividing net loss by weighted average common stock outstanding[315] - For 2023 and 2022, potentially dilutive securities (options, warrants, convertible debentures) were anti-dilutive, resulting in basic and diluted loss per share being the same[315] Segment Reporting - ZIVO reports all financial results as a single segment, as the CEO reviews consolidated financial information for operating decisions and performance assessment[316] - The company operates solely in the United States[316] Warrants - Warrants are classified as equity or liability based on specific terms and accounting guidance (ASC 480, ASC 815-40)[317] - Equity-classified warrants are measured at fair value upon issuance and not remeasured, while liability-classified warrants are remeasured at fair value each period, using Black-Scholes modeling[317] Fair Value of Financial Instruments - Fair value measurements adhere to the FASB fair value hierarchy (Level 1, 2, 3 inputs)[318][323] - Fair values of short-term assets and liabilities approximated carrying values. Convertible notes were accounted for at fair value using Level 3 inputs[319] Concentrations of Credit Risk - Credit risk is concentrated in cash and cash equivalents, with balances sometimes exceeding FDIC insured limits, but no significant losses have occurred[320] Recently Adopted Accounting Standards - ZIVO adopted ASU 2016-13 (Measurement of Credit Losses on Financial Instruments) and ASU 2020-06 (Debt with Conversion and Other Options) effective January 1, 2023[321][322] - Neither ASU had a material impact on the company's financial statements or diluted earnings per share for 2023[321][322] NOTE 5 - LOAN PAYABLE, RELATED PARTIES ZIVO engaged in related party loan transactions in 2023, including a $1 million 10% promissory note and warrants issued to its CEO, which was fully satisfied by October 2023. Additionally, a $150,000 10% promissory note was issued to HEP Investments, LLC, a significant shareholder, and fully repaid in December 2023 Payne Bridge Loan - On April 3, 2023, ZIVO issued a $1 million 10% promissory note and warrants to its CEO[330] - The warrants were valued at $439,594 and recorded as additional paid-in capital and a debt discount[333] - The Payne Note matured on October 2, 2023, with an effective interest rate of 49.0% (including discount amortization), and was fully satisfied[334] HEP Investments, LLC - On November 16, 2023, ZIVO issued a $150,000 10% promissory note to HEP Investments, LLC, which was fully repaid on December 5, 2023[335][336] NOTE 6 - CONVERTIBLE DEBT ZIVO has $240,000 in outstanding convertible debentures with a 1% annual interest rate. The original maturity dates have passed, but the lender allows rolling 30-day extensions - ZIVO has $240,000 in outstanding convertible debentures with a 1% annual interest rate, with rolling 30-day extensions past their original maturity dates[339] NOTE 7 - NOTE PAYABLE ZIVO entered into and fully repaid two unsecured short-term loans for insurance premiums: $605,600 at 8.4% APR in 2023 and $628,600 at 4.15% APR in 2022 Short Term Loans - In 2023, ZIVO secured and fully repaid a $605,600 unsecured short-term loan at 8.4% APR for insurance premiums[340] - A similar $628,600 loan from 2022 at 4.15% APR was also fully repaid by the end of 2022[341] NOTE 8 - DEFERRED R&D OBLIGATIONS - PARTICIPATION AGREEMENTS ZIVO entered into 21 Participation Agreements for $2,985,000, granting warrants and a 44.78% "Revenue Share" of license fees. The associated R&D obligation, initially $2,031,103, was amortized as a contra R&D expense ($701,332 in 2023, $774,025 in 2022) and is now fully amortized. The agreements include buy-back options for ZIVO under specific conditions - ZIVO entered 21 Participation Agreements for $2,985,000, granting warrants and a 44.78% "Revenue Share" of license fees to Participants[342][345] - Warrants were valued at $953,897, and $2,031,103 was recorded as Deferred R&D Obligation[343] - The R&D obligation was amortized as a contra R&D expense ($701,332 in 2023, $774,025 in 2022) and is now fully amortized as of December 31, 2023[343] - The agreements include options for ZIVO to buy back the Revenue Share under specific terms, including premiums and minimum payment thresholds[344] NOTE 9 - STOCKHOLDERS' EQUITY (DEFICIT) This note details changes in ZIVO's stockholders' equity (deficit), including a registered direct offering in June 2023 that raised approximately $4 million from stock and warrant sales. The company also completed a 1-for-6 reverse stock split in October 2023. Directors' fees decreased in 2023, while stock-based compensation expense was $870,000. Information on outstanding common stock options and private/public warrants is also provided, showing 292,515 options and 671,448 private warrants outstanding as of December 31, 2023 June 2023 Registered Direct Offering and 2023 Private Placement Warrants - On July 5, 2023, ZIVO completed a registered direct offering, selling 171,666 shares of common stock and 78,021 pre-funded warrants for approximately $4 million gross proceeds[347] - Series A and B Warrants (249,688 shares each) were issued as additional consideration, with an exercise price of $16.80 per share, subject to adjustment[348] - All pre-funded and Series A/B warrants were equity-classified, and net proceeds were recorded in additional paid-in capital[349] Recapitalization - Reverse Stock Split - On October 26, 2023, ZIVO implemented a 1-for-6 reverse stock split, reducing authorized common stock shares from 150,000,000 to 25,000,000[350] - All share and per-share amounts in the financial statements have been retroactively adjusted to reflect this reverse stock split[353] Board of Directors Fees - In June 2023, the Board awarded $50,000 in common stock options to each of the three non-employee directors[358] - Total directors' fees recorded were $337,682 in 2023, a decrease from $1,155,722 in 2022[359] - Unpaid directors' fees accrued amounted to $172,670 as of December 31, 2023[359] Stock Issuances - In December 2023, ZIVO issued 563,016 shares of common stock for $640,000 in private placements, with $485,000 from related parties[361] Stock Based Compensation - Stock-based compensation expense was approximately $870,000 in 2023 ($230,000 R&D, $640,000 G&A), down from $2.7 million in 2022[362] Stock-Based Compensation Assumptions (Weighted Average) | Assumption | 2023 | 2022 | | :----------------- | :----------- | :----------------- | | Expected volatility | 112.28% | 116.42% to 130.18% | | Expected dividends | 0% | 0% | | Expected term | 5.31 years | 5 to 5.75 years | | Risk free rate | 3.88% | 1.88% to 3.70% | Stock Warrants Exercised - In 2023, prefunded warrants from the June 30, 2023, Securities Purchase Agreement were exercised for $47, leading to the issuance of 78,021 shares of common stock[366] 2021 Equity Incentive Plan - The 2021 Equity Incentive Plan, adopted in October 2021, initially authorized 166,666 shares, with an automatic annual increase of 5% of outstanding shares[367][368] - As of December 31, 2023, 232,101 options have been issued under the 2021 Plan, with 91,559 shares remaining available for issuance[369] 2019 Omnibus Long-Term Incentive Plan - No new awards are being made under the 2019 Plan since the adoption of the 2021 Plan[370] - As of December 31, 2023, 60,414 stock options from the 2019 Plan remained outstanding[370] Common Stock Options Common Stock Options Summary (As of December 31) | Metric | 2023 (Shares) | 2022 (Shares) | | :------------------------------------ | :----------- | :----------- | | Outstanding, beginning of year | 281,637 | 286,838 | | Issued | 10,878 | 122,671 | | Forfeited | 0 | (127,872) | | Outstanding, end of period | 292,515 | 281,637 | | Weighted Average Exercise Price (Outstandi