The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains certain forward-looking statements that involve risk and uncertainties. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those set forth under the section titled "Risk Factors," and other documents we file with the SEC. Historical results are not necessarily indicative of future results.





Overview

We have put in place a business model in which we may derive future income from licensing and selling natural bioactive ingredients including algal biomass and products that may be derived from or are initially based on the algal biomass. We expect that these planned new products will likely be sold or licensed to much larger, better-financed human and animal pharma companies, and to food, dietary supplement, and skin care manufacturers. The anticipated income streams are to be generated from a) sales of algal biomass or extracts thereof, and b) license payments in the form of royalties and / or other contractual payments for licensed natural bioactive ingredients. Our manufacturing strategy is to create contract manufacturers for our non-licensed products which products will be sold by us to animal food, dietary supplement, and medical food processors and/or name-brand marketers. Further, we expect to license our bioactive molecules as lead compounds or templates for synthetic variants intended for therapeutic applications.

For our Wellmetrix, subsidiary, the Company's board of directors (the "Board") and management agreed to halt active product development and instead focus on prospective out-licensing of the existing IP, consisting of a patent and several patents pending. An ongoing commitment to patent prosecution and maintenance of the existing patent portfolio has been approved by the Board.






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Financial Overview

General and Administrative Expenses

General and administrative expenses consist primarily of personnel-related costs for personnel in functions not directly associated with research and development activities, professional fees and consultant expenses, and other overhead spending. Personnel related costs include cash compensation, benefits, and stock-based compensation expenses. Professional fees and consultant expenses consist primarily of legal fees relating to corporate matters, intellectual property costs, professional fees for consultants assisting with regulatory, and financial matters. Other overhead spending includes cost to support information technology, rent, insurances, public company listing, and supplies.

We anticipate that our general and administrative expenses will significantly increase in the future to support our continued research and development activities, potential commercialization of our product candidates, hiring of additional personnel, legal and professional services, and other public company related costs.





Research and Development

Research and development expenses are incurred in developing our product candidates, compensation and benefits for research and development employees, including stock-based compensation, research related overhead expenses, cost of laboratory supplies, clinical trial and related clinical manufacturing expenses, costs related to regulatory operations, fees paid to research consultants and other outside expenses. Research and development costs are expensed as incurred and costs incurred by third parties are expensed as the contracted work is performed.

We expect our research and development expenses to significantly increase over the next several years as we continue to develop product candidates targeting additional pharma and algal biomass applications. These additional activities will increase the need to conduct preclinical testing and clinical trials and will depend on the duration, costs and timing to complete our preclinical programs and clinical trials.






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Interest Expense

Interest expense primarily consists of interest costs related to our convertible notes and for interest on short term debt, as discussed in detail below.





Other Income

Other income consists of proceeds derived from activity outside of normal operating activity, including the forgiveness of the paycheck protection program loan in 2021.





Results of Operations

Comparison of Year Ended December 31, 2022 and 2021





The following table summarizes our results of operations for the year ended
December 31, 2022 and 2021:



                                                      Year ended December 31,
                                                       2022              2021
Revenue:                                           $           -     $          -
Total revenue                                      $           -     $          -
Costs and expenses:
General and administrative                             6,491,704        6,694,619
Research and development                               2,240,270        1,950,500
Total costs and expenses                           $   8,731,974     $  8,645,119
Loss from operations                               $  (8,731,974 )   $ (8,645,119 )
Other income (expense):
Interest (expense)                                       (13,319 )       (233,282 )
Gain on forgiveness of debt and accrued interest               -          122,520
Total other (expense), net                         $     (13,319 )   $   (110,762 )
Net loss                                           $  (8,745,293 )   $ (8,755,881 )

General and Administrative Expenses

General and administrative expenses were $6.5 million for the 12 months ended December 31, 2022, which is about $200,000 lower than the approximately $6.7 million for the comparable prior period, explained by the following changes: a decrease of $1.4 million in salary expense ($900,000 non-cash decrease due to stock options issued to employees and roughly $500,000 decrease in cash compensation), and an increase in overhead expense of $1.2 million (including $460,000 increase in insurance, $660,000 increase in legal and accounting fees, and $450,000 increase in board of directors fees; these increases were partially offset by a reduction in travel and other expenses of $120,000).

Research and Development Expenses

For the 12 months ended December 31, 2022, we incurred $2.2 million in net R&D expenses, as compared to $2.0 million for the comparable period in 2021.

Of these expenses, all $2.2 million for 2022 and $2.0 million for 2021 are costs associated with research relating to our biotech and agtech businesses. Of these costs in 2022, $1.5 million is for salary and other internal costs, an increase of approximately $700,000 from the prior year. The increase is fully explained by higher stock related compensation costs. Third party research and development spending of $1.4 million was $250,000 lower than the prior year due to fewer third-party research studies. For the year ending December 31, 2022, the Company recognized a reduction in gross research and development spending of roughly $775,000 to account for the amortization of the spending obligation created through the complete funding of the Participation Agreements, roughly $220,000 higher than the amount research and development was reduced in 2021. (See Note 9: Deferred R&D Obligations - Participation Agreements)






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                                                       December 31,      December 31,
                                                           2022              2021
Labor and other internal expenses                      $   1,582,628     $     832,221
External research expenses                                 1,431,667         1,674,025
Total gross R&D expenses                               $   3,014,295     $   2,506,246

Less contra-expense for amortization of deferred R&D obligation - Participation Agreements

                       (774,025 )        (555,746 )
Net R&D expenses                                       $   2,240,270     $   1,950,500

Subject to the availability of funding, we expect our R&D costs to grow as we work to complete the research in the development of natural bioactive compounds for use as dietary supplements and food ingredients, as well as biologics for medicinal and pharmaceutical applications in humans and animals. The Company's scientific efforts presently are focused on the licensing products for healthy immune response in livestock and growing of our proprietary algal culture in commercial scale facilities.

Liquidity and Capital Resources





Historical Capital Resources

As of December 31, 2022, our principal source of liquidity consisted of cash deposits of $1.8 million. We expect to continue to incur significant expenses and increasing operating and net losses for the foreseeable future until and unless we generate an adequate level of revenue from potential commercial sales to cover expenses.

We anticipate that our expenses will increase substantially as we develop and seek to commercialize our product candidates and continue to pursue pre-clinical and clinical trials, seek regulatory approvals, manufacture product candidates, hire additional staff, add operational, financial and management systems and continue to operate as a public company.

Our source of cash to date has been proceeds from the issuances of notes, common stock with and without warrants and unsecured loans, and the entry into Participation Agreements, the terms of which are further described below. See also "Funding Requirements and Outlook" below.

June 2021 Underwritten Public Offering

On May 27, 2021, we entered into an Underwriting Agreement relating to the issuance and sale of 2,760,000 Units, at a price to the public of $5.00 per Unit. In addition, under the terms of the Underwriting Agreement, we granted the Underwriter an option, exercisable for 45 days, to purchase up to an additional 414,000 shares of common stock and/or 414,000 2021 Warrants, in any combination thereof, on the same terms. The base offering closed on June 2, 2021, and the sale of 150,000 shares of common stock subject to the Underwriter's overallotment option closed on July 2, 2021. The gross proceeds from this offering were approximately $14.5 million prior to deducting underwriting discounts and other offering expenses payable by us.





Convertible Notes

On June 2, 2021, pursuant to the terms of several Debt Extension and Conversion Agreements with holders of our 11% convertible debt, a total of $7,538,556 comprised of outstanding principal of $4,940,342 and interest of $2,598,214 of our convertible notes were automatically converted into 942,322 shares of common stock at $8.00 per share.






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Deferred R&D Obligations - Participation Agreements

From April 13, 2020, through May 14, 2021, the Company entered into twenty-one License Co-Development - Participation Agreements (the "Participation Agreements") with certain accredited investors ("Participants") for an aggregate of $2,985,000. The Participation Agreements provide for the issuance of warrants to such Participants and allows the Participants to participate in the fees (the "Fees") from licensing or selling bioactive ingredients or molecules derived from ZIVO's algae cultures. Specifically, ZIVO has agreed to provide to the Participants a 44.775% "Revenue Share" of all license fees generated by ZIVO from any licensee.

The Participation Agreements allow the Company the option to buy back the right, title and interest in the Revenue Share for an amount equal to the amount funded plus a forty percent (40%) premium, if the option is exercised less than 18 months following execution, and for either forty (40%) or fifty percent (50%) if the option is exercised more than 18 months following execution. Pursuant to the terms of twelve of the Participation Agreements, the Company may not exercise its option until it has paid the Participants a revenue share equal to a minimum of thirty percent (30%) of the amount such Participant's total payment amount. Pursuant to the terms of the one of the Participation Agreements, the Company may not exercise its option until it has paid the Participant a revenue share equal to a minimum of one hundred forty percent (140%) of the amount such Participant's total payment amount. Five of the Participation Agreements have no minimum threshold payment. Once this minimum threshold is met, the Company may exercise its option by delivering written notice to a Participant of its intent to exercise the option, along with repayment terms of the amount funded, which may be paid, in the Company's sole discretion, in one lump sum or in four (4) equal quarterly payments. If the Company does not make such quarterly payments timely for any quarter, then the Company shall pay the prorate Revenue Share amount, retroactive on the entire remaining balance owed, that would have been earned during such quarter until the default payments have been made and the payment schedule is no longer in default.





Unsecured Loans

From January 1, 2021 to December 31, 2022, the Company received gross proceeds of $819,100 in unsecured loans. As of December 31, 2022, no principal and accrued interest remained outstanding under such loans.





Private Placements

Between January 1, 2021 and December 31, 2022, we entered into Subscription Agreements with accredited investors pursuant to which we, in private placements, issued and sold an aggregate of 144,128 shares of common stock for gross proceeds in the amount of $1,564,969.

Paycheck Protection Program Loan

In connection with the 2020 Coronavirus Aid, Relief, and Economic Security ("CARES Act"), the Company received loan funding of approximately $121,700 under the Paycheck Protection Program ("PPP"), which was forgiven by the U.S. Small Business Administration on September 9, 2021.

Funding Requirements and Outlook

At December 31, 2022, we had approximately $1.8 million in cash deposits.

Management has noted the existence of substantial doubt about our ability to continue as a going concern. Additionally, our independent registered public accounting firm included explanatory paragraphs in the reports on our financial statements as of and for the years ended December 31, 2022 and 2021, respectively, noting the existence of substantial doubt about our ability to continue as a going concern. Our existing cash may not be sufficient to fund our operating expenses through at least twelve months from the date of this filing. To continue to fund operations, we will need to secure additional funding through public or private equity or debt financings, through collaborations or partnerships with other companies or other sources. We may not be able to raise additional capital on terms acceptable to us, or at all. Any failure to raise capital when needed could compromise our ability to execute on our business plan. If we are unable to raise additional funds, or if our anticipated operating results are not achieved, we believe planned expenditures may need to be reduced in order to extend the time period that existing resources can fund our operations. If we are unable to obtain the necessary capital, it may have a material adverse effect on our operations and the development of our technology, or we may have to cease operations altogether.






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Our material cash requirements relate to the funding of our ongoing product development. See "Item 1-Business-Clinical Development and Regulatory Pathway-Clinical Experience, Future Development and Clinical Trial Plans" in this Report for a discussion of design, development, pre-clinical and clinical activities that we may conduct in the future, including expected cash expenditures required for some of those activities, to the extent we are able to estimate such costs.

The development of our product candidates is subject to numerous uncertainties, and we could use our cash resources sooner than we expect. Additionally, the process of development is costly, and the timing of progress in pre-clinical tests and clinical trials is uncertain. Our ability to successfully transition to profitability will be dependent upon achieving further regulatory approvals and achieving a level of product sales adequate to support our cost structure. We cannot assure you that we will ever be profitable or generate positive cash flow from operating activities.





Cash Flows

Cash Flows from Operating Activities. During the 12 months ended December 31, 2022, our operating activities used $7.1 million in cash, an increase of cash used of roughly $300,000 from the comparable prior period. The approximate $300,000 increase in cash used by operating activities was primarily attributable to the following (all of which are approximated): a $10,000 decrease in net loss, a decrease in non-cash expenses of $350,000 (a decrease of stock issued for services of $310,000, an increase in of gain on forgiveness of debt of $123,000, and an increase in amortization of lease liability of $60,000), and $100,000 lower use of cash for changes in assets and liabilities ($85,000 less cash from issuance of deferred R&D obligations, $220,000 of amortization of deferred R&D obligations, a net increase in accounts payable and accrued liabilities of $190,000, and lower lease related liabilities and prepaid expenses of $70,000).

Cash Flows from Investing Activities. During the 12 months ended December 31, 2022 and 2021, there were no investing activities.

Cash Flows from Financing Activities. During the 12 months ended December 31, 2022, we generated no cash from financing activities, compared to $15.6 million provided in the prior year.

We estimate that we would require approximately $5 million in cash over the next 12 months in order to fund our basic operations, excluding our R&D initiatives. Based on this cash requirement, we have a near term need for additional funding to continue to develop our products and intellectual property. Historically, we have had substantial difficulty raising funds from external sources. If we are unable to raise the required capital, we will be forced to curtail our business operations, including our R&D activities. The following table shows a summary of our cash flows for the periods indicated:





                                                   Twelve months ended December 31,
                                                       2022                  2021
Net cash provided by (used in):
Operating activities                             $      (7,102,612 )     $  (6,803,333 )
Investing activities                                             -                   -
Financing activities                                             -          15,567,346
Net increase (decrease) in cash and cash
equivalents                                      $      (7,102,612 )     $   8,764,013





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Critical Accounting Estimates

Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of the balance sheets and the reported amounts of revenue and expenses during the reporting periods. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances at the time such estimates are made. Actual results may differ materially from our estimates and judgments under different assumptions or conditions. We periodically review our estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates are reflected in our financial statements prospectively from the date of the change in estimate.

While our significant accounting policies are more fully described in the notes to our financial statements appearing elsewhere in this Report, we believe the following are the critical accounting policies used in the preparation of our financial statements that require significant estimates and judgments.

Fair Value of Financial Instruments

We account for fair value measurements of assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring or nonrecurring basis adhering to the Financial Accounting Standards Board ("FASB") fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:





    ·   Level 1 Inputs: Unadjusted quoted prices in active markets for identical
        assets or liabilities accessible to the Company at the measurement date.

    ·   Level 2 Inputs: Other than quoted prices included in Level 1 inputs that
        are observable for the asset or liability, either directly or indirectly,
        for substantially the full term of the asset or liability.

    ·   Level 3 Inputs: Unobservable inputs for the asset or liability used to
        measure fair value to the extent that observable inputs are not available,
        thereby allowing for situations in which there is little, if any, market
        activity for the asset or liability at measurement date.

As of December 31, 2022 and December 31, 2021, fair values of cash, prepaid, other assets, accounts payable and accrued expenses approximated their carrying values because of the short-term nature of these assets or liabilities. We elected to account for the convertible notes while they were outstanding on a fair value basis under ASC 825 to comprehensively value and streamline the accounting for the embedded conversion options. The fair value of these convertible notes were based on both the fair value of our common stock, discount associated with the embedded redemption features, and cash flow models discounted at current implied market rates evidenced in recent arms-length transactions representing expected returns by market participants for similar instruments and are based on Level 3 inputs.

Premium Conversion Derivatives

We evaluate all conversion and redemption features contained in a debt instrument to determine if there are any embedded derivatives that require separation from the host debt instrument. An embedded derivative that requires separation is bifurcated from its host debt instrument and a corresponding discount to the host debt instrument is recorded. The discount is amortized and recorded to interest expense over the term of the host debt instrument using the straight-line method which approximates the effective interest method. The separated embedded derivative is accounted for separately on a fair market value basis. We record the fair value changes of a separated embedded derivative at each reporting period in the consolidated statements of comprehensive loss as a fair value change in derivative and warrant liabilities.






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Stock-Based Compensation

We account for share­based compensation in accordance with the provisions of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC 718), Compensation - Stock Compensation. Accordingly, compensation costs related to equity instruments granted are recognized at the grant­date fair value. The Company records forfeitures when they occur. Share­based compensation arrangements to non­employees are accounted for in accordance with the applicable provisions of ASC 718.

Recent Accounting Pronouncements

See "Note 4 - Summary of Significant Accounting Policies" in this Report regarding the impact of certain recent accounting pronouncements on our financial statements.

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