ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES
(a) Prior period results have been adjusted to reflect the 1 for 80 Reverse Stock Split in May 2021. See "Note 10 - Stockholders’ Equity (Deficit)”, for details regarding stock split and public offerings.
The accompanying notes are an integral part of these consolidated financial statements
(a) Prior period results have been adjusted to reflect the 1 for 80 Reverse Stock Split in May 2021. See Note 10, ”Stockholders’ Equity (Deficit)”, for details regarding stock split and public offerings.
The accompanying notes are an integral part of these consolidated financial statements
(a) Prior period results have been adjusted to reflect the 1 for 80 Reverse Stock Split in May 2021. See “Note 10 - “Stockholders’ Equity (Deficit)”, for details regarding the Reverse Stock Split and public offering.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES
During the year ended December 31, 2021, a related party applied the proceeds of a Loan Payable in the principal amount of $9,000, against an investment in a Participation Agreement.
During the year ended December 31, 2021, warrants to purchase 139,100 shares of the Company’s common stock were exercised on a “cashless” basis resulting in the issuance of 54,361 shares of common stock.
On June 2, 2021, pursuant to the terms of several Debt Extension and Conversion Agreements with holders of our 11% convertible debt, a total of $7,538,557 comprised of outstanding principal of $4,940,342 and interest of $2,598,215 of our convertible notes were automatically converted into 942,322 shares of common stock at $8.00 per share. See “Note 7 – Convertible Debt” for additional information.
On September 9, 2021, the Company received a Notification of Paycheck Protection Program Forgiveness Payment letter from the SBA confirming that the full amount of the principal, $121,700, and accrued interest, $1,653, were forgiven by the SBA. The Company recognized the forgiveness of debt principal of $121,700 and the 2020 accrued interest of $820 as an Other Income of $122,520.
During the year ended December 31, 2020, $100,000 of 11% convertible notes, as well as $36,225 in related accrued interest were converted at $8.00 per share into 17,028 shares of the Company’s common stock.
During the year ended December 31, 2020, a principal shareholder and related party assigned warrants to purchase 46,875 shares of the Company’s common stock to third party investors and such warrants were exercised in 2020 at $8.00 per share resulting in the issuance of 46,875 shares of common stock for gross proceeds of $375,000. The Company considered the warrants to be contributed capital from a principal shareholder and recorded equity related finance charges. The warrants were valued at $453,441 using the Black Scholes pricing model relying on the following assumptions: volatilities ranging from 128.20% to 142.46%; annual rate of dividends 0%; and discount rates ranging from 0.66% to 1.65%.
During the year ended December 31, 2020, a principal shareholder and related party assigned a warrant to purchase 6,250 shares of the Company’s common stock to a third-party investor and such warrant was exercised in the second quarter of 2020 at $8.00 per share resulting in the issuance of 6,250 shares of common stock for gross proceeds of $50,000. The Company considered the warrant to be contributed capital from a principal shareholder and recorded equity related finance charges. The warrants were valued at $42,090 using the Black Scholes pricing model relying on the following assumptions: volatility of 133.44%; annual rate of dividends 0%; discount rate of 0.41%.
During the year ended December 31, 2020, warrants to purchase 70,625 shares of the Company’s common stock were exercised on a “cashless” basis resulting in the issuance of 28,841 shares of common stock.
During the year ended December 31, 2020 the Company entered into a lease for a facility located in Fort Myers, Florida. The lease is for two years in length and has an option to renew. We have accounted for this pursuant to ASC 842 and have recorded an operating lease asset in the amount of $49,984, and lease liabilities of $49,984.
During the year ended December 31, 2020, 20,000 of Loan Payable, Related Parties were converted at $8.00 per share into 2,500 shares of the Company’s commons stock, and $1,254 of accrued interest on Loan Payable, Related Parties was converted at $8.00 per share into 156 shares of the Company’s common stock.
The accompanying notes are an integral part of these consolidated financial statements.
ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – DESCRIPTION OF BUSINESS
The business model of Zivo Bioscience, Inc. and its subsidiaries (Health Enhancement Corporation, HEPI Pharmaceuticals, Inc., Zivo Bioscience, LLC, Wellmetrix, LLC, WellMetris, LLC, Zivo Biologic, Inc., and Zivo Zoologic, Inc. (collectively the “Company”)) is to derive future income from licensing and selling natural bioactive ingredients derived from their proprietary algae cultures to animal, human and dietary supplement and medical food manufacturers.
NOTE 2 – BASIS OF PRESENTATION
Going Concern
The Company incurred net losses since inception, experienced negative cash flows from operations for the year ended December 31, 2021, and has an accumulated deficit of $108,227,041. The Company has historically financed its operations primarily through the issuance of common stock, warrants, and debt.
During the year ended December 31, 2021 and prior to the June 2021 Offering, the Company raised $1,564,970 from the issuance of common stock and exercise of common stock warrants and $150,000 from the proceeds from the sale of Participation Agreements and related warrants. On June 2, 2021, the Company completed the June 2021 Offering from which the Company netted proceeds of $12,181,602 after related underwriting and other costs. In the third and fourth quarters of 2021, the Company received net proceeds from the sale of an overallotment of the June 2021 Offering in the amount of $673,159, and received $1,091,767 from the exercise of warrants. The Company expects to continue to incur operating losses and net cash outflows until such time as it generates a level of revenue to support its cost structure. There can be no assurance that the Company will achieve profitable operations, and, if achieved, whether it will be sustained on a continued basis.
The Company intends to fund ongoing activities by utilizing its current cash on hand and by raising additional capital through equity or debt financings. There can be no assurance that the Company will be successful in raising that additional capital or that such capital, if available, will be on terms that are acceptable to the Company. If the Company is unable to raise sufficient additional capital, the Company may be compelled to reduce the scope of its operations and planned capital expenditures.
These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. The Company’s condensed consolidated financial statements have been prepared on the basis of continuity of operations, realization of assets and satisfaction of liabilities in the ordinary course of business; no adjustments have been made relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company not continue as a going concern.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Zivo Bioscience, Inc. and its wholly-owned subsidiaries, Health Enhancement Corporation, HEPI Pharmaceuticals, Inc., Wellmetrix, LLC, Wellmetris, LLC, Zivo Bioscience, LLC, Zivo Biologic, Inc., and Zivo Zoologic, Inc. All significant intercompany transactions and accounts have been eliminated in consolidation.
Accounting Estimates
The Company’s consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, which require management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, at the date of the financial statements and reported amount of revenues and expenses during the reporting period. Due to the inherent uncertainty involved in making estimates, actual results could differ from those estimates. Management uses its best judgment in valuing these estimates and may, as warranted, solicit external professional advice and other assumptions believed to be reasonable.
ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cash
For the purpose of the statements of cash flows, cash equivalents include time deposits, certificates of deposit and all highly liquid debt instruments with original maturities of three months or less. The Company maintains cash and cash equivalents balances at financial institutions and are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At times, balances in certain bank accounts may exceed the FDIC insured limits. Cash equivalents consist of highly liquid investments with an original maturity of three months or less when purchased. At December 31, 2021, the Company did not have any cash equivalents.
Property and Equipment
Property and equipment consist of furniture and office equipment and are carried at cost less allowances for depreciation and amortization. Depreciation and amortization are determined by using the straight-line method over the estimated useful lives of the related assets. Repair and maintenance costs that do not improve service potential or extend the economic life of an existing fixed asset are expensed as incurred.
Leases
ASC 842, Leases, requires the recognition of a right-of-use (“ROU”) and a corresponding lease liability on the balance sheet. ROU assets represent the right to use an underlying asset over the lease term and lease liabilities represent the obligation to make lease payments resulting from the lease agreement. ROU assets and lease liabilities are recognized on commencement of the lease agreement.
ROU assets are included within operating lease right-of-use assets, and the corresponding operating lease liabilities are recorded as current portion of long-term operating lease, and within long-term liabilities as long-term operating lease, net of current portion on the Company’s Consolidated Balance Sheets as of December 31, 2021 and December 31, 2020.
Lease assets and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Because the Company’s lease does not provide an implicit rate of return, the Company used its incremental borrowing rate in determining the present value of lease payments.
Revenue Recognition
Revenue is recognized in accordance with ASC 606, which utilizes five steps to determine whether revenue can be recognized and to what extent: (i) identify the contract with a customer; (ii) identify the performance obligation(s); (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) determine the recognition period. The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, Revenue from Contracts with Customers, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (continued)
Significant judgments exercised by management include the identification of performance obligations, and whether such promised goods or services are considered distinct. The Company evaluates promised goods or services on a contract-by-contract basis to determine whether each promise represents a good or service that is distinct or has the same pattern of transfer as other promises. A promised good or service is considered distinct if the customer can benefit from the good or service independently of other goods/services either in the contract or that can be obtained elsewhere, without regard to contract exclusivity, and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contact. If the good or service is not considered distinct, the Company combines such promises and accounts for them as a single combined performance obligation.
For the years ended December 31, 2021 and 2020, the Company had $-0- and $20,000 of service revenue, respectively.
Research and Development
Research and development (“R&D”) costs are expensed as incurred. The Company’s R&D costs, including internal expenses, consist of clinical study expenses as it relates to the biotech business and the development and growing of algae as it relates to the agtech business. These consist of fees, charges, and related expenses incurred in the conduct business with Company development by independent outside contractors. External clinical studies expenses were approximately $1.6 million and $1.7 million for the years ended December 31, 2021 and 2020, respectively. Internal expenses, composed of staff salaries compose approximately $1.0 million and $2.0 million for the years ended December 31, 2021 and 2020, respectively. These costs were offset by the amortization of the R&D obligation of $555,746 and $0 for the years ending December 31, 2021 and 2020, respectively; $150,805 of the year ended 2021 amortization amount was attributable to related parties (see “Note 9 – Deferred R&D Obligations – Participation Agreements”).
Income Taxes
The Company follows the authoritative guidance for accounting for income taxes. Deferred income taxes are determined using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The tax effects of temporary differences that gave rise to the deferred tax assets and deferred tax liabilities at December 31, 2021 and 2020 were primarily attributable to net operating loss carry forwards. Since the Company has a history of losses, and it is more likely than not that some portion or all of the deferred tax assets will not be realized, a full valuation allowance has been established. In addition, utilization of net operating loss carry-forwards is subject to a substantial annual limitation due to the “change in ownership” provisions of the Internal Revenue Code. The annual limitation may result in the expiration of net operating loss carry-forwards before utilization.
Stock Based Compensation
The Company accounts for stock-based compensation in accordance with FASB ASC 718, Compensation – Stock Compensation. Under the provisions of FASB ASC 718, stock-based compensation cost is estimated at the grant date based on the award’s fair value and is recognized as expense over the requisite service period. The Company, from time to time, issues common stock or grants common stock options and warrants to its employees, consultants and board members. At the date of grant, the Company determines the fair value of the stock option award and recognizes compensation expense over the requisite service period. Issuances of common stock are valued at the closing market price on the date of issuance and the fair value of any stock option or warrant awards is calculated using the Black Scholes option pricing model.
ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Stock Based Compensation (continued)
During 2021 and 2020, options and warrants were granted to employees, directors and consultants of the Company. As a result of these grants, the Company recorded expenses of $3.4 million during the year ended December 31, 2021, approximately $500,000 of this expense was for R&D and $2.9 million was attributed to SG&A. During the year ending December 31, 2020 the Company recorded stock based compensation of $3.8 million, approximately $800,000 attributed to R&D and $3.0 million for SG&A.
The fair value of options and warrants were estimated on the date of grant using the Black-Scholes option-pricing model based on the following weighted average assumptions:
Year Ended December 31,
| | 2021 | | | 2020 | |
Expected volatility | | 141.38% to 151.87% | | | 144.39% to 184.19% | |
Expected dividends | | | 0% | | | | 0% | |
Expected term | | 10 years | | | 5-10 years | |
Risk free rate | | 0.93% to 1.68% | | | 0.28% to 2.31% | |
The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including the expected stock price volatility.
Income (Loss) Per Share
Basic loss per share is computed by dividing the Company’s net loss by the weighted average number of shares of common stock outstanding during the period presented. Diluted loss per share is based on the treasury stock method and includes the effect from potential issuance of common stock such as shares issuable pursuant to the exercise of options and warrants and conversions of debentures. Potentially dilutive securities as of December 31, 2021, consisted of 53,076 shares of common stock from convertible debentures and related accrued interest and 7,250,206 shares of common stock underlying outstanding options and warrants. Potentially dilutive securities as of December 31, 2020 consisted of 974,449 shares of common stock underlying convertible debentures and related accrued interest and 3,120,962 shares of common stock from outstanding options and warrants. For 2021 and 2020, diluted and basic weighted average shares were the same, as potentially dilutive shares are anti-dilutive.
Segment Reporting
The Company’s Chief Executive Officer, who is considered to be the chief operating decision maker (CODM), reviews financial information presented on a consolidated basis, accompanied by information about operating segments for purposes of making operating decisions and assessing financial performance. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the CODM in deciding how to allocate resources and in assessing performance.
The Company operates solely in the United States.
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.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents. The Company has historically maintained cash balances at financial institutions which exceed the current FDIC limit of $250,000 at times during the year.
The Company has not experienced losses on these accounts and management believes the Company is not exposed to significant risks on such account.
Immaterial Revision
Subsequent to the issuance of the Company's 2020 consolidated financial statements, an error was identified due to the Company omitting certain income tax related disclosures specific to the Company's deferred tax assets and liabilities and rate reconciliation for 2020. Additionally, as of December 31, 2020, the Company originally disclosed gross deferred tax assets of $19,860,000 in error. The gross deferred tax assets as of December 31, 2020 should have been disclosed as $21,164,000.
The Company evaluated the materiality of the error, considering both quantitative and qualitative factors, and determined that the related impact was not material to the consolidated financial statements for the year ended December 31, 2020. The 2020 disclosures have been included within Note 13 - Income Taxes.
ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Enacted Accounting Standards
Recent Accounting Pronouncements Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Measurement of Credit Losses on Financial Instruments (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires companies to measure credit losses utilizing a methodology that reflects expected credit losses and requires a consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The standard is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company expects to adopt this ASU beginning January 1, 2023. The Company is evaluating the potential impact of this standard on its financial statements.
In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. This update provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. This update is effective for fiscal years beginning after December 15, 2021. The Company is evaluating the potential impact of this standard on its financial statements.
In August 2020, the FASB issued ASU No. 2020-06 ("ASU 2020-06"), Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”). ASU 2020-06 eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, ASU 2020-06 modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. The amendments in this update are effective for public business entities for fiscal years beginning after December 15, 2021 (or December 15, 2023 for companies who meet the SEC definition of Smaller Reporting Companies), and interim periods within those fiscal years. The amendment is to be adopted through either a fully retrospective or modified retrospective method of transition. Early adoption is permitted. The Company is currently evaluating the impact of this standard on its financial statements and related disclosures.
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment at December 31, 2021 and 2020 consist of the following:
| | December 31, | | | December 31, | |
| | 2021 | | | 2020 | |
Furniture & fixtures | | $ | 20,000 | | | $ | 20,000 | |
Equipment | | | 80,000 | | | | 80,000 | |
| | | 100,000 | | | | 100,000 | |
Less accumulated depreciation and amortization | | | (100,000 | ) | | | (100,000 | ) |
| | $ | - | | | $ | - | |
There were no depreciation and amortization expenses for the years ended December 31, 2021 and 2020, respectively.
NOTE 5 – LEASES
On December 17, 2020, the Company entered into a 25 ½ month lease agreement for a facility that contains office, warehouse, lab and R&D space in Ft. Myer, Florida. The lease agreement commenced on December 17, 2020 and ends on January 31, 2023. The lease agreement provided for a total rent of $54,993 over the period. Occupancy of the property commenced on December 17, 2020, and there was a 6-week rent holiday and a commencement date of February 1, 2021. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. Rent is $3,291 per month from January 15, 2021 to January 31, 2022 and $1,154 from February 1, 2022 to January 31, 2023.
The balances for our operating lease where we are the lessee are presented as follows within our condensed consolidated balance sheet:
Operating leases:
Assets: | | December 31, 2021 | | | December 31, 2020 | |
Operating lease right-of-use asset | | $ | 27,225 | | | $ | 49,364 | |
| | | | | | | | |
Liabilities: | | | | | | | | |
Current portion of long-term operating lease | | $ | 15,178 | | | $ | 29,172 | |
Long-term operating lease, net of current portion | | | - | | | | 15,178 | |
| | $ | 15,178 | | | $ | 44,350 | |
ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 – LEASES (CONTINUED)
The components of lease expense are as follows within our condensed consolidated statement of operations:
| | For the Year ended | |
| | December 31, 2021 | | | December 31, 2020 | |
Operating lease expense | | $ | 25,879 | | | $ | 620 | |
Other information related to leases where we are the lessee is as follows:
| | For the Year ended | |
| | December 31, 2021 | | | December 31, 2020 | |
Weighted-average remaining lease term: | | | | | | |
Operating leases | | 1.08 Years | | | 2.08 Years | |
| | | | | | |
Discount rate: | | | | | | |
Operating leases | | | 11.00% | | | | 11.00% | |
Supplemental cash flow information related to leases where we are the lessee is as follows:
| | For the Year ended | |
| | December 31, 2021 | | | December 31, 2020 | |
Cash paid for amounts included in the measurement of lease liabilities: | | $ | 32,913 | | | $ | 6,091 | |
As of December 31, 2021, the maturities of our operating lease liability are as follows:
Year Ended: | | Operating Lease | |
December 31, 2022 | | $ | 15,989 | |
Total minimum lease payments | | | 15,989 | |
Less: Interest | | | 811 | |
Present value of lease obligations | | | 15,178 | |
Less: Current portion | | | 15,178 | |
Long-term portion of lease obligations | | $ | - | |
ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 – LOAN PAYABLE, RELATED PARTIES
Christopher Maggiore
During the year ended December 31, 2020, Mr. Christopher Maggiore, a director and a significant shareholder of the Company, provided a short-term loan of $20,000 to the Company. The Company agreed to pay interest of 11% per annum on such loan. On September 15, 2020, Mr. Maggiore applied $20,000 of the loan balance to fund the partial exercise of 2,500 shares of a warrant for 3,125 shares of common stock at an exercise price of $8.00 per share (see “Note 10 – Stockholders’ Equity (Deficit)”). The 625 remaining shares underlying the warrant were also exercised on a cashless basis, resulting in the issuance of 46 shares of common stock. On October 21, 2020, Mr. Maggiore converted the remaining $1,254 of accrued interest due into 156 shares of common stock.
During the years ended December 31, 2021, and December 31, 2020, the Company recorded interest expense on loans payable to Mr. Maggiore of $-0- and $1,254, respectively.
HEP Investments, LLC
During the year ended December 31, 2021, the Company and HEP Investments, LLC (“HEP”, or “HEP Investments”) agreed to exchange the $9,000 in related party debt into an equal investment of $9,000 in the Participation Agreements (see “Note 9 – Deferred R&D Obligations - Participation Agreements”). This agreement eliminated any remaining third-party debt with HEP Investments. As of December 31, 2021, there were no Loans Payable to related parties.
During the year ended December 31, 2020, HEP Investments advanced the Company $139,000 in cash, of which $30,000 was repaid while $100,000 was converted into a License Co-Development Participation Agreement on October 4, 2020. As of the year ended December 31, 2020, HEP Investments was owed $9,000.
NOTE 7 – CONVERTIBLE DEBT
HEP Investments, LLC – Related Party
On December 2, 2011, the Company and HEP Investments entered into the following documents, effective as of December 1, 2011, as amended through May 16, 2018: (i) a Loan Agreement under which the HEP Investments agreed to advance up to $20,000,000 to the Company, subject to certain conditions, (ii) an 11% Convertible Secured Promissory Note in the principal amount of $20,000,000 (“Convertible Note”) (of which a total of $18,470,640 was funded, with a total of $14,380,298 converted into 1,796,287 shares of common stock, leaving a balance advanced of $4,090,342 as of December 31, 2020), (iii) a Security Agreement, under which the Company granted HEP Investments a security interest in all of its assets, (iv) warrants issued to HEP Investments to purchase 20,833 shares of common stock at an exercise price of $9.60 per share (including a cashless exercise provision) which expired September 30, 2016, (v) a Registration Rights Agreement with respect to all the shares of common stock issuable to HEP Investments in connection with the Loan Agreement, in each case subject to completion of funding of the full $20,000,000 called for by the Loan Agreement, and (vi) an Intellectual Property security agreement under which the Company and its subsidiaries granted HEP Investments a security interest in all their respective intellectual properties, including patents, in order to secure their respective obligations to HEP Investments under the Convertible Note and related documents. The Convertible Note was originally convertible into the Company’s common stock at $8.00 per share. In addition, the Company’s subsidiaries guaranteed the Company’s obligations under the Convertible Note. On March 31, 2021, HEP Investments entered into a “Debt Extension and Conversion Agreement” with the Company providing that the Convertible Notes, including principal and accrued interest, would automatically convert into shares of common stock upon consummation of an underwritten public offering of the Company’s common stock.
On June 2, 2021, in accordance with the Debt Extension and Conversion Agreement, all of the outstanding debt and accrued interest for the Convertible Notes was automatically converted into common stock of the Company. The principal amount of $4,090,342 and the accrued interest to June 2, 2021, of $2,161,845 totaled $6,252,187; this total amount was converted into 781,524 shares of common stock (calculated at $8.00 per share). As of December 31, 2021, the Company has no further remaining financial obligations to the HEP Investments under the terms of the Loan Agreement, the Convertible Note or the Registration Rights Agreement. Additionally, as of the conversion of the total outstanding principal and accrued interest balance, HEP Investments no longer retains a security interest in the Company’s intellectual property or other assets.
In January 2019, and in connection with the Convertible Note, HEP Investments entered into a life insurance policy for Andrew Dahl, our former Chief Executive Officer. On February 23, 2021, the Company and HEP Investments entered into a Letter Agreement in which the Company agreed to pay certain premiums of $2,565 per month under the life insurance policy while payments under the Convertible Note remained outstanding. Upon conversion of the Convertible Notes on June 2, 2021, the Company immediately stopped paying the premiums under the life insurance policy.
ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – CONVERTIBLE DEBT (CONTINUED)
Paulson Investment Company, LLC - Related Debt
On August 24, 2016, the Company entered into a Placement Agent Agreement with Paulson Investment Company, LLC (“Paulson”). The Placement Agent Agreement provided that Paulson could provide up to $2 million in financings to “accredited investors”. Between August 24, 2016 and December 31, 2016, the Company received gross proceeds of $1,250,000 in connection with loans received from seven accredited investors (the “New Lenders”). Each loan included (i) a Loan Agreement, (ii) a Convertible Secured Promissory Note (“New Lenders Notes”) in the principal amount of the loan, (iii) a Security Agreement under which the Company granted the New Lenders a security interest in all of its assets and (iv) an Intercreditor Agreement with HEP Investments whereby HEP Investments and the New Lenders agree to participate in all collateral on a pari passu basis. The New Lender Notes had a two-year term and matured September 2018 ($600,000) and October 2018 ($650,000). Paulson received a 10% cash finance fee for monies invested in the Company in the form of convertible debt, along with 5-year warrants, exercisable at $8.00 per share, all the warrants have expired as of December 31, 2021. The New Lenders Notes were convertible into the Company’s common stock at $8.00 per share.
On September 24, 2018, one New Lender converted $300,000 of the debt and $64,280 of accrued interest into 45,535 shares of the Company’s common stock (at $8.00 per share).
On January 15, 2020, two New Lenders converted $100,000 of the debt and $36,225 of accrued interest into 17,028 shares of the Company’s common stock (at $8.00 per share).
In May 2021, each of the remaining New Lenders entered into a Debt Extension and Conversion Agreement with the Company. These agreements provided that the New Lender Notes, including principal and accrued interest, would automatically convert into shares of common stock upon consummation of an underwritten public offering of the Company’s common stock.
On June 2, 2021, in accordance with the Debt Extension and Conversion Agreement between the remaining New Lenders and the Company, all of the remaining outstanding debt and accrued interest for the New Lenders Notes were automatically converted to common stock. The principal amount of $850,000 and the accrued interest to June 2, 2021, of $436,369 totaled $1,286,369; this total amount was converted into 160,798 shares of common stock at $8.00 per share. As of December 31, 2021, the Company has no further remaining financial obligations to the New Lenders under the terms of the New Lenders Notes. All security interests of the New Lenders in the Company’s assets have been terminated.
Other Debt
The Company’s 1% convertible debentures allow for rolling 30-day extensions until notice is given by the lender to the Company to the contrary. As of December 31, 2021, that agreement is still in place.
Convertible debt consists of the following:
| | December 31, | | | December 31, | |
| | 2021 | | | 2020 | |
1% Convertible notes payable, due January 2022 | | $ | 240,000 | | | $ | 240,000 | |
11% Convertible note payable – HEP Investments, LLC, a related party, net of unamortized discount and debt issuance costs of $-0- and $-0-, respectively | | | - | | | | 4,090,342 | |
11% Convertible note payable – New Lenders; placed by Paulson | | | - | | | | 850,000 | |
| | | 240,000 | | | | 5,180,342 | |
| | | | | | | | |
Less: Current portion | | | 240,000 | | | | 5,180,342 | |
Long term portion | | $ | - | | | $ | - | |
NOTE 8 – NOTE PAYABLE
Paycheck Protection Program Loan
On May 7, 2020, the Company received $121,700 in loan funding from the Paycheck Protection Program (the “PPP”) established pursuant to the recently enacted Coronavirus Aid, Relief, and Economic Security Act of 2020 (the “CARES Act”) and administered by the U.S. Small Business Administration (“SBA”). The unsecured loan (the “PPP Loan”) is evidenced by a promissory note of the Company, dated April 29, 2020 (the “Note”) in the principal amount of $121,700 with Comerica Bank (the “Bank”), the lender.
Under the terms of the Note and the PPP Loan, interest accrues on the outstanding principal at the rate of 1.0% per annum. The term of the Note was two years, though it could have been payable sooner in connection with an event of default under the Note.
The CARES Act and the PPP provide a mechanism for forgiveness of up to the full amount borrowed. Under the PPP, the Company was eligible to apply for forgiveness for all or a part of the PPP Loan. The amount of loan proceeds eligible for forgiveness, as amended, was based on a formula that takes into account a number of factors, including: (i) the amount of loan proceeds that are used by the Company during the covered period after the loan origination date for certain specified purposes including payroll costs, interest on certain mortgage obligations, rent payments on certain leases, and certain qualified utility payments, provided that at least 60% of the loan amount is used for eligible payroll costs; (ii) the Company maintaining or rehiring employees, and maintaining salaries at certain levels; and (iii) other factors established by the SBA. Subject to the other requirements and limitations on loan forgiveness, only that portion of the loan proceeds spent on payroll and other eligible costs during the covered period will qualify for forgiveness.
In August 2021, the Company applied to the SBA for forgiveness of the outstanding loan principal and accrued interest under the CARES Act. On September 9, 2021, the Company received a Notification of Paycheck Protection Program Forgiveness Payment letter from the SBA confirming that the full amount of the principal, $121,700, and accrued interest, $1,653, were forgiven by the SBA. The Company recognized the forgiveness of debt principal of $121,700 and the 2020 accrued interest of $820 as an Other Income of $122,520, the remaining interest due for the PPP Loan in 2021 through the forgiveness date of $833 was booked to offset the 2021 interest expense. The Company’s PPP loan and application for forgiveness of loan amounts remain subject to review and audit by SBA for compliance with program requirements.
ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – DEFERRED R&D OBLIGATIONS - PARTICIPATION AGREEMENTS
The Company entered into twenty-one (21) License Co-Development Participation Agreements (the “Participation Agreements”) with certain investors (“Participants”) for aggregate proceeds of $2,985,000. The Participation Agreements provide for the issuance of warrants to such Participants and allows the Participants to participate in the fees (the “Fees”) from licensing or selling bioactive ingredients or molecules derived from ZIVO’s algae cultures. Specifically, ZIVO has agreed to provide to the Participants a 44.78% “Revenue Share” of all license fees generated by ZIVO from any licensee (See the Table below).
According to the terms of the Agreements, and pursuant to ASC 730-20-25 the Company has bifurcated the proceeds of $2,985,000 as follows: 1) the 106,315 warrants sold were attributed a value of $953,897 based on the Black Scholes pricing model using the following assumptions: volatilities ranging from 129.13% to 154.26%; annual rate of dividends 0%; discount rates ranging from 0.26% to 0.87%, and recorded as Additional Paid In Capital; 2) the remaining $2,031,103 was recorded as Deferred R&D Obligation – Participation Agreements. Since the Company believes there is an obligation to perform pursuant to ASC 730-20-25, the Deferred R&D Obligation will be amortized ratably based on expenses incurred as the Company develops the technology for bioactive ingredients or molecules (including its TLR4 Inhibitor molecule) derived from the Company’s algae cultures. In the year ending December 31, 2021, the Company recognized $555,745 as a contra R&D expense related to personnel and third-party expenses to develop the subject technology. $150,805 of this total contra R&D expense was attributed to deferred R&D obligations funded by a related party.
The Participation Agreements allow the Company the option to buy back the right, title and interest in the Revenue Share for an amount equal to the amount funded plus a forty percent (40%) premium, if the option is exercised less than 18 months following execution, and for either forty (40%) or fifty percent (50%) if the option is exercised more than 18 months following execution. Pursuant to the terms of twelve of the Participation Agreements, the Company may not exercise its option until it has paid the Participants a revenue share equal to a minimum of thirty percent (30%) of the amount such Participant’s total payment amount. Pursuant to the terms of one of the Participation Agreements, the Company may not exercise its option until it has paid the Participant a revenue share equal to a minimum of one hundred forty percent (140%) of such Participant’s total payment amount. Five of the Participation Agreements have no minimum threshold payment. Once this minimum threshold is met, the Company may exercise its option by delivering written notice to a Participant of its intent to exercise the option, along with repayment terms of the amount funded, which may be paid, in the Company’s sole discretion, in one lump sum or in four (4) equal quarterly payments. If the Company does not make such quarterly payments timely for any quarter, then the Company shall pay the prorated Revenue Share amount, retroactive on the entire remaining balance owed, that would have been earned during such quarter until the default payments have been made and the payment schedule is no longer in default. See below a summary of the Participation Agreements:
ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 – DEFERRED R&D OBLIGATIONS - PARTICIPATION AGREEMENTS (CONTINUED)
| | | | | | Warrants | | Term | | | | | | | | | Buy-back | | Buy-back |
| | | | | | Minimum | Premium % | Premium % |
Agreement | Date of | Amount | Exercise | Revenue | | Payment | pre-18 | post 18 |
# | Funding | Funded | Price | Share | | Threshold | mos. | mos. |
1 | | April 13, 2020 | $ | 100,000 | | 3,750 | | 5 Years | $ | 9.60 | | 1.500% | | $ | -” | | 40% | | 40% |
2 | | April 13, 2020 | | 150,000 | | 5,625 | | 5 Years | | 9.60 | | 2.250% | | | - | | 40% | | 40% |
3 | | April 13, 2020 | | 150,000 | | 5,625 | | 5 Years | | 9.60 | | 2.250% | | | - | | 40% | | 40% |
4 | | May 7, 2020 | | 250,000 | | 9,375 | | 5 Years | | 9.60 | | 3.750% | | | - | | 40% | | 40% |
5 | | June 1, 2020 | | 275,000 | | 10,313 | | 5 Years | | 8.80 | | 4.125% | | | 82,500 | | 40% | | 50% |
6 | | June 3, 2020 | | 225,000 | | 8,438 | | 5 Years | | 8.80 | | 3.375% | | | 67,500 | | 40% | | 50% |
7 | | July 8, 2020 | | 100,000 | | 3,750 | | 5 Years | | 9.60 | | 1.500% | | | 30,000 | | 40% | | 50% |
8 | | Aug. 24, 2020 | | 125,000 | | 4,688 | | 5 Years | | 9.60 | | 1.875% | | | 37,500 | | 40% | | 50% |
9 | | Sept. 14, 2020 | | 150,000 | | 5,625 | | 5 Years | | 9.60 | | 2.250% | | | 45,000 | | 40% | | 50% |
10 | | Sept.15, 2020 | | 50,000 | | 1,875 | | 5 Years | | 9.60 | | 0.750% | | | 15,000 | | 40% | | 50% |
11 | | Sept.15, 2020 | | 50,000 | | 1,875 | | 5 Years | | 9.60 | | 0.750% | | | 15,000 | | 40% | | 50% |
12 | | Sept.25, 2020 | | 300,000 | | 5,625 | | 5 Years | | 9.60 | | 4.500% | | | 420,000 | | 40% | | 50% |
13 | | Oct. 8, 2020 | | 500,000 | | 18,750 | | 5 Years | | 9.60 | | 7.500% | | | 150,000 | | 40% | | 40% |
14 | | Oct. 4, 2020 | | 100,000 | | 3,750 | | 5 Years | | 9.60 | | 1.500% | | | 40,000 | | 40% | | 50% |
15 | | Oct. 4, 2020 | | 250,000 | | 9,375 | | 5 Years | | 9.60 | | 3.750% | | | - | | 40% | | 40% |
16 | | Oct. 9, 2020 | | 50,000 | | 1,875 | | 5 Years | | 9.60 | | 0.750% | | | 15,000 | | 40% | | 40% |
17 | | Dec. 16, 2020 | | 10,000 | | 375 | | 5 Years | | 9.60 | | 0.150% | | | 17,000 | | 40% | | 50% |
18 | | Jan. 22, 2021 | | 40,000 | | 1,500 | | 5 Years | | 11.20 | | 0.600% | | | 12,000 | | 40% | | 50% |
19 | | Jan. 25, 2021 | | 40,000 | | 1,500 | | 5 Years | | 11.20 | | 0.600% | | | 12,000 | | 40% | | 50% |
20 | | Jan. 27, 2021 | | 25,000 | | 938 | | 5 Years | | 11.20 | | 0.375% | | | 12,000 | | 40% | | 50% |
21 | | May 14,2021 | | 45,000 | | 1,688 | | 5 Years | | 10.40 | | 0.675% | | | 13,500 | | 40% | | 50% |
| | | $ | 2,985,000 | | 106,315 | | | | | | 44.775% | | $ | 984,000 | | | | |
Certain of the Participation Agreements are owned by related parties. Participation Agreements numbers 8, 14, and 19 totaling $265,000 are owned by HEP Investments, Participation Agreement 21 in the amount of $45,000 is owned by MKY MTS LLC an entity controlled by the owners of HEP Investments, and Participation Agreement 13 in the amount of $500,000 is owned by an investment company owned by a significant shareholder Mark Strome (“Strome”).
ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – STOCKHOLDERS’ EQUITY (DEFICIENCY)
Recapitalization - Reverse Stock Split
On November 11, 2020, ZIVO’s stockholders approved a reverse stock split of the Company’s common stock within the range of 1-for-25 to 1-for-120 of our authorized, issued, and outstanding shares of common stock. The Board was given discretion to determine the final ratio, effective date, and date of filing of the certificate of amendment to our articles of incorporation, as amended, in connection with the reverse stock split.
On May 27, 2021, the Company filed a certificate of amendment to its articles of incorporation with the Secretary of State of the State of Nevada (the “Certificate of Amendment”) to (i) effectuate a reverse stock split (the “Reverse Stock Split”) of its issued and outstanding shares of common stock and treasury shares on a 1-for-80 basis and (ii) decrease the number of total authorized shares of common stock of the Company from 1,200,000,000 to 150,000,000 shares. The Certificate of Amendment became effective at 12:01 a.m. (Eastern Time) on May 28, 2021 (the “Effective Time”).
As of the Effective Time, every 80 shares of issued and outstanding common stock were converted into one share of common stock. No fractional shares were issued in connection with the Reverse Stock Split. Instead, a holder of record of old common stock as of immediately prior to the Effective Time who would otherwise have been entitled to a fraction of a share was entitled to receive cash in lieu thereof.
The Company’s transfer agent, Issuer Direct Corporation acted as the exchange agent for the Reverse Stock Split. The Reverse Stock Split did not alter the par value of the Company’s common stock or modify any voting rights or other terms of the common Stock. In addition, pursuant to their terms, a proportionate adjustment was made to the per share exercise price and number of shares issuable under all of the Company’s outstanding stock options and warrants to purchase shares of common Stock, and the number of shares authorized and reserved for issuance pursuant to the Company’s equity incentive plan will be reduced proportionately.
All issued and outstanding common stock and per share amounts contained in the financial statements have been retroactively adjusted to reflect this Reverse Stock Split for all periods presented. In addition, a proportionate adjustment was made to the per share exercise price and the number of shares issuable upon the exercise of all outstanding stock options, restricted stock units and warrants to purchase shares of common stock. A proportionate adjustment was also made to the number of shares reserved for issuance pursuant to the Company’s equity incentive compensation plans to reflect the Reverse Stock Split.
ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – STOCKHOLDERS’ EQUITY (DEFICIENCY) (CONTINUED)
Board of Directors Fees
On September 30, 2020, our Board of Directors granted to three of its directors warrants to purchase 6,250 shares of common stock and the Chairman of the Board warrants to purchase 125,000 shares of common stock at an exercise price of $8.00 per share. The warrants have a term of five years and vest immediately. The warrants were valued at $1,248,616 using the Black Scholes pricing model relying on the following assumptions: volatility 144.93%; annual rate of dividends 0%; discount rate 0.28%. In addition, each director is entitled to receive $10,000 for each annual term served.
On October 12, 2021, our Board of Directors approved the Non-Employee Director Compensation Policy. Pursuant to that policy, the Board granted to each of the four non-employee directors $50,000 in value of common stock options. The Company used the Black Scholes option pricing model to determine the number of shares that would derive a value of $50,000 for each non-employee director. The Black Scholes pricing model use the following assumptions: term of 10 years; volatility 142.54%; annual rate of dividends 0%; discount rate 1.59%. The model yielded an award grant of 45,664 total options, 11,416 for each of the four non-employee directors. In addition, the Board granted Ms. Cornell a pro rata number of options for her tenure from February 2, 2021 through October 11, 2021; a grant of 7,660 shares valued at $33,549 using the same Black Scholes assumptions.
The Company recorded directors’ fees of $710,481 and $1,280,366 for the years ended December 31, 2021 and 2020, respectively, representing the cash fees paid or accrued and the expense associated with the vested warrants and the common stock options described above.
Stock Based Compensation
On November 24, 2020, the Company and a Consultant entered into a Second Amendment to the Supply Chain Consulting Agreement (See “Note 12 – Commitments and Contingencies: Supply Chain Consulting Agreement”) whereby the issuance to a consultant of a cashless warrant with a five-year term to purchase 237,500 shares of the Company’s common stock was reduced to 162,500 shares of the Company’s common stock, and a cashless warrant with a five-year term to purchase 37,500 shares of the Company’s common stock was issued to a member of the Consultant. The warrants, all immediately vested, were valued at $386,348 using the Black Scholes pricing model relying on the following assumptions: volatility 148.83%; annual rate of dividends 0%; discount rate 0.39%.
On January 1, 2021, in connection with his appointment as the Company’s Chief Financial Officer, Mr. Marchiando received a stock option award issued pursuant to the 2019 Plan to purchase 162,500 shares of the Company’s common stock, with an exercise price of $11.20 per share. Vesting of these options shall be as follows: 37,500 shares vested immediately upon grant of the option award, and 15,625 shares will vest on each 6 month anniversary of January 1, 2021.
The Company, on June 15, 2021, issued 5,000 shares of unregistered common stock to CorProminence, LLC (d/b/a COREir) for services in accordance with the consulting agreement between COREir and the Company (See “Note 11 – Commitment and Contingencies”). The shares were value at the market price on June 15, 2021, $4.48 per share for a total expense of $22,400. On October 15, 2021, the Company, per its consulting agreement with CorProminence, LLC (dba COREir), issued an additional 2,500 shares of common stock to CorProminence, LLC. The shares were valued on October 15, 2021, at $4.15 per share for a total expense in the aggregate of $10,375.
On October 21, 2021, the Board of directors granted options under its 2021 equity incentive plan (the “2021 Plan”) to purchase 924,000 shares of common stock to several directors and officers of the Company. The options have a term of ten years and 260,000 shares granted to board members vest over one year, and the 664,000 shares granted to the officers vest over three years. The options were valued at $3,476,392 using the Black Scholes pricing model relying on the following assumptions: volatility 141.38%; annual rate of dividends 0%; discount rate 1.68%.
Stock Issuances
During the year ended December 31, 2021, the Company issued 139,664 shares for proceeds of $1,514,970 to investors in private placements. In addition, during this same period, a related party purchased 4,464 shares of the Company’s common stock at $11.20 per share for proceeds of $50,000.
On June 2, 2021, the Company completed its public offering of common stock and common stock warrants. The Company issued 2,760,000 units at $5.00 (each unit consisting of one share of the Company’s common stock and one warrant (“registered warrant”) with an exercise price $5.50 per share) for gross proceeds of $13,804,240, and net proceeds of $12,181,602 after related underwriting and other costs of $1,622,638.
On July 2, 2021, the underwriter of the June 2021 Offering exercised its overallotment option and purchased an additional 150,000 shares of the Company’s common stock at $4.99 per share for gross proceeds of $748,500, and net proceeds of $673,159 after related underwriting and other costs of $75,191.
During the year ended December 31, 2020, the Company issued 46,807 shares of its common stock at an average price of $8.56 per share for proceeds of $400,866. Of this amount, 46,650 shares ($399,612 of proceeds) were issued to private investors and 156 shares ($1,254 of proceeds) were issued to Mr. Maggiore, a related party.
ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – STOCKHOLDERS’ EQUITY (DEFICIENCY) (CONTINUED)
Stock Warrants Exercised
During the twelve months ended December 31, 2021, warrants to purchase 139,100 shares of the Company’s common stock were exercised on a “cashless” basis resulting in the issuance of 54,361 shares of common stock.
In September 2021, two groups of the Company’s registered warrants were exercised resulting in the Company issuing 198,503 shares of common stock. The exercise price of the registered warrants was $5.50 per share, resulting in gross cash proceeds to the Company of $1,091,767.
During the year ended December 31, 2020, HEP, a principal shareholder and related party, assigned warrants to purchase 53,125 shares of the Company’s common stock to third party investors. These warrants were exercised at $8.00 per share resulting in proceeds of $425,000. Due to the nature of this transaction, the Company considered the warrants to be contributed capital from a principal shareholder and recorded equity related finance charges. The warrants were valued at $495,501 using the Black Scholes pricing model relying on the following assumptions: volatilities ranging from 128.20% to 142.46%; annual rate of dividends 0%; discount rates ranging from 0.41% to 1.65%.
During the year ended December 31, 2020, warrants to purchase 70,625 shares of the Company’s common stock were exercised on a “cashless” basis resulting in the issuance of 28,841 shares of common stock.
In addition, the Company issued 108,562 shares of the Company’s common stock at an average price of $7.65 per share for proceeds of $830,400 from the exercise of warrants. Mr. Maggiore, a related party, exercised 2,500 of those warrants at an exercise price of $8.00 per share, representing $20,000 of the proceeds (from the conversion of a Loan Payable, See “Note 6 - Loan Payable, Related Parties”).
Sale of Common Stock Warrants
During the twelve months ending December 31, 2021, and in connection with the Participation Agreements (see “Note 9 – Deferred R&D Obligation – Participation Agreements”), the Company sold warrants to purchase 5,626 shares of common stock for $55,697. The warrants were valued based on the Black Scholes pricing model relying on the following assumptions: volatility 129.13% to 140.20%; annual rate of dividends 0%; discount rate 0.41% to 0.87%.
On June 2, 2021, the Company completed its public offering of common stock and warrants. As part of the transaction, the Company sold 414,000 warrants (“registered warrants”) with an exercise price of $5.50 per share, from the overallotment option that was exercised by the underwriter for $4,140. Additionally, the Company issued the underwriter 8% of the number of shares of common stock in the offering in 220,800 unregistered warrants for shares of common stock, for an aggregate price to the Company of $100. These warrants are exercisable 180 days after the offering date and expire five years after the first day they are exercisable. The warrants were valued at $946,675 based on the Black Scholes pricing model relying on the following assumptions: volatility 132.46%; annual rate of dividends 0%; discount rate 0.80%. This was recognized by the company as an underwriting cost and was accounted for as an offset to funds raised.
During the twelve months ending December 31, 2020, in connection with the Participation Agreements, the Company sold warrants to purchase 100,689 shares of common stock for $897,805. The warrants were valued based on the Black Scholes pricing model relying on the following assumptions: volatility 129.13% to 154.26%; annual rate of dividends 0%; discount rate 0.26% to 0.87%.
2021 Equity Incentive Plan
On October 12, 2021, after approval from the stockholders at the Company’s 2021 annual meeting of stockholders, the Company adopted the 2021 Plan for the purpose of enhancing the Company’s ability to attract and retain highly qualified directors, officers, key employees and other persons and to motivate such persons to improve the business results and earnings of the Company by providing an opportunity to acquire or increase a direct proprietary interest in the operations and future success of the Company. The 2021 Plan is administered by the compensation committee of the Board who will, amongst other duties, have full power and authority to take all actions and to make all determinations required or provided for under the 2021 Plan. Pursuant to the 2021 Plan, the Company may grant options, share appreciation rights, restricted shares, restricted share units, unrestricted shares and dividend equivalent rights. The 2021 Plan has a duration of 10 years.
Subject to adjustment as described in the 2021 Plan, the aggregate number of shares of common stock available for issuance under the 2021 Plan is initially set at 1,000,000 shares; this number is automatically increased each January 1st by an amount equal to 5% of the number of common stock shares outstanding at that date. As of December 31, 2021, 969,644 options have been issued under the 2021 Plan, and 30,356 shares remained available for issuance.
2019 Omnibus Long-Term Incentive Plan
Prior to the adoption of the 2021 Equity Incentive Plan, the Company maintained a 2019 Omnibus Long-Term Incentive Plan (the “2019 Plan”). Following the approval by the shareholders of the 2021 Equity Incentive Plan, no additional awards have been or will be made under the 2019 Plan. As of December 31, 2021, 781,250 stock options had been issued under the 2019 Plan with terms between 5 years and 10 years, of which 743,750 remained outstanding.
ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – STOCKHOLDERS’ EQUITY (DEFICIENCY) (CONTINUED)
Common Stock Options
A summary of the status of the Company’s options issued under the Company’s equity incentive plans is presented below. As of December 31, 2021 there is no intrinsic value in any of the Company's outstanding options as the market price of the Company's common stock is in all cases lower than the exercise price of options.:
| | December 31, 2021 | | | December 31, 2020 | |
| | Number of Options | | | Weighted Average Exercise Price | | | Number of Options | | | Weighted Average Exercise Price | |
Outstanding, beginning of year | | | 606,250 | | | $ | 9.67 | | | | 362,500 | | | $ | 8.11 | |
Forfeited | | | (37,500 | ) | | | 11.84 | | | | | | | | | |
Issued | | | 1,152,324 | | | | 6.32 | | | | 243,750 | | | | 11.98 | |
Outstanding, end of period | | | 1,721,074 | | | $ | 7.38 | | | | 606,250 | | | $ | 9.67 | |
Options outstanding and exercisable by price range as of December 31, 2021 were as follows:
Outstanding Options | | | Exercisable Options | |
Range of Exercise Price | | | Number | | | Average Weighted Remaining Contractual Life in Years | | | Range of Exercise Price | | | Number | | | Weighted Average Exercise Price | |
| $ | 4.00-4.99 | | | | 53,324 | | | | 9.78 | | | $ | 4.00-4.99 | | | | - | | | $ | - | |
| 5.00-5.99 | | | | 924,000 | | | | 9.81 | | | | 5.00-5.99 | | | | 231,000 | | | | 5.50 | |
| 8.00-8.99 | | | | 375,000 | | | | 7.60 | | | | 8.00-8.99 | | | | 371,876 | | | | 8.05 | |
| 9.00-9.99 | | | | 25,000 | | | | 3.63 | | | | 9.00-9.99 | | | | 25,000 | | | | 9.60 | |
| 11.00-11.99 | | | | 175,000 | | | | 8.93 | | | | 11.00-11.99 | | | | 65,625 | | | | 11.20 | |
| 12.00-12.99 | | | | 168,750 | | | | 3.14 | | | | 12.00-12.99 | | | | 146,875 | | | | 12.80 | |
| | | | | 1,721,074 | | | | 8.49 | | | | | | | | 840,376 | | | $ | 8.47 | |
ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – STOCKHOLDERS’ EQUITY (DEFICIENCY) (CONTINUED)
Common Stock Warrants - Unregistered
A summary of the status of the Company’s unregistered warrants is presented below.
| | December 31, 2021 | | | December 31, 2020 | |
| | Number of Warrants | | | Weighted Average Exercise Price | | | Number of Warrants | | | Weighted Average Exercise Price | |
| | | | | | | | | | | | | | | | |
Outstanding, beginning of year | | | 2,502,291 | | | $ | 7.67 | | | | 2,427,634 | | | $ | 7.43 | |
Issued | | | 226,426 | | | | 5.64 | | | | 287,564 | | | | 9.34 | |
Exercised | | | (139,099 | ) | | | 6.41 | | | | (179,564 | ) | | | 7.26 | |
Cancelled | | | - | | | | - | | | | - | | | | - | |
Expired | | | 35,983 | | | | 6.52 | | | | (33,343 | ) | | | 7.08 | |
Outstanding, end of period | | | 2,553,635 | | | $ | 7.57 | | | | 2,502,291 | | | $ | 7.67 | |
Unregistered warrants outstanding and exercisable by price range as of December 31, 2021 were as follows:
Outstanding Warrants | | | Exercisable Warrants | |
| Range of | | Number | | | Average Weighted Remaining Contractual Life in Years | | | Exercise Price | | Number | | | Weighted Average Exercise Price | |
| | | | | | | | | | | | | | | |
$ | 4.00-4.99 | | | 200,625 | | | | 0.59 | | $ | 4.00-4.99 | | | 200,625 | | | $ | 4.80 | |
| 5.00-5.99 | | | 252,050 | | | | 3.96 | | | 5.00-5.99 | | | 252,050 | | | | 5.51 | |
| 6.00-6.99 | | | 241,091 | | | | 2.56 | | | 6.00-6.99 | | | 241,091 | | | | 6.40 | |
| 7.00-7.99 | | | 1,250 | | | | 0.58 | | | 7.00-7.99 | | | 1,250 | | | | 7.20 | |
| 8.00-8.99 | | | 1,584,180 | | | | 1.42 | | | 8.00-8.99 | | | 1,584,180 | | | | 8.02 | |
| 9.00-9.99 | | | 231,938 | | | | 3.69 | | | 9.00-9.99 | | | 231,938 | | | | 9.60 | |
| 10.00-10.99 | | | 1,688 | | | | 4.37 | | | 10.00-10.99 | | | 1,688 | | | | 10.40 | |
| 11.00-11.99 | | | 35,813 | | | | 2.00 | | | 11.00-11.99 | | | 35,813 | | | | 11.20 | |
| 14.00-14.99 | | | 5,000 | | | | 2.99 | | | 14.00-14.99 | | | 5,000 | | | | 14.40 | |
| | | | 2,553,635 | | | | 1.93 | | | | | | 2,553,635 | | | $ | 7.57 | |
ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 – STOCKHOLDERS’ EQUITY (DEFICIENCY) (CONTINUED)
Common Stock Warrants - Registered
A summary of the status of the Company’s registered warrants is presented below:
| | December 31, 2021 | | | December 31, 2020 | |
| | Number of Registered Warrants | | | Weighted Average Exercise Price | | | Number of Registered Warrants | | | Weighted Average Exercise Price | |
Outstanding, beginning of year | | | - | | | $ | - | | | | - | | | $ | - | |
Issued | | | 3,174,000 | | | | 5.50 | | | | - | | | | - | |
Exercised | | | (198,503 | ) | | | 5.50 | | | | - | | | | - | |
Cancelled | | | - | | | | - | | | | - | | | | - | |
Expired | | | - | | | | - | | | | - | | | | - | |
Outstanding, end of period | | | 2,975,497 | | | $ | 5.50 | | | | - | | | $ | - | |
Registered warrants outstanding and exercisable by price range as of December 31, 2021, were as follows:
Outstanding Registered Warrants | | | Exercisable Registered Warrants | |
Exercise Price | | | Number | | | Average Weighted Remaining Contractual Life in Years | | | Exercise Price | | | Number | | | Weighted Average Exercise Price | |
| | | | | | | | | | | | | | | | |
| $ | 5.50 | | | | 2,975,497 | | | | 4.39 | | | $ | 5.50 | | | | 2,975,497 | | | | 5.50 | |
| | | | | 2,975,497 | | | | 4.39 | | | | | | | | 2,975,497 | | | $ | 5.50 | |
ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – COMMITMENTS AND CONTINGENCIES
COVID-19
In March 2020, the World Health Organization declared the outbreak of a disease caused by a novel strain of the coronavirus (COVID-19) to be a pandemic. Global pandemics and other natural disasters or geopolitical actions, including related to the COVID-19 pandemic, could affect the Company’s ability to access the public markets and obtain necessary capital in order to properly capitalize and continue our operations. Prior to the COVID-19 pandemic, the expectation was that there would be forward movement with the production of our algal biomass, validation and purification. However, these were temporarily suspended and/or delayed, and many continue in diminished capacity.
Employment Agreements
At December 31, 2021, the Company had compensation agreements with its former President / Chief Executive Officer, one with our present Chief Financial Officer, and a separation agreement with our former Chief Financial Officer.
Mr. Dahl’s Employment Agreement:
The Company’s former Chief Executive Officer, Andrew Dahl, served as Chief Executive Officer and under the terms of his employment $7,500 per month of Mr. Dahl’s was deferred until either of the following events occur: (i) within five years after the effective date, the Company enters into a term sheet to receive at least $25,000,000 in equity or other form of investment or debt on terms satisfactory to the Board including funding at closing on such terms of at least $10 million; or (ii) within 12 months after the effective date that the Company receives revenue of at least $10 million. As of December 31, 2021, the Company had accrued $232,500 in deferred salary pursuant to Mr. Dahl’s agreement.
Mr. Dahl’s employment was terminated effective January 4, 2022. See “Note 14 – Subsequent Events.”
Mr. Marchiando’s Employment Agreement:
The Company’s employment agreement with Mr. Marchiando (“Marchiando Agreement”) includes a provision whereby Mr. Marchiando shall receive $25,000 upon the closing, prior to December 31, 2021, of a third party financing that raises at least $10,000,000. If, upon the closing prior to December 31, 2021 of a third party financing that raises over $13,000,000 for the Company, Mr. Marchiando shall receive a maximum bonus of $50,000, as long as Mr. Marchiando is employed at the time of closing. On June 15, 2021, the Company paid Mr. Marchiando $50,000 in accordance with the Marchiando Agreement and the closing of the June 2021 Offering that raised gross funds to the Company of approximately $13,800,000.
ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - COMMITMENTS AND CONTINGENCIES (continued)
Mr. Rice’s Transition Arrangement:
On January 7, 2021, the Company and Philip Rice, the Company’s former Chief Executive Officer, entered into a written agreement concerning Rice’s departure from the Company (the “Separation Agreement”). Pursuant to the Separation Agreement, Mr. Rice resigned from his position as Chief Financial Officer of the Company effective on January 1, 2021, and following a transition period, agreed to resign from all positions as an officer or employee of the Company effective as of January 31, 2021 (the “Separation Date”). The Separation Agreement provides that Mr. Rice will receive certain benefits that he is entitled to receive under his employment agreement dated March 4, 2020. Accordingly, under the Separation Agreement, subject to non-revocation of a general release and waiver of claims in favor of the Company, the Company has agreed to pay Mr. Rice his base salary of $280,000 for one year and three weeks, beginning on the Separation Date, and grant him an option to purchase 12,500 shares of common stock. Pursuant to the Rice Agreement and the Separation Agreement, the Company paid to Mr. Rice on June 15, 2021, a $50,000 bonus that was tied to the successful June 2021 Offering.
Corporate Advisory Agreement
On September 30, 2019, effective July 9, 2019, the Company entered into an agreement with an Investment Opportunity Provider (IOP). The IOP has been engaged as an exclusive financial advisor in connection with the proposed securities offering and sale of up to $35 million of the Company’s common stock. The Company has agreed to pay the IOP, upon the acceptance of a successful funding transaction, a fee of 1% of the aggregate value of the transaction and a warrant to purchase up to 75,000 shares of common stock at an exercise price of $8.00 for a term of five years. As of December 31, 2021, in connection with this agreement, no successful funding transactions have taken place and no warrants have been issued.
Financial Consulting Agreement – May 2020
On May 4, 2020, the Company entered into a Financial Consulting and Corporate Advisory Agreement (“FCCA Agreement”). The FCCA Agreement calls for a non-refundable initial fee of $25,000 and two additional monthly fees of $15,000 per month. To the extent a transaction (defined as the sale of equity securities, hybrid debt and equity securities or the entering into any fund capital, joint venture, buy out, or similar transactions) is entered into, then the Company will pay an 8% fee based on the value of the transaction. A 50% credit of the initial fee and monthly fees will be credited against the 8% fee. The FCCA Agreement was cancellable at any time by either party, however, there is a 24-month period where the 8% transaction will be payable based on identified transaction participants. This FCCA Agreement was cancelled in July 2020.
Financial Consulting Agreement – July 2020
On July 16, 2020, the Company entered into an Advisory Agreement (“FC Agreement”). The FC Agreement calls for monthly fees of $10,000 per month. The FC Agreement is on a month-to-month renewal basis. Upon each renewal (starting with the second month), the Company shall issue a warrant to purchase 1,875 shares of common stock at an exercise price of $9.60 for a term of five years. The Company issued warrants to purchase 5,625 shares of common stock at an exercise price of $9.60 for a term of five years valued at $51,278 using the Black Scholes pricing model relying on the following assumptions: volatility 144.93% to 145.50%; annual rate of dividends 0%; discount rate 0.29% to 0.32% The Company terminated the FC Agreement in October 2020.
ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
Supply Chain Consulting Agreement
On February 27, 2019, the Company entered into a Supply Chain Consulting Agreement with a consultant (“Consultant”) (see “Note 10 – Stockholders’ Equity (Deficiency)”). In May 2019, the Company issued a warrant to purchase 62,500 shares of common stock at an exercise price of $8.00 for a term of five years to the Consultant. The warrants were valued at $529,023 using the Black Scholes pricing model relying on the following assumptions: volatility 181.49%; annual rate of dividends 0%; discount rate 2.34%. In October 2019, 25,000 of those warrants were returned to the Company resulting in a reduction in the value of $211,609. On September 14, 2019, the parties entered into a First Amendment to the Supply Chain Consulting Agreement (“Supply Consulting Agreement Amendment”). The Supply Consulting Agreement Amendment provides that the Consultant will identify and help negotiate the terms of potential joint ventures involving algae production development projects or related transactions or business combinations (“Development Project”). The Supply Consulting Agreement provides for exclusivity in Southeast Asia; Oceania; Indian subcontinent; and Africa; with regions in the Middle East by mutual agreement. The closing of a Development Project (as acceptable to the Company) is defined as the date that the Company is able, financially and otherwise, to proceed with engineering and construction of algae production facilities, processing or warehousing facilities and supply chain development, or related business combinations rendering an equivalent outcome (in the reasonable determination of the Company), for the production, processing, transport, compliance, marketing and resale of its proprietary algae biomass. Upon the closing of a Development Project, the Company will pay cash fees of $300,000 to Consultant, pay an on-going monthly fee of $50,000 for 24 months and issue to Consultant a cashless warrant with a five-year term to purchase two hundred thirty-seven thousand and five hundred (237,500) shares of the Company’s common stock at an exercise price of $8.00 per share. On November 24, 2020, the parties entered into a Second Amendment to the Supply Chain Consulting Agreement whereby the issuance to Consultant a cashless warrant with a five-year term to purchase two hundred thirty-seven thousand five hundred (237,500) shares of the Company’s common stock was reduced to one hundred sixty-two thousand five hundred (162,500) shares of the Company’s common stock, and a cashless warrant with a five-year term to purchase thirty-seven thousand five hundred (37,500) shares of the Company’s common stock was issued to a member of the Consultant. The warrants were valued at $386,348 using the Black Scholes pricing model relying on the following assumptions: volatility 148.83%; annual rate of dividends 0%; discount rate 0.39%. As of December 31, 2021, the Development Project has not closed, and the warrants have not yet been issued.
The Board of Directors has also authorized the Company to issue to Consultant a cashless warrant with a five-year term to purchase 12,500 shares of the Company’s common stock at an exercise price of $8.00 per share at its discretion. As of December 31, 2021, such warrant has not been issued.
On March 1, 2021, the Company and the aforementioned “member of the Consultant” signed an amendment to the original consulting agreement. The member of the Consultant agreed to take on additional responsibilities related to the non-North America expansion of the Company biomass production network. Upon the successful formation, licensing and start of operations, the member of the Consultant will be granted warrants to purchase 40,625 shares of the Company’s common stock at the prevailing market price at that time. In addition, a monthly cash payment of $12,500 is included in the consulting agreement. On November 3, 2021, the Company and the “member of the Consultant” signed a second amendment to the original consulting agreement. The monthly cash payment was raised to $15,000. All other terms of the original agreement as amended remained unchanged.
On December 8, 2021, the Company sent a letter to the consultant that terminated the Supply Chain Consulting Agreement effective December 13, 2021.
Marketing / Public Relations Agreement
On December 27, 2019, the Company entered into a Marketing / Public Relations Agreement (“MPR Agreement”) with a consultant (“MPR Consultant”). The MPR Agreement provides that the MPR Consultant will assist the Company in identifying and assist in the negotiation of potential licensing, product sales, joint ventures and venture financing of projects outside of the United States and provide advice for the Company’s long-term business strategy and commercial relationships. The MPR Agreement calls for the issuance of warrants to purchase up to 62,500 shares of the Company’s common stock at an exercise price based on the closing market price on the day of issuance, with a five-year term. For commercial transactions whose value is determined and agreed to by both parties exceeding $1,000,000 (“Qualifying Transaction”), the Company shall issue to MPR Consultant a warrant to purchase common stock in the amount of 6,250 shares. For each successive Qualifying Transaction of at least $1,000,000, the MPR Consultant shall be issued 3,750 shares up to a maximum cumulative award of 62,500 shares in warrant form in total.
NOTE 11 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
Marketing / Public Relations (continued)
Further, the Company will pay a 4% commission on the revenue received on the sale of Company algal product to one or more entities identified and cultivated by the MPR Consultant, and on the revenue received from licensing the Company’s intellectual property to such entities identified and cultivated by the MPR Consultant, for a period of three (3) years from the effective date of a qualifying transaction. The Agreement also calls for a $5,000 payment upon signing and monthly payments of $5,000 once a Qualifying Transaction, the sale of an algal product or revenue from a licensing transaction occurs. As of December 31, 2021, a commercial transaction has not closed, and the warrants have not yet been issued and no commissions have been paid.
On June 11, 2021 the MPR Consultant and the Company signed a termination letter for the MPR Agreement. The Company agreed to pay the MPR Consultant $83,000 and business expenses of roughly $10,000 to terminate the MPR Agreement in full satisfaction of services performed through the termination date.
Investor / Public Relations
On February 15, 2021, the Company signed a consulting agreement with CorProminence, LLC (dba COREir) to provide us with investor relations and public relations services. The COREir agreement includes a provision to issue to COREir on the four (4) month anniversary of the effective date, or as soon thereafter as is practically possible, 10,000 authorized restricted shares of common stock of the Company, of which 5,000 shares shall vest immediately upon receipt, 2,500 shall vest on the eight (8) month anniversary of the contract effective date and 2,500 shares shall vest on the twelve (12) month anniversary of the effective date of the COREir agreement. In addition, the agreement requires the Company to pay COREir $15,000 per month, plus out of pocket expenses, for their consulting services.
On October 15, 2021, the Company, per its consulting agreement with CorProminence, LLC (dba COREir), issued 2,500 shares of common stock to CorProminence, LLC. The shares were valued on October 15, 2021, at $4.15 per share for a total expense in the aggregate of $10,375. On October 31, 2021, the Company informed CorProminence LLC that it was immediately terminating the consulting agreement. Under the termination clause of the agreement, the Company may be liable for an additional 2,500 shares to be issued to CorProminence.
Legal Contingencies
On April 13, 2022, AEGLE Partners, 2 LLC (“AEGLE”) initiated an arbitration in Michigan against the Company with the American Arbitration Association. AEGLE asserted claims related to a certain Supply Chain Consulting Agreement entered into between AEGLE and the Company in 2019 (as amended from time to time, the “Agreement”), and a disagreement between AEGLE and the Company regarding whether AEGLE is entitled to payment of certain fees and warrants pursuant to the Agreement. AEGLE's complaint seeks, among other things, three times the payment of such alleged fees and warrants and recovery of AEGLE's costs and expenses. We believe that the claims made by AEGLE in its complaint are without merit and we intend to vigorously defend ourselves against them.
We may become a party to litigation in the normal course of business. In the opinion of management, there are no legal matters involving us that would have a material adverse effect upon our financial condition, results of operation or cash flows.
ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – RELATED PARTY TRANSACTIONS
Loan Payable – Related Party
See “Note 6 – Loan Payable, Related Parties” for disclosure of loans payable to related parties.
Employment Agreement
See “Note 11 – Commitments and Contingencies” for disclosure of the employment agreements with the former Chief Executive Officer and current and former Chief Financial Officer.
Building Lease
As of December 31, 2021, the Company rents its office space from M&M Keego Center LLC. This entity is controlled by an immediate family member of a principal shareholder. The Company rents space on a month-to-month basis. The Company paid the related party $60,000 and $48,000 for the years ended December 31, 2021, and December 31, 2020 respectively for use of the office. See “Note 14 – Subsequent Events”.
Stock Issuances
On June 2, 2021, the Company completed its public offering of units consisting of common stock and warrants. Two of the Company’s directors participated in the offering; Chris Maggiore purchased 100,000 units, and Alison Cornell purchased 15,000 units.
NOTE 13 – INCOME TAXES
The following table presents the components of net loss before income taxes:
| | Years Ended December 31, | |
| | 2021 | | | 2020 | |
Domestic | | $ | (9,163,367 | ) | | $ | (9,105,728 | ) |
(Loss) before provision for income taxes | | $ | (9,163,367 | ) | | $ | (9,105,728 | ) |
There was no income tax for the years ended December 31, 2021 and December 31, 2020. The Company’s tax expense differs from the “statutory” tax expense for the years ended December 31, 2021, and 2020 as noted below:
| | For the Years Ended December 31, | |
| | 2021 | | | 2020 | |
Income tax (benefit) / Expense at federal statutory rate | | $ | (1,924,307 | ) | | | 21.0 | % | | $ | (1,912,203 | ) | | | 21.0 | % |
State income taxes, net of federal benefit | | | (434,344 | ) | | | 4.7 | % | | | (431,612 | ) | | | 4.7 | % |
Stock based compensation | | | (128,211 | ) | | | 1.4 | % | | | 36,078 | | | | (0.4 | )% |
Other non-deductible items | | | (26,590 | ) | | | 0.3 | % | | | 4,945 | | | | (0.1 | )% |
Change in valuation allowance | | | 2,513,451 | | | | (27.4 | )% | | | 2,302,791 | | | | (25.3 | )% |
Total income tax provision | | $ | - | | | | 0.0 | % | | $ | - | | | | 0.0 | % |
ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards. The tax effects of significant items comprising the Company’s deferred taxes were as follows:
| | For the Years Ended December 31, | |
| | 2021 | | | 2020 | |
Deferred tax assets: | | | | | | |
Federal net operating loss carryforwards | | $ | 17,643,858 | | | $ | 16,407,136 | |
State net operating loss carryforwards | | | 3,135,622 | | | | 2,856,476 | |
Stock based compensation | | | 2,898,289 | | | | 1,900,706 | |
Total deferred tax assets | | $ | 23,677,769 | | | $ | 21,164,319 | |
Valuation allowance | | | (23,677,769 | ) | | | (21,164,319 | ) |
Total deferred income taxes | | $ | - | | | $ | - | |
ASC 740 Income Taxes requires that the tax benefit of net operating losses (“NOLs”), temporary differences and credit carryforwards be recorded as an asset to the extent that management assesses that realization is “more likely than not.” Realization of the future tax benefits is dependent on the Company’s ability to generate sufficient taxable income within the carryforward period. Management believes that realization of the deferred tax assets arising from the above-mentioned future tax benefits from operating loss carryforwards is currently not more likely than not and, accordingly, has provided a valuation allowance. The valuation allowance increased by $2.5 million and $2.3 million for the years ended December 31, 2021, and 2020.
Section 382 (“§382”) of the Internal Revenue Code of 1986, as amended (“IRC”) limits the use of NOL and tax credit carryforwards in certain situations where changes occur in the stock ownership of a company. In general, if we experience a greater than 50% aggregate change in ownership over a 3-year period, we are subject to an annual limitation under IRC §382 on the utilization of the Company’s pre-change NOL carryforwards. The annual limitation generally is determined by multiplying the value of the Company’s stock at the time of such ownership change (subject to certain adjustments) by the applicable long-term exempt rate. Such limitations may result in expiration of a portion of the NOL carryforwards before utilization. The Company is in the process of developing a §382 analysis to evaluate the potential effects on the Company’s NOLs. It is probable that the NOLs created in 2017 and prior years will expire before they could be utilized.
As of December 31, 2021, and 2020 the Company has $84.0 million and $78.1 million of Federal NOLs, being carried forward which were incurred in 2003 through 2021. The NOLs begin expiring in the calendar year 2023 for Federal and state purposes. However, under the new Tax Cuts and Jobs Act, all NOLs incurred after December 31, 2017 are carried forward indefinitely for Federal tax purposes. As of December 31, 2021 and 2020, the Company has $66.1 million and $60.2 million of NOL carryforward for state purposes that begin to expire in 2022.
| | Net Operating Loss Expiration by Year | |
2023 | | $ | 69,188 | |
2024 | | | 2,867,736 | |
2025 | | | 3,728,213 | |
2026 | | | 2,669,446 | |
2027 | | | 1,386,345 | |
2028 through 2037 | | | 41,517,220 | |
Total expiring operating losses (incurred prior to December 31, 2017) | | $ | 52,238,148 | |
Non-expiring operating losses (incurred after December 31, 2017) | | | 31,780,226 | |
Total Operating Loss | | $ | 84,018,374 | |
In the ordinary course of its business the Company incurs costs that, for tax purposes, are determined to be qualified research expenditures within the meaning of IRC Code Sec. 41 and are, therefore, eligible for the Increasing Research Activities credit under IRC Code Sec. 41. The Company has not claimed a credit pursuant to IRC Code Sec. 41 on its federal returns. i.e. no deferred tax asset on the books.
As of December 31, 2021, the Company has no uncertain tax positions. It is the Company’s policy to account for interest and penalties related to uncertain tax positions as interest expense and general and administrative expense, respectively in its statements of operations. No interest or penalties have been recorded related to the uncertain tax positions.
ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - INCOME TAXES (CONTINUED)
It is not expected that there will be a significant change in uncertain tax positions in the next 12 months. The Company is subject to U.S. federal and state income tax as well as to income tax in multiple state jurisdictions. In the normal course of business, the Company is subject to examination by tax authorities. As of the date of the financial statements, there are no tax examinations in progress. The statute of limitations for tax years ended after December 31, 2016, are open for federal and state tax purposes.
In response to the COVID-19 pandemic, the CARES Act was signed into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”). Corporate taxpayers may carryback NOLs originating during 2018 through 2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or 2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30% limit under the 2017 Tax Act) for tax years beginning January 1, 2020 and 2021. The CARES Act allows taxpayers with alternative minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds over a period of years, as originally enacted by the 2017 Tax Act. The impact on the Company’s income taxes is minimal.
NOTE 14 – SUBSEQUENT EVENTS
Chief Executive Officer Termination and Replacement
Effective January 4, 2022, the Company terminated Andrew Dahl, its President and Chief Executive Officer.
New Lease
The Company entered into a sublease commencing February 21, 2022 that expires November 2024. The terms of the sublease include rent of $7,265 per month with annual increase of 2.7%, and the Company is responsible for electricity costs. On February 28, 2022, the Company terminated its month-to-month rental arrangement with a related party as described in Note 12 – Related Parties.
Short Term Debt Agreement
On February 21, 2022, the Company entered into a short-term debt agreement with First Insurance Funding to provide $628,600 of financing to fund a portion of the Company’s directors’ and officers’ insurance policy. The financing agreement has an annual percentage rate of 4.15% and has a term of nine months.
2021 Plan Evergreen Provision
Under the 2021 Plan, the shares reserved automatically increase on January 1st of each year, for a period of not more than ten years from the date the 2020 Plan is approved by the stockholders of the Company, commencing on January 1, 2022, and ending on (and including) January 1, 2029, by an amount equal to 5% of the shares of common stock outstanding as of December 31st of the preceding calendar year. Notwithstanding the foregoing, the Board of Directors may act prior to January 1st of a given year to provide that there will be no January 1st increase in the share reserve for such year or that the increase in the share reserve for such year will be a lesser number of shares of common stock than would otherwise occur pursuant to the preceding sentence. On January 1, 2022, 470,983 shares were added to the 2021 Plan as a result of the evergreen provision.
