UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

 

FORM 10-K

 

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year ended December 31, 2019

 

or

 

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____ to _____

 

Commission File Number: 000-30415

 

Zivo Bioscience, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

Nevada

 

87-0699977

(State or Other Jurisdiction

of Incorporation or Organization)

 

(I.R.S. Employer Identification No.)

 

2804 Orchard Lake Rd., Suite 202, Keego Harbor, MI 48320

(Address of Principal Executive Offices)

 

(248) 452 9866

(Registrant’s telephone number)

 

Securities registered pursuant to Section 12(b) of the Exchange Act:

None

 

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, par value $.001 per share

(Title of Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

Yes [   ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

 

Yes [   ] No [X]

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes [X] No [   ]

 

Indicate by checkmark whether the registrant has submitted electronically every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes [X] No [   ]


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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

[   ]

Accelerated filer

[   ]

Non-accelerated filer

[   ] (Do not check if a smaller reporting company)

Smaller reporting company

[X]

Emerging growth company

[   ]

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [   ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

 

Yes [   ] No [X]

 

The aggregate market value of the issuer’s voting and non-voting common equity held as of June 30, 2019 by non-affiliates of the issuer was $18,825,967 based on the closing price of the registrant’s common stock on such date.

 

As of March 26, 2020, there were 402,198,752 shares of $.001 par value common stock issued and outstanding.

 

Documents Incorporated by Reference

 

Portions of the proxy statement for the 2020 annual meeting of shareholders are incorporated by reference into Part III of this Annual Report to the extent described herein.


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FORM 10-K

ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES INDEX

 

 

PART I

 

Item 1.

Business

5

Item 1A.

Risk Factors

23

Item 1B.

Unresolved Staff Comments

25

Item 2.

Properties

25

Item 3.

Legal Proceedings

25

Item 4.

Mine Safety Disclosures

25

 

 

 

 

PART II

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

26

Item 6.

Selected Financial Data

26

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

30

Item 8.

Financial Statements and Supplementary Data

30

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.

30

Item 9A

Controls and Procedures.

30

Item 9B.

Other Information

31

 

 

 

 

PART III

 

Item 10.

Directors, Executive Officers and Corporate Governance.

32

Item 11.

Executive Compensation

32

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

32

Item 13.

Certain Relationships and Related Transactions, and Director Independence.

32

Item 14.

Principal Accountant Fees and Services

32

 

 

 

 

PART IV

 

Item 15.

Exhibits and Financial Statement Schedules

33

 

 

 

SIGNATURES

34


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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Some of the statements contained in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements involve known and unknown risks, uncertainties and other factors which may cause our or our industry’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to statements regarding:

 

our ability to raise the funds we need to continue our operations;  

 

our goal to begin to generate revenues and become profitable;  

 

regulation of our products;  

 

market acceptance of our products and derivatives thereof;  

 

the results of current and future testing of our products;  

 

the anticipated performance and benefits of our products; the ability to generate licensing fees; and  

 

our financial condition or results of operations.  

 

In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,”, “expects,” “plans,” “anticipates,” “believes,” “estimates,” “projects,” “predicts,” “potential,” and similar expressions intended to identify forward looking statements. These statements are only predictions and involve known and unknown risks, uncertainties, and other factors that may cause our actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by such forward-looking statements. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as otherwise required by law, we expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statement contained in this report to reflect any change in our expectations or any change in events, conditions or circumstances on which any of our forward-looking statements are based. We qualify all of our forward-looking statements by these cautionary statements.


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PART I

 

Item 1. Business.

 

Unless we state otherwise or the context otherwise requires, references in this Annual Report on Form 10-K to “we,” “our,” “us,” “the Registrant” or “the Company” refer to ZIVO Bioscience, Inc.., a Nevada corporation, and its subsidiaries.

 

General

 

We were incorporated under the laws of the State of Nevada on March 28, 1983, under the name of “L. Peck Enterprises, Inc.” On May 27, 1999, we changed our name to “Western Glory Hole, Inc.” From 1990 until October 2003, we had no business operations; we were in the development stage and were seeking profitable business opportunities. On October 30, 2003, we acquired 100% of the outstanding shares of Health Enhancement Corporation (“HEC”) in exchange for 9,000,000 of our shares, making HEC our wholly-owned subsidiary. In connection with this transaction, we changed our name to Health Enhancement Products, Inc. On October 14, 2014, at the annual meeting of the stockholders of the Company, a proposal was passed to change the name of the Company from Health Enhancement Products, Inc. to ZIVO Bioscience, Inc. (“ZIVO”). On October 30, 2014, the Financial Industry Regulatory Authority (“FINRA”) approved the name ZIVO Bioscience, Inc. for trading purposes and the symbol change to ZIVO effective November 10, 2014.

 

We acquired HEC in 2003 because we believed its unique and complex algal culture produced natural bioactive compounds that promoted health benefits. A production facility based in Scottsdale, AZ produced and marketed a liquid dietary supplement with marginal success beginning in 2003 until sales were suspended in January of 2012.

 

Our new management team, in place since December 2011, determined the sole focus for the near term was to move forward with a research-based product development program. From 2012 through 2019, we have engaged fully in such activities, all as more fully explained herein. We hold significant intellectual property in the form of bioactive compounds, patented applications and processes, an optimized algal strain, nutritional products and applications derived from our proprietary algal biomass that can find their way into food, feed, supplements and therapeutics.

 

From the start of 2017 and moving into 2020, we have been conducting the final phase of validation for a discovery-stage bovine mastitis treatment, consisting of in vitro and in vivo studies, which is intended to dovetail with analytics and characterization of bioactive compounds produced by the algae itself. This body of work will be submitted to Zoetis, Inc. (ZTS) (“Zoetis”) a global animal health company, per an option/collaboration agreement dated December 19, 2013 and amended in 2019 (fifth amendment), to determine if our bioactive compounds exhibit efficacy in addressing bovine mastitis, a common condition afflicting dairy cows that results in milk production losses. Upon completion of the research, we expect to move into negotiations regarding the option payment and subsequent licensing.

 

Upon the finalization of the negotiations on the aforementioned option and license agreement, we plan to explore our options for further licensing arrangements as they relate to poultry and other livestock, canine joint health and potentially human cholesterol management.

 

To that end, we expanded our research in 2018 and 2019 to include applications of bioactive molecules originally derived from the algal culture to other animal health conditions, in poultry, canine and swine. This effort, spread out across several research laboratories working in parallel, resulted in the successful isolation and characterization of a novel non-starch polysaccharide with exceptional properties in addressing immune modulation and inflammatory response for both animal and human use. A patent application was filed at the close of 2019.

 

On the food and feed application side of the business, our business model anticipates deriving future income from licensing and selling natural ingredients that may be extracted from or are initially based on our proprietary alga1 cultures. In line with this, on April 20, 2017, we entered into a Limited License Agreement (the “License Agreement”) with NutriQuest, LLC (“NutriQuest”) a recognized leader in animal health and nutrition solutions. In the License Agreement, we granted to NutriQuest a limited, exclusive license to market, distribute, sell and collect the sales proceeds in all of our nutrition, feed additive and supplementation applications relating to naturally-derived algal biomass and extraction products for oral administration in swine and/or poultry species. As mentioned above, we affirmed human GRAS Generally Recognized As Safe, or “GRAS” status as a plant-based ingredient in food products for human consumption. We are in the process of garnering poultry GRAS status as a production feed ingredient and expect that approval in late 2020. We have also entered into an Exclusive Supply Agreement (the “Exclusive Supply Agreement”) with NutriChipz, LLC (“NutriChipz”) to supply our algae as an ingredient in chips and crisps. Other applications available for out-licensing include spice mixes, rubs and condiments. Funding is required to grow algae at commercial scale in order to meet compliance for animal feed ingredient and supply NutriQuest, NutriChipz and others with product.


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Further, we expect these new product formulations will likely be sold to much larger, well-established animal, food, dietary supplement and medical food manufacturers. The anticipated income streams are to be generated from a) royalties and advances for licensed natural bioactive ingredients, and b) bulk sales of such ingredients. We expect bulk ingredients to be made by contracted algae growers and then sold by us to animal food, dietary supplement and food processors and/or name-brand marketers.

 

In January 2007, we established HEPI Pharmaceuticals, Inc. as our wholly owned subsidiary (“HEPI Pharma”). The purpose of HEPI Pharma was to develop potential pharmaceutical applications for the bioactive ingredients that may be derived from our algae cultures.

 

In February 2013, we formed ZIVO Biologic, Inc., a Delaware corporation (“ZIVO Biologic”), for the purpose of manufacturing and commercialization of proprietary ingredients for non-medicinal animal health applications. ZIVO Biologic is 100% owned by ZIVO Bioscience, Inc. ZIVO Biologic is not currently conducting any operating activities.

 

In August 2013, we acquired the assets, consisting primarily of intellectual property rights, of Wellness Indicators, Inc. (“Wellness”), a Michigan corporation based in Illinois. Concurrently, we formed WellMetris, LLC as a 100% owned entity of ZIVO. In 2018, we changed the name of WellMetris, LLC to Wellmetrix, LLC (“Wellmetrix”). We acquired four patent applications as part of the transaction, in addition to engineering drawings, prototypes, chemical formulae, validation data, laboratory equipment and IT equipment. We assigned all of the intellectual property acquired to Wellmetrix with a stated value of $1,391,281.

 

The mission of Wellmetrix is to develop, manufacture, market and sell Wellness Tests. The Wellness Tests are intended to provide individuals the information and opportunity to optimize their health and identify future health risks or to provide insurers, employers and healthcare providers with timely information to intervene with wellness programs, fitness regimes or other preventative measures. During the period of time we have owned Wellmetrix, we have drafted and filed an additional fifteen patent applications around the intellectual property acquired, as noted in the section “Patents and Proprietary Rights.” In the summer of 2014, we evaluated the circumstances related to the original four patent applications acquired and determined that two of the existing patent applications could be improved and filed new patents applications to redefine and better protect our intellectual property. We have abandoned one of the initial four patent applications purchased, released two of the four applications purchased and substituted them with two new patent applications, and retained ownership of one of the four applications purchased, which has now converted to a national phase application. In connection with the abandoned patents, we have protected our rights with regards to the original patent applications purchased, however we determined we should record a loss on abandonment of $1,391,281 for the year ended December 31, 2014 as the initial value of the acquired patent applications pending resides in the newly drafted and filed eight patent applications. On December 25, 2018 the U.S Patent and Trademark Office (“USPTO”) issued Patent No. 10,161,928 – Wellness Panel, effectively securing the core conceptual premise of the Wellmetrix technology platform.

 

2019 Highlights

 

The most significant development in 2019 was the isolation and description of a novel polysaccharide with immune modulating and anti-inflammatory properties. We believe it is responsible for some of the various positive benefits we’ve observed in both dairy cow and poultry research studies. This molecule may represent an entirely new class of therapeutics or medicinal products with wide-ranging applications. Accordingly, we filed a US patent to protect the technology in December 2019.

 

On the biotech side of the business, which focuses on biologically active molecules initially derived from the proprietary algal culture, we have developed a more refined strategy to define the mechanism of action for our molecules in poultry, namely:

 

The direct effect on the Eimeria parasite – a global poultry health issue 

The direct effect of our bioactive molecules on poultry immunity via various key immune biomarkers 

Kinomics analysis currently underway involving 771 markers of immune response and metabolic pathways 

 

Our work with bovine mastitis continues, when funding is available to do so. At the close of 2019, we await data and results from a study conducted earlier in the year by long-time research collaborator Dairy Experts, based in California. This most recent study yielded a massive amount of data, which takes considerable time and effort to compile and analyze before any results can be announced.


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With respect to the agtech side of the business, which focuses on dried algal biomass and extracts thereof, we vastly accelerated the poultry testing schedule, with 10 new studies initiated or completed in 2019, versus 2 studies completed in each of the two previous years. Some of the notable findings include the following:

 

Demonstration of beneficial effects by treating poultry drinking water with a few drops of ZIVO algal extract added 

 

Multiple confirmation of beneficial effects and nutritional enhancement by introducing small amounts of dried algal biomass into poultry feed 

 

Demonstration of improved vaccine efficiency when chicks are fed small amounts of dried algal biomass during the vaccination process 

 

Multiple confirmations from repeated testing that dried algal biomass boosts immune response in broilers 

 

Repeated demonstration that salmonella is reduced when dried algal biomass is consumed in very small quantities 

 

A study conducted at University of North Carolina Greensboro revealed a positive effect in poultry microbiome 

 

Announced results of a study that shows improvement in feed conversion ratio when dried algal biomass is consumed by broilers at an inclusion rate of approximately  

 

We also extended a letter of intent with Grekin Laboratories and Dr. Steven Grekin to formulate, test, manufacture and market a suite of anti-aging and skin health supplements and food products featuring our proprietary algal biomass, pending availability of funding. Funding is required to produce sufficient biomass for clinical trials per the Letter of Intent executed by both parties.

 

We established an algae production base in India, contracting ALG India Enterprices pvt LTD (“ALG India”) (fka Shibin), an experienced spirulina grower, to exclusively produce ZIVO algae for export to the US. ALG India has also undertaken construction of a 25 acre facility dedicated to ZIVO algae and financed by Swedish investors, to be completed in a phased fashion as production is scaled during the first half of 2020. Other growers and laboratories in India are being approached. We also executed a letter of intent with Peruvian agribusiness Alimenta to exclusively produce ZIVO algae for export to the US and EU.

 

The garnering GRAS status for a poultry feed ingredient is expected to be achieved in late 2020, depending on available funding. To that end, we have completed a number of studies relating to poultry production that support optimized animal nutrition. Our dried algal biomass has been classified as an animal feed material in the EU, and testing is planned with NutriQuest in the Czech Republic in Q2 2020.

 

Relating to R&D funding, 2019 saw continued but inconsistent funding, resulting in start-stop of several key research initiatives and resulting delays in obtaining results and sharing with our prospective partners and potential licensees. We are continuing with our research partners to conduct classical, non-GMO strain development to improve cultivation efficiencies for our proprietary algal strain. On the pharmaceutical side, we are continuing work on the discovery and analytics work pertinent to the bovine mastitis therapeutic candidate, and to enter the final arm of the in vivo validation study. ZIVO has also expanded its poultry research after a number of successful field trials. A number of key research organizations were engaged to work on several fronts simultaneously in order to compress the timeframe and approach the tasks from different functional and analytical perspectives. The research organizations included the National Center for Natural Product Research at the University of Mississippi, Michigan State University School of Veterinary Medicine, University of North Carolina – Greensboro, Iowa State University, University of Illinois, , Eurofins, SBH Biosciences, Dairy Experts and Elicityl, among others. The achievement of our R&D goals is subject to the availability of sufficient funding.

 

Marketing and Sales

 

ZIVO Algal Products & Derivatives

 

The marketing and sale of all future products are subject to compliance with applicable regulations. Based on the findings from ongoing research, we have approached and are continuing to approach potential customers or licensees in the market verticals described below. The products described throughout this document are still in the development stage and are subject to development risk. There can be no assurance that any of the products described below will prove to be effective, or if found to be effective, will be able to be produced in a commercially viable manner. We have affirmed human GRAS in the USA and for the EU our dried algal biomass has been classified as an animal feed material. As we continue to work on regulatory around the world, funding is required to grow algae at commercial scale in order to accomplish commercialization of our products.


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Animal Health and Nutrition

 

A 2007 pilot study in dairy cows indicated that our algal culture may be effective in fending off the onset or significantly reducing symptoms of bovine mastitis – a condition that effectively stops milk production in affected cows. According to the National Mastitis Council, the condition affects 10% of the U.S. dairy herd at any one time, costing producers approximately $1,100 per case. In the U.S. alone, production losses are nearly $3 billion. Mycoplasma bovis causes a highly contagious and potentially fatal form of bovine mastitis (an infection of the mammary gland), for which there currently is no treatment. In the cow’s udder, mammary epithelial cells form an immunological barrier to protect the mammary gland. When bacteria or other pathogens break through this barrier, an infection can set in, affecting quality and quantity of milk produced. Our compounds showed promising early results for restoration of the immunological barrier in experiments conducted in vitro, as conducted by the Principal Researcher at the University of Wisconsin - Madison, Department of Dairy Science.

 

On December 20, 2013 (as amended in 2019 – fifth amendment), we entered into a Collaboration and Option Agreement (the “Zoetis Agreement”) with Zoetis, a global animal health company, in connection with the prevention, treatment, and management of bovine mastitis. In the Zoetis Agreement, we granted to the counterparty an exclusive option to negotiate an exclusive license with us. Specifically, upon completion of the final phases of a collaborative program, and acceptance of the work product by Zoetis, the Zoetis Agreement provides for a 90-day exclusivity period for evaluation of results, followed by a 90-day period to exercise the option and negotiate an option payment.

 

With respect to livestock and poultry applications, we intend to move on three related fronts – working to bring an algal feed ingredient to market in the United States and EU by amplifying the algae culture; working to produce a dietary supplement or feed additive for global consumption outside the U.S.; and, putting ourselves in a position to license the isolated bioactive molecules to a pharmaceutical or drug development company for synthetic development as a prescribed treatment for production animal applications. The isolated bioactive molecules form the intellectual property of interest to Zoetis. The feed ingredient, feed additive and dietary supplement are intended for other potential collaborators along with NutriQuest, (whose agreement covers swine and/or poultry species only). During 2019, the Company elected to focus its limited resources on poultry applications as they represent the nearest term revenue opportunities.

 

A 2008 pilot study in dogs indicated that our algal culture may be effective in relieving the symptoms of osteoarthritis and soreness from overexertion. That same experiment with our amplified algae culture can be repeated in dogs, which if successful could allow a relatively rapid release to production and sales as a companion animal dietary supplement. According to the Nutrition Business Journal, the canine joint-health dietary supplement market segment tops $360 million annually in the U.S. alone. Estimates for the world market may be substantially higher, but such estimates are difficult to obtain. An in vitro tissue explant experiment conducted by the Comparative Orthopaedics Laboratory at University of Missouri in 2016 found that direct stimulation of living canine joint tissue with our bioactive compounds protected cartilage from degradation by IL-1b, an inflammatory cytokine. If our product is proven to be effective in vivo and can be produced on an efficient basis, we intend to sell or license our product as a supplement ingredient to larger, well-established and profitable brand names in the pet industry. We have conducted other laboratory studies simulating the effects of canine osteoarthritis with generally positive results. All of this work has been put on hold pending the availability of additional funding.

 

With all of the above, the isolated bioactive molecules found in the amplified algae product may, subject to successful negotiations, be licensed to a pharmaceutical company for development as a synthetic prescription drug. We expect that the process of developing and testing such a drug could take years. Therefore, as is common practice, we intend to work toward negotiating an upfront discovery-stage licensing fee, milestone payments upon each successful conclusion of a developmental phase, followed by pre-market approval; and finally, a steady stream of royalties in the future. The other revenue streams are generated by feed and supplement sales which may begin to be realized in 2020, but no assurance can be provided in that regard. Much of the research and licensing progress has been and will continue to be paced by the availability of capital funding and/or debt financing (see Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations: Liquidity and Capital Resources).

 

In April 2017, we entered into the License Agreement with animal health innovator NutriQuest, which provides nutritional services to the biggest brand names in US poultry and pork production. We have completed a number of “pen” studies (pen studies are controlled testing of our ZIVO Algae to groups of incubator chicks ranging in size from 1,000 chicks to 25,000 chicks, ultimately up to 1 million chicks - “broilers”). In the U.S., broilers consume more than 61 billion pounds of feed annually. The U.S. is the third-largest poultry producing nation. Phytogenic or plant-based ingredients like ours constitute the fastest-growing segment of the global poultry feed industry, currently generating about $780 million in sales annually, and growing at 8% annually. We are well-positioned to take market share if we meet expected market pricing parameters.

 


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Functional Food Ingredient - Human

 

According to NutraIngredients-USA, functional foods, or health foods, represent an estimated $20 billion business in the U.S. and a $28 billion business in Europe. The Middle East, although significantly smaller, is growing at a rate of 12-14% annually, followed closely by the newly affluent in China and India. These foods typically are processed products that contain one or more staple foods augmented with a variety of performance-enhancing ingredients.

 

We entered into the Exclusive Supply Agreement in 2018 to supply the ZIVO Algae to NutriChipz to gain a presence in the functional food market. As we move forward into 2020, we plan to work with other suppliers in the functional food market vertical as our algae supply expands, having engaged The Mansour Companies as brokers for sports nutrition market verticals, and HISCO as marketing representatives for functional food ingredients in the EU and US. Additional funding is required to grow algae at commercial scale in order to supply NutriChipz, The Mansour Companies and others with product.

 

Dietary Supplement & Nutraceutical - Human

 

The success of spirulina, dried kelp, Omega-3 fish oil, resveratrol, saw palmetto and similar supplements attests to the American public’s obsession with ‘natural’ products. The dietary supplement business is a $24 billion industry in the U.S. alone, and twice that the world over.

 

Rather than attempting to market as a branded nutraceutical or supplement, we will endeavor to private-label the compound or finished product for larger, well-established marketers and retailers. If we are able to accomplish this, we believe this is a more efficient use of capital and resources, while still retaining control of the intellectual property, the manufacturing process and pricing power. Our goal is not to be placed in a position where our premier product application is commodified and we must compete on price.

 

As an entry into this market, we have executed a letter of intent with Grekin Laboratories, directed by Dr. Steven K. Grekin, in a joint effort to develop, test and launch an exclusive line of products designed to address skin health and the appearance of aging through novel combinations of all-natural ingredients featuring the ZIVO proprietary algae strain. The initial product line being readied for launch includes a nourishing complex, fatty acid replenishment, collagen/protein mix and phytonutrient booster. Additional funding is required to produce sufficient algal biomass for clinical trials per the Letter of Intent executed by both parties.

 

Medicinal Food and Botanical Drug

 

Doctors prescribe medicinal foods and botanical drugs prior to, during or after various medical procedures, including surgery, chemotherapy, radiation therapy and physical therapy. At times, medicinal foods are used to augment the effects of prescription drugs. These medicinal foods are expensive and typically reimbursed by health insurers. Botanical drugs can also be made available over-the- counter (OTC) after an extensive compliance program.

 

We believe that this area has potential for us if we can demonstrate that various properties of the algal extract can be isolated and produced as a medicinal food or beverage prescribed by physicians, or as an OTC botanical drug. These sectors are both regulated by the Food and Drug Administration (“FDA”). Medicinal food standards are somewhat less stringent than pharmaceutical applications. Botanical drug standards are similar to other pharmaceutical applications. Under our business model, if we are able to produce a commercial product in these areas, we will endeavor to enter into a private-label arrangement with a larger strategic partner to produce and distribute these product applications. Our goal is to turn over the drug candidates at discovery stage and allow the licensee to move the drug development program forward.

 

Pharmaceuticals

 

We believe that we may be able to pursue prescription drug applications for our product. The process for developing a new prescription drug is costly, complex and time-consuming. It is an undertaking well beyond our financial capabilities and one that may take several years to achieve. Our intent is to out-license the natural molecules at discovery stage and allow the licensee to develop the Investigatory New Drug (IND) filing and conduct subsequent safety/efficacy phases in order to bring a therapeutic product to market. If we elect to pursue the development of a prescription drug, we will likely seek a partnership with a co-developer that will share in the risk and expense of the initial development process, and then share in any royalties resulting from the licensing or sale of any synthetic molecule and its homologs we are able to develop and license.

 

The first such step was the execution of the bovine mastitis Collaboration and Option Agreement with Zoetis. Part of our business plan is to execute agreements that may ultimately result in option payments, licenses fees and royalty payments across animal and human applications, typically at the discovery stage.


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Wellmetrix

 

Wellmetrix was formed for the purpose of developing, manufacturing, marketing, and selling tests that we believe will allow individuals and their care providers to optimize personal health and identify future health risks. The information obtained will also provide insurers, employers and healthcare providers timely information to intervene with wellness programs, fitness regimes or other preventative measures. We plan to develop and commercialize such tests in three phases:

 

In phase one (“Phase One”) or, alternately named Gen 1.0, we plan to develop and commercialize a series of tests, which are intended to measure indicators of good health and optimal metabolic function (collectively, the “Phase One Test”). The Phase One Test has been designed to measure biomarkers related to oxidative stress, inflammation, and antioxidant status to establish a metabolic assessment from which intervention can commence, and from which metabolic syndrome can be inferred. A patent that covers this particular combination of biomarkers was issued December 25, 2018.  

 

In phase two (“Phase Two”) or alternately named Gen 1.5, we plan to develop and commercialize a testing technology focused on the positive or negative metabolic effects of metabolizing fat and muscle efficiency due to changes in diet, exertion, hydration and dietary supplements in a self-administered format that integrates with smartphone operating systems.  

 

In phase three (“Phase Three”) or alternately named Gen 2.0, we plan to develop and commercialize additional tests intended to provide a more complete metabolic profile for an individual utilizing the metabolites present in urine. The Company believes the Gen 2.0 tests, in aggregate, will allow identification of healthy versus unhealthy bodily processes in real-time. This technology can also be applied to livestock and companion animals. As capital funding becomes available, the Company will move forward with finalizing its transition cow syndrome test, for which a provisional patent application has already been filed.  

 

We are currently in Phase One of development as described above.

 

We believe there is a viable market for our Wellness Tests. More than 19% of Americans are afflicted with cardiovascular diseases, diabetes, autoimmune diseases and cancer. The Wellness Tests are intended to identify pre-conditions to such illnesses. Such identification may allow for early intervention and reduce incidence of such illnesses or forestall their onset. This is critically important to large employers, insurers and governmental agencies who are payers for health claims and are facing massive increases in premiums or cash outlays.

 

The Wellmetrix technology also incorporates sophisticated software to analyze, report, record and manage wellness and health data for an individual or large groups such as large employers, pension funds, accountable care organizations, state Medicaid agencies and their actuarial consultants, underwriters, re-insurers and wellness consultants. The software also contains tools to conduct meta-analysis of baseline health benchmarks and monitor the progress of pre-clinical intervention programs within large groups. We were awarded a US patent for the Company’s novel Wellness Panel, which was announced in January of 2019.

 

Later in 2019, we attracted the attention of DSM, a Dutch multinational that adopted a global personalized nutrition initiative and has contracted Wellmetrix to use its proprietary test platform to substantiate the healthiness of two premier DSM functional food ingredients. This represents the first revenue opportunity for Wellmetrix.

 

However, due to funding issues, the project with DSM cannot move forward, as we are obliged to furnish certain study components at our own cost. Therefore, 2019 saw a renewed effort to either sell or fund independently Wellmetrix and spin it out as a free-standing business.

 

Competition

 

ZIVO Algal Products & Derivatives

 

Generic dietary supplements and functional food ingredients such as vitamins, Omega-3 and antioxidants are made and marketed in a fiercely competitive, price-sensitive market environment. Recently, several algae producers have made health claims for their proprietary algae strains, ranging from alternative treatment for diabetes to controlling some HIV symptoms. Proprietary products offered by some marketers are often dogged by unsubstantiated claims of product efficacy or present potential product safety issues, which in turn draw the attention of regulators. The optimal position for a supplement and ingredient maker is when pricing power can be exerted through well-protected intellectual property and further backed by well-documented safety and efficacy claims.

 


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We believe that our primary competition will come from innovators in food technology such as DSM-Martek, Cognis, ConAgra, Cargill and Nestle, each of which has active M&A efforts, a large scientific staff and a generous R&D budget to develop supplements and ingredients for a wide range of applications. However, we intend to approach these very same competitors as potential strategic partners, in order to leverage their specific expertise in certain food and supplement categories where a mutually beneficial relationship can be established. There can be no assurance that this strategy will be effective.

 

With respect to animal health, the companion animal dietary supplement segment, and specifically canine joint health, is made up almost exclusively of chondroitin/glutathione supplements, which have dominated that segment for more than a decade. This $360 million segment represents a potentially lucrative opportunity to introduce a completely new product if we are able to demonstrate superior benefits and produce a product at a comparable price. It is likely we will partner with an established animal health brand name.

 

Further, the animal health market as it pertains to mastitis in dairy cows, and specifically feed ingredients that exhibit beneficial properties, has been largely in the realm of yeast-based products. Only recently has there been a focus on algae-based alternatives, as promoted by Alltech with its $200 million expansion of an algae facility in Kentucky. In the U.S., feed ingredients cannot be promoted using any form of health claim, and dietary supplements for production animals are, to our knowledge, non-existent due to FDA/CVM regulation. However, outside the U.S., the use of dietary supplements is widespread, and we intend to market our refined ingredients to a worldwide market in partnership with a global brand name.

 

Wellmetrix

 

The biomedical and biotech fields are fiercely competitive. Many of the “wellness” tests available to the healthcare consumer or provider are not necessarily accurate nor reliable because most do not take into account urine concentration as normalized by creatinine or specific gravity, which changes markedly throughout the day. This normalization process is included in the Wellness Panel patent issued in December 2018. Blood-based wellness tests can be even less reliable because the biomarkers for oxidative stress and inflammation are extremely dynamic and will often change before the blood can be tested, casting doubt on the results.

 

Although we are not aware that competitors or competing products have entered the market recently, there is no guarantee that our products will be proven to be effective and commercially viable, or that a larger, better-financed competitor may not emerge once we begin promoting our products.

 

Raw Materials

 

ZIVO Algal Products & Derivatives

 

We produce our microbial mixture using third party facilities. At the close of 2019, we continue to use the AzCATI facility at Arizona State University to produce our microbial mixture for continued experimentation and as a source of inoculum to seed ponds of contracted growers overseas. Our initial approach to building a global supply chain is to approach existing spirulina algae growers. Spirulina producers can easily convert their ponds to grow the ZIVO algae strain. This would allow us to rapidly build production capacity with relatively low capital expense. Once a licensed grower supply chain is established, we will endeavor to build larger scale facilities with joint venture partners in locations best suited for our proprietary algal strains. This is intended to provide stability and consistency in the global supply.

 

In 2019 and into 2020, we are working with two ZIVO algae contract growers in India. We also have a Letter of Intent with a grower in Peru and anticipate approval from that Government to import our ZIVO Algae strain into Peru in the second quarter of 2020. We are actively pursuing other algae producers in other areas of the world, including Thailand, Viet Nam and Indonesia

 

Wellmetrix

 

In tandem with seeking regulatory approval, we will need two physical components to deliver our services. A dedicated, custom reader device and a test comprised of eight (8) different chemistry tests on a single urine test panel housed in a proprietary disposable cartridge.

 

The dedicated, custom reader device is manufactured by a third party to our specifications. We do not believe that there is a risk of supply, as there are several manufacturers available to produce the unit.

 

The test panel and proprietary cartridge are manufactured by a third party to our specifications. We do not believe that there is a risk of supply, as there are several manufacturers available to produce the units.

 


11


 

 

Dependence on Customers

 

ZIVO Algal Products & Derivatives

 

As discussed above, we reoriented the business model to focus on research and development in order to license our product and technology to third parties and to furnish algal biomass in bulk. Our potential customers are larger, well-established brand names in nutrition and health who will likely combine our algal biomass with other ingredients for feed, food and beverage applications. At this time, there are no customers providing any revenue.

 

Wellmetrix

 

Wellmetrix products will initially be private-labeled to established brand-names in the personal health space. Several such brand names have been approached, however, due to funding issues, this initiative has been placed on hold for the near term.

 

Production

 

ZIVO Algal Products & Derivatives

 

As discussed above in the section titled “Raw Materials”, we produce our microbial mixture using third party laboratory facilities. We are producing ZIVO algae at contract growers in India. We have Letters of Intent to produce our ZIVO Algae in Peru upon in-country Government approval to import the ZIVO Algae strain. We are actively pursuing other algae producers in other areas of the world.

 

Wellmetrix

 

As discussed above, we are using third parties to manufacture our custom reader device and test panel, which we are currently using for development purposes.

 

Patents and Proprietary Rights

 

ZIVO Algal Products & Derivatives

 

We have rights in certain patent applications and trademarks. With respect to patents and trademarks, we have secured patent and federal trademark registrations in the USPTO as described below:

 

U.S. Patent No. 7,807,622 issued October 5, 2010, relates to our proprietary complex algal culture. The title of the patent is: “Composition and use of phyto-percolate for treatment of disease.” This invention relates generally to a method of preparation of a phyto-percolate that is derived from fresh water mixture including algae. The invention further relates to the potential use of the phyto-percolate in a variety of disease states. This patent was filed on November 30, 2006 and has a term of 20 years from the earliest claimed filing date.  

 

U. S. Patent No. 8,586,053 issued November 19, 2013, relates to our proprietary algal culture. The title of the patent is: “Composition and Use of Phytopercolate for Treatment of Disease.” This invention relates generally to a method of preparation of a phyto-percolate that is derived from fresh water mixture including algae. The invention further relates to the use of the phyto-percolate in a variety of disease states. The phyto-percolate is believed to contain an activity that induces the reduction of soluble and insoluble fibrin. Further, the phyto-percolate is believed to reduce oxidative stress in the body. The patent was filed on April 20, 2006 and has a term of 20 years from the earliest claimed filing date.  

 

U.S. Patent No. 8,791,060 issued July 29, 2014, relates to our proprietary culture. Title of the patent is the same: “Composition and Use of Phytopercolate for Treatment of disease.” This invention relates generally to a method of preparation of a phyto- percolate that is derived from fresh water mixture including algae. The invention further describes proteolytic activity. The patent was filed on October 4, 2010 and has a term of 20 years from the earliest claimed filing date.  

 

U.S. Patent No. 9,486,005 issued November 8, 2016, relates to our proprietary culture. Title of the patent is: “Agents and Mechanisms for Treating Hypercholesterolemia.” This invention relates generally to a method of treating hypercholesterolemia in mammals, by administering an effective amount of microbial fermentation product and regulating genes involved in lipoprotein metabolism.  


12


 

U.S. Patent No. 10,161,928, issued December 25, 2018, relates to a panel for monitoring levels of biomarkers. Title of the patient is: “Wellness Panel.” This invention relates generally to an assay having at least one inflammation monitoring test, at least one oxidative stress monitoring test, and at least one antioxidant activity monitoring test. A method of monitoring an individual’s health, by collecting a sample from the individual applying the sample to an assay panel performing at least one inflammation monitoring test, at least one oxidative stress monitoring test, and at least one antioxidant activity monitoring test in the panel, and determining levels of biomarkers related to inflammation, oxidative stress, and antioxidant activity and therefore providing information regarding the individual’s relative health and/or risk of developing one or more disease.  

 

U.S. Patent No. 10,166,270, issued January 1, 2019 relates to disclosing a composition and method for effecting various cytokines and NF-KB. Title of the patent is: Composition and Method for Affecting Cytokines and NF-KB.” This invention relates generally to administering an effective amount of a phyto-percolate composition to an individual. In various exemplary embodiments, the composition is claimed to be useful for the effective treatment of inflammation, cancer, and/or various infections including HIV by regulation of various interleukins, such as IL-10 and Il-2, and of transcription factors including NF-KB.  

 

U.S. Patent No. 10,232,028, issued March 19, 2019 relates to isolates and fractions from a phyto-percolate and methods for affecting various cytokines by administering an effective amount of one or more of said isolates or fractions to an animal. In various exemplary embodiments, the isolates are useful for the treatment of bovine, canine and swine infection or inflammation, including bovine mastitis, by regulation of TNF-a, lactoferrin, INF-y, IL-B, serum amyloid-A (SAA), IL-6 and/or B-de-fensin associated with infection or an immune response generally. 

 

We also have allowed pending trademark applications for “KALGAE™,” and “WELLMETRIX.” We may have other common law rights in other trademarks, trade names, service marks, and the like which will continue as long as we use those respective marks.

 

We have registered the name “WellMetrix” to replace the current “WellMetris” corporate identification and secured an ICANN domain of the same spelling in late 2017.

 

The following patent filings are pertinent to the operation of the ZIVO business:

 

Title

Country

Patent/Application

Number

Status

Algal Feed Ingredient for Controlling Coccidiosis and Necrotic Enteritis in Poultry

US

PCTUS19/67600

Filed 12/19/19; national stage deadline 6/21/21

Agents and Mechanisms for Treating Hypercholesterolemia

EU

SN 11745434.8

Filed 2/22/11; response to exam report filed 6/28/19; undergoing prosecution

Agents and Mechanisms for Treating Hypercholesterolemia

US Div.

SN 15/330,830

Filed 11/7/16; office action received 4/19/19; office action response filed 10/16/19; undergoing prosecution

 

Composition and Use of Phyto-percolate For Treatment of Disease

Canada

2,631,773

Office action response submitted on 12/20/18

Composition and Method For Affecting Cytokines and NF-kB

BR

BR 11 2012 011678.9

Request for examination submitted 11/11/13; awaiting examination

Compounds and Methods for Affecting Cytokines

CIP

16/273,794

Continuation filed 2/12/19; office action received 3/11/19; notice of publication issued 6/13/19; office action response filed 7/10/19; information disclosure filed 7/15/19; office action received; office action response due 2/7/2020 (extensions available till 4/7/2020


13


 

 

Title

Country

Patent/Application

Number

Status

Dietary Supplements, Food Ingredients and Foods Comprising High-Protein Algal-Biomass

US

15/913,712

Filed 3/16/18; Notice of Recordation received 3/6/18; notice of publication received 9/13/8;  awaiting examination; information disclosure filed 7/15/19

 

Dietary Supplements, Food Ingredients and Foods Comprising High-Protein Algal-Biomass1

Brazil

BR1120190186002

Filed 3/6/19; request for examination due 3/6/21

Dietary Supplements, Food Ingredients and Foods Comprising High-Protein Algal-Biomass

Mexico

MX/a/2019/010670

Filed 3/6/18

Dietary Supplements, Food Ingredients and Foods Comprising High-Protein Algal-Biomass

Peru

1820-2019

Filed 3/6/18

Dietary Supplements, Food Ingredients and Foods Comprising High-Protein Algal-Biomass

Thailand

190105502

Filed 3/6/19 notarized POA filed

Dietary Supplements, Food Ingredients and Foods Comprising High-Protein Algal-Biomass

China

TBA

Filed; request for examination due 3/04/2020

Dietary Supplements, Food Ingredients and Foods Comprising High-Protein Algal-Biomass

EU

EP 18763110.5

Filed 10/4/19

Dietary Supplements, Food Ingredients and Foods Comprising High-Protein Algal-Biomass

Taiwan

107107720

Filed 3/7/18; certificate of Biological Material Deposit and complete translation of English text of claims and abstract filed with Taiwan patent office 6/14/18 and 7/9/18; request for examination due 3/7/21

 

Methods of modulating immune response and inflammatory response via administration of algal biomass

US

15/550,749

Filed 8/11/17; received filing receipt and notice of acceptance 10/16/17; Notice of Publication received 1/25/18; response to office restriction filed 6/21/18; Information Disclosure Statement filed 8/31/18; office action received; response to office action filed 7/5/19; information disclosure filed 7/15/19; office action received 7/31/19; office action response filed 01/31/2020.

 

Methods of modulating immune response and inflammatory response via administration of algal biomass

EU

EP16752918.9

Voluntary amendment to claims filed April 2018; search report received 10/3/18; response to supplemental search report filed 3/6/19.

 

Methods of modulating immune response and inflammatory response via administration of algal biomass

 

BR

1120170175991

Filed 8/16/17; exam requested 2/14/19 with amended claims; awaiting examination

Methods of Modulating Immune Response and Inflammatory Response Via Administration of Algal Biomass

 

HK

18108238.5

Standard Hong Kong patent was filed on 6/26/18


14


 

 

Title

Country

Patent/Application

Number

Status

Methods of Modulating Immune Response and Inflammatory Response Via Administration of Algal Biomass

 

CA

3,011,687

Filed 7/23/18; request for exam due 2/16/21

Nutritional Support for Animals via Administration of an Algal Derived Supplement

China

201780023561.5

Filed 10/12/18; request for examination filed 2/18/19 with amended claims; awaiting examination

 

Nutritional Support for Animals via Administration of an Algal Derived Supplement

 

 

EU

EU 17753729.7

Filed 9/12/18; amended application filed

Nutritional Support for Animals via Administration of an Algal Derived Supplement

US

15/998,619

Filed 8/16/18; information disclosure filed 7/15/19; awaiting examination

 

Nutritional Support for Animals Via Administration of an Algal Derived Supplement

MX

MX/a/2018/009818

Application filed 8/13/18; awaiting first exam report

 

Nutritional Support for Animals Via Administration of an Algal Derived Supplement

CA

3,014,897

Canadian Application filed 8/16/18; examination report received; response to examination report filed 2/1/2020

 

Nutritional Support for Animals Via Administration of an Algal Derived Supplement

Hong Kong

19,125,173

Filed 6/13/19; awaiting grant of related EPO application

 

Nutritional Support for Human via Administration of an Algal Derived Supplement

 

Taiwan

107104744

Filed 6/11/18; request for examination due 2/9/2021

 

TL84 Selective Inhibitor and Uses Thereof

US

Provisional 62/944,757

Filed 12/5/19; non-provisional filing deadline 12/5/20; declaration and POA filed

 

 

WellMetris

 

We have rights in certain patent applications and trademarks. The patent filings below are pertinent to the operation of the Wellness test, its constituent components and the methodology of the test panel.

 

Title

Country

Patent/Application

Number

Status

Sample Collection Device and Method for Urine and Other Fluid

US

15/569,376

Filed 10/25/17; preliminary amendment filed 10/25/17; declaration and assignment filed 1/11/18; notice of recordation received and awaiting first office action; Notice of Publication received 10/18/18; information disclosure filed and received 3/21/19; office action restriction requirement received; response filed 2/1/2020

 

Sample Collection Device and Method for Urine and other Fluids

 

CA

2984152

Application filed 10/26/17; request for examination due 4/28/21


15


 

 

Title

Country

Patent/Application

Number

Status

Sample Collection Device and Method for Urine and other Fluids

EU

EP16787127.6

Application field 11/10/17; objection notice received 2/18/18; received search report 9/13/18; response to objection filed 4/2/19; request for examination due 4/28/21

 

Sample Collection Device and Method for Urine and other Fluids

 

JP

2017-556723

Application filed 10/27/17; request for examination due 4/28/19; request for examination filed 5/7/19; awaiting first exam report

 

Sample Collection Device and Method for Urine and other Fluids

MX

MX/a/2017/013898

Application filed 10/27/17

Sample Collection Device and Method for Urine and other Fluids

HK

HK18110967.8

Hong Kong Application filed 8/24/18; awaiting grant of related EP application

 

Smartphone Enabled Urinalysis Devise, software and Test Platform

US

15/560,989

Filed 9/22/17; preliminary amendment filed 9/28/17; awaiting first office action

 

Smartphone Enabled Urinalysis Devise, software and Test Platform

CA

2979864

Application filed 9/14/17; request for examination due 3/23/21

 

Smartphone Enabled Urinalysis Devise, software and Test Platform

EU

EP167695572.5

Application Filed 10/10/2017; response to extended search report filed 5/8/19; awaiting first exam report

 

Smartphone Enabled Urinalysis Devise, software and Test Platform

JP

2017-549797

Application filed 09/19/2017; request for exam due 03/23/2019; exam requested with amended claims; awaiting first exam report

 

Smartphone Enabled Urinalysis Devise, software and Test Platform

 

MX

MX/a/2017/012095

Filed 9/25/17


16


Smartphone Enabled Urinalysis Devise, software and Test Platform

 

HK

HK 18109765.4

Filed 7/27/18

Stress and Inflammation Biomarker Urine Panel for Dairy Cows and Beef Cattle

US

14/904,274

Application filed 1/11/16; response to restriction requirement due 2/17/18 (4 month date); response filed 3/19/18; office action received 10/23/18; office action response filed 2/25/19;  information disclosure filed and received 3/21/19; final rejection received 06/05/19; response filed 12/3/19; REC file 12/5/19; all inventors assignments filed

 

Systems and Methods for Monitoring an Individuals' Health

 

Taiwan

108127757

Filed 8/5/19; POA filed

Systems and Methods for Monitoring an Individuals' Health

 

US

PCT/US19/44956

CIP PCT filed 8/2/19


17


 

 

Title

Country

Patent/Application

Number

Status

Rapid Health Assessment System, Device, and Method

US

62/667,916

Provision application filed 5/7/18; declaration and assignment filed 05/24/18

 

Wellness Panel for Companion Animals

US

14/916,068

US national phase based on PCT/US14/53836; office action received 4/20/18; office action response to restriction filed 6/4/18; office action received; office action response filed 3/26/19; office action received 7/11/19; office action response filed 1/7/2020

 

 

Regulation

 

ZIVO Algal Products & Derivatives

 

General Regulatory Framework

 

In the United States and in any foreign market we may choose to enter, our products are subject to extensive governmental regulations.

 

In the United States, these laws, regulations and other constraints exist at the federal, state and local levels and at all levels of government in foreign jurisdictions. The majority of these regulations directly relate to (1) the formulation, clinical testing, manufacturing, packaging, labeling, distribution, sale and storage of our products and (2) product claims and advertising, including claims and advertising by us, as well as claims and advertising by distributors for which we may be held responsible.

 

U.S. product classification

 

In the U.S., the formulation, testing, manufacturing, packaging, storing, labeling, promotion, advertising, distribution and sale of our products are subject to regulation by various governmental agencies, primarily the FDA and the Federal Trade Commission (“FTC”). Our activities also are regulated by various agencies of the states and localities and foreign countries in which our products are manufactured, promoted, distributed and sold. The FDA, in particular, regulates the formulation, manufacture and labeling of conventional foods, dietary ingredients and dietary supplements (or nutraceuticals).

 

The FDA is responsible for the oversight of all foods (including dietary supplements), drugs, cosmetics and medical devices in the United States. To the extent that we manufacture finished products for sale to consumers (and in certain other limited circumstances where we sell our product as an ingredient), FDA regulations require us to comply with current good manufacturing practice (“cGMP”) regulations for the preparation, packing and storage of dietary supplements. This is a complex series of regulations that have posed significant compliance challenges to the supplement industry. To the extent that we supply our products as ingredients for the use in foods or nutraceuticals, we would be required to comply with cGMP regulations for foods, as well as the provisions of the Food Safety Modernization Act of 2011 which require all companies involved in the production of food and food ingredients to develop and implement a Hazard Analysis and Critical Control Point program.

 

The Dietary Supplement Health and Education Act of 1994 (“DSHEA”) revised the provisions of the Federal Food, Drug and Cosmetic Act by recognizing “dietary supplements” as a distinct category of food and, we believe, is generally favorable to the dietary supplement industry. The legislation grandfathered, with some limitations, dietary ingredients that were on the market before October 15, 1994. A dietary supplement that contains a dietary ingredient that was not on the market before October 15, 1994 will require evidence of a history of use or other evidence of safety establishing that it is reasonably expected to be safe. To the extent that we offer for sale unique, proprietary ingredients we will be required to file with the FDA evidence supporting the conclusion that we have a “reasonable expectation” that they will be safe for human consumption when used as directed. The FDA recently published an “Advance Notice of Proposed Rulemaking” which the nutraceutical industry believes will substantially increase the level of evidence required to satisfy the “reasonable expectation” standard.

 


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DSHEA provides for specific nutritional labeling requirements for dietary supplements. DSHEA permits substantiated, truthful and non- misleading statements of nutritional support to be made in labeling, such as statements describing general well-being from consumption of a nutraceutical ingredient or the role of a nutrient or dietary ingredient in affecting or maintaining structure or function of the body. A company making a statement of nutritional support must possess adequate substantiating scientific evidence for the statement, disclose on the label that the FDA has not reviewed the statement and that the product is not intended to mitigate, treat, cure or prevent disease, and notify the FDA of the statement within 30 days after its initial use. To the extent we produce finished product for use by consumers as nutraceuticals, we will be required to comply with these provisions of DSHEA.

 

Labeling and advertising regulations

 

We may market one or more of our products as a conventional food or for use as an ingredient in conventional foods. Within the U.S., this category of products is subject to the Nutrition, Labeling and Education Act (“NLEA”) and regulations promulgated under the NLEA. The NLEA regulates health claims, ingredient labeling and nutrient content claims characterizing the level of a nutrient in the product. The ingredients added to conventional foods must either be GRAS or be approved as food additives under FDA regulations.

 

The FTC, which exercises jurisdiction over the advertising of our product, has for years instituted enforcement actions against companies marketing supplements for alleged false, misleading or unsubstantiated advertising of some of their products. The FTC has specific guides for advertising claim substantiation as well as for the use of testimonials. As a general matter, companies making health related claims for their products or ingredients are required to possess well designed human clinical studies supporting such claims at the time they are made. Enforcement actions have often resulted in consent decrees and significant monetary payments by the companies involved. In addition, the FTC has increased its scrutiny of the use of testimonials which we have and may in the future utilize.

 

International regulations of our products

 

In many foreign markets in which we may choose to offer our products for sale, we may be required to obtain an approval, license or certification from the relevant country’s ministry of health or comparable agency. This would hold true for jurisdictions such as Canada, the European Union, Japan, Australia and New Zealand. The approval process generally requires us to present each product and product ingredient to appropriate regulators for review of data supporting safety as well as substantiating any claims we may desire to make. We would also be required to comply with product labeling and packaging regulations that vary from country to country. Our failure to comply with these regulations could prevent our products from being legally offered for sale.

 

California Proposition 65

 

California’s Safe Drinking Water and Toxic Enforcement Act of 1986, also known as Proposition 65, provides that no person in the course of doing business shall knowingly discharge or release a chemical known to the state to cause cancer or reproductive toxicity into water or into land where such chemical passes or probably will pass into any source of drinking water, without first giving clear and reasonable warning. Among other things, the statute covers all consumer goods (including foods) sold in the State of California. Proposition 65 allows private enforcement actions (sometimes called “bounty hunter” actions). While we intend to take appropriate steps to ensure that any of our products that we may market will be in compliance with the Act, given the nature of this statute and the extremely low tolerance limits it establishes (well below federal requirements), there is a risk that we, our contracted producer or a licensee could be found liable for the presence of miniscule amounts of a prohibited chemical in our product. Such liability could be significant.

 

General

 

To the extent dictated by our research partners, we will continue to produce research-only feedstock for chemical analysis, safety studies and efficacy studies compliant with applicable state and federal regulations. However, we will rely on our research partners to conduct their respective R&D programs in a manner compliant with applicable regulation and law. Once a product concept has been fully developed, we intend to manufacture that product, either internally or on a contract basis. We intend to adhere to all state and federal food safety and food manufacturing regulations for applicable product categories, and to produce our algal biomass in compliance with standards set forth in our GRAS dossier. In either case, we intend to adhere to all state and federal regulations relative to the safety and efficacy of the product application, as well as relevant regulations covering the safe and consistent manufacture of that product.

 


19


 

 

Compliance

 

In November 2018, we affirmed GRAS status for use as a plant-based ingredient for human consumption. We are in the process of affirming poultry GRAS status and expect that approval in mid-2020. We have completed a number of studies relating to the poultry production that supports good animal nutrition. These studies are being performed in conjunction with our licensing partner, NutriQuest, a global innovator in animal nutrition. In the EU, the ZIVO algal biomass has been classified as an animal feed material and testing in the EU has commenced. With appropriate funding, we can move forward with human food ingredient compliance in 2020 utilizing all or most of the US FDA GRAS dossier.

 

Wellmetrix

 

We have worked to make the Wellmetrix testing systems compliant with existing FDA regulations and to that end retained FDA counsel and a medical device consulting firm, which have advised us as to the most time and cost-efficient path to classification and approvals. This activity will be reactivated upon availability of additional funding.

 

Research and Development

 

ZIVO Bioscience, Inc.

 

Research

 

Our algal culture has been subjected to product testing in its original form over several years, beginning in 2004. In spring of 2009, we undertook a research and development process with a view to fractioning the existing product into much smaller, concentrated groups of molecules with similar physical properties. These groups were then tested in vivo and in vitro with successful results noted in maintaining healthy cholesterol levels. A patent application describing a novel method of cholesterol regulation was submitted to the USPTO in spring of 2010 and a PCT filing was submitted in February of 2011.

 

Since January 2012, we continue to develop our research programs internally and direct outside academic researchers, private laboratories or contract research organizations to conduct experiments, tests and studies on our behalf. We spent approximately $2,206,000 for the year ended December 31, 2019 on research and development, as compared to $2,798,000 in 2018. The resources were spent on external research, mainly to independent facilities involved in the analysis and validation of our bioactive compounds in various applications and animal models. To date, all of these amounts have been directly expensed as they have been incurred.

 

Beginning in March 2016, the Company moved forward with the following R&D initiatives

 

Continuing a large-scale bovine mastitis study utilizing samples validated in vitro by the principal researcher at the University of Wisconsin - Madison and further validated in vivo by other researchers in the fall of 2016. The pre-pilot and pilot arms of this study have been completed. The primary arm of the study was delayed in 2018 due to inconsistencies in the testing sample, availability of research facilities, and delays in the analytical process. The primary study arm or a portion thereof is expected to commence in Q1 2019. The analytical work that must occur in tandem required the addition of new research resources in order to complete such work in a timely manner.  

 

A study utilizing cadaver cartilage and joint tissue at the Comparative Orthopaedics Laboratory located at the University of Missouri showed positive early results for protective effects in canine joint health, using our natural bioactive compounds. The study will be repeated and expanded when capital funding is made available.  

 

A canine whole blood experiment was conducted at an international contract research organization to study the effects of our natural bioactive compounds on inflammatory cytokines and chemokines present in blood to assess whether a systemic or localized mechanism of action can be determined. Although the results trended in a positive direction, Company principals determined that a more definitive in vivo study would be more useful. Such study is expected to be conducted when capital funding is available.  

 

The ongoing elucidation and characterization of the natural bioactive compounds had undergone a data integrity review in early 2014. Further work to develop a more comprehensive understanding of the bioactives had been placed on hold since spring of 2014 pending available funding. In mid-March 2016, the Company re-activated the elucidation and characterization as funding became available. Several university and privater laboratories were contracted to conduct isolation, and fractionation, followed by bioassays or in vivo studies to validate the bioactivity of the purified and isolated samples, with work ongoing at the close of 2019.  


20


 

 

Beginning in spring 2017, we contracted with the National Center for Natural Products Research at the University of Mississippi, the Boston Institute of Biotechnology, the Donald Danforth Plant Science Center, Elicityl SA, and other research facilities to accelerate the elucidation and characterization of the bioactive compounds present in the algal biomass, with the intent to converge these findings with the in vivo validation conducted for treatment of bovine mastitis, and present this body of work to Zoetis and effectively start the clock on the 90-day evaluation period. Such work resulted in the characterization of numerous bioactive compounds, which requires additional screening and validation to separate bioactives pertinent to bovine mastitis from those pertinent to other human and animal models.  

 

Beginning in fall 2016, we commenced a significant number of tests to determine the nutritional composition of the algal biomass, its toxicity, genetic mutagenicity, bacterial count and other safety measures for successive batches of biomass produced at AzCATI and other producers to establish consistent production and repeatability in anticipation of GRAS approvals. These tests form the basis for safety and stability claims as part of the requirement to meet GRAS standards applicable to both human and poultry uses.  

 

As mentioned previously, 2019 saw a decrease in R&D spending and the active recruitment of algae growers in India and Peru, as well as other parts of the world. We engaged an outside consultant to advise us on outsourcing algae production and to develop our internal and external organizational structures to support a global supply chain in anticipation of a market launch in early 2020 pending availability of biomass from contracted growers In addition, we worked closely with our animal feed partner NutriQuest to conduct initial trials and analyses of a potential poultry feed ingredient, with good results. The FDA compliance effort for a poultry feed ingredient is still underway and is expected to dovetail with product availability in mid-2020.  

 

The purposes for these various tests and experiments are manifold: We are not only isolating bioactive molecules, but also testing the method of isolation and then validating that the isolated molecules retain their bioactivity across a select range of human and animal cell lines, and that these molecules exhibit no deleterious effects before they are introduced into humans or animals during in vivo studies. We must ensure that this does not occur occasionally, it is required for every production process, every safety validation process and every intended application, such as a canine dietary supplement that is mixed with food, as opposed to a canine dietary supplement that is administered in the form of a chewable caplet.

 

As of late 2019, as we enter production scale-up, we are required to provide cGMP protocols and Quality Assurance (“QA”) protocols that show we can produce the algal biomass and/or the active ingredients safely, consistently and in defined quantities, and therefore rely on these same experiments and methods to substantiate our quality claims. These datasets form the basis for establishing the value of a license agreement. Therefore, every single license that we hope to issue requires its own data set and safety validation for the specific application being licensed. These datasets represent the core of the intellectual property that is being licensed.

 

Status of Culturing and Production

 

Independent of identifying the bioactive compound(s) or validating their bioactivity and safety is the process and method of growing and maintaining the algal culture that gives rise to various nutritional and bioactive compound(s) in the first place. This culture and its growing environment were developed decades ago. However, the method was not commercially viable, and the Company has expended considerable resources to develop a single-species, high-volume and commercially viable production methodology.

 

We made the decision to spread product development risk, resulting in the creation of a product platform strategy whereby four different forms could be developed for future marketing across several categories and applications:

 

a)the raw algae biomass, which would naturally contain various nutritional and beneficial compounds;  

 

b)a more refined extraction which could be introduced into animal feed or supplements;  

 

c)the isolated natural molecule(s) which could be more appropriate for human consumption in food or supplements; and  

 

d)the synthetic version of any such natural molecule(s) which could be licensed to drug development companies or joint-ventured in a risk-sharing arrangement.  

 


21


 

 

To that end, we contracted with several experts in the field to coordinate isolation of the different organisms present in the culture, grow each of them separately and then subject them to the same life-cycle stressors as the original culture. The stated goal was to grow algae in bulk as a direct source of micro-nutrition and feed ingredient for production animals, namely poultry, beef cattle and dairy cows, as well as companion animal dietary supplementation. The production capability would be licensed or contracted to others. Per the business model, we have no intention of fielding a finished product, but rather coordinating licensees and entering into supply agreements with larger, better-financed brand names or licensing directly with such brand names. There can be no assurance that commercially viable products will be developed, or that they can be successfully and profitably manufactured and marketed.

 

Over the last several years, our contracted researchers were able to successfully isolate one or more algal species, scale up the production/output of the isolated species and still retain some of the key, desirable bioactive properties associated with the earlier, complex culture. Proof of concept growing techniques, including both pond and bioreactor modes, showed that our target algal specie can be grown in commercially viable quantities, and the harvest time was compressed from several weeks to several days’ time. We are uncertain if we can grow biomass in sufficient tonnage for livestock feed, but we believe that the current production methods will allow us to satisfy demand for a more refined product introduced into animal feed and into human supplements as global production capacity ramps up.

 

In 2018, we updated Standard Operating Procedures (“SOPs”) in order to draft contractual terms with contract growers domestically and abroad. The SOPs form the basis for current Good Manufacturing Practice (“cGMP”) protocols to which contract growers and processors must adhere as part of the FDA’s updated Food Safety Modernization Act of 2011 requirements, regardless of country of origin. We conducted experiments in post-processing, such as spray-drying centrifugal water extraction and other techniques to better understand feed and food handling requirements. We contracted the Burdock Group of Orlando, Florida in summer of 2016 to manage the compliance process on our behalf and we affirmed GRAS self-affirmation in November 2018.

 

Looking Forward

 

A significant portion of our research efforts have been directed towards identifying a candidate “class of compound” and one or more “active ingredients,” as it relates to autoimmune and anti-inflammatory response. These are very broad categories and work is still required to fully describe the 3D structure of such compounds to fully realize their potential licensing value. One approach among several we’ve taken is to create synthetic homologs, and from them deduce the composition and 3D structure of the naturally bioactive compounds.

 

Subject to the availability of sufficient funding, we estimate that we will, in fiscal 2020, be required to expend in excess of $5,000,000 on research and subsequent product development and manufacturing in order to complete the initiatives discussed herein. In addition to the activity in 2020, we plan to continue our research and development efforts as well as manufacturing feed and food products in 2020 and beyond. These expenditures will need to be met from external funding sources as well as revenues we intend to receive. In the past, we have had difficulty raising funds from external sources. Thus, we may not be able to raise the funding required to continue our research and development activities. In the event that these sources are not available or adequate to meet our research needs, we will be unable to pursue our research activities, in which case our ability to substantiate the accumulated intellectual property with objective clinical support for its characterization, method of action and efficacy will continue to be impeded, thereby severely hindering our ability to generate licensing revenue (or otherwise commercialize our products) and adversely affect our operating results.

 

In the event that we are successful in raising the necessary capital, we will continue our current research program with our research partners, we will expand our investigations to include various experts and consultants on an as-needed basis and explore new product concepts and applications. Our current contracts with our research partners cover the following activities:

 

Ongoing isolation and characterization of individual natural molecules from various production formats in sufficient quantities for downstream analyses, experiments, standards development, compliance, cGMP and QA protocols, whether as the basis for feed or food applications, as a lead compound for a synthetic therapeutic, or as a medical food or botanical drug  

 

Ongoing validation of samples in vivo and in vitro to substantiate efficacy and safety for each specific application or claim, i.e., bovine mastitis, poultry nutrition, health, canine osteoarthritis, canine joint health, porcine respiratory/reproductive syndrome, etc., to boost value for each specific license or market vertical  

 

Synthetic development/validation of individual molecules to boost value of licenses, likely to be conducted by others, either as licensees or joint ventures  

 

Ongoing validation of samples in vivo and in vitro for standards development, FDA safety compliance, cGMP and QA protocols  


22


 

 

Product development initiatives such as the joint development project with NutriQuest to develop a successful poultry feed ingredient; the project with NutriChipz to develop products in the functional food market; the project with Dr. Steven K. Grekin to develop skin health, with other partners, to develop a protein enhancement ingredient for vegan drinks and smoothies as well as a human dietary supplement formulation  

 

All of the above activities need to continue in parallel in order to arrive at marketable products or licenses, and our ability to undertake all such activities is subject to our receipt of additional funding. Ancillary development activities would occur in parallel with our research partners.

 

Development

 

Wellmetrix

 

Wellmetrix was initially focused on large-scale, programmatic applications of its testing and reporting platform. We are interested in supporting the intervention by wellness consultants or medical professionals in the lifestyle choices made by individuals covered by traditional health insurance plans, retiree medical benefits pools, employer-sponsored health initiatives and taxpayer-sponsored programs like Medicaid and the ACA (Affordable Care Act) or its proposed replacement. These interventions, which are typically pre-clinical, have been shown to be successful in delaying the onset of chronic diseases such as diabetes or cardiovascular problems. We believe that targeting asymptomatic individuals and focusing intervention efforts on these individuals may have a positive result for wellness programs, and potentially lower premiums and health claims. We spent approximately $101,000 for the year ended December 31, 2019 on research and development, as compared to $17,000 in 2018. The resources were spent on external research.

 

At the close of 2015, the Wellmetrix product platform required additional prototype analyzers and additional dry chemistry reagent strips and cartridges to conduct pilot programs for potential customers, and to use the results of these pilot programs to help normalize data for the dry chemistry reagents as part of the FDA submission package.

 

In early 2016 we refocused product development on self-monitoring of individual health, primarily focused on those individuals who purchase dietary supplements, join health clubs or are otherwise actively pursuing a healthy lifestyle. Since that time, we have redeveloped the sample collection device, the analyzer and the mobile software application to better serve the needs of the consumer, rather than a workplace wellness provider. In 2018, we completed CAD design of all key components, conducted finite element analysis of the sample collection device to make sure that it functioned as intended and prepared CAD files for low-volume tooling of key components. We successfully obtained a US patent in December 2018 for the core technology – a multianalyte Wellness Panel, US Patent No. 10,161,928. We did not have the financial or scientific resources to complete all aspects of the testing assay, which requires additional development before it is ready for production, or the mobile software application, pending available funding. Estimated funding required to successfully launch the technology is expected to reach $12 million.

 

In mid-2019, we entered negotiations with Dutch multinational DSM to apply Wellmetrix testing technology to two premier functional food ingredients manufactured by DSM. A Research and Development Agreement was entered into with DSM in the third quarter of 2019 and a large clinical trial using the Wellmetrix Wellness Panel platform has been planned for mid-2020. As part of the contracted work, Wellmetrix is obliged to gear up its operations to run the clinical trial and manufacture sufficient testing material and test components to conduct the clinical trial. This will require new funding, but it does represent the first revenue opportunity for the company and therefore efforts are focused on moving forward with this relationship.

 

The company filed a trademark for “Wellmetrix” and purchased the ICANN domain www.wellmetrix.com and www.wellmetrix-bts.com and registered “Wellmetrix” as an LLC in the state of Delaware.

 

Compliance with Environmental Laws

 

We believe that we are, in all material respects, in compliance with local, state, and federal environmental laws applicable to our production and waste disposal. The cost of this compliance activity to date has not been material and has been absorbed within our general operations overhead.

 

Employees

 

As of December 31, 2019, we had five full-time employees, four of whom are positioned in executive management. In addition, we have two part-time people acting on a consulting basis in administrative roles. We believe that our employee relations are good. No employee is represented by a union.

 


23


 

 

Corporate Communications and Available Information

 

We maintain our website www.zivobioscience.com and provide a toll-free number (888) 871-6903. The content of our website is not incorporated by reference into this Form 10-K and should not be considered part of this report or any other filing we make with the SEC. We file annual, quarterly and current reports, and other information with the Securities and Exchange Commission. Our filings with the SEC can be viewed at www.sec.gov.

 

Wellmetrix maintains a separate website: www.wellmetrix.com and provides the same toll-free number as ZIVO Bioscience on its website.

 

Item 1A. Risk Factors.

 

There is substantial doubt about our ability to continue as a going concern. Our independent registered public accounting firm has issued an opinion on our consolidated financial statements which states that the consolidated financial statements were prepared assuming we will continue as a going concern and further states that our recurring losses from operations, stockholders’ deficit and inability to generate sufficient cash flow to meet our obligations and sustain our operations raise substantial doubt about our ability to continue as a going concern.

 

We are materially dependent on external sources for continued funding. Unless and until we realize licensing and royalty revenues sufficient to cover our expenses, we will be reliant upon external sources to fund our continued operations. We estimate that we will require approximately $6,000,000 in cash over the next 12 months in order to fund our normal operations and to fund our research and development initiatives. There is no guarantee that we will receive this funding. If we are unable to raise additional funds, there will be a material adverse effect on our business, financial condition and results of operations.

 

We have 1.2 billion shares authorized for issuance. As of December 31, 2019, we had 394,688,456 shares outstanding. We also had contractual commitments to issue 375,105,341 additional shares as of December 31, 2019, consisting of 75,950,501 common shares issuable upon the conversion of convertible debentures and related accrued interest and 299,154,840 common shares issuable upon the exercise of outstanding options and warrants. This totals a potential 769,793,797 shares outstanding if all debentures were converted and warrants exercised. In order to increase the authorized shares to a higher number, we would need to amend our articles of incorporation, which would require stockholder approval. There is no guarantee that we will be able to obtain the stockholder approval necessary to amend our articles of incorporation to increase our authorized shares.

 

Our future success is dependent on our ability to establish strategic partnerships. We do not have resources to pursue the development, manufacturing and marketing of products on our own, and we will need to rely on third parties for some of these activities. There is no guarantee that we will be able to successfully establish strategic partnerships.

 

The ability to market our product is dependent upon the completion of proven, clinical research. While we are currently undergoing studies to further identify the active ingredients in our products, there is no guarantee that the research will successfully achieve this goal. If our current research does not return the results we expect, our business prospects will be materially and adversely affected.

 

Government regulation of our products may adversely affect sales. Nutraceutical and animal supplement products, although not subject to FDA approval, must follow strict guidelines in terms of production and advertising claims. Our ability to produce and successfully market our products is dependent upon adhering to these requirements. If we fail to comply with applicable government regulations concerning the production and marketing of our product, we could be subject to substantial fines and penalties, which would have a material adverse effect on our business.

 

We have a history of losses, we expect to continue to incur losses and we may not achieve or sustain profitability in the future. We have incurred losses in each fiscal year of our existence. We cannot assure you that we will reach profitability in the future or at any specific time in the future or that, if and when we do become profitable, we will sustain profitability. If we are ultimately unable to generate sufficient revenue to meet our financial targets, become profitable and have sustainable positive cash flows, investors could lose their investment.

 

Competition from current competitors and new market entrants could adversely affect us. We compete with a wide range of established companies in a variety of different markets, all of whom have substantially greater name recognition and resources than we do. We face or will face other specialized competitors if we are able to expand into new vertical markets. These competitors may be more efficient and successful than we are. If we fail to compete successfully, our operating results and financial condition will be materially adversely affected.

 


24


 

 

Changes in laws and/or regulations may cause our business to suffer. The future success of our business depends upon our ability to meet regulatory requirements for the sale of our products. Increased enforcement of existing laws and regulations, as well as any laws, regulations, or changes that may be adopted or implemented in the future, could limit our ability to market our products.

 

The loss of key employees and technical personnel or our inability to hire additional qualified personnel could have a material adverse effect on our business. Our success depends in part upon the continued service of our senior management personnel. Our success will also depend on our future ability to attract and retain highly qualified technical, managerial and marketing personnel. The market for qualified personnel has historically been, and we expect that it will continue to be, intensely competitive. We cannot assure you that we will continue to be successful in attracting or retaining such personnel. The loss of certain key employees or our inability to attract and retain other qualified employees could have a material adverse effect on our business.

 

We could incur substantial costs as a result of any claim of infringement of another party’s intellectual property rights. In recent years, there has been significant litigation in the U.S. and elsewhere involving patents and other intellectual property rights. Companies are increasingly bringing and becoming subject to suits alleging infringement, misappropriation or other violations of patents, copyrights, trademarks, trade secrets or other intellectual property rights. These risks have been amplified by an increase in the number of third parties whose sole or primary business is to assert such claims. We could incur substantial costs in prosecuting or defending any intellectual property litigation. Additionally, the defense or prosecution of claims could be time-consuming and could divert our management’s attention away from the execution of our business plan.

 

We cannot be certain that our products do not infringe the intellectual property rights of third parties. Claims of alleged infringement or misappropriation could be asserted against us by third parties in the future. We cannot be sure that we would prevail against any such asserted claim.

 

Moreover, any settlement or adverse judgment resulting from a claim could require us to pay substantial amounts or obtain a license to continue to use the technology that is the subject of the claim, or otherwise restrict or prohibit our use of the technology. We cannot assure you that we would be able to obtain a license from the third patty asserting the claim on commercially reasonable terms, that we would be able to develop alternative technology on a timely basis, or that we would be able to obtain a license to use a suitable alternative technology to permit us to continue offering, and our customers to continue using, our affected products or technology. In addition, we may be required to indemnify our customers for third-party intellectual property infringement claims, which would increase the cost to us. An adverse determination could also prevent us from offering our products or services to others. Infringement claims asserted with or without merit against us may have an adverse effect on our business, financial condition and results of operations.

 

If we are required to make substantial payments or undertake any of the other actions noted above as a result of any intellectual property infringement claims against us or any obligation to indemnify our customers for such claims, such payments or costs could have a material adverse effect upon our business and financial results. Even if we are not a party to any litigation between a customer and a third party, an adverse outcome in any such litigation could make it more difficult for us to defend our technology in any subsequent litigation in which we are a named party. Moreover, such infringement claims with or without merit may harm our relationships with our existing customers and may deter others from dealing with us.

 

We may not be able to adequately protect our intellectual property rights and efforts to protect them may be costly and may substantially harm our business. Our ability to compete effectively is dependent in part upon our ability to protect our intellectual property rights. While we hold seven issued patent and pending patent applications covering certain elements of our technology, these patents, and, more generally, existing patent laws, may not provide adequate protection for portions of the technology that are important to our business. In addition, our pending patent applications may not result in issued patents.

 

U.S. patent, copyright, trademark and trade secret laws offer us only limited protection and the laws of some foreign countries do not protect proprietary rights to the same extent. Accordingly, defense of our trademarks and proprietary technology may become an increasingly important issue as we seek to expand our product development into countries that provide a lower level of intellectual property protection than the U.S. Policing unauthorized use of our trademarks and technology is difficult and the steps we take may not prevent misappropriation of the trademarks or technology on which we rely. If competitors are able to use our trademarks or technology without recourse, our ability to compete would be harmed and our business would be materially and adversely affected.

 

We may elect to initiate litigation in the future to enforce or protect our proprietary rights or to determine the validity and scope of the rights of others. That litigation may not be ultimately successful and could result in substantial costs to us, the reduction or loss in intellectual property protection for our technology, the diversion of our management’s attention and harm to our reputation, any of which could materially and adversely affect our business and results of operations.

 

We do not anticipate paying any dividends on our common stock. We do not anticipate paying any cash dividends on our common stock in the foreseeable future. If we do not pay cash dividends, you could receive a return on your investment in our common stock only if the market price of our common stock has increased when you sell your shares.


25


 

 

Substantial future sales of our common stock in the public market could cause our stock price to fall. Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could cause the market price of our common stock to decline and impede our ability to raise capital through the issuance of additional equity securities. We have outstanding warrants and convertible debt that may result in substantially more outstanding shares, which could cause the price of our common stock to decline.

 

Sales Risk – Wellmetrix products. We have not finished developing our products or sold any products. We have only begun test marketing. We cannot be assured that there is a sufficient market demand for our products. In addition, while we are actively pursuing the relationships necessary to begin manufacturing and marketing the Wellness Tests, we have not yet finalized agreements with potential business partners, including third-party resellers, labs or distributors of the Wellness Tests. Failure to secure these critical alliances on reasonable terms could negatively impact us, our business and future plans.

 

Dependence on Manufacturers. We do not own or operate, and currently do not plan to own or operate, manufacturing facilities for production of tests or devices which are critical to the successful operation of the business. We plan to target manufacturers and to form alliances for the mass production of our products, but we have no assurance that such alliances will be established. Furthermore, once we enter into such relationships, we may not have sufficient long-term agreements with any third-party manufacturers to ensure adequate supply and price controls. This may result in delays, quality control issues, additional expenses, and failure to meet demand or other customer obligations or needs.

 

Failure of Manufacturers to Meet Design Specifications. The success of our products is contingent upon one or more third parties manufacturing products according to design specifications. In practice, this is difficult to enforce and guarantee. As a result, we may never realize the expected efficiency, quality or sensitivity of our products and, as a result, may be required to continue research and development with another manufacturer. If a joint venture partner or contractor fails to meet design specifications, we will experience delays in commencing operations or delays in fulfilling orders in the future. Such delays could have a material adverse impact on our financial condition.

 

COVID-19 STATEMENT. The Company is carefully monitoring the effects the COVID-19 global pandemic is having on its operations.  Currently, the main potential effect is the uncertainty of the Company’s ability to raising capital.  Based on the nature of our operations, employees are able to work remotely with access to teleconferencing and video conferencing.  The research partners utilized by the Company are currently providing services as requested, although some University researchers have limited availability as their campuses have closed down, with the expectation they will reopen sometime in April 2020.  However, the Company cannot make any assurances the research partners will open as expected and perform at the levels as required until the COVID-19 situation is resolved. Other contract research organizations have remained open and accessible, although some resources have delayed response effectiveness.

 

Item 1B. Unresolved Staff Comments.

 

Not required for smaller reporting companies.

 

Item 2. Properties.

 

We lease 500 square feet in Bloomfield Hills, Michigan and 2,000 square feet in Keego Harbor, Michigan on a month to month basis to serve as the headquarters of our company. We also lease 820 square feet in Plymouth, Michigan for our laboratory operations. The combined monthly rent is $7,600.

 

Item 3. Legal Proceedings.

 

From time to time we are involved in litigation incidental to our business.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.


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PART II

 

Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Market Information 

 

Our common stock is quoted on the OTC Market (“OTCQB”) administered by FINRA under the symbol “ZIVO.” The following table sets forth the range of high and low bid information as reported on the OTCQB by quarter for the last two fiscal years. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.

 

Year ended December 31, 2018

 

 

 

HIGH

 

LOW

First Quarter

$

0.12

$

0.07

Second Quarter

 

0.18

 

0.08

Third Quarter

 

0.19

 

0.11

Fourth Quarter

 

0.17

 

0.12

 

Year ended December 31, 2019

 

 

 

HIGH

 

LOW

First Quarter

$

0.14

$

0.10

Second Quarter

 

0.14

 

0.09

Third Quarter

 

0.12

 

0.07

Fourth Quarter

 

0.17

 

0.07

 

Holders

 

As of December 31, 2019, we had 212 shareholders of record.

 

We have not paid any dividends on our common stock during the last two fiscal years, due to our need to retain all of our cash for operations. We do not anticipate paying any cash dividends on our common stock for the foreseeable future.

 

Recent Sales of Unregistered Securities.

 

During the three months ended March 31, 2019, we issued 1,500,000 shares of common stock valued at $150,000. We issued 4,649,291 shares in connection the conversion of related party loans of $464,929.

 

During the three months ended June 30, 2019 we issued 12,020,000 shares of common stock valued at $1,202,000. We issued 143,447,677 shares in connection the conversion of debt of $12,080,298 and related accrued interest of $2,264,470.

 

During the three months ended September 30, 2019 we issued 12,980,000 shares of common stock valued at $1,298,000. We issued 3,118,359 shares in connection the conversion of related party loans of $176,405 and related accrued interest of $135,431.

 

During the three months ended December 31, 2019, we issued 9,688,917 shares of common stock valued at $982,017 We issued 29,295,827 shares in connection the conversion of debt of $2,180,000 and related accrued interest of $749,583.

 

 The Company believes that the foregoing transactions were exempt from the registration requirements under Rule 506 of Regulation D promulgated under the Securities Act of 1933, as amended (“the Act”) or Section 4(a)(2) under the Act, based on the following facts: in each case, there was no general solicitation, there was a limited number of investors, each of whom was an “accredited investor” (within the meaning of Regulation D under the Act, as amended) and/or was (either alone or with his/her purchaser representative) sophisticated about business and financial matters, each such investor had the opportunity to ask questions of our management and to review our filings with the Securities and Exchange Commission, and all shares issued were subject to restrictions on transfer, so as to take reasonable steps to assure that the purchasers were not underwriters within the meaning of Section 2(11) under the Act.

 

Item 6. Selected Financial Data.

 

Not required for smaller reporting companies.


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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

Overview

 

For ZIVO, we have put in place a business model in which we would derive future income from licensing and selling natural bioactive ingredients that may be derived from or are initially based on the algae cultures. We expect that these planned new products will likely be sold to much larger, better-financed animal, food, dietary supplement and medical food manufacturers. The anticipated income streams are to be generated from a) royalties and advances for licensed natural bioactive ingredients, and b) a toll on bulk sales of such ingredients. These bulk ingredients will likely be made by contracted ingredient manufacturers and then sold by us to animal food, dietary supplement and medical food processors and/or name-brand marketers. Further, we expect to license our bioactive molecules as lead compounds or templates for synthetic variants intended for therapeutic applications.

 

For Wellmetrix, we are developing, with the intention to manufacture, market, and sell tests, that we believe will allow people to optimize their health and identify future health risks. We plan to develop and commercialize such tests in three phases:

 

In phase one (“Phase One”) or, alternately named Gen 1.0, we plan to develop and commercialize a series of tests, which are intended to measure indicators of good health and optimal metabolic function (collectively, the “Phase One Test”). The Phase One Test is being designed to measure biomarkers related to oxidative stress, inflammation, and antioxidant status to establish a metabolic assessment from which intervention can commence, and from which metabolic syndrome can be inferred. A patent that covers this particular combination of biomarkers was issued December 25, 2018.  

 

In phase two (“Phase Two”) or alternately named Gen 1.5, we plan to develop and commercialize a testing technology focused on the positive or negative metabolic effects of metabolizing fat and muscle efficiency due to changes in diet, exertion, hydration and dietary supplements in a self-administered format that integrates with smartphone operating systems.  

 

In phase three (“Phase Three”) or alternately named Gen 2.0, we plan to develop and commercialize additional tests intended to provide a more complete metabolic profile for an individual utilizing the metabolites present in urine. The Company believes the Gen 2.0 tests, in aggregate, will allow identification of healthy versus unhealthy bodily processes in real-time. This technology can also be applied to livestock and companion animals. As capital funding becomes available, the Company will move forward with finalizing its transition cow syndrome test, for which a provisional patent application has already been filed.  

 

The Wellmetrix technology also incorporates sophisticated software to analyze, report, record and manage wellness and health data for large groups such as large employers, pension funds, accountable care organizations, state Medicaid agencies and their actuarial consultants, underwriters, re-insurers and wellness consultants. The software also contains tools to conduct meta-analysis of baseline health benchmarks and monitor the progress of pre-clinical intervention programs within large groups.

 

Results of Operations for Years Ended December 31, 2019 and 2018 Sales

 

We had no sales for the years ended December 31, 2019 and 2018.

 

Cost of Sales

 

The Company had no Costs of Sales for the years ended December 31, 2019 and 2018.

 

Selling Expenses

 

The Company had no Selling Expenses for the years ended December 31, 2019 and 2018.


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General and Administrative Expenses

 

General and administrative expenses increased approximately $2,723,000 to $4,076,000 in 2019 compared to $1,353,000 in 2018. Of this $2,723,000 increase, approximately $2,524,000 related to an increase in non-cash expenses as noted below, leaving an increase in cash expenses of approximately $199,000. General and administrative expenses increased in the following areas: an increase in salaries of $2,584,000, of which is $2,636,000 is due to an award in 2019 of 29 million stock options to the CEO (a non-cash expense), an increase in salary expenses of $75,000, offset by awards in 2018 of stock warrants to the Vice President – Operations valued at $121,000 (a non-cash expense) and a decrease of the value of stock warrants issued to the CFO of $6,000 (a non-cash expense), an increase in recruiting expense of $66,000 for the Vice President of Global Operations, an increase of $55,000 in insurance expense, an increase in Wellmetrix operating expenses of $42,000 mainly relating to a recruiting expense for the Executive Vice-President of Operations and Product Development, an increase of $25,000 in travel expenses and an increase of $15,000 of office expenses, offset by a reduction of $64,000 web-site development and public relations. Our increase in related cash expenses of general and administrative expenses was due to increased activity.

 

Professional Fees and Consulting Expense

 

Professional fees and consulting expense increased approximately $7,000 to $1,969,000 in 2019 compared to $1,962,000 in 2018. Professional fees and consulting expense increased in 2019 due to the following: an increase of $931,000 in the use of financial consultants (of the total expense of $1,011,000 in 2019 related to these activities, $737,000 was a non-cash expense in the forms warrants issued for services rendered) and an increase in general legal fees of $165,000 offset by a decrease of $798,000 in the use of an investment banking firm and investor relations (of which $620,000 of the expense in 2018 was in the form of warrants - a non-cash expense), a decrease in Board of Director Fees of $191,000 (the decrease was in the value of non-cash expense in the form of 2,500,000 common stock warrants valued at $192,614 in 2019 compared to $384,065 in 2018 issued for services rendered), a decrease in patent legal fees of $85,000, a decrease of accounting fees of $14,000 and a decrease in listing and service fees of $1,000.

 

Research and Development Expenses

 

Research and development expenses decreased approximately $508,000 to $2,307,000 in 2019 compared to $2,815,000 in 2018 for the comparable period.

 

Of these expenses, approximately $2,206,000 and $2,798,000 for the years ended December 31, 2019 and 2018, respectively, are costs associated with external research relating to Zivo. Subject to the availability of funding, our research and development costs will grow as we work to complete the research in the development of natural bioactive compounds for use as dietary supplements and food ingredients, as well as biologics for medicinal and pharmaceutical applications in humans and animals. The Company’s scientific efforts are focused on the metabolic aspects of oxidation and inflammation, with a parallel program to validate and license products for healthy immune response. The decrease of $508,000 from the prior period can be attributed to a decrease in available funding. We expect external research and development to increase in 2020 as we pursue additional external trials, subject to the availability of sufficient funding, which we do not currently have.

 

With respect to our Wellmetrix, LLC subsidiary, we incurred approximately $101,000 and $17,000 in research and development expenses for the year ended December 31, 2019 and 2018, respectively. The R&D effort to date has centered on optimizing dry chemistry, developing lower-cost alternatives for the proprietary analyzer device, negotiating and collaborating with offshore manufacturers and assembling the FDA pre-submission package for product classification and approval. The increase of $84,000 from the prior period is due to prioritization of Wellmetrix research.

 

Other Income (Expenses)

 

During the year ended December 31, 2019, we recorded approximately $375,000 relating to amortization of debt discount as compared to $903,000 for the year ended December 31, 2018, a decrease $528,000. The decrease is related to the funding expenses of the convertible debt and the valuation related to the debt discount calculation. The discounts are amortized on a straight-line basis through April 1, 2019.

 

During the year ended December 31, 2019, we recorded $-0- in finance costs as compared to $97,000 in 2018. The decrease of $97,000 was due to a decrease in convertible debt funding in 2019 as compared with 2018.

 

During the year ended December 31, 2019, we recorded $-0- in finance costs paid in stock and warrants as compared to $311,000 in 2018. The increase of $311,000 was due to a decrease in convertible debt funding in 2019 as compared to 2018.

 


29


 

 

During the year ended December 31, 2019, we recorded approximately $2,783,000 in interest expense as compared to $7,194,000 in 2018, a decrease of $4,411,000. Included in interest expense is the amortization of debt issuance costs of approximately $1,189,000 and $5,093,000, respectively. The decrease of $4,411,000 is due to: 1) no new funding of convertible debt in 2019, 2) the conversion of $17,274,350 in principal and interest of Convertible Debt to HEP Investments (a related party) over the course of 2019, 3) conversion of $311,836 of Loan Payable-Related Party and accrued interest, 4) the amortization of the remaining deferred finance costs from 2018 offset by 5) the issuance to HEP Investments a warrant to purchase 2,000,000 shares of common stock valued at $165,432.

 

Liquidity and Capital Resources

 

The consolidated financial statements contained in this report have been prepared on a “going concern” basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. For the reasons discussed herein, there is a significant risk that we will be unable to continue as a going concern, in which case, you would likely suffer a total loss of your investment in our company.

 

As of March 23, 2020, we had cash in the bank of $14,000. We have incurred significant net losses since inception, including a net loss of approximately $11,427,000 during the year ended December 31, 2019. We have, since inception, consistently incurred negative cash flow from operations. During the year ended December 31, 2019, we incurred negative cash flows from operations of approximately $3,707,000. As of December 31, 2019, we had a working capital deficiency of $8,338,483 and a stockholders’ deficiency of $8,338,483. Although we recently raised a limited amount of capital, we have a near term need for significant additional capital. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

During the year ended December 31, 2019, our operating activities used approximately $3,707,000 in cash, compared with $5,007,000 in cash during the comparable prior period. The approximate $1,300,000 decrease in cash used by our operating activities was due primarily to the following (all of which are approximated): a $3,209,000 decrease in net loss, an increase of $542,000 in cash expense offset by a decrease in non-cash expenses of $2,451,000. The $542,000 of increase in cash expense was due to the following: an increase of accounts payable of $1,113,000, an increase of prepaid expenses of $7,000, offset by a decrease of $578,000 in accrued liabilities (mainly composed of the decrease in accrued interest).

 

During the years ended December 31, 2019 and 2018, there were no investing activities.

 

During the years ended December 31, 2019 and 2018, our financing activities generated $3,665,000 and $5,078,000 in cash, respectively. The decrease of $1,413,000 was primarily related to a net increase of proceeds of $199,000 from issuance of common stock and exercise of common stock warrants, an increase of $250,000 in net loans from related parties, an increase in deferred finance costs of $107,000 offset by a decrease of $1,969,000 from issuance of convertible debentures.

 

Although we raised a limited amount of capital during 2019, we continue to experience a shortage of capital, which is materially and adversely affecting our ability to run our business. As noted above, we have been largely dependent upon external sources for funding. We have in the past had difficulty in raising capital from external sources. We are still heavily reliant upon external financing for the continuation of our research and development program.

 

We estimate that we will require approximately $6,000,000 in cash over the next 12 months in order to fund our normal operations and to fund our research and development initiatives. Based on this cash requirement, we have a near term need for additional funding. Historically, we have had substantial difficulty raising funds from external sources; however, we recently were able to raise a limited amount of capital from outside sources. If we are unable to raise the required capital, we will be forced to curtail our business operations, including our research and development activities.

 

COVID-19 STATEMENT

 

The Company is carefully monitoring the effects the COVID-19 global pandemic is having on its operations.  Currently, the main potential effect is the uncertainty of the Company’s ability to raising capital.  Based on the nature of our operations, employees are able to work remotely with access to teleconferencing and video conferencing.  The research partners utilized by the Company are currently providing services as requested, although some University researchers have limited availability as their campuses have closed down, with the expectation they will reopen sometime in April 2020.  However, the Company cannot make any assurances the research partners will open as expected and perform at the levels as required until the COVID-19 situation is resolved. Other contract research organizations have remained open and accessible, although some resources have delayed response effectiveness.


30


 

 

Seasonality

 

Based on our implemented business model, anticipated income streams will be generated from the following:

 

a)For ZIVO, (i) royalties and advances for licensed natural bioactive ingredients, isolated natural compounds and synthetic variants thereof, and (ii) bulk sales of such ingredients;  

 

b)For Wellmetrix, the (i) sale of wellness tests and data services related to medical records management and (ii) analysis/compilation of data gathered on behalf of payers. For insurers, the primary selling season is November through April of any given year.  

 

We do not anticipate that these will be affected by seasonality.

 

Staffing

 

We have conducted all of our activities since inception with a minimum level of qualified staff. We currently do not expect a significant increase in staff.

 

Off-Balance Sheet arrangements

 

We have no off-Balance Sheet arrangements that would create contingent or other forms of liability.

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

 

Not required for smaller reporting companies.

 

Item 8. Financial Statements and Supplementary Data.

 

Reference is made to the Consolidated Financial Statements, the Reports thereon, and the Notes thereto, commencing on page F-1 of this report, which Consolidated Financial Statements, Reports, Notes and data are incorporated herein by reference.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

 

None.

 

Item 9A. Controls and Procedures.

 

(a) Evaluation of Disclosure Controls and Procedures. Based on their evaluation as of December 31, 2019, our Chief Financial Officer has concluded that our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, were effective as of the end of the period covered by this report to ensure that the information required to be disclosed by us in this Annual Report on Form 10-K was recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and instructions for Form 10-K. Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Financial Officer, to allow timely decisions regarding required disclosure.  

 

(b )Management’s Annual Report on Internal Control over Financial Reporting. Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as defined by Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2019. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment of those criteria, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2019.  

 

This Management’s report is not deemed filed for purposes of Section 18 of the Exchange Actor otherwise subject to the liabilities of that section, unless we specifically state in a future filing that such report is to be considered filed.


31


 

 

(c) Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting (as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the year ended December 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  

 

Item 9B. Other Information.

 

None.


32


 

 

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

 

Directors and Executive Officers

 

Incorporated by reference to the Registrant’s 2020 Proxy Statement to be filed within 120 days after the Registrant’s fiscal year end.

 

Code of Ethics

 

We have adopted a Code of Ethics and Business Conduct that defines the standard of conduct expected of our officers, directors and employees. We will upon request and without charge provide a copy of our Code of Ethics. Requests should be directed to Principal Accounting Officer, Zivo Bioscience, Inc., 2804 Orchard Lake Road, Suite 202, Keego Harbor, MI 48320.

 

Item 11. Executive Compensation

 

Incorporated by reference to the Registrant’s 2020 Proxy Statement to be filed within 120 days after the Registrant’s fiscal year end.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

Incorporated by reference to the Registrant’s 2020 Proxy Statement to be filed within 120 days after the Registrant’s fiscal year end.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence.

 

Incorporated by reference to the Registrant’s 2020 Proxy Statement to be filed within 120 days after the Registrant’s fiscal year end.

 

Item 14. Principal Accountant Fees and Services

 

Incorporated by reference to the Registrant’s 2020 Proxy Statement to be filed within 120 days after the Registrant’s fiscal year end.

 


33


 

 

PART IV

 

Item 15. Exhibits and Financial Statement Schedules.

 

(a) (1) (2) Financial Statements.

 

Financial Statements are listed in the Index to Consolidated Financial Statements on page F-1 of this report.

 

All schedules have been omitted because they are not applicable or the required information is included in the Consolidated Financial Statements or Notes thereto.

 

(3) Exhibits.

 

The Exhibit Index and required Exhibits immediately following the Signatures to this Form 10-K are filed as part of, or hereby incorporated by reference into, this Form 10-K.


34


 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

ZIVO BIOSCIENCE, INC.

Date: March 26, 2020

 

 

 

By:

/s/ Philip M. Rice II

 

 

Philip M. Rice II

 

 

Chief Financial Officer

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 

By:

/s/ Andrew Dahl

 

 

Andrew Dahl,

 

 

Principal Executive Officer CEO, President, Director

 

 

March 26, 2020

 

 

 

 

By:

/s/ Philip M. Rice II

 

 

Philip M. Rice II

 

 

Chief Financial Officer

 

 

March 26, 2020

 

 

 

 

By:

/s/ Christopher Maggiore

 

 

Christopher Maggiore,

 

 

Director

 

 

March 26, 2020

 

 

 

 

By:

/s/ Nola Masterson

 

 

Nola Masterson,

 

 

Director

 

 

March 26, 2020

 

 

 

 

By:

/s/ John Payne

 

 

John Payne,

 

 

Director

 

 

March 26, 2020

 

 

 

 

By:

/s/ Robert Rondeau

 

 

Robert Rondeau,

 

 

Director

 

 

March 26, 2020


35


 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and the Board of Directors of

 ZIVO Bioscience, Inc. and Subsidiaries

 

Opinion on the Consolidated financial statements

 

We have audited the accompanying consolidated balance sheets of ZIVO Bioscience, Inc. and subsidiaries (the "Company") as of December 31, 2019 and 2018, the related consolidated statements of operations, stockholders' deficiency, and cash flows, for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has incurred significant operating losses for the years ended December 31, 2019 and 2018 and, as of December 31, 2019, has a significant working capital and stockholders’ deficiency. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding those matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

WOLINETZ, LAFAZAN & COMPANY, P.C. 

 

We have served as the Company's auditor since 2004.

Rockville Centre, NY

March 26, 2020


F-1


 

 

ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEET

 

 

 

December 31,

 

December 31,

 

 

2018

 

2019

ASSETS

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

Cash

$

388,891

$

346,111

Prepaid Expenses

 

22,615

 

23,282

Total Current Assets

 

411,506

 

369,393

PROPERTY AND EQUIPMENT, NET

 

-

 

-

TOTAL ASSETS

$

411,506

$

369,393

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT:

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

Accounts Payable

$

422,426

$

1,372,428

Due to Related Party

 

432,429

 

-

Loans Payable, Related Parties

 

176,405

 

-

Convertible Debentures Payable, less unamortized discounts and debt issuance costs of $1,562,425 and $-0- at December 31, 2018 and 2019, respectively

 

17,978,215

 

5,280,342

Accrued Interest

 

3,674,148

 

1,952,606

Accrued Liabilities – Other

 

10,000

 

102,500

Total Current Liabilities

 

22,693,623

 

8,707,876

LONG TERM LIABILITIES:

 

 

 

 

 

 

-

 

-

TOTAL LIABILITIES

 

22,693,623

 

8,707,876

 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

STOCKHOLDERS’ DEFICIT:

 

 

 

 

Common stock, $.001 par value, 1,200,000,000 shares authorized (700,000,000 as of December 31, 2018); 180,036,435 and 396,736,506 issued and outstanding at

 

 

 

 

December 31, 2018 and 2019, respectively

 

180,037

 

396,737

Additional Paid-In Capital

 

55,985,626

 

81,222,726

Accumulated Deficit

 

(78,447,780)

 

(89,957,946)

Total Stockholders’ Deficit

 

(22,282,117)

 

(8,338,483)

TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT

$

411,506

$

369,393

 

The accompanying notes are an integral part of these financial statements


F-2


 

 

ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

For the year ended

December 31,

2018

 

For the year ended

December 31,

2019

REVENUE:

$

-

$

-

 

 

 

 

 

COSTS AND EXPENSES:

 

 

 

 

General and Administrative

 

1,353,319

 

4,076,439

Professional Fees and Consulting Expense

 

1,962,333

 

1,968,878

Research and Development

 

2,814,991

 

2,307,033

Total Costs and Expenses

 

6,130,643

 

8,352,350

 

 

 

 

 

LOSS FROM OPERATIONS

 

(6,130,643)

 

(8,352,350)

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

Amortization of Debt Discount

 

(903,317)

 

(374,608)

Financing Costs

 

(96,595)

 

-

Finance Costs Paid in Stocks and Warrants

 

(310,892)

 

-

Interest Expense – Related Parties

 

(7,060,383)

 

(2,676,308)

Interest Expense

 

(133,537)

 

(106,900)

 

 

 

 

 

Total Other Income (Expense)

 

(8,504,724)

 

(3,157,816)

 

 

 

 

 

NET LOSS

$

(14,635,367)

$

(11,510,166)

 

 

 

 

 

BASIC AND DILUTED LOSS PER SHARE

$

(0.09)

$

(0.04)

 

 

 

 

 

WEIGHTED AVERAGE

 

 

 

 

BASIC AND DILUTED SHARES OUTSTANDING

 

156,678,765

 

276,396,362

 

The accompanying notes are an integral part of these financial statements


F-3


 

 

ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

FOR THE PERIOD JANUARY 1, 2018 THROUGH DECEMBER 31, 2019

 

 

Common Stock

 

Additional

Paid in

Capital

 

Accumulated

Deficit

 

Total

Shares

 

Amount

Balance, January 1, 2018

141,106,061

$

141,107

$

47,366,814

$

(63,812,413)

$

(16,304,492)

Issuance of warrants to board of directors

-

 

-

 

384,065

 

-

 

384,065

Issuance of warrants for services

-

 

-

 

822,001

 

-

 

822,001

Issuance of warrants for services – related party

-

 

-

 

187,247

 

-

 

187,247

Issuance of common stock for cash

34,338,130

 

34,338

 

3,399,477

 

-

 

3,433,815

Common stock issued on conversion of 11% Convertible Debt and accrued interest

4,035,110

 

4,035

 

399,476

 

-

 

403,511

Discounts on issuance of 11% convertible debentures

-

 

-

 

819,854

 

-

 

819,854

Warrants issued for debt issuance costs

-

 

-

 

2,542,852

 

-

 

2,542,852

Common stock issued for financing costs

557,134

 

557

 

63,840

 

-

 

64,397

Net loss for the year ended December 31, 2018

-

 

-

 

-

 

(14,635,367)

 

(14,635,367)

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2018

180,036,435

$

180,037

$

55,985,626

$

(78,447,780)

$

(22,282,117)

Issuance of warrants to board of directors

-

 

-

 

192,614

 

-

 

192,614

Issuance of warrants for services

-

 

-

 

759,378

 

-

 

759,378

Issuance of warrants and options for services – related party

-

 

-

 

2,653,243

 

-

 

2,653,243

Issuance of common stock for cash

26,500,000

 

26,500

 

2,623,500

 

-

 

2,650,000

Common stock issued on warrant exercise

9,688,917

 

9,689

 

972,328

 

-

 

982,017

Common stock issued on conversion of 11% Loan Payable and accrued interest

3,118,359

 

3,118

 

308,718

 

-

 

311,836

Common stock issued on conversion of Due to Related Party

4,649,291

 

4,649

 

460,280

 

-

 

464,929

Common stock issued on conversion of 11% Convertible Debt and accrued interest

172,743,504

 

172,744

 

17,101,607

 

-

 

17,274,351

Warrants issued for financing costs

-

 

-

 

165,432

 

-

 

165,432

Net loss for the year ended December 31, 2019

-

 

-

 

-

 

(11,510,166)

 

(11,510,166)

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2019

396,736,506

$

396,737

$

81,222,726

$

(89,957,946)

$

(8,338,483)

 

The accompanying notes are an integral part of these consolidated financial statements.


F-4


 

 

ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS

 

 

 

For the Year Ended

 

For the Year Ended

 

 

December 31,

 

December 31,

 

 

2018

 

2019

Cash Flows from Operating Activities:

 

 

 

 

Net Loss

$

(14,635,367)

$

(11,510,166)

Adjustments to reconcile Net Loss to net cash used in operating activities:

 

 

 

 

Stocks and warrants issued for services rendered

 

822,001

 

759,378

Issuance of warrants and options for services – related party

 

187,247

 

2,653,243

Warrants issued for Directors’ Fees

 

384,065

 

192,614

Stocks and warrants issued for financing costs

 

310,894

 

165,432

Amortization of debt issuance costs

 

5,093,001

 

1,187,817

Amortization of bond discount

 

903,317

 

374,608

Changes in assets and liabilities:

 

 

 

 

(Increase) in prepaid expenses

 

(7,473)

 

(666)

Increase (Decrease) in accounts payable

 

(119,285)

 

950,002

(Decrease) in due to related party

 

(43,405)

 

-

Increase in accrued liabilities

 

2,098,419

 

1,520,441

Net Cash (Used) in Operating Activities

 

(5,006,586)

 

(3,707,297)

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

Net Cash (Used) in Investing Activities

 

-

 

-

 

 

 

 

 

Cash Flow from Financing Activities:

 

 

 

 

Proceeds from (payments of) loans payable, related parties

 

(217,614)

 

32,500

Debt Issuance Costs

 

(106,658)

 

-

Proceeds from issuance of 11% convertible debentures

 

1,968,801

 

-

Proceeds from exercise of common stock warrants

 

-

 

982,017

Proceeds from sales of common stock

 

3,433,813

 

2,650,000

Net Cash Provided by Financing Activities

 

5,078,342

 

3,664,517

 

Increase (Decrease) in Cash

 

71,756

 

(42,780)

Cash at Beginning of Period

 

317,135

 

388,891

Cash at End of Period

$

388,891

$

346,111

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information:

 

 

 

 

Cash paid during the period for:

 

 

 

 

Interest

$

-

$

-

Income taxes

$

-

$

-

 

The accompanying notes are an integral part of these consolidated financial statements.


F-5


 

 

ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CASH FLOWS (Continued)

 

Supplemental Schedule of Non-Cash Investing and Financing Activities:

 

For the Year Ended December 31, 2019:

 

During the quarter ended March 31, 2019, $464,929 of Due to Related Party and Loans Payable – Related Party were converted at $.10 per share into 4,649,291 shares of the Company’s common stock.

 

During the quarter ended June 30, 2019, $12,080,298 of 11% Convertible Notes – Related Party, as well as $2,264,470 in related accrued interest were converted at $.10 per share into 143,447,677 shares of the Company’s common stock.

 

During the quarter ended September 30, 2019, $176,405 of Loan Payable, Related Parties and related accrued interest of $135,431 were converted at $.10 per share into 3,118,359 shares of the Company’s common stock.

 

During the quarter ended December 31, 2019, $2,180,000 of 11% Convertible Notes – Related Party, as well as $749,583 in related accrued interest were converted at $.10 per share into 29,295,827 shares of the Company’s common stock.

 

During the quarter ended December 31, 2019, a principal shareholder and related party assigned warrants to purchase 8,550,000 shares of the Company’s Common Stock to third party investors, such warrants were exercised in the fourth quarter of 2019 at $.10 per share resulting in the issuance of 8,550,000 shares of common stock for gross proceeds of $855,000.  The Company considered the warrants to be contributed capital from a majority shareholder and recorded equity related finance charges. The warrants were valued at $820,432 using the Black Scholes pricing model relying on the following assumptions: volatilities ranging from 123.49% to 150.39%; annual rate of dividends 0%; discount rates ranging from 1.58% to 2.55%.

 

For the Year Ended December 31, 2018:

 

During the quarter ended March 31, 2018, the Company recorded $43,520 of discounts on the issuance of $500,000 of 11% convertible debentures.

 

During the quarter ended June 30, 2018, the Company recorded $576,396 of discounts on the issuance of $1,000,000 of 11% convertible debentures.

 

During the quarter ended June 30, 2018, $30,000 of 11% Convertible Notes – Related Party as well as $9,231 in related accrued interest were converted at $.10 per share into 392,310 shares of the Company’s common stock.

 

During the quarter ended June 30, 2018, warrants to purchase 30,000,000 shares of the Company’s common stock at $.10 valued at $3,592,949 were issued. Of the $3,592,949 in costs, $2,039,448, representing the amount attributable to the sale of common stock, were recorded as a reduction to Additional Paid in Capital and $1,553,501, representing the amount attributable to the issuance of 11% convertible debentures, were recorded as Debt Issuance Costs.

 

During the quarter ended September 30, 2018, the Company recorded $134,499 of discounts on the issuance of $330,000 of 11% convertible debentures.

 

During the quarter ended September 30, 2018, $300,000 of 11% Convertible Notes as well as $64,280 in related accrued interest were converted at $.10 per share into 3,642,800 shares of the Company’s common stock.

 

During the quarter ended December 31, 2018, warrants to purchase 25,000,000 shares of the Company’s common stock at $.10 valued at $3,377,387 were issued. Of the $3, 377,387 in costs, $2,585,725, representing the amount attributable to the sale of common stock, were recorded as a reduction to Additional Paid in Capital and $791,662, representing the amount attributable to the issuance of 11% convertible debentures, were recorded as Debt Issuance Costs.

 

During the quarter ended December 31, 2018, the Company recorded $65,439 of discounts on the issuance of $138,801 of 11% convertible debentures.

 

The accompanying notes are an integral part of these consolidated financial statements.


F-6


 

 

ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – DESCRIPTION OF BUSINESS

 

The business model of ZIVO Bioscience, Inc. and Subsidiaries (Health Enhancement Corporation, HEPI Pharmaceuticals, Inc., Wellmetrix, LLC (fka WellMetris, LLC), and Zivo Biologic, Inc., (collectively the “Company”) is as follows: 1) 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, and 2) developing, manufacturing, marketing, and selling tests that the Company believes will allow people to optimize their health and identify future health risks.

 

NOTE 2 – BASIS OF PRESENTATION

 

Going Concern

 

The Company had a net loss of $11,510,166 and $14,635,367 during the years ended December 31, 2019 and 2018, respectively.

 

In addition, the Company had a working capital deficiency of $8,338,483 and a stockholders’ deficiency of $8,338,483 at December 31, 2019. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

There can be no assurance that sufficient funds required during the next year or thereafter will be generated from operations or that funds will be available from external sources such as debt or equity financings or other potential sources. The lack of additional capital resulting from the inability to generate cash flow from operations or to raise capital from external sources would force the Company to substantially curtail or cease operations and would, therefore, have a material adverse effect on its business. Furthermore, there can be no assurance that any such required funds, if available, will be available on attractive terms or that they will not have a significant dilutive effect on the Company’s existing shareholders.

 

The accompanying consolidated financial statements do not include any adjustments related to the recoverability or classification of asset- carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.

 

The Company is attempting to address its lack of liquidity by raising additional funds, either in the form of debt or equity or some combination thereof. There can be no assurances that the Company will be able to raise the additional funds it requires.

 

During the year ended December 31, 2019, the Company received proceeds of $2,650,000 from the issuance of Common Stock, $982,017 from the exercise of Common Stock Warrants and $32,500 in proceeds from loans payable – related party.

 

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, and Zivo Biologic, 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.

 


F-7


 

 

ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

Cash and Cash Equivalents

 

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 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, 2019, 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.

 

Debt Issuance Costs

 

The Company follows authoritative guidance for accounting for financing costs (as amended) as it relates to convertible debt issuance cost. These costs are deferred and amortized over the term of the debt period or until redemption of the convertible debentures. Debt Issuance Costs are reported on the balance sheet as a direct deduction from the face amount of the related notes. Amortization of debt issuance costs amounted to $1,187,817 and $5,093,001 and are included in Interest Expense and Interest Expense – Related Parties on the Consolidated Statements of Operations for the years ended December 31, 2019 and 2018, respectively. Unamortized Debt Issuance Costs in the amounts of $-0- and $1,187,817 are netted against Convertible Notes Payable on the Consolidated Balance Sheets presented in these financial statements as of December 31, 2019 and 2018, respectively.

 

Revenue Recognition

 

We will recognize net product revenue when the earnings process is complete and the risks and rewards of product ownership have transferred to our customers, as evidenced by the existence of an agreement, delivery having occurred, pricing being deemed fixed, and collection being considered probable. We will record pricing allowances, including discounts based on contractual arrangements with customers, when we recognize revenue as a reduction to both accounts receivable and net revenue.

 

For year ended December 31, 2019 and 2018, the Company had no revenue.

 

Shipping and Handling Costs

 

Shipping and handling costs are expensed as incurred. For the years ended December 31, 2019 and 2018 no shipping and handling costs were incurred.

 

Research and Development

 

Research and development costs are expensed as incurred. The majority of the Company’s research and development costs consist of clinical study expenses. These consist of fees, charges, and related expenses incurred in the conduct of clinical studies conducted with Company products by independent outside contractors. External clinical studies expenses were $2,307,033 and $2,814,991 for the years ended December 31, 2019 and 2018, respectively.

 

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.


F-8


 

ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

The tax effects of temporary differences that gave rise to the deferred tax assets and deferred tax liabilities at December 31, 2019 and 2018 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.

 

We have adjusted Deferred Tax Assets and Liabilities in accordance with the December 22, 2017 enactment of the U.S. Tax Cuts and Jobs Act. (See Note 11 – Income Taxes).

 

Stock Based Compensation

 

We account 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.

 

During 2019 and 2018, options and warrants were granted to employees, directors and consultants of the Company. As a result of these grants, the Company recorded compensation expense of $3,605,235 and $1,393,313 during the years ended December 31, 2019 and 2018 respectively.

 

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,

 

 

2019

 

2018

Expected volatility

150.34% to 186.77%

 

176.10% to 180.13%

Expected dividends

0%

0%

Expected term

5 to 10 years

5 years

Risk free rate

1.58% to 2.55%

2.65% to 2.96%

 

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. Because the Company’s employee options and warrants have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion the existing models may not necessarily provide a reliable single measure of the fair value of the warrants.

 

Income (Loss) Per Share

 

Basic loss per share is computed by dividing the Company’s net loss by the weighted average number of common shares 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, 2019, consisted of 73,871,688 common shares from convertible debentures and related accrued interest and 223,204,339 common shares from outstanding options and warrants. Potentially dilutive securities as of December 31, 2018, consisted of 232,333,598 common shares from convertible debentures and related accrued interest and 192,148,956 common shares from outstanding options and warrants. For 2019 and 2018, diluted and basic weighted average shares were the same, as potentially dilutive shares are anti-dilutive.

 

Advertising Costs

 

Advertising costs are charged to operations when incurred. There were no Advertising Costs during the years 2019 and 2018.


F-9


 

 

ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

 

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 Federal Deposit Insurance Corporation (“FDIC”) limit of $250,000 at times during the year.

 

Reclassifications

 

Certain items in these consolidated financial statements have been reclassified to conform to the current period presentation.

 

Recently Enacted Accounting Standards

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), “Revenue from Contracts with Customers.” ASU 2014-09 superseded the revenue recognition requirements in “Revenue Recognition (Topic 605),” and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflect the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period. Historically the Company has had no revenues.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, to require lessees to recognize all leases, with limited exceptions, on the balance sheet, while recognition on the statement of operations will remain similar to current lease accounting. The ASU also eliminates real estate-specific provisions and modifies certain aspects of lessor accounting. Subsequently, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, ASU No. 2018-11, Targeted Improvements, and ASU No. 2018-20, Narrow-Scope Improvements for Lessors, to clarify and amend the guidance in ASU No. 2016-02.

 

The Company has adopted both of the ASUs on January 1, 2019. Prior comparative periods were not required to be restated and the ASUs have not had an impact on the Company’s consolidated financial statements.

 

NOTE 4 – PROPERTY AND EQUIPMENT

 

Property and equipment at December 31, 2019 and 2018 consist of the following:

 

 

 

December 31,

 

December 31,

 

 

2019

 

2018

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, 2019 and 2018, respectively.

 

NOTE 5 – DUE TO RELATED PARTY

 

As of January 1, 2018, the Company owed HEP Investments, LLC, a related party $475,834 pursuant to the terms an agreement with HEP Investments. The origin of the payable was a 5.4% cash finance fee for monies invested in the Company in the form of convertible debt (see Note 7). During the year ended December 31, 2018, as a result of various financings HEP Investments earned an additional $96,595 in finance fees. In the same year the Company paid $140,000 in cash for a balance due to related party on December 31, 2018 of $432,429.

 

During the year ended December 31, 2019 the company borrowed an additional $110,500 in working capital. The total of $542,929 was repaid with cash of $78,000 and $464,929 by issuing 4,649,291 shares of common stock at $.10 per share.


F-10


 

 

ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 5 – DUE TO RELATED PARTY (CONTINUED)

 

For the years ended December 31, 2019 and 2018, the Company incurred additional finance costs related to these transactions of $-0- and $96,595, respectively.

 

NOTE 6 – LOAN PAYABLE, RELATED PARTIES

 

Christopher Maggiore

 

On January 1, 2018 the Company owed Mr. Christopher Maggiore, a director and significant shareholder $176,405 as a result of cash advances for continuing operations. During the year ended December 31, 2018, Mr. Maggiore advanced an additional $500,000 to the Company, which he then converted to 5,000,000 units of the Company at $.10 per unit. Each unit consisted of share of common stock and warrants to purchase 20% of one share of common stock at an exercise price of $.10 per share (1,000,000 warrants). As of December 31, 2018, the Company owed Mr. Maggiore $176,405 in principal and accrued interest of $111,369.

 

During the year ended December 31, 2019, Mr. Maggiore converted the principal balance of $176,405 and accrued interest of $135,431 at $.10 per share into 3,118,359 units of the Company at $.10 per unit. Each unit consisted of one share of common stock and five-year warrants to purchase 20% of one share of common stock (623,672 warrants) at $.10 per share. As of December 31, 2019, there were no outstanding loans payable to Maggiore.

 

During the December 31, 2019 and 2018, interest expense on this indebtedness was $40,364 and $45,172, respectively.

 

HEP Investments, LLC

 

In addition to amounts owed to HEP Investments pursuant to Convertible Debt (see Note 7), as of January 1, 2018, the Company owed HEP Investments $217,614. During the year ended December 31, 2018, HEP Investments loaned the Company an additional $1,751,187. Pursuant to the terms of the agreement with HEP Investments, $1,968,801 of these loans were used to purchase 11% Convertible Secured Promissory Notes, leaving a remaining loan balance of $-0- as of December 31, 2019 and December 31, 2018.

 

NOTE 7 – CONVERTIBLE DEBT

 

HEP Investments, LLC – Related Party

 

On December 2, 2011, the Company and HEP Investments, LLC, a Michigan limited liability company (the “Lender”), entered into the following documents, effective as of December 1, 2011, as amended through May 16, 2018: (i) a Loan Agreement under which the Lender has agreed to advance up to $20,000,000 to the Company, subject to certain conditions, (ii) a Convertible Secured Promissory Note in the principal amount of $20,000,000 (“Note”) (of which $18,350,640 has been advanced as of December 31, 2018), (iii) a Security Agreement, under which the Company granted the Lender a security interest in all of its assets, (iv) issue the Lender warrants to purchase 1,666,667 shares of common stock at an exercise price of $.12 per share (including a cashless exercise provision) which expired September 30, 2016 (from the original December 1, 2011 agreement), (v) enter into a Registration Rights Agreement with respect to all the shares of common stock issuable to the Lender in connection with the Loan transaction, in each case subject to completion of funding of the full $2,000,000 called for by the Loan Agreement,. and (vi) an Intellectual Property security agreement under which the Company and its subsidiaries granted the Lender a security interest in all their respective intellectual properties, including patents, in order to secure their respective obligations to the Lender under the Note and related documents. In addition, the Company’s subsidiaries have guaranteed the Company’s obligations under the Note. The Company has also made certain agreements with the Lender which shall remain in effect as long as any amount is outstanding under the Loan. These agreements include an agreement not to make any change in the Company’s senior management, without the prior written consent of the Lender. Two representatives of the Lender will have the right to attend Board of Director meetings as non-voting observers.

 


F-11


 

 

ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 7 – CONVERTIBLE DEBT (CONTINUED)

 

On January 31, 2018, the Company and the Lender entered into the following documents, effective as of January 31, 2018: (i) Ninth Amendment to Loan Agreement under which the Lender has agreed to advance up to a total of $17,500,000 to the Company, subject to certain conditions, and (ii) a Tenth Amended and Restated Senior Secured Convertible Promissory Note. The Ninth Amendment to Loan Agreement amends and restates the Eighth Amendment to Loan Agreement, which was entered into with the Lender on March 1, 2017 and disclosed in the Company’s Form 8-K Current Report filed on March 6, 2017. The Tenth Amended and Restated Senior Secured Convertible Promissory Note extends the maturity date for all convertible debt due to HEP Investments to April 1, 2019, including the payment of any interest due and owing at that time. In consideration for extending the maturity date of the Loan to April 1, 2019 in accordance with the Tenth Amended and Restated Senior Convertible Promissory Note, the Company agreed to issue to the Lender warrants to purchase 3,250,000 shares of common stock at an exercise price of $.10 with a term of 5 years. The warrants were valued at $246,496 using the Black Scholes pricing model relying on the following assumptions: volatility 175.81%; annual rate of dividends 0%; discount rate 2.41%. The Company determined that the modification of these Notes was not a substantial modification in accordance with ASC 470-50, “Modifications and Extinguishments.”

 

On April 12, 2018, the Lender converted $30,000 of the debt and $9,231 of accrued interest into 392,310 shares of the Company’s common stock (at $.10 per share).

 

On April 30, 2018, the Board of Directors approved the issuance to the Lender of a warrant to purchase 50 million shares of common stock at an exercise price of $.10 for a term of five years on the basis of $4 million funding through a combination of sales of common stock and the issuances of 11% convertible notes (at a conversion price of $.10) to HEP Investments. This warrant is in addition to 10% warrant coverage (five-year term) provided to the Lender in connection with investments in convertible debt pursuant to existing agreements. A warrant for 25 million shares of common stock at an exercise price of $.10 for a term of five years was issued on June 6, 2018 as $2 million of the related $4 million funding was complete. A portion of the warrant has a cashless exercise provision. The related issued warrants were valued at $3,116,485 using the Black Scholes pricing model relying on the following assumptions: volatility 175.02%; annual rate of dividends 0%; discount rate 2.77%. The Company recorded $2,039,448 of these costs, which represents the amount attributable to the sale of common stock, as a reduction to additional paid-in-capital and $1,077,037 was recorded as a Debt Issuance Cost on the Company’s Balance Sheet as a direct deduction of 11% convertible notes payable.

 

On May 16, 2018, the Company and the Lender, entered into the following documents, effective as of May 16, 2018: (i) Tenth Amendment to Loan Agreement under which the Lender has agreed to advance up to a total of $20,000,000 to the Company, subject to certain conditions, and (ii) an Eleventh Amended and Restated Senior Secured Convertible Promissory Note. The Tenth Amendment to Loan Agreement amends and restates the Ninth Amendment to Loan Agreement, which was entered into with the Lender on January 31, 2018 and disclosed in the Company’s Form 8-K Current Report filed on May 18, 2018. The Eleventh Amended and Restated Senior Secured Convertible Promissory Note increased amount that the Lender can advance to $20,000,000. In consideration for increasing the advance amount to $20,000,000 in accordance with the Eleventh Amended and Restated Senior Convertible Promissory Note, the Company agreed to issue to the Lender warrants to purchase 5,000,000 shares of common stock at an exercise price of $.10 with a term of 5 years. The warrants were valued at $476,464 using the Black Scholes pricing model relying on the following assumptions: volatility 174.80%; annual rate of dividends 0%; discount rate 2.94%. The Company determined that the modification of these Notes was not a substantial modification in accordance with ASC 470-50, “Modifications and Extinguishments.”

 

On June 6, 2018 the Lender and Strome Mezzanine Fund LP and Strome Alpha Fund LP (“Participant”) entered into the First Amended and Restated Participation Agreement (amending the June 17, 2017 agreement) whereby the Participant agreed to fund a total of $691,187 (“the committed funding”), through the Lender’s 11% convertible note (at a conversion price of $.10). The Company also agreed to a “Right of First Refusal” (ROFR) with the Participant. The Company would give the Participant the ROFR to invest funds into the Company on the same terms and conditions (“Right of Participation”) as negotiated by the Company with a third party, provided that the Right of Participation must be exercised within 10 days. Certain exclusions apply relating to the committed funding from parties unrelated to the Participant. This ROFR terminates on the third (3) anniversary of the Agreement. The Participant has an agreement with the Lender and the Company, that upon the funding of the Participant’s full $2 million ($1,308,813 though the purchase of common stock from the Company and $691,187 through the purchase of HEP Investments’ 11% convertible note (at a conversion price of $.10)), a warrant for 25 million shares of common stock at an exercise price of $.10 for a term of five years would be allocated from the warrant for 50 million shares of common stock authorized in the April 30, 2018 Board of Directors Resolution. The total funding of $2 million was achieved on June 6, 2018.

 


F-12


 

ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 7 – CONVERTIBLE DEBT (CONTINUED)

 

During the year ended December 31, 2018, the Company recorded debt discounts, related to $1,968,801 of Notes in the amount of $819,854 to reflect the relative fair value of the related warrants pursuant to “FASB ASC 470-20-30 – Debt with Conversion and Other Options: Beneficial Conversion Features” (ASC 470-20) as a reduction to the carrying amount of the convertible debt and an addition to additional paid-in capital. In accordance with ASC 470-20, the Company valued the beneficial conversion feature and recorded the amount of $613,758 as a reduction to the carrying amount of the convertible debt and as an addition to paid-in capital. Additionally, the relative fair value of the warrants was calculated and recorded at $206,096 as a further reduction to the carrying amount of the convertible debt and an addition to additional paid-in capital. The Company is amortizing the debt discount over the term of the debt. The relative fair value of the debt discounts of $206,096 were calculated using the Black Scholes pricing model relying on the following assumptions: volatility 174.59% to 180.14%; annual rate of dividends 0%; discount rate 2.09% to 3.04% The Company is amortizing the debt discount over the term of the debt. Amortization of the debt discounts were $903,317 for the year ended December 31, 2018.

 

The Company amortized the debt discount over the term of the debt. Amortization of the debt discounts were $374,608 and $903,317 for the years ended December 31, 2019 and December 31, 2018, respectively

 

On March 29, 2019, the Company and the Lender entered into a “Debt Extension Agreement” whereby the Lender extended the maturity date of the Note to June 30, 2019. The Lender received no additional consideration related to this debt extension. The Company determined that the modification of these Notes was not a substantial modification in accordance with ASC 470-50, “Modifications and Extinguishments.”

 

In October 2019, the Company issued to the Lender a warrant to purchase 2,000,000 shares of common stock at an exercise price of $.10 with a term of 5 years. The warrants were valued at $165,432 using the Black Scholes pricing model relying on the following assumptions: volatility 156.60%; annual rate of dividends 0%; discount rate 1.64%.

 

During the year ended December 31, 2019, the Lender converted $14,260,298 of the debt and $3,014,052 of accrued interest into 172,743,505 shares of the Company’s common stock (at $.10 per share).

 

As of December 31, 2019, the total shares of common stock, if the Lender converted the complete $4,090,342 convertible debt, including related accrued interest of $1,522,071, would be 56,166,406 shares, not including any future interest charges which may be converted into common stock.

 

As of December 31, 2019, the Company has not made the required annual interest payments and principal payments to the Lender. As the Company has not received a notice of default, pursuant to the terms of the Notes, the Company does not currently consider itself in default. Were the Company to default, additional interest would accrue at a rate of 16% per annum.

 

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 agreement provided that Paulson could provide up to $2 million in financings through “accredited investors” (as defined by Regulation D of the Securities Act of 1933, as amended). As of December 31, 2016, the Company received funding of $1,250,000 through seven (7) individual loans (the “New Lenders”). Each loan included a (i) a Loan Agreement of the individual loan, (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 Lender a security interest in all of its assets and (iv) an Intercreditor Agreement with HEP Investments, LLC (HEP) whereby HEP and the New Lenders agree to participate in all collateral on a pari passu basis. The loans have a two-year term and mature in 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, $.10 warrants equal to 15% of the number of common shares for which the debt is convertible into at $.10 per share.

 

On September 24, 2018, one New Lender converted $300,000 of the debt and $64,280 of accrued interest into 3,642,800 shares of the Company’s common stock (at $.10 per share). On May 8, 2019, one of the New Lenders bought the note of another New Lender.

 

The New Lenders Notes are convertible into the Company’s restricted common stock at $.10 per share and bear interest at the rate of 11% per annum. The Company is in discussions through intermediaries with the remaining three (3) New Lenders to determine their intentions.


F-13


 

 

ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 7 – CONVERTIBLE DEBT (CONTINUED)

 

The New Lenders Notes must be repaid as follows: accrued interest must be paid on the first and second anniversary of the Note and unpaid principal not previously converted into common stock must be repaid on the second anniversary of the Note. As of December 31, 2019, the Company has not made the required annual interest payments to five (5) New Lenders and is in default.

 

On January 15, 2020, two New Lenders converted $100,000 of the debt and $36,225 of accrued interest into 1,362,246 shares of the Company’s common stock (at $.10 per share) (see Note 12 – Subsequent Events). As the Company has not received notices of default, pursuant to the terms of the Notes, we do not currently consider ourselves in default to the three (3) remaining investors. Were the Company to be considered in default, additional interest would accrue at a rate of 16% per annum.

 

Other Debt

 

In September 2014, the Lender of the 1% convertible debentures agreed to rolling 30-day extensions until notice is given to the Company to the contrary. As of December 31, 2019, that agreement is still in place. The Company determined that the modification of these Notes is not a substantial modification in accordance with ASC 470-50, “Modifications and Extinguishments.”

 

Convertible debt consists of the following:

 

 

 

December 31,

 

December 31,

 

 

2019

 

2018

1% Convertible notes payable, due January 2020

$

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 $1,562,425, respectively, due June 30, 2019 (as of December 31, 2019 no notice of default has been received)

 

4,090,342

 

16,788,215

11% Convertible note payable – New Lenders; placed by Paulson, due at various dates ranging from September 2018 to October 2019 (as of December 31, 2019 no notice of default has been received)

 

950,000

 

950,000

 

 

5,280,342

 

17,978,215

Less: Current portion

 

5,280,342

 

17,978,215

Long term portion

$

-

$

-

 

As of December 31, 2019, there were no unamortized debt discounts or debt issuance costs included in Notes Payable. As of December 31, 2018, the reductions to Notes Payable of $1,562,425 consisted of, unamortized discounts of $374,608 and debt issuance costs of $1,187,817.

 

Amortization of debt discounts was $374,608 and $903,317 for the year ended December 31, 2019 and 2018, respectively.

 

NOTE 8 - STOCKHOLDERS’ DEFICIENCY

 

Recapitalization

 

On May 1, 2019, the shareholders of the Company voted for approval and adoption of an amendment to the Articles of Incorporation, as amended, to increase the number of authorized shares of common stock from 700,000,000 shares to 1,200,000,000 shares. The Certificate of Amendment to the Articles of Incorporation has been filed with the Secretary of State of Nevada.

 

Board of Directors fees

 

On September 28, 2018, the board of directors granted to each of its directors warrants to purchase 500,000 shares of common stock at an exercise price of $.14 per share. The warrants have a term of five years and vest immediately. The warrants were valued at $384,065 using the Black Scholes pricing model relying on the following assumptions: volatility 178.54%; annual rate of dividends 0%; discount rate 2.96%. In addition, each director is entitled to receive $10,000 for each annual term served.


F-14


 

 

ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 8 - STOCKHOLDERS’ DEFICIENCY (CONTINUED)

 

On September 26, 2019, the board of directors granted to each of its directors warrants to purchase 500,000 shares of common stock at an exercise price of $.08 per share. The warrants have a term of five years and vest immediately. The warrants were valued at $192,614 using the Black Scholes pricing model relying on the following assumptions: volatility 185.11%; annual rate of dividends 0%; discount rate 1.66%. In addition, each director is entitled to receive $10,000 for each annual term served.

 

The Company recorded directors’ fees of $232,614 and $424,065 for the years ended December 31, 2019 and 2018, respectively, representing the cash fees and the value of the vested warrants described above.

 

Stock Based Compensation

 

During the year ended December 31, 2018, pursuant to Board of Directors authorization, the Company issued warrants to purchase 1,000,000 shares of common stock at an exercise price of $.11 with a term of 5 years to a consultant (Executive Director of Asia Operations – see Note 10 – Related Party Transactions). The warrants were valued at $163,798 using the Black Scholes pricing model relying on the following assumptions: volatility 176.10%; annual rate of dividends 0%; discount rate 2.77%. Further, the Company issued warrants to purchase 5,334,081 shares of common stock at an exercise price of $.12 with a term of 5 years to an investment banker (see Note 8 – Stockholders’ Deficiency: Investment Banking, M&A and Corporate Advisory Agreement). The warrants were valued at $619,511 using the Black Scholes pricing model relying on the following assumptions: volatility 177.09% to 180.13%; annual rate of dividends 0%; discount rate 2.65% to 2.69%.

 

In May 2019, in connection with a Supply Consulting Agreement, the Company issued a warrant to purchase 5,000,000 shares of common stock at an exercise price of $.08 for a term of five years. 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% (See Note 9 – Commitments and Contingencies: Supply Chain Consulting Agreement). In October 2019, 2,000,000 of those warrants were returned to the Company resulting in a reduction in the value of $211,609. In August 2019, the Company issued warrants to purchase 3,000,000 shares of common stock at an exercise price of $.10 with a term of 5 years pursuant to an agreement with a financial consultant. The warrants were valued at $231,032 using the Black Scholes pricing model relying on the following assumptions: volatility 184.75%; annual rate of dividends 0%; discount rate 1.58%. In October 2019, the Company issued a warrant to purchase 1,000,000 shares of common stock at an exercise price of $.10 with a term of 5 years pursuant to an agreement with a development consultant. The warrants were valued at $129,762 using the Black Scholes pricing model relying on the following assumptions: volatility 150.34%; annual rate of dividends 0%; discount rate 2.55%. In December 2019, the Company issued warrants to purchase 400,000 shares of common stock at an exercise price of $.18 with a term of 5 years pursuant to an agreement with a financial consultant. The warrants were valued at $61,424 using the Black Scholes pricing model relying on the following assumptions: volatility 184.10%; annual rate of dividends 0%; discount rate 1.68%.

 

Stock Issuances

 

During the year ended December 31, 2018, in connection with the issuance of $1,968,800 in principal of 11% Convertible Debenture the Company issued to HEP Investments 552,672 shares of common stock valued at $64,397 and various five-year warrants to purchase 1,543,801 shares of common stock at an exercise price of $.10 per share (see Note 7 – Convertible Debt). In addition, the Company received proceeds of $3,433,813 from the issuance of 34,338,129 shares of common stock at $.10 per share.

 

During the year ended December 31, 2019, the Company issued 26,500,000 shares of its common stock at $.10 per share, for proceeds of $2,650,000.  Of this amount, 20,500,000 shares ($2,050,000 of proceeds) were issued to private investors and 6,450,000 shares ($645,000 of proceeds) were issued to HEP Investments, a related party. The Company also issued to HEP Investments warrants to purchase 1,060,000 shares of common stock at an exercise price of $.10 with a term of 5 years in connection with the issuances. Investors exercised 9,688,917 common stock warrants, at an average price of $.10 per share, for proceeds of $982,017.  HEP Investments, a related party, exercised 618,750 of those warrants at an average of $.08 per share, representing $50,000 of the proceeds.


F-15


 

 

ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 8 - STOCKHOLDERS’ DEFICIENCY (CONTINUED)

 

Stock Warrants Exercised

 

During the year ended December 31, 2019, HEP Investments, a principal shareholder and related party, assigned warrants to purchase 8,550,000 shares of the Company’s Common Stock to third party investors. These warrants were exercised in the fourth quarter at $.10 per share resulting in a capital raise of $855,000. Due to nature of this transaction, the Company considered the warrants to be contributed capital from a majority shareholder and recorded equity related finance charges. The warrants were valued at $820,432 using the Black Scholes pricing model relying on the following assumptions: volatilities ranging from 123.49% to 150.39%; annual rate of dividends 0%; discount rates ranging from 1.58% to 2.55%.

 

2019 Omnibus Long-Term Incentive Plan

 

On November 29, 2019, after approval from the Board, the Company entered into and adopted the 2019 Omnibus Long-Term Incentive Plan (the “2019 Incentive Plan”) for the purpose of enhancing the Registrant’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 2019 Incentive Plan will be 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 2019 Incentive Plan. Pursuant to the 2019 Incentive Plan, the Company may grant options, share appreciation rights, restricted shares, restricted share units, unrestricted shares and dividend equivalent rights. The Plan has a duration of 10 years.

 

Subject to adjustment as described in the 2019 Incentive Plan, the aggregate number of common shares (“Shares”) available for issuance under the 2019 Incentive Plan is One Hundred Two Million (102,000,000) Shares. The exercise price of each Share subject to an Option (as defined in the 2019 Incentive Plan) shall be at least the Fair Market Value (as defined in the 2019 Incentive Plan) (except in the case of a more than 10% shareholder of the Company, in which case the price should not be less than 110% of the Fair Market Value) on the date of the grant of a Share and shall have a term of no more than ten years. As of December 31, 2019, 29 million Options have been issued to the Chief Executive Officer (see Note 9 – Commitments and Contingencies: Employment Agreement).

 

Common Stock Options

 

A summary of the status of the Company’s Options related to the 2019 Incentive Plan is presented below:

 

 

 

December 31, 2019

 

 

Number of

Warrants

 

Weighted

Average Exercise

Price

Outstanding, beginning of year

 

-

$

-

Issued

 

29,000,000

 

0.10

Outstanding, end of period

 

29,000,000

$

0.10

 


F-16


 

 

ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 8 - STOCKHOLDERS’ DEFICIENCY (CONTINUED)

 

Options outstanding and exercisable by price range as of December 31, 2019 were as follows:

 

 

Outstanding Options

 

Exercisable Options

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

Weighted

 

 

 

 

 

Remaining

 

 

 

 

 

Average

 

Range of

 

Number

 

Contractual Life in Years

 

Exercise Price

 

Number

 

Exercise Price

 

 

 

 

 

 

 

 

 

 

 

 

$

0.10

 

28,000,000

 

9.88

$

0.10

 

28,000,000

$

0.10

 

0.14

 

1,000,000

 

9.94

 

0.14

 

1,000,000

 

0.14

 

 

 

29,000,000

 

9.88

 

 

 

29,000,000

$

0.10

 

Executive Compensation

 

As compensation for serving as Chief Financial Officer, the Company, quarterly, issues warrants to purchase 50,000 shares of common stock to Philip M. Rice at the prevailing market price with a term of 5 years, provided that the preceding quarterly and annual filings were submitted in a timely and compliant manner, at which time such warrants would vest.

 

On February 21, 2018, the Company issued the CFO warrants to purchase 50,000 shares of common stock at $.11. The warrants were valued at $5,255 using the Black Scholes pricing model relying on the following assumptions: volatility 177.09%; annual rate of dividends 0%; discount rate 2.69%. On April 23, 2018, the Company issued the CFO warrants to purchase 50,000 shares of common stock at $.10. The warrants were valued at $4,762 using the Black Scholes pricing model relying on the following assumptions: volatility 174.51%; annual rate of dividends 0%; discount rate 2.83%. On August 14, 2018, the Company issued the CFO warrants to purchase 50,000 shares of common stock at $.12. The warrants were valued at $5,737 using the Black Scholes pricing model relying on the following assumptions: volatility 177.70%; annual rate of dividends 0%; discount rate 2.77%. On November 14, 2018, the Company issued the CFO warrants to purchase 50,000 shares of common stock at $.14. The warrants were valued at $7,695 using the Black Scholes pricing model relying on the following assumptions: volatility 180.26%; annual rate of dividends 0%; discount rate 2.95%.

 

During the year ended December 31, 2018, the Company issued the following warrants pursuant to offers of employment with three employees: 1) to purchase 500,000 shares of common stock at an exercise price of $.10 with a term of 5 years (these warrants were valued at $33,045 using the Black Scholes pricing model relying on the following assumptions: volatility 175.59%; annual rate of dividends 0%; discount rate 2.36%), 2) to purchase 500,000 shares of common stock at an exercise price of $.11 with a term of 5 years (these warrants were valued at $81,897 using the Black Scholes pricing model relying on the following assumptions: volatility 176.04%; annual rate of dividends 0%; discount rate 2.81%); and 3) to purchase 1,000,000 shares of common stock at an exercise price of $.11 with a term of 5 years (these warrants were valued at $163,798 using the Black Scholes pricing model relying on the following assumptions: volatility 176.10%; annual rate of dividends 0%; discount rate 2.77%). These warrants will vest one year from issuance (June 19, 2019 ) (the Company has recorded $19,745 and $ 87,508 as stock-based compensation during year ended December 31, 2019 and 2018, respectively).

 

On February 12, 2019, the Company issued the CFO warrants to purchase 50,000 shares of common stock at $.10. The warrants were valued at $4,766 using the Black Scholes pricing model relying on the following assumptions: volatility 180.46%; annual rate of dividends 0%; discount rate 2.53%. On May 13, 2019, the Company issued the CFO warrants to purchase 50,000 shares of common stock at $.10. The warrants were valued at $4,800 using the Black Scholes pricing model relying on the following assumptions: volatility 181.72%; annual rate of dividends 0%; discount rate 2.18%. On August 7, 2019, the Company issued the CFO warrants to purchase 50,000 shares of common stock at $.08. The warrants were valued at $3,850 using the Black Scholes pricing model relying on the following assumptions: volatility 184.57%; annual rate of dividends 0%; discount rate 1.59%. On October 28, 2019, the Company issued the CFO warrants to purchase 50,000 shares of common stock at $.08. The warrants were valued at $3,859 using the Black Scholes pricing model relying on the following assumptions: volatility 186.77%; annual rate of dividends 0%; discount rate 1.66%.


F-17


 

 

ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 8 - STOCKHOLDERS’ DEFICIENCY (CONTINUED)

 

Common Stock Warrants

 

A summary of the status of the Company’s warrants is presented below.

 

 

 

December 31, 2019

 

December 31, 2018

 

 

Number of

Warrants

 

Weighted

Average

Exercise

Price

 

Number of

Warrants

 

Weighted

Average

Exercise

Price

 

 

 

 

 

Outstanding, beginning of year

 

192,148,956

$

0.09

 

119,301,754

$

0.09

Issued

 

12,783,672

 

0.10

 

74,377,862

 

0.10

Exercised

 

(9,688,917)

 

0.10

 

-

 

-

Cancelled

 

(345,205)

 

0.11

 

-

 

-

Expired

 

(694,167)

 

0.17

 

(1,530,660)

 

0.26

 

 

 

 

 

 

 

 

 

Outstanding, end of period

 

194,204,339

$

0.09

 

192,148,956

$

0.09

 

Warrants outstanding and exercisable by price range as of December 31, 2019 were as follows:

 

 

Outstanding Warrants

 

Exercisable Warrants

 

Range of

 

Number

 

Average

Weighted

Remaining

Contractual Life

in Years

 

Exercise

Price

 

Number

 

Weighted

Average

Exercise Price

 

 

 

 

 

 

 

 

 

 

 

 

$

0.05

 

1,250,000

 

1.70

$

0.05

 

1,250,000

$

0.05

 

0.06

 

16,050,000

 

2.59

 

0.06

 

16,050,000

 

0.06

 

0.07

 

3,000,000

 

2.70

 

0.07

 

3,000,000

 

0.07

 

0.08

 

36,905,977

 

2.18

 

0.08

 

36,905,977

 

0.08

 

0.09

 

704,833

 

2.53

 

0.09

 

704,833

 

0.09

 

0.10

 

131,038,734

 

4.13

 

0.10

 

131,038,734

 

0.10

 

0.11

 

2,204,795

 

4.42

 

0.11

 

2,204,795

 

0.11

 

0.12

 

100,000

 

3.12

 

0.12

 

100,000

 

0.12

 

0.14

 

2,550,000

 

4.67

 

0.14

 

2,550,000

 

0.14

 

0.18

 

400,000

 

0.37

 

0.18

 

400,000

 

0.18

 

 

 

194,204,339

 

4.34

 

 

 

194,204,339

$

0.09


F-18


 

 

ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 9- COMMITMENTS AND CONTINGENCIES

 

Employment Agreement

 

On November 29, 2019, the Company entered into an amended and restated employment agreement with Andrew Dahl, Chief Executive Officer of the Company (“Mr. Dahl’s Employment Agreement” or the “Agreement”). Under the terms of Mr. Dahl’s Employment Agreement, Mr. Dahl will serve as chief executive officer of the Company for three years, with successive automatic renewals for one year terms, unless either party terminates the Agreement on at least sixty days’ notice prior to the expiration of the then current term of Mr. Dahl’s Employment Agreement. Mr. Dahl will receive an annual base salary, commencing on June 1, 2019, of $440,000 (“Base Salary”), of which $7,500 per month will be deferred until either of the following events occur: (i) within five (5) 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 of directors of the Company (the “Board”) including funding at closing on such terms of at least $10 million; or (ii) within twelve (12) months after the Effective Date that the Company receives revenue of at least $10 million. The Company has accrued $52,500 of the deferred salary as of December 31, 2019, reflected in accrued expenses on the Balance Sheet. The Base Salary shall be subject to annual review and increase (but not decrease) by the Board during the Employment Term with minimum annual increases of 4% over the previous year’s Base Salary.

 

Mr. Dahl is entitled to a Revenue Bonus (as defined in the Agreement) equal to 2% of the Company’s revenue contribution in accordance with a formula as detailed in the Agreement. No Revenue Bonus is payable in any year where there is an Operating Net Loss (as defined in the Agreement). For the 2020 fiscal year (January 1, 2020 to December 31, 2020) (“Year One”), the Company shall pay Mr. Dahl a bonus equal to 50% of his Base Salary if the Company achieves revenues for Year One which are (w) at least $500,000; and (x) greater than that for the 12-month period immediately preceding Year One. In addition, for 2021 fiscal year (January 1, 2021 through December 31, 2021) (“Year Two”), the Company shall pay Mr. Dahl a bonus equal to 50% of the Base Salary if the Company achieves revenues for Year Two which are (y) at least $500,000; and (z) greater than that for Year One.

 

Mr. Dahl was awarded a non-qualified option to purchase 28 million shares of the Company’s common stock at a price equal to the greater of $0.10 per share and the Fair Market Value (as defined in the 2019 Omnibus Long-term Incentive Plan).

 

Mr. Dahl will be entitled to non-qualified performance-based options having an exercise price equal to the greater of $.10 per share and the Fair Market Value (as defined in the 2019 Omnibus Long-term Incentive Plan), upon the attainment of specified milestones as follows: (i) Non-qualified option to purchase 1,000,000 common shares upon identification of bioactive agents in the Company product and filing of a patent with respect thereto; (ii) Non-qualified option to purchase 1,500,000 common shares upon entering into a contract under which the Company receives at least $500,000 in cash payments; (iii) Non-qualified option to purchase 1,500,000 common shares upon the Company entering into a co-development agreement with a research company to develop medicinal or pharmaceutical applications (where the partner provides at least $2M in cash or in-kind outlays); (iv) Non-qualified option to purchase 1,500,000 common shares upon the Company entering into a co-development agreement for nutraceutical or dietary supplement applications (where the partner provides at least $2M in cash or in-kind outlays); and (v) Non-qualified option to purchase 1,500,000 common shares upon the Registrant entering into a pharmaceutical development agreement.

 

As it relates to the Company‘s wholly-owned subsidiary, Wellmetrix, LLC (“Wellmetrix”), if and when at least $2 million in equity capital is raised from a third party and invested in Wellmetrix in an arms-length transaction, Mr. Dahl shall be granted a warrant to purchase an equity interest in Wellmetrix that is equal to the equity interest in Wellmetrix owned by the Company at the time of the first tranche of any such capital raise (the “Wellmetrix Warrant”). The Wellmetrix Warrant shall be fully vested as of the date it is granted and shall expire on the tenth (10th) anniversary of the grant date. Once granted, the Wellmetrix Warrant may be exercised from time to time in whole or in part, with Mr. Dahl retaining any unexercised portion. The exercise price for the Wellmetrix Warrant shall be equal to the fair market value of the interest in Wellmetrix implied by the pricing of the first tranche of any such capital raise.

 

Mr. Dahl’s Employment Agreement provides that if a Change of Control (as defined in the Agreement) occurs and Mr. Dahl is not offered substantially equivalent employment with the successor corporation or Mr. Dahl’s employment is terminated without Cause (as defined in the Agreement) during the three month period prior to the Change of Control or the 24-month period following the Change of Control, 100% of Mr. Dahl’s unvested options will be fully. Mr. Dahl’s Employment Agreement also provides for severance payments of, amongst other things, 300% of base salary and 2x the amount of the Revenue Bonus in such event.


F-19


 

 

ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 9- COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

As of December 31, 2019, the milestone relating to the identification of bioactive agents in the Company product and the filing of a patent with respect thereto was met, thereby triggering the option to purchase 1,000,000 common shares. As per the Agreement, the Company issued a non-qualified option to purchase 1 million shares of the Company according to the 2019 Incentive Plan at an exercise price of $.14 with a term of 10 years (these options were valued at $138,806 using the Black Scholes pricing model relying on the following assumptions: volatility 164.37%; annual rate of dividends 0%; discount rate 1.84%).

 

The Company issued a non-qualified option to purchase 28 million shares of the Company according to the 2019 Incentive Plan at an exercise price of $.10 with a term of 10 years (these options were valued at $2,497,161 using the Black Scholes pricing model relying on the following assumptions: volatility 164.20%; annual rate of dividends 0%; discount rate 1.84%).

 

Investment Banking, M&A and Corporate Advisory Agreement

 

On February 21, 2018 the Company entered into a one-year agreement with an Investment Banking, Merger and Acquisition (M&A) and Corporate Advisory firm (“Firm”). Pursuant to the terms of the agreement, the Company issued a warrant to purchase 2,326,504 shares of common stock at an exercise price of $.10 for a term of five years. The warrants were valued at $245,040 using the Black Scholes pricing model relying on the following assumptions: volatility 177.09%; annual rate of dividends 0%; discount rate 2.69%. In addition to the contract fee, the Company could potentially be obligated to pay up to an 8% M&A transaction fee (as defined in the Agreement) plus a warrant to purchase shares of common stock equal to between 0.5% and 1.0%. As of December 31, 2018, the Company issued warrants to purchase 3,007,132 shares of common stock at an exercise price of $.13 with a term of 5 years to an investment banker. The warrants were valued at $374,511 using the Black Scholes pricing model relying on the following assumptions: volatility 180.13%; annual rate of dividends 0%; discount rate 2.65%. As a result of this issuance, any further potential obligation to pay a M&A transaction fee relating to warrants to purchase shares of common stock would be equal to 0.5% of the post financing fully shares outstanding at an exercise price equal to the valuation / share price of the financing (see Note 8 – Stockholders’ Deficiency).

 

On September 30, 2019, effective July 9, 2019, the Company entered into an agreement with a Financial Advisor. The Financial Advisor has been engaged in an exclusive arrangement 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 Financial Advisor, 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 6,000,000 shares of common stock at an exercise price of $.10 for a term of five years. As of December 31, 2019, in connection with this agreement, no successful funding transactions have taken place and no warrants have been issued.

 

Supply Chain Consulting Agreement

 

On February 27, 2019, the Company entered into a Supply Chain Consulting Agreement with a consultant (“Consultant”) (see Note 8 – Stockholders’ Deficiency). In May 2019, the Company issued a supplemental warrant to purchase 5,000,000 shares of common stock at an exercise price of $.08 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, 2,000,000 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 nineteen million (19,000,000) shares of the Company’s common stock at an exercise price of $0.10 per share. As of December 31, 2019, 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 1,000,000 shares of the Company’s common stock at an exercise price of $0.10 per share at its discretion. As of December 31, 2019, such warrant has not been issued.


F-20


 

 

ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 9- COMMITMENTS AND CONTINGENCIES (CONTINUED)

 

Legal Contingencies

 

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.

 

NOTE 10 - RELATED PARTY TRANSACTIONS

 

Due to Related Party

 

See Note 5 Due to Related Party for disclosure of payable to related Party.

 

Loan Payable – Related Party

 

See Note 6 Loan Payable – Related Parties for disclosure of loans payable to related Parties

 

Executive Compensation

 

See Note 8 – Stockholders’ Deficit for disclosure of warrants to purchase 1,000,000 shares of common stock at an exercise price of $.11 with a term of 5 years to the Executive Director of Asia Operations (a consultant). The Executive Director of Asia Operations is the spouse of the Chief Financial Officer. The Executive Director of Asia Operations is contracted on a month to month basis.

 

See Note 8 – Stockholder’ Deficiency for disclosure of compensation to the Chief Executive Officer and Chief Financial Officer.

 

Employment Agreement

 

See Note 9 – Commitments and Contingencies and Note 12 – Subsequent Event for disclosures of the Employment Agreements with the Chief Executive Officer and Chief Financial Officer.

 

NOTE 11 - INCOME TAXES

 

At December 31, 2018 the Company had available net-operating loss carry-forwards for Federal tax purposes of approximately $76,746,000, which may be applied against future taxable income, if any, at various dates from 2019 through 2039. Certain significant changes in ownership of the Company may restrict the future utilization of these tax loss carry-forwards.

 

At December 31, 2019 the Company had a deferred tax asset of approximately $20,721,000 representing the benefit of its net operating loss carry-forwards. The Company has not recognized the tax benefit because realization of the tax benefit is uncertain and thus a valuation allowance has been fully provided against the deferred tax asset. The difference between the Federal and State Statutory Rate of 27% and the Company’s effective tax rate of 0% is due to an increase in the valuation allowance of approximately $3,788,000 in 2019.

 

NOTE 12 – SUBSEQUENT EVENTS

 

LOAN PAYABLE, RELATED PARTIES

 

As of March 26, 2020, the Company received proceeds of $40,000 from Chris Maggiore and HEP Investments to be used as working capital.

 

CONVERTIBLE DEBT

 

Paulson Investment Company, LLC - Related Debt

 

On January 15, 2020, two New Lenders converted $100,000 of the debt and $36,225 of accrued interest into 1,362,246 shares of the Company’s common stock (at $.10 per share) (see Note 7 - Convertible Debt).

 


F-21


 

 

ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 12 – SUBSEQUENT EVENTS (CONTINUED)

 

STOCKHOLDERS’ DEFICIENCY and COMMITMENTS AND CONTINGENCIES

 

Stock Issuances

 

Through March 26, 2020, HEP Investments, a principal shareholder and related party, assigned warrants to purchase 4,100,000 shares of the Company’s Common Stock to third party investors. The Company received proceeds of $410,000 from the issuance of 4,100,000 shares of common stock from the exercise of those warrants.

 

Employment Agreement

 

On March 4, 2020, the Company entered into an employment letter with Philip Rice, Chief Financial Officer of the Company (“Agreement”). Under the terms of the Agreement, Mr. Rice will serve as Chief Financial Officer of the Company for one year, with successive automatic renewals for one year terms, unless either party terminates the Agreement on at least sixty days’ notice prior to the expiration of the then current term of the Agreement. Mr. Rice will receive an annual base salary, commencing on January 1, 2020, of $280,000 (“Base Salary”). The Base Salary shall increase to $300,000, when the following event occurs: within one (1) year after the Effective Date, the Company enters into a term sheet and receives the related financing to receive at least $15,000,000 in equity or other form of investment or debt (“Third Party Financing”) on terms satisfactory to the board of directors of the Company (the “Board”). On the date the Agreement is executed, Mr. Rice shall receive a fully-vested nonqualified stock option to purchase 2,000,000 shares of the Company’s common stock at a price equal to the greater of $0.10 per share and the Fair Market Value (as defined in the 2019 Omnibus Long-term Incentive Plan),10 year term and a $25,000 retention bonus.

 

Mr. Rice shall also receive a $50,000 and a fully-vested nonqualified stock option to purchase 2,000,000 shares of the Company’s common stock at a price equal to the greater of $0.10 per share and the Fair Market Value (as defined in the 2019 Omnibus Long-term Incentive Plan),10 year term, upon the closing, prior to December 31, 2020, of Third Party Financing which raises at least $15,000,000, as long as Mr. Rice was employed at the time of closing or was employed within one year prior to the closing.

 

If, upon the closing prior to December 31, 2021 of Third Party Financing which raises at least $10,000,000 for the Company, Mr. Rice shall receive an additional bonus of $50,000, as long as Mr. Rice was employed at the time of closing or if employed within one year prior to the closing.

 

Mr. Rice’s Agreement provides that if a Change of Control (as defined in the Agreement) occurs and Mr. Rice is not offered substantially equivalent employment with the successor corporation or Mr. Rice’s employment is terminated without Cause (as defined in the Agreement) during the three month period prior to the Change of Control or the 24-month period following the Change of Control, 100% of Mr. Rice’s unvested options will be fully vested and the restrictions on his restricted shares will lapse. Mr. Rice’s Agreement also provides for severance payments of, amongst other things, a lump sum payment of 300% of base salary and payment of 24 months of the base salary in such event.

 

Mr. Rice’s will receive the following severance benefits following a termination (as defined) of employment: a continuation of his Base Salary for one (1) year and a fully-vested, nonqualified stock option to purchase 1,000,000 shares of the Company’s common stock at a price equal to the greater of $0.10 per share and the Fair Market Value (as defined in the 2019 Omnibus Long-term Incentive Plan), 10 year term.

 

Employment Agreements

 

In 2020, the Company entered into Employment Letters (“Agreement”) with two of its key employees. The Agreements provide, among other items, for immediate issuance of 6,500,000 options of the Company’s common stock at an exercise price of at least the Fair Market Value (as defined in the 2019 Omnibus Long-term Incentive Plan) on the date of the grant of a Share and shall have a term of five years. Based on certain performance milestones, the Agreements also provide for the issuance of an additional 10,000,000 options of the Company’s common stock at an exercise price of at least the Fair Market Value (as defined in the 2019 Omnibus Long-term Incentive Plan) on the date of the grant of a Share and shall have a term of five years. The agreements provide for a base salary and cash performance bonuses.


F-22


 

 

ZIVO BIOSCIENCE, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 12 – SUBSEQUENT EVENTS (CONTINUED)

 

COVID-19 STATEMENT

 

The Company is carefully monitoring the effects the COVID-19 global pandemic is having on its operations.  Currently, the main potential effect is the uncertainty of the Company’s ability to raising capital.  Based on the nature of our operations, employees are able to work remotely with access to teleconferencing and video conferencing.  The research partners utilized by the Company are currently providing services as requested, although some University researchers have limited availability as their campuses have closed down, with the expectation they will reopen sometime in April 2020.  However, the Company cannot make any assurances the research partners will open as expected and perform at the levels as required until the COVID-19 situation is resolved. Other contract research organizations have remained open and accessible, although some resources have delayed response effectiveness.


F-23


 

EXHIBIT INDEX

 

Exhibit

 

 

Number

Title

3.1

Articles of Incorporation of Health Enhancement Products, Inc., as amended

(1)

3.1.1

Amendment to Articles of Incorporation of the Company, dated July 24, 2012

(2)

3.1.2

Amended Articles of Incorporation dated October 16, 2014 for name change

(3)

3.1.3

Certificate to Amendment of Articles of Incorporation dated November 14, 2016

(4)

3.1.4

Certificate to Amendment dated May 2, 2019

(5)

3.2

Amended and restated By-laws of the Company

(6)

4.1

Description of Securities

*

10.1

Security Agreement with HEP Investments, LLC ($100K loan) dated September 8, 2011

(7)

10.2

Senior Secured Note with HEP Investments, LLC ($100K loan) dated September 8, 2011

(8)

10.3

Loan Agreement with HEP Investments, LLC ($2M loan) dated December 2, 2011

(9)

10.4

Senior Secured Note with HEP Investments, LLC ($2M loan) dated December 2, 2011

(10)

10.5

Security Agreement with HEP Investments, LLC ($2M loan) dated December 2, 2011

(11)

10.6

IP Security Agreement with HEP Investments, LLC ($2M loan) dated December 2, 2011

(12)

10.7

Amended and Restated Senior Secured Convertible Promissory Note and the First Amendment to Loan Agreement with HEP Investments, LLC dated April 15, 2013

(13)

10.8

Second Amendment to Loan Agreement with HEP Investments, LLC dated December 16, 2013

(14)

10.9

Third Amendment to Loan Agreement with HEP Investments, LLC dated March 17, 2014

(15)

10.10

Third Amendment to Loan Agreement with HEP Investments, LLC dated July 1, 2014

(16)

10.11

Fourth Amended and Restated Senior Secured Convertible Promissory Note with HEP Investments, LLC dated July 1, 2014

(17)

10.12

Fourth Amendment to Loan Agreement with HEP Investments, LLC dated December 1, 2014

(18)

10.13

Fifth Amended and Restated Senior Secured Convertible Promissory Note with HEP Investments, LLC dated December 1, 2014

(19)

10.14

Fifth Amendment to Loan Agreement with HEP Investments, LLC dated April 28, 2015

(20)

10.15

Sixth Amended and Restated Senior Secured Convertible Promissory Note with HEP Investments, LLC dated April 28, 2015

(21)

10.16

Sixth Amendment to Loan Agreement with HEP Investments, LLC dated December 31, 2015

(22)

10.17

Seventh Amended and Restated Senior Secured Convertible Promissory Note with HEP Investments, LLC dated December 31, 2015

(23)

10.18+

Amended and Restated Employment Agreement with Andrew Dahl, the Registrant’s CEO

(24)

10.19

Seventh Amendment to Loan Agreement with HEP Investments, LLC dated September 30, 2016

(25)

10.20

Eighth Amended and Restated Senior Secured Convertible Promissory Note with HEP Investments, LLC dated September 30, 2016

(26)

10.21

Eighth Amendment to Loan Agreement with HEP Investments, LLC dated March 1, 2017

(27)

10.22

Ninth Amended and Restated Senior Secured Convertible Promissory Note with HEP Investments, LLC dated March 1, 2017

(28)

10.23+

Amended and Restated Change of Control Agreement dated April 21, 2017

(29)

10.24

Limited License Agreement with NutriQuest dated April 20, 2017

(30)

10.25

Amended and Restated Registration Rights Agreement with HEP Investments, LLC (Lender) and Strome Mezzanine Fund LP dated October 18, 2017

(31)

10.26

Ninth Amendment to Loan Agreement with HEP Investments, LLC dated January 31, 2018

(32)

10.27

Tenth Amended and Restated Senior Secured Convertible Promissory Note with HEP Investments, LLC dated January 31, 2018

(33)

10.28

Tenth Amended and Restated Senior Secured Convertible Promissory Note with HEP Investments, LLC dated May 16, 2018

(34)

10.29

Eleventh Amendment to Loan Agreement with HEP Investments, LLC dated May 16, 2018

(35)

10.30+

Amended and Restated Change of Control Agreement dated December 31, 2018

(36)

10.31

Debt Extension Agreement HEP Investments, LLC dated March 29, 2019

(37)

10.32

Debt Conversion Agreement with HEP Investments, LLC dated April 5, 2019

(38)


1


 

 

10.33+

Amended and Restated Employment Agreement with Andrew Dahl, dated as of November 29, 2019

*

10.34+

2019 Omnibus Long-Term Incentive Plan

*

10.35+

Philip M. Rice Employment Letter, dated as of March 4, 2020

*

10.36+

Stock Option Grant Notice for 2019 Omnibus Long-Term Incentive Plan - A. Dahl

*

10.37+

Stock Option Grant Notice for 2019 Omnibus Long-Term Incentive Plan

*

14.1

Code of Ethics

*

21.1

Subsidiaries of the Registrant

*

31.1

Certification of the Principal Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

*

31.2

Certification of the Principal Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

*

32.1

Certification of the Principal Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

*

32.2

Certification of the Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

*

101.INS

XBRL Instance Document

*

101.SCH

XBRL Taxonomy Extension Schema Document

*

101.CAL

XBRL Taxonomy Extension Calculation Linkbase Document

*

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document

*

101.LAB

XBRL Taxonomy Extension Label Linkbase Document

*

101.PRE

XBRL Taxonomy Extension Presentation Linkbase Document

*

*

Filed herewith.

 

+

Indicates management contract or compensatory plan.

 

 

(1)Filed as Exhibit 3.13 to the Registrant’s Form 8K filed with the Commission on June 29, 2015 and incorporated herein by this reference.  

 

(2)Filed as Exhibit 3.11 to the Registrant’s Form 10Q filed with the Commission on March 25, 2013 and incorporated by this reference.  

 

(3)Filed as Exhibit 3.12 to the Registrant’s Form 10Q filed with the Commission on November 14, 2014 and incorporated by this reference.  

 

(4)Filed as Exhibit 3.1 to the Registrant’s Form 10Q filed with the Commission on November 14, 2016 and incorporated by this reference.  

 

(5)Filed as Exhibit 3.1 to the Registrant’s Form 8-K filed with the Commission on May 7, 2019 and incorporated by this reference. 

 

(6)Filed as Exhibit 3.2 to the Registrant’s Form 10Q filed with the Commission on May 17, 2010 and incorporated by this reference.  

 

(7)Filed as Exhibit 10.04 to Form 10K filed with the Commission on March 30, 2012 and incorporated by this reference.  

 

(8)Filed as Exhibit 10.05 to Form 10K filed with the Commission on March 30, 2012 and incorporated by this reference.  

 

(9)Filed as Exhibit 10.06 to Form 10K filed with the Commission on March 30, 2012 and incorporated by this reference.  

 

(10)Filed as Exhibit 10.07 to Form 10K filed with the Commission on March 30, 2012 and incorporated by this reference.  

 

(11)Filed as Exhibit 10.08 to Form 10K filed with the Commission on March 30, 2012 and incorporated by this reference.  

 

(12)Filed as Exhibit 10.09 to Form 10K filed with the Commission on March 30, 2012 and incorporated by this reference.  

 

(13)Filed as Exhibit 10.24 to Form 10Q filed with the Commission on May 16, 2013 and incorporated by this reference.  

 

(14)Filed as Exhibit 10.26 to Form 10K filed with the Commission on March 31, 2014 and incorporated by this reference.  

 

(15)Filed as Exhibit 10.27 to Form 10K filed with the Commission on March 31, 2014 and incorporated by this reference.  

 

(16)Filed as Exhibit 10.28 to Form 10Q filed with the Commission on August 14, 2014 and incorporated by this reference.  


2


 

 

(17)Filed as Exhibit 10.29 to Form 10Q filed with the Commission on August 14, 2014 and incorporated by this reference.  

 

(18)Filed as Exhibit 10.31 to Form 8K filed with the Commission on December 26, 2014 and incorporated by this reference.  

 

(19)Filed as Exhibit 10.32 to Form 8K filed with the Commission on December 26, 2014 and incorporated by this reference.  

 

(20)Filed as Exhibit 10.33 to Form 8K filed with the Commission on May 1, 2015 and incorporated by this reference.  

 

(21)Filed as Exhibit 10.34 to Form 8K filed with the Commission on May 1, 2015 and incorporated by this reference.  

 

(22)Filed as Exhibit 10.36 to Form 8K filed with the Commission on January 7, 2016 and incorporated by this reference.  

 

(23)Filed as Exhibit 10.37 to Form 8K filed with the Commission on January 7, 2016 and incorporated by this reference.  

 

(24)Filed as Exhibit 10.39 to Form 10Q filed with the Commission on August 12, 2016 and incorporated by this reference.  

 

(25)Filed as Exhibit 10.40 to Form 8K filed with the Commission on October 5, 2016 and incorporated by this reference.  

 

(26)Filed as 10.41 to Form 8K filed with the Commission on October 5, 2016 and incorporated by this reference.  

 

(27)Filed as Exhibit 10.42 to Form 8K filed with the Commission on March 6, 2017 and incorporated by this reference.  

 

(28)Filed as Exhibit 10.43 to Form 8K filed with the Commission on March 6, 2017 and incorporated by this reference.  

 

(29)Filed as Exhibit 10.1 to Form 10Q filed with the Commission on May 12, 2017 and incorporated by this reference.  

 

(30)Filed as Exhibit 10.2 to Form 10Q filed with the Commission on May 12, 2017 and incorporated by this reference.  

 

(31)Filed as Exhibit 10.1 to Form 10Q filed with the Commission on October 19, 2017 and incorporated by this reference.  

 

(32)Filed as Exhibit 10.1 to Form 8K filed with the Commission on February 12, 2018 and incorporated by this reference.  

 

(33)Filed as Exhibit 10.2 to Form 8K filed with the Commission on February 12, 2018 and incorporated by this reference.  

 

(34)Filed as Exhibit 10.1 to Form 8K filed with the Commission on May 18, 2018 and incorporated by this reference.  

 

(35)Filed as Exhibit 10.2 to Form 8K filed with the Commission on May 18, 2018 and incorporated by this reference.  

 

(36)Filed as Exhibit 10.1 to Form 8K filed with the Commission on January 7, 2019 and incorporated by this reference.  

 

(37)Filed as Exhibit 10.1 to Form 8-K filed with the Commission on April 8, 2019 and incorporated by this reference.  

 

(38)Filed as Exhibit 10.2 to Form 8-K filed with the Commission on April 8, 2019 and incorporated by this reference.  


3