Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains certain forward-looking statements that involve risk and uncertainties. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those set forth under the section titled “Risk Factors,” and other documents we file with the SEC. Historical results are not necessarily indicative of future results.
Overview
We have put in place a business model in which we may derive future income from licensing and selling natural bioactive ingredients including algal biomass and products that may be derived from or are initially based on the algal biomass. We expect that these planned new products will likely be sold or licensed to much larger, better-financed human and animal pharma companies, and to food, dietary supplement, and skin care manufacturers. The anticipated income streams are to be generated from a) sales of algal biomass or extracts thereof, and b) license payments in the form of royalties and / or other contractual payments for licensed natural bioactive ingredients. Our manufacturing strategy is to create contract manufacturers for our non-licensed products which products will be sold by us to food distributors and retailers, animal food, dietary supplement, and medical food processors and/or name-brand marketers. Further, we expect to license our bioactive fractions and molecules as lead compounds or templates for synthetic variants intended for therapeutic applications.
Financial Overview
Revenue
The Company earns revenue through the sales of its proprietary microalgae products which are presently sold as a dried green powder packaged for retail sale. The product is sold under the Zivolife TM brand. We have one customer who distributes our products via a direct-to-consumer model through a Zivolife TM branded webpage under a distribution, marketing, and limited license agreement.
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Cost of Goods Sold
Cost of goods sold for the Company included purchasing our proprietary dried green microalgae in a final packaged form from a contract grower located in Peru. We have established a contract manufacturing agreement and limited license with this grower to provide ZIVO pre-packaged product ready to be sold to our customer. The product is delivered directly to our customer.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel-related costs for personnel in functions not directly associated with research and development activities, professional fees and consultant expenses, and other overhead spending. Personnel related costs include cash compensation, benefits, and stock-based compensation expenses. Professional fees and consultant expenses consist primarily of legal fees relating to corporate matters, intellectual property costs, professional fees for consultants assisting with regulatory, and financial matters. Other overhead spending includes cost to support information technology, rent, insurances, public company listing, and supplies.
We anticipate that our general and administrative expenses will significantly increase in the future to support our continued research and development activities, potential commercialization of our product candidates, hiring of additional personnel, legal and professional services, and other public company related costs.
Research and Development
Research and development expenses are incurred in developing our product candidates, compensation and benefits for research and development employees, including stock-based compensation, research related overhead expenses, cost of laboratory supplies, clinical trial and related clinical manufacturing expenses, costs related to regulatory operations, fees paid to research consultants and other outside expenses. Research and development costs are expensed as incurred and costs incurred by third parties are expensed as the contracted work is performed.
We expect our research and development expenses to significantly increase over the next several years as we continue to develop product candidates targeting additional pharma and algal biomass applications. These additional activities will increase the need to conduct preclinical testing and clinical trials and will depend on the duration, costs and timing to complete our preclinical programs and clinical trials.
Interest Expense
Interest expense primarily consists of interest costs related to our convertible notes, term notes, and for interest on short term debt, as discussed in detail below.
Other Income
Other income consists of proceeds derived from activity outside of normal operating activity, including amortization of debt discounts where appropriate.
Results of Operations
Comparison of Year Ended December 31, 2024 and 2023
The following table summarizes our results of operations for the year ended December 31, 2024 and 2023:
Year ended December 31,
Total revenue
Total cost of goods sold
Gross margin
Costs and expenses:
General and administrative
Research and development
Total costs and expenses
Loss from operations
Total interest and other (expense), net
Net loss
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Revenue
During the year ended December 31, 2024, the Company recorded commercial revenue relating to sales of the Company’s dried algal biomass product as a human food or food ingredient. The $157,220 for the year ending December 31, 2024 is an approximately $130,000 increase over the $27,650 in revenue in the prior year. The increase is the result of product volume increases partially offset by lower selling prices for product sold in the year ended December 31, 2024 versus the year ended December 31, 2023.
Costs of Goods Sold
Cost of goods sold for the year ended December 31, 2024 was $108,268. This is approximately $92,000 higher than $16,040 in cost of goods sold from the same period last year. The increase in cost of goods sold is essentially all attributable to product volume increases from the prior year period.
Gross Margin
Gross margin for the year ended December 31, 2024 was approximately $49,000. This is $37,000 higher than the same period last year. This increase is attributable to higher product volumes partially offset by lower selling prices than the prior year period. Gross margin percentage in the year ended December 31, 2024 was 31%, down from 42% shown in the year ended December 31, 2023.
General and Administrative Expenses
General and administrative expenses were $10.3 million for the year ended December 31, 2024, which is about $4.4 million higher than the approximately $5.9 million for the comparable prior period, explained by the following changes: an increase of $2.8 million in labor expense (increase of $3.5 million non-cash employee compensation due to stock options issued to employees partially offset by a roughly $700,000 decrease in bonus expense), and an increase in overhead expense of $1.6 million ($2.9 million increase in directors fees, partially offset by $100,000 in lower directors and officers insurance premiums, $110,000 in lower exchange listing and related fees, $30,000 in lower travel expense, $300,000 in lower accounting fees, and $800,000 lower legal fees). The decreases in accounting and legal fees versus the prior year period were largely the result of legal and accounting fees incurred in capital raising efforts in 2023 that were not incurred in 2024.
Research and Development Expenses
For the 12 months ended December 31, 2024, we incurred $3.1 million in net R&D expenses, as compared to $1.4 million for the comparable period in 2023.
Of these costs in 2024, $3.1 million is for salary and other internal costs, an increase of approximately $1.9 million from the prior year. The increase is primarily explained by higher stock related compensation costs for non-employee directors of $2 million and an increase of $50,000 in consultant expense, partially offset by employee costs of $160,000 and travel expense of $20,000. Third party research and development spending of $20,000 was approximately $840,000 lower than the prior year due to elimination of essentially all the Company-funded third-party research studies. For the year ending December 31, 2023, the Company recognized a reduction in gross research and development spending of roughly $700,000 to account for the amortization of the spending obligation created through the complete funding of the Participation Agreements. There was no amortization of spending obligations in the year ending December 31, 2024 as the Company completed all the funding for this program in the prior year. (See Note 8: Deferred R&D Obligations - Participation Agreements )
December 31,
December 31,
Labor and other internal expenses
External research expenses
Total gross R&D expenses
Less contra-expense for amortization of deferred R&D obligation - Participation Agreements
Net R&D expenses
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Subject to the availability of funding, we expect our R&D costs to grow as we work to complete the research in the development of natural bioactive compounds for use as dietary supplements and food ingredients, as well as biologics for medicinal and pharmaceutical applications in humans and animals. The Company’s scientific efforts presently are focused on the licensing products for healthy immune response in livestock and growing of our proprietary algal culture in commercial scale facilities.
Liquidity and Capital Resources
Historical Capital Resources
As of December 31, 2024, our principal source of liquidity consisted of cash deposits of $1.5 million. We expect to continue to incur significant expenses and increasing operating and net losses for the foreseeable future until and unless we generate an adequate level of revenue from potential commercial sales to cover expenses.
We anticipate that our expenses will increase substantially as we develop and seek to commercialize our product candidates and continue to pursue pre-clinical and clinical trials, seek regulatory approvals, manufacture product candidates, hire additional staff, add operational, financial and management systems and continue to operate as a public company.
Our source of cash to date has been proceeds from the issuances of notes, common stock with and without warrants and unsecured loans, and the entry into Participation Agreements, the terms of which are further described below. See also “ Funding Requirements and Outlook ” below.
Unsecured Loans
From January 1, 2023 to December 31, 2024, the Company received gross proceeds of $2,273,160 in unsecured loans. As of December 31, 2024, all the loans were repaid and no principal or accrued interest remained outstanding under such loans.
Debt Settlement Agreements
On November 12, 2024, the Company entered into a Debt Settlement Agreement (“Debt Settlement Agreement”) with three investors (each a “Creditor”) to restructure the outstanding $240,000 convertible debt and accrued interest of the Company. Each Creditor agreed to settle the Company’s existing debt in exchange for the Company issuing each Creditor an unsecured promissory note (each a “Note,” collectively, the “Notes”) pursuant to the terms agreed upon in each Debt Settlement Agreement. The Notes have an aggregate principal amount of $277,254. Each Note is payable in 24 equal monthly installments beginning November 30, 2024 and bears interest at a rate of 1.0% per annum.
Private Placements
In the year ending December 31, 2024, we entered into Subscription Agreements with accredited investors pursuant to which we, in private placements, issued and sold an aggregate of 793,489 shares of common stock for gross proceeds in the amount of $5,602,269. Included in these transactions were the sale of 598,054 shares of common stock for $4,283,387 to unrelated private investors, and 195,435 shares of common stock for $1,318,882 to related parties.
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Going Concern, Funding Requirements and Outlook
At December 31, 2024, we had $1,542,442 in cash deposits.
The Company has incurred substantial losses during the years ended December 31, 2024 and 2023, and expects to continue to incur losses in the near future and has a negative working capital as of December 31, 2024. Management has determined that these factors raise substantial doubt about our ability to continue as a going concern. Additionally, our independent registered public accounting firm has included explanatory paragraphs in their report on our financial statements as of and for the year ended December 31, 2024, noting the existence of substantial doubt about our ability to continue as a going concern. Our existing cash is not sufficient to fund our operating expenses through at least twelve months from the date of this filing and liabilities of the Company such as accounts payable, accrued expenses, and our term debt. To continue to fund operations and execute on management’s plans, we will need to secure additional funding through public or private equity or debt financings, through collaborations or partnerships with other companies or other sources. We may not be able to raise additional capital on terms acceptable to us, or at all. Any to raise capital when needed could compromise our ability to execute on our business plan. If we are to raise additional funds, or if our anticipated operating results are not , we believe planned expenditures may need to be reduced in order to extend the time period that existing resources can fund our operations. If we are to obtain the necessary capital, it may have a material effect on our operations and the development of our technology, or we may have to operations altogether.
Our material cash requirements also relate to the funding of our ongoing product development. See “ Item 1-Business-Clinical Development and Regulatory Pathway-Clinical Experience, Future Development and Clinical Trial Plans ” in this Report for a discussion of design, development, pre-clinical and clinical activities that we may conduct in the future, including expected cash expenditures required for some of those activities, to the extent we are able to estimate such costs.
The development of our product candidates is subject to numerous uncertainties, and we could use our cash resources sooner than we expect. Additionally, the process of development is costly, and the timing of progress in pre-clinical tests and clinical trials is uncertain. Our ability to successfully transition to profitability will be dependent upon achieving further regulatory approvals and achieving a level of product sales adequate to support our cost structure. We cannot assure you that we will ever be profitable or generate positive cash flow from operating activities.
Cash Flows
Cash Flows from Operating Activities . During the 12 months ended December 31, 2024, our operating activities used $4.3 million in cash, a decrease of cash used of roughly $1.5 million from the comparable prior period. The approximate $1.5 million decrease in cash used by operating activities was primarily attributable to the following (all of which are approximated): a $5.6 million increase in net loss, an increase in non-cash expenses of $8.9 million (explained by an increase of stock issued for services of $8.6 million, lower debt discount amortization of $(400,000), and lower amortization of deferred R&D obligations of $700,000), and cash used to fund changes is assets and liabilities of $1.8 million (mostly explained by a reduction in accrued liabilities of $(800,000), a decrease in accounts payable of $(925,000), a decrease in accounts payable to related parties of $(175,000), partially offset by an increase of $100,000 in prepaid expenses).
Cash Flows from Investing Activities . During the 12 months ended December 31, 2024 and 2023, there were no investing activities.
Cash Flows from Financing Activities. During the 12 months ended December 31, 2024, we generated $5.6 million in cash from financing activities; primarily from several board approved fund raising programs to sell unregistered common stock via private placements. These programs raised $4.3 million from accredited investors, and an additional $1.3 million from related parties. In the year ending December 31, 2023 the Company had financing activities that raised a total of $4.3 million through the sales of unregistered common stock of $485,000 to related parties, and an additional $155,000 to accredited investors. The Company also sold through a single transaction registered common stock with proceeds of $3.6 million.
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The following table shows a summary of our cash flows for the periods indicated:
Twelve months ended
December 31,
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net increase (decrease) in cash and cash equivalents
We estimate that we would require approximately $5 million in cash over the next 12 months in order to fund our basic operations, excluding our R&D initiatives. Based on this cash requirement, we have a near-term need for additional funding to continue to develop our products and intellectual property. Historically, we have had substantial difficulty raising funds from external sources. If we are unable to raise the required capital, we will be forced to curtail our business operations, including our R&D activities.
Critical Accounting Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of the balance sheets and the reported amounts of revenue and expenses during the reporting periods. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances at the time such estimates are made. Actual results may differ materially from our estimates and judgments under different assumptions or conditions. We periodically review our estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates are reflected in our financial statements prospectively from the date of the change in estimate.
While our significant accounting policies are more fully described in the notes to our financial statements appearing elsewhere in this Report, we believe the following are the critical accounting policies used in the preparation of our financial statements that require significant estimates and judgments.
Fair Value of Financial Instruments
We account for fair value measurements of assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring or nonrecurring basis adhering to the Financial Accounting Standards Board (“FASB”) fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:
Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the Company at the measurement date.
Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability.
Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at measurement date.
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As of December 31, 2024 and December 31, 2023, fair values of cash, prepaid, other assets, accounts payable and accrued expenses approximated their carrying values because of the short-term nature of these assets or liabilities. We elected to account for the convertible notes while they were outstanding on a fair value basis under ASC 825 to comprehensively value and streamline the accounting for the embedded conversion options. The fair value of these convertible notes were based on both the fair value of our common stock, discount associated with the embedded redemption features, and cash flow models discounted at current implied market rates evidenced in recent arms-length transactions representing expected returns by market participants for similar instruments and are based on Level 3 inputs.
Complex Financial Instruments
We evaluate all conversion and redemption features contained in a debt instrument to determine if there are any embedded derivatives that require separation from the host debt instrument. An embedded derivative that requires separation is bifurcated from its host debt instrument and a corresponding discount to the host debt instrument is recorded. The discount is amortized and recorded to interest expense over the term of the host debt instrument using the straight-line method which approximates the effective interest method. The separated embedded derivative is accounted for separately on a fair market value basis. We record the fair value changes of a separated embedded derivative at each reporting period in the consolidated statements of operations as a fair value change in derivative and warrant liabilities.
Stock-Based Compensation
We account for share‑based compensation in accordance with the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 718, Compensation - Stock Compensation. Accordingly, compensation costs related to equity instruments granted are recognized at the grant‑date fair value. The Company records forfeitures when they occur. Share‑based compensation arrangements to non‑employees are accounted for in accordance with the applicable provisions of ASC 718.
Recent Accounting Pronouncements - Adopted
The Company continually assesses new accounting pronouncements to determine their applicability. When it is determined a new accounting pronouncement affects the Company’s financial reporting, the Company undertakes a review to determine the consequences of the change to its consolidated financial statements and assures there are sufficient controls in place to ascertain the Company’s consolidated financial statements properly reflect the change.
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting—Improvements to Reportable Segment Disclosures, which improves segment disclosure requirements, primarily through enhanced disclosure requirements for significant segment expenses. The improved disclosure requirements apply to all public entities that are required to report segment information, including those with only one reportable segment. The Company adopted the guidance in the fiscal year beginning January 1, 2024 and there was no impact on the Company’s reportable segments identified.
Recent Accounting Pronouncements – Not Yet Adopted
In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures, which updates income tax disclosures primarily related to the rate reconciliation and income taxes paid information. This ASU also includes certain other amendments to improve the effectiveness of income tax disclosures. The amendments in this ASU are effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The Company is in the process of determining the effect this ASU will have on the disclosures contained in the notes to the consolidated financial statements.
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In February 2024, the FASB issued ASU 2024-04 — Debt — Debt with Conversion and Other Options (Subtopic 470-20): Induced Conversions of Convertible Debt Instruments. This update is intended to improve the relevance and consistency in application of the induced conversion guidance in FASB Accounting Standards Codification Subtopic 470-20, Debt —Debt with Conversion and Other Options. Current generally accepted accounting principles provide guidance for determining whether a settlement of convertible instruments at terms different from the original conversion terms should be accounted for as an induced conversion (as opposed to a debt extinguishment). The amendments in the ASU clarify requirements for determining whether certain settlements of convertible debt instruments, including convertible debt instruments with cash conversion features or convertible debt instruments that are not currently convertible, should be accounted for as an induced conversion. This new standard is effective for fiscal years beginning after December 15, 2025. Early adoption is permitted. The Company is in the process of determining the effect this ASU will have on the disclosures contained in the notes to the consolidated financial statements.
In November 2024, the FASB issued ASC 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses, which is intended to provide more detailed information about specified categories of expenses (purchases of inventory, employee compensation, depreciation and amortization) included in certain expense captions presented on the consolidated statement of operations. This new standard is effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027. Early adoption is permitted. The amendments may be applied either (1) prospectively to financial statements issued for periods after the effective date of this ASU or (2) retrospectively to all prior periods presented in the consolidated financial statements. The Company is currently assessing the impact this ASU will have on the consolidated financial statements and footnote disclosures.
See “ Note 3 - Summary of Significant Accounting Policies ” in this Report regarding the impact of certain recent accounting pronouncements on our financial statements.
