Correspondence 0001654954-24-007155 from Zivo Bioscience, Inc. (ZIVO, ZIVOW) (CIK 0001101026) (ZIVO)
Zivo Bioscience, Inc. (ZIVO, ZIVOW) (CIK 0001101026)
Date: May 31, 2024 · CIK: 0001101026 · Accession: 0001654954-24-007155
AI Filing Summary & Sentiment
File numbers found in text: 001-40449
Referenced dates: May 3, 2024
Letter
zivo_corresp.htm
May 31, 2024
VIA EDGAR TRANSMISSION
Division of Corporation Finance
Office of Technology
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549
Attention: Ibolya Ignat and Angela Connell
Re:
Zivo Bioscience, Inc.
Form 10-K for the Fiscal Year Ended December 31, 2023
Filed March 15, 2024
File No. 001-40449
Ladies and Gentlemen:
On behalf of Zivo Bioscience, Inc. (“Zivo”, “Company”, or “we”), this letter responds to your letter dated May 3, 2024. Zivo understands that the purpose of the SEC’s review process is to assist Zivo in its compliance with the applicable disclosure requirements and to enhance the overall disclosure in Zivo’s filings.
For your convenience, we have bolded the questions put forth in your letter and Zivo’s responses are set forth in italics.
Form 10-K for the Fiscal Year ended December 31, 2023
Notes to Consolidated Financial Statements
Note 8 – Deferred R&D Obligations – Participation Agreements, page F-16
1.
We note your disclosure regarding the accounting for your Participation Agreements on page F-16 as well as the related restatement disclosures provided in your Item 4.02 Form 8-K dated April 15, 2022. Please address the following:
·
Provide us with a detailed analysis supporting your accounting treatment of these Participation Agreement as research & development arrangements under ASC 730-20-25 and clearly explain why you determined that your prior accounting as sales of future revenues under ASC 470-10 was in error.
Response:
Between the period from April 13, 2020, and May 14, 2021, the Company entered into twenty-one (21) License Co-Development Participation Agreements (the “Participation Agreements”) with certain investors (“Participants”) for aggregate proceeds of $2,985,000. The intent of the Participation Agreements was to provide the Company with the capital necessary to facilitate the research & development efforts necessary to commercialize certain product offerings. The Participation Agreements provide for the issuance of warrants to such Participants, and allow the Participants to participate in the fees from licensing or selling bioactive ingredients or molecules derived from Zivo’s algae cultures in the form of a royalty (“Participant Rights”) which will provide the Participants an aggregate of 44.78% “Revenue Share” of all license fees generated by Zivo from any licensee.
21 EAST LONG LAKE ROAD | Suite 100 | Bloomfield Hills, MI 48304 | www.zivobioscience.com
Zivo Bioscience, Inc.
May 3, 2024 U.S. Securities and Exchange Commission Review Response
Page 2
The Participation Agreements also contain an option for the Company to purchase all of the revenue sharing rights of the participants (“Buy-Back Option”). However, such Buy-Back Option cannot be exercised until the participant has received a stated threshold of revenue share.
The Participants were not a service provider to the Company and would not be involved in the licensing or sale of the Company’s products beyond their Participant Rights in this arrangement.
Analysis:
Given that we received cash in return for future revenue participation, we considered whether the Participation Rights are in the scope of either ASC 470-10 Debt or ASC 730-20 Research and Development – Research and Development Arrangements. In this regard, we noted that ASC 470-10 applies to specific obligations, including, but not limited to the sale of future revenue, while ASC 730-20-15-2 establishes standards of financial accounting and reporting for an entity that is a party to a research and development arrangement through which it can obtain the results of research and development funded partially or entirely by others.
At the date the Participation Agreements were executed, and continuing as of the date of this analysis, Zivo was in pre-revenue stage and did not have products that had reached technological feasibility. Management did not believe that it would achieve technological feasibility in the foreseeable future. Further, the investors were funding the Company’s R&D projects through the License Co-development Participation Agreements. Therefore, we determined that the Participation Rights are within the scope of ASC 730-20, and thus the initial accounting under ASC 470-10 was in error.
Next, we assessed whether the Company was obligated to repay any funds received from the funding party, regardless of the ultimate success of the R&D activities. This type of arrangement is essentially a financing arrangement. If the financial risk is transferred to the funding party, the Company would account for its obligation as a contract to perform R&D for others.
Based on the terms of the Participation Agreements, the Company has no requirement or obligation to repay the Participants should the R&D be unsuccessful. Payment to the Participants will only occur if/when the licensing fee revenues are generated. We have determined that the terms of the Participation Agreements align with the intent, which was to purchase the Participant Rights under the terms of the Buy-Back Option only if/when the Company begins generating revenues. Note, the Buy-Back Option is only available once the Participant has been paid a minimum amount of royalties under the Participation Agreements. Thus, the Company cannot repay the amounts received through exercise of the Buy-Back Option if the R&D is unsuccessful, nor would we ever intend to.
Based on these considerations, namely, because the repayment of the initial investment is dependent upon successful completion of the R&D activities and commercialization of the products, we determined that the risk associated with the R&D activities has passed to the Participants and therefore, the proceeds allocated to the Participation Rights are to be accounted for as an obligation to perform R&D activities. As such, the amounts should be recognized in the income statement as the R&D services are performed. ASC 730-20 does not provide guidance on how to present this recognition.
Zivo Bioscience, Inc.
May 3, 2024 U.S. Securities and Exchange Commission Review Response
Page 3
Deferred R&D Expense:
We concluded that the Participant to the Participation Agreement is not a customer, because it was not in the normal course of business for us to perform outsourced R&D services.As a result, we determined that it is most appropriate to recognize the amounts received as a Deferred R&D expense. The Deferred R&D expense has been amortized ratably as we incurred R&D expense for associated projects.
·
Provide us with an example of one of the Participation Agreements that clearly outlines the significant terms of the agreements, including the revenue share and your obligations to perform R&D services.
A sample agreement is attached to this letter as Exhibit A.
·
Explain your accounting for the buy-back option included in the agreements.
Accounting for the Buy-Back Option was considered as part of our overall analysis of the Participation Agreements as described above. We concluded that the Buy-Back Option is not legally detachable and not separately exercisable from the Participant Rights because its exercise terminates/cancels the participant revenue sharing rights.
·
Clarify whether you have a continuing obligation to provide the participants with a share of revenues, and if so, how this revenue share will be accounted for given that your deferred R&D obligation appears to be fully amortized as of December 31, 2023.
The Company will have an obligation to provide Particpants with a share of certain specific revenues related to the identified R&D work. Management has determined that because there is no clear guidance set-forth within the codification, judgement must be applied. In this instance, given the nature of the contract and analysis performed above, Management has determined that the Participant Rights, specifically, the payments to be made to the Participant subsequent to the bioactive ingredients achieving sales revenue are to be recorded as royalty expense on the Company’s consolidated statements of operations. We plan to account for these royalty payments as a General &Administrative expenses in accordance with our analysis outlined above.
As stated in your letter, Zivo acknowledges that:
·
After reviewing our response to your comments, you may have additional comments; and
·
Zivo and its management are responsible for the accuracy and adequacy of our disclosures, notwithstanding any review, comments, action or absence of action by the staff.
If you have any questions concerning the foregoing, please do not hesitate to contact Keith Marchiando, Chief Financial Officer of Zivo Bioscience, Inc. via phone at (248) 452-9866 x130, or via email at kmarchiando@zivobioscience.com.
Zivo Bioscience, Inc.
May 3, 2024 U.S. Securities and Exchange Commission Review Response
Page 4
Very truly yours,
Keith R. Marchiando
Show Raw Text
CORRESP
1
filename1.htm
zivo_corresp.htm
May 31, 2024
VIA EDGAR TRANSMISSION
Division of Corporation Finance
Office of Technology
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549
Attention: Ibolya Ignat and Angela Connell
Re:
Zivo Bioscience, Inc.
Form 10-K for the Fiscal Year Ended December 31, 2023
Filed March 15, 2024
File No. 001-40449
Ladies and Gentlemen:
On behalf of Zivo Bioscience, Inc. (“Zivo”, “Company”, or “we”), this letter responds to your letter dated May 3, 2024. Zivo understands that the purpose of the SEC’s review process is to assist Zivo in its compliance with the applicable disclosure requirements and to enhance the overall disclosure in Zivo’s filings.
For your convenience, we have bolded the questions put forth in your letter and Zivo’s responses are set forth in italics.
Form 10-K for the Fiscal Year ended December 31, 2023
Notes to Consolidated Financial Statements
Note 8 – Deferred R&D Obligations – Participation Agreements, page F-16
1.
We note your disclosure regarding the accounting for your Participation Agreements on page F-16 as well as the related restatement disclosures provided in your Item 4.02 Form 8-K dated April 15, 2022. Please address the following:
·
Provide us with a detailed analysis supporting your accounting treatment of these Participation Agreement as research & development arrangements under ASC 730-20-25 and clearly explain why you determined that your prior accounting as sales of future revenues under ASC 470-10 was in error.
Response:
Between the period from April 13, 2020, and May 14, 2021, the Company entered into twenty-one (21) License Co-Development Participation Agreements (the “Participation Agreements”) with certain investors (“Participants”) for aggregate proceeds of $2,985,000. The intent of the Participation Agreements was to provide the Company with the capital necessary to facilitate the research & development efforts necessary to commercialize certain product offerings. The Participation Agreements provide for the issuance of warrants to such Participants, and allow the Participants to participate in the fees from licensing or selling bioactive ingredients or molecules derived from Zivo’s algae cultures in the form of a royalty (“Participant Rights”) which will provide the Participants an aggregate of 44.78% “Revenue Share” of all license fees generated by Zivo from any licensee.
21 EAST LONG LAKE ROAD | Suite 100 | Bloomfield Hills, MI 48304 | www.zivobioscience.com
Zivo Bioscience, Inc.
May 3, 2024 U.S. Securities and Exchange Commission Review Response
Page 2
The Participation Agreements also contain an option for the Company to purchase all of the revenue sharing rights of the participants (“Buy-Back Option”). However, such Buy-Back Option cannot be exercised until the participant has received a stated threshold of revenue share.
The Participants were not a service provider to the Company and would not be involved in the licensing or sale of the Company’s products beyond their Participant Rights in this arrangement.
Analysis:
Given that we received cash in return for future revenue participation, we considered whether the Participation Rights are in the scope of either ASC 470-10 Debt or ASC 730-20 Research and Development – Research and Development Arrangements. In this regard, we noted that ASC 470-10 applies to specific obligations, including, but not limited to the sale of future revenue, while ASC 730-20-15-2 establishes standards of financial accounting and reporting for an entity that is a party to a research and development arrangement through which it can obtain the results of research and development funded partially or entirely by others.
At the date the Participation Agreements were executed, and continuing as of the date of this analysis, Zivo was in pre-revenue stage and did not have products that had reached technological feasibility. Management did not believe that it would achieve technological feasibility in the foreseeable future. Further, the investors were funding the Company’s R&D projects through the License Co-development Participation Agreements. Therefore, we determined that the Participation Rights are within the scope of ASC 730-20, and thus the initial accounting under ASC 470-10 was in error.
Next, we assessed whether the Company was obligated to repay any funds received from the funding party, regardless of the ultimate success of the R&D activities. This type of arrangement is essentially a financing arrangement. If the financial risk is transferred to the funding party, the Company would account for its obligation as a contract to perform R&D for others.
Based on the terms of the Participation Agreements, the Company has no requirement or obligation to repay the Participants should the R&D be unsuccessful. Payment to the Participants will only occur if/when the licensing fee revenues are generated. We have determined that the terms of the Participation Agreements align with the intent, which was to purchase the Participant Rights under the terms of the Buy-Back Option only if/when the Company begins generating revenues. Note, the Buy-Back Option is only available once the Participant has been paid a minimum amount of royalties under the Participation Agreements. Thus, the Company cannot repay the amounts received through exercise of the Buy-Back Option if the R&D is unsuccessful, nor would we ever intend to.
Based on these considerations, namely, because the repayment of the initial investment is dependent upon successful completion of the R&D activities and commercialization of the products, we determined that the risk associated with the R&D activities has passed to the Participants and therefore, the proceeds allocated to the Participation Rights are to be accounted for as an obligation to perform R&D activities. As such, the amounts should be recognized in the income statement as the R&D services are performed. ASC 730-20 does not provide guidance on how to present this recognition.
Zivo Bioscience, Inc.
May 3, 2024 U.S. Securities and Exchange Commission Review Response
Page 3
Deferred R&D Expense:
We concluded that the Participant to the Participation Agreement is not a customer, because it was not in the normal course of business for us to perform outsourced R&D services.As a result, we determined that it is most appropriate to recognize the amounts received as a Deferred R&D expense. The Deferred R&D expense has been amortized ratably as we incurred R&D expense for associated projects.
·
Provide us with an example of one of the Participation Agreements that clearly outlines the significant terms of the agreements, including the revenue share and your obligations to perform R&D services.
A sample agreement is attached to this letter as Exhibit A.
·
Explain your accounting for the buy-back option included in the agreements.
Accounting for the Buy-Back Option was considered as part of our overall analysis of the Participation Agreements as described above. We concluded that the Buy-Back Option is not legally detachable and not separately exercisable from the Participant Rights because its exercise terminates/cancels the participant revenue sharing rights.
·
Clarify whether you have a continuing obligation to provide the participants with a share of revenues, and if so, how this revenue share will be accounted for given that your deferred R&D obligation appears to be fully amortized as of December 31, 2023.
The Company will have an obligation to provide Particpants with a share of certain specific revenues related to the identified R&D work. Management has determined that because there is no clear guidance set-forth within the codification, judgement must be applied. In this instance, given the nature of the contract and analysis performed above, Management has determined that the Participant Rights, specifically, the payments to be made to the Participant subsequent to the bioactive ingredients achieving sales revenue are to be recorded as royalty expense on the Company’s consolidated statements of operations. We plan to account for these royalty payments as a General &Administrative expenses in accordance with our analysis outlined above.
As stated in your letter, Zivo acknowledges that:
·
After reviewing our response to your comments, you may have additional comments; and
·
Zivo and its management are responsible for the accuracy and adequacy of our disclosures, notwithstanding any review, comments, action or absence of action by the staff.
If you have any questions concerning the foregoing, please do not hesitate to contact Keith Marchiando, Chief Financial Officer of Zivo Bioscience, Inc. via phone at (248) 452-9866 x130, or via email at kmarchiando@zivobioscience.com.
Zivo Bioscience, Inc.
May 3, 2024 U.S. Securities and Exchange Commission Review Response
Page 4
Very truly yours,
Keith R. Marchiando
Chief Financial Officer
cc:
Bradley J. Wyatt, Dickinson Wright, PLLC
Zivo Bioscience, Inc.
May 3, 2024 U.S. Securities and Exchange Commission Review Response
Page 5
Exhibit A
LICENSE CO-DEVELOPMENT PARTICIPATION AGREEMENT
THIS LICENSE CO-DEVELOPMENT PARTICIPATION AGREEMENT (this "Agreement") is made and entered into as of May 29, 2020 (the “Effective Date”) by and between ZIVO BIOSCIENCE, INC., a Nevada corporation (“ZIVO” or the “Company”), whose address is 2804 Orchard Lake Rd., Suite 202, Keego Harbor, Michigan 48320, Attention: Andrew Dahl, CEO, and [Participant Name] whose email is: [●] ("Partner") and whose address is: [●].
RECITALS
A. The Company is in the business of, among other things, generating fees (the “Fees”) from licensing or selling bioactive ingredients or molecules (including its TLR4 Inhibitor molecule) derived from the Company’s algae cultures.
B. The Company has received interest from potential licensees (each a “Licensee”) and desires to provide what is requested from or necessary for a Licensee to execute a license agreement (a “License”). The Company and Partner desire to enter into a Participation Agreement for Partner to fund a portion of the budgeted costs (estimated to be $3 million) for the Company’s work to enter into such a License and receive certain share of revenues from any such License.
C. The Company and Partner desire to set forth certain rights and obligations relating to such funding of the License work, all in accordance with the terms and conditions of this Agreement.
NOW, THEREFORE, for and in consideration of the foregoing Recital, the mutual covenants, agreements and undertakings set forth below, and other good and valuable consideration, the receipt and adequacy of which are acknowledged, the undersigned agree as follows:
1.
Funding and Revenue Share. Partner shall fund the amount of $275,000.00 (“Partner’s Funding Portion”) to the Company promptly upon execution of this Agreement by wire transfer to the Company’s designated bank account. Subject to the Company’s exercise of the Company’s Option (defined below), during the term of this Agreement, Partner shall be entitled to Four and 125/1000 percent (4.125%) of all Fees generated by the Company from licensing or selling bioactive ingredients or molecules (including its TLR4 Inhibitor molecule) derived from the Company’s algae cultures and actually received from any Licensee (the “Revenue Share”). Partner shall also be entitled to a warrant to purchase 825,000 shares of common stock of the Company at an exercise price of twelve cents ($0.12) per share or the average daily price as of the date of funding under this Agreement, whichever is lower (the “Warrant”) exercisable during the five (5) year term following the issuance date. The Company shall issue such Warrant promptly upon execution of this Agreement in accordance with its normal process and procedures. Such Warrant and the common shares issuable upon exercise of the Warrant shall be subject to all applicable securities laws and regulations. Both the number of shares subject to such Warrant and the Warrant exercise price shall be adjusted in the event of any stock split, recapitalization, merger or other event affecting the capitalization of the Company.
2.
Company Buy Out Option. Partner hereby grants the Company the right, but not the obligation (the “Option”), to purchase all of Partner’s right, title and interest in and to the Revenue Share for the purchase price (the “Option Price”) equal to Partner’s Funding Portion plus forty percent (40%) of such amount of Partner’s Funding Portion. Such Option shall not be exercisable unless and until Partner has received Revenue Share payments at least equal to $82,500. In the event such Option is exercised at a date later than 18 months after the date of this Agreement, then the forty percent (40%) in the previous sentence shall be increased to fifty percent (50%). The Company may exercise its Option by delivering written notice to Partner of its intent to exercise the Option along with payment due to Partner relating to the exercise of the Option. Such notice shall also state the payment terms of such purchase price which may be paid, in the Company’s sole discretion, in one lump sum or in 4 equal quarterly payments. If the Company does not make any such quarterly payments timely for any such quarter, then Partner shall be entitled to the prorate Revenue Share amount, retroactive on the entire remaining balance owed, that would have been earned during such quarter as provided in paragraph 1 above until the default payments have been received and payment schedule is no longer in default. Upon the Company’s exercise of its Option, Partner shall no longer be entitled to any revenue share from any revenue or license of any type from the Company (so long as there is no default on payment schedule as described above); provided, however, Partner may retain any Revenue Share payments previously paid to Partner by the Company prior to the exercise of the Option, as well as the Warrant. In the event of non-payment of the revenue share or any portion of the Option Price by the Company, Partner shall have the right to pursue and collect all such amounts and be entitled to its legal fees in such collection efforts if it prevails.
3.
Partner’s Rights. The parties agree that Partner’s right to receive payment hereunder shall not be deemed to be equity but shall be a contract right. The Company shall not assert that the rights of the Company’s equity holders with respect to such equity are senior to or pari passu with the rights of Partner to payments hereunder.
4.
CONFIDENTIALITY.
(a)
Partner acknowledges that by reason of Partner's duties to and association with the Company Partner has had and will have access to and has and will become informed of Confidential Information (as defined below) which is a competitive asset of the Company. Partner agrees to keep in strict confidence and not, directly or indirectly, make known, disclose, furnish, make available or use, any Confidential Information during or after the Term, except for use in Partner's regular authorized duties on behalf of the Company. Partner acknowledges that all documents and other property including or reflecting Confidential Information furnished to Partner by the Company or otherwise acquired or developed by Partner during the Term shall at all times be the property of the Company. Partner shall take all reasonable and appropriate steps to safeguard Confidential Information and protect it against disclosure, misappropriation, misuse, loss and theft. Partner shall deliver to the Company, at termination of this Agreement and at any other time the Company may request, all memoranda, notes, plans, records, reports, computer tapes, printouts and software and o