Zeo ScientifiX, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this report. This discussion contains forward-looking statements, which involve risks and uncertainties. Our actual results may differ materially from those we currently anticipate as a result of many factors, including the factors we describe under Item 1A. Risk Factors and elsewhere in this report. 47 Results of Operations Fiscal year ended October 31, 2023 as compared to fiscal year ended October 31, 2022 Revenues . Our revenues for the year ended October 31, 2023 were $4,558,278, compared to revenues of $6,491,008 for the year ended October 31, 2022. The decrease in revenues during the year ended October 31, 2023 of $1,932,730 or 29.8%, was primarily the result of a decrease of approximately 22.0% (approximately $1,243,000) in the overall unit sales of its products during the year ended October 31, 2023 compared with the year ended October 31, 2022, a decrease of approximately 10.7% (approximately $678,600) in the average sales prices for the products sold during the year ended October 31, 2023 compared with the average sales prices realized on products sold during the year ended October 31, 2022, partially offset from an increase of approximately $7,300 of new revenues associated with its recently launched PPX™ service platform during the year ended October 31, 2023 compared with the year ended October 31, 2022. The decrease in the average sales prices realized on products sold during the year ended October 31, 2023 compared with the year ended October 31, 2022, was due to the reduction in overall unit sales of medical grade and aesthetic product offerings. The percentage of overall unit sales among the Company’s medical grade products and the Company’s aesthetic product offerings fell from 70.4% and 29.6%, respectively for the year ended October 31, 2022 to 40.7% and 59.3%, respectively, during the year ended October 31, 2023. Cost of Revenues . Our cost of revenues for the year ended October 31, 2023 were $507,629, compared with cost of revenues of $753,534 for the year ended October 31, 2022. The decrease in the cost of revenues during the year ended October 31, 2023 of $245,905 or 32.6%, compared with the year ended October 31, 2022, was due to a decrease in the amount of units sold of 22.0% (approximately $117,600) during the year ended October 31, 2023, compared with the year ended October 31, 2022 and from a decrease in the cost of units sold of 38.3% (approximately ($141,900) during the year ended October 31, 2023, compared to costs of units sold during the year ended October 31, 2022, partially offset from an increase in the costs associated with its recently launched PPX™ service platform of approximately $13,600 during the year ended October 31, 2023. The decrease in the cost of units sold was primarily the result of the Company’s decrease in sales of its medical grade product offerings partially offset from the increases in costs associated with its recently launched PPX™ service platform during the year ended October 31, 2023 as compared to the year ended October 31, 2022. Gross Profit . Our gross profit for the year ended October 31, 2023 was $4,050,649 (88.9% of revenues), compared with gross profit of $5,737,475 (88.4% of revenues) for the year ended October 31, 2022. The decrease in gross profit during the year ended October 31, 2023 of $1,686,826 was the result of decreases in the average sales prices for the products sold during the year ended October 31, 2023 and decreases in overall unit sales of its products during the year ended October 31, 2023 compared to the year ended October 31, 2022. General and Administrative Expenses . General and administrative expenses for the year ended October 31, 2023 were $10,817,627, compared with $14,580,434 for the year ended October 31, 2022, a decrease of $3,762,807 or 25.8%. The decrease in the general and administrative expenses for the year ended October 31, 2023 compared with the year ended October 31, 2022, was primarily the result of decreased payroll and consulting fees of approximately $2,113,500, decreases in commissions from sales of the Company’s products and travel and entertainment costs of approximately $1,177,100, decreases in stock-based compensation costs to advisors, consultants and administrative staff totaling approximately $707,800, decreased office related expenses of approximately $116,400, decreased laboratory related costs of approximately $150,200 and decreased costs associated with the settlement of litigation of approximately $88,800, partially offset by increased research and development costs of approximately $131,400, increases in insurance costs of approximately $247,000, increased marketing and investor relations costs of approximately $165,600 and increased reserves and/or write-offs against receivables from related parties of approximately $56,000. The reduction in payroll and consulting fees was primarily the result of the executives’ agreement to a reduction in salary and other compensation and reductions in fees paid to consultants during the year ended October 31, 2023 compared to 2022. The decreases in commissions on from sales of the Company’s products and travel and entertainment costs was principally the result of lower unit sales and overall revenues from the sale of the Company’s products during the year ended October 31, 2023 compared with the year ended October 31, 2022. The decrease in stock-based compensation costs during the year ended October 31, 2023 compared with the year ended October 31, 2022 was principally the result of reduced amortization of costs from warrants issued as stock-based compensation to consultants in connection with the Restructuring in August 2022, stock issued as payment for services, and warrants issued to outside directors. 48 Other income (expense). Other expense, net, for the year ended October 31, 2023 was ($219,730), compared with other expense, net, of ($53,597) for the year ended October 31, 2022. The increase in other expense, net of ($166,133) during the year ended October 31, 2023 compared to the year ended October 31, 2022, was principally the result of the reduction in the gain from the write-off of liabilities attributable to discontinued operations of approximately $125,900, the increase in losses from the impairment of non-marketable securities of $100,000, increased interest costs of approximately $33,200 and reduced income from the write-off of liabilities of approximately $259,600 during the year ended October 31, 2023 compared with the year ended October 31, 2022, partially offset from the increase in the gain from the sale of the Basalt Lab of approximately $340,600 during the year ended October 31, 2023 compared with the year ended October 31, 2022. Liquidity and Capital Resources Cash and Cash Equivalents The following table summarizes the sources and uses of cash for the periods stated. The Company held no cash equivalents for any of the periods presented: For the Fiscal Year Ended October 31, 2023 2022 Cash, beginning of year $ 3,753,097 $ 108,570 Net cash used in operating activities (2,197,275 ) (3,165,840 ) Net cash provided by (used in) investing activities 615,566 (824,743 ) Net cash (used in) provided by financing activities (415,186 ) 7,635,110 Cash, end of year $ 1,756,202 $ 3,753,097 During the year ended October 31, 2023, the Company used cash in operating activities of $2,197,275, compared to $3,165,840 for the year ended October 31, 2022, a decrease in cash used of $968,565. The decrease in cash used was primarily the result of a reduction in general and administrative expenses and other income (expense) after adjusting for non-cash related activities of $3,261,706 for the year ended October 31, 2023 compared to the year ended October 31, 2022, partially offset by reductions in gross profit of $1,648,049 and reductions in cash provided from changes in operating assets and liabilities of $606,315 for the year ended October 31, 2023 compared to the year ended October 31, 2022. The decrease in cash provided from changes in operating assets and liabilities was due to decreases in accounts payable and accrued expenses and accrued liabilities to management partially offset from increases in prepaid expenses and deferred revenues during the year ended October 31, 2023 as compared to the year ended October 31, 2022. The reduction in general and administrative expenses and other oncome (expense) after adjusting for non-cash related activities was the result of reduced operating expenses associated with professional fees, payroll, consulting costs, research and laboratory related expenses during the year ended October 31, 2023 as compared to the year ended October 31, 2022. The decrease in revenues and gross profit during the year ended October 31, 2023 as compared to the year ended October 31, 2022 was primarily the result of lower units sales of the Company’s products. During the year ended October 31, 2022, the Company had cash provided by investing activities of $615,566, compared to cash used in investing activities of $824,743 for the year ended October 31, 2022 an increase in cash provided from investing activities of $1,440,309. The increase in cash provided by investing activities was due primarily due to proceeds received from the sale of the Company’s Basalt, Colorado lab facility of $740,957 and the reduction of payments made in connection with the Company’s purchase of laboratory equipment and leasehold improvements associated with the then new Basalt lab facility during the year ended October 31, 2023 as compared to the year ended October 31, 2022, partially offset from the increase in investments from non-marketable securities of $100,000 during the year ended October 31, 2023 as compared to the year ended October 31, 2022. 49 During the year ended October 31, 2023, the Company had cash used in financing activities of $415,186 compared to cash provided by financing activities of $7,635,110 for the year ended October 31, 2022. The decrease in cash provided by financing activities of $8,050,296 was due to the reduction in proceeds from the private sale of equity securities of $4,000,0000 and the sale of equity securities in other transactions of $3,170,000, decreases in capital contributed by a former executive of $250,000, increases in the shares repurchased in connection with litigation of $500,000, increases in repayment of notes payable of approximately $765,040 and increases in payments on finance leases of approximately $54,655, partially offset from increases in issuances of notes payable of $689,400 during the year ended October 31, 2023 as compared to the year ended October 31, 2022. Capital Resources The Company has historically relied on the sale of debt or equity securities, the restructuring of debt obligations and/or the issuance and/or exchange of equity securities to meet the shortfall in cash to fund its operations. During the fiscal year ended October 31, 2023 and through the date of this Annual Report, the Company completed the following private sales of its securities: Tysadco Pursuant to the Purchase Agreement entered into with Tysadco Partners LLC (“ Tysadco ”) on December 2, 2022, the Company submitted a put request to Tysadco to purchase 22,282 registered shares at a purchase price (as calculated pursuant to the Purchase Agreement) of $4.49, for a total of $100,000 (the “ Put Request”). On December 5, 2022, Tysadco funded the Put Request and the Company issued 22,282 shares to Tysadco. The proceeds from the share sale were used for working capital and general corporate purposes. SPA 23 On March 6, 2023, the Company entered into a Securities Purchase Agreement (“ SPA 23 ”) with AJB Capital, pursuant to which we sold a Promissory Note in the principal amount of $530,000 (“$ 530,000 Note ”) to AJB in a private transaction for a purchase price of $519,400 (giving effect to original issue discount of $10,600). In connection with the sale of the $530,000 Note, the Company also paid AJB Capital’s legal fees and due diligence costs of $15,000, resulting in net proceeds to the Company of $504,400, which was used for working capital and other general corporate purposes. The $530,00 Note bears interest at the rate of 12% per annum. The $530,000 Note matured on September 6, 2023 and was paid in full Private Offering – Convertible Promissory Notes During August and September 2023, the Company sold 2.9 Units (“ Units ”) to 4 investors in a private offering at a purchase price of $250,000 per Unit for an aggregate purchase price of $725,000. Each Unit consists of (a) a $250,000 in principal amount 8% Convertible Promissory Note due September 30, 2026; and (b) 7,813 common stock purchase warrants (the “ Warrants ”), each entitling the holder to purchase one share of common stock, $0.001 par value (“ Shares ”) at an exercise price of $20.00 for a period of five years from the date of issuance. Going Concern Consideration The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. The Company has had limited revenues since its inception. The Company incurred net losses of $6,986,708 for the year ended October 31, 2023 and used $2,197,275 of cash from operating activities during that period. In addition, the Company had an accumulated deficit and a stockholders’ deficit of $57,508,014 and $1,241,019, respectively, at October 31, 2023. The Company had a working capital deficit of $1,807,926 at October 31, 2023. 50 United States Food and Drug Administration ( “FDA ”) regulations which were announced in November 2017 and which became effective in May 2021 (require that the sale of products that fall under Section 351 of the Public Health Services Act pertaining to marketing traditional biologics and human cells, tissues and cellular and tissue based products (“ HCT/Ps ”) can only be sold pursuant to an approved biologics license application (“ BLA ”). The Company has not obtained any opinion or ruling regarding the Company’s operations and whether the processing, sales and distribution of the products it currently produces would be subject to the FDA’s previously announced intended enforcement policies regarding HCT/P’s. As a result of the above, the Company’s efforts to establish a stabilized source of sufficient revenues to cover operating costs has yet to be achieved and ultimately may prove to be unsuccessful unless (a) the Company’s ability to process, sell and distribute the products currently being produced or developed in the future are not restricted; and/or (b) additional sources of working capital through operations or debt and/or equity financings are realized. These financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. Management anticipates that the Company will remain dependent, for the near future, on additional investment capital to fund ongoing operating expenses and research and development costs related to development of new products and to perform required clinical studies in connection with the sale of its products. The Company does not have any assets to pledge for the purpose of borrowing additional capital. In addition, the Company relies on its ability to produce and sell products it manufactures that are subject to changing technology and regulations that it currently sells and distributes to its customers. The Company’s current market capitalization, common stock liquidity and available authorized shares may hinder its ability to raise equity proceeds. The Company anticipates that future sources of funding, if any, will therefore be costly and dilutive, if available at all. In view of the matters described in the preceding paragraphs, recoverability of the recorded asset amounts shown in the accompanying consolidated balance sheet assumes that (a) the Company is able to continue to produce products or obtain products under supply arrangements which are in compliance with current and future regulatory guidelines; (b) the Company will be able to establish a stabilized source of revenues, including efforts to expand sales internationally and the development of new product offerings and/or designations of products; (c) obligations to the Company’s creditors are not accelerated; (d) the Company’s operating expenses remain at current levels and/or the Company is successful in restructuring and/or deferring ongoing obligations; (e) the Company is able to continue its research and development activities, particularly in regards to remaining compliant with the FDA and ongoing safety and efficacy of its products; and/or (f) the Company obtains additional working capital to meet its contractual commitments and maintain the current level of Company operations through debt or equity sources. There is no assurance that the products we currently produce will not be subject to the FDA’s previously announced intended enforcement policies regarding HCT/P’s and/or the Company will be able to complete its revenue growth strategy. There is no assurance that the Company’s research and development activities will be successful or that the Company will be able to timely fund the required costs of those activities. Without sufficient cash reserves, the Company’s ability to pursue growth objectives will be adversely impacted. Furthermore, despite significant effort since July 2015, the Company has thus far been unsuccessful in achieving a stabilized source of revenues. If revenues do not increase and stabilize, if the Company’s ability to process, sell and/or distribute the products currently being produced or developed in the future are restricted, and/or if additional funds cannot otherwise be raised, the Company might be required to seek other alternatives which could include the sale of assets, closure of operations and/or protection under the U.S. bankruptcy laws. As of October 31, 2023, based on the factors described above, the Company concluded that there was substantial doubt about its ability to continue to operate as a going concern for the 12 months following the issuance of these financial statements. 51 Off-Balance Sheet Arrangements Our liquidity is not dependent on the use of off-balance sheet financing arrangements (as that term is defined in Item 303(a) (4) (ii) of Regulation S-K) and as of October 31, 2023 and through the date of this report, we had no such arrangements. Recently Issued Financial Accounting Standards There were no recently issued financial accounting standards that would have an impact on the Company’s financial statements. Critical Accounting Policies Our audited consolidated financial statements reflect the selection and application of accounting policies which require us to make significant estimates and judgments. See Note 2 to our audited consolidated financial statements included in this report, “ Summary of Significant Accounting Policies ”. Item 7A. Quantitative and Qualitative Disclosures about Market Risk As a “ smaller reporting company ,” as defined by Item 10 of Regulation S-K, we are not required to provide the information required by this item of Form 10-K. 52