The accompanying notes are an integral part of these condensed consolidated financial statements.
The accompanying notes are an integral part of these condensed consolidated financial statements.
The financial information of Medizone International, Inc. and subsidiaries (collectively, the Company), a Nevada corporation (the “Company”), included herein, is unaudited and has been prepared consistent with U.S. generally accepted accounting principles (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, these condensed consolidated financial statements do not include all information and notes required by US GAAP for complete financial statements. These notes should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2014.2015. In the opinion of management, these financial statements contain all adjustments (consisting solely of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of results for the interim periods presented. The results of operations for the three and nine months ended September 30, 2015March 31, 2016 are not necessarily indicative of the results to be expected for the full year.year ending December 31, 2016.
In late 2008, the Company assisted in the formation of the Canadian Foundation for Global Health (“CFGH”), a not-for-profit foundation based in Ottawa, Canada. The Company helped establish CFGH for two primary purposes: (1) to establish an independent not-for-profit foundation intended to have a continuing working relationship with the Company for research purposes that is best positioned to attract the finest scientific, medical and academic professionals possible to work on projects deemed to be of social benefit; and (2) to provide a means for the Company to use a tiered pricing structure for services and products in emerging economies and extend the reach of the Company’s technology to as many in need as possible.
Accounting standards require a variable interest entity (“VIE”) to be consolidated by a company if that company absorbs a majority of the VIE’s expected losses and/or receives a majority of the entity’s expected residual returns as a result of holding variable interests, which are the ownership, contractual, or other financial interests in the entity. In addition, a legal entity may be considered to be a VIE, if it does not have sufficient equity at risk to finance its own activities without relying on financial support from other parties. If the legal entity is a VIE, then the reporting entity determined to be the primary beneficiary of the VIE must consolidate its financial statements with those of the VIE. The Company determined that CFGH met the requirements of a VIE effective upon the first advance to CFGH inon February 12, 2009. Accordingly, the financial statements of CFGH have been consolidated with those of the Company for all periods presented.
The computations of basic and diluted net loss per common share are based on the weighted average number of common shares outstanding during the periods as follows:
Continuation of the Company as a going concern is dependent upon future revenues, obtaining additional capital and ultimately, upon the Company’s attaining profitable operations. The Company will require substantial additional funds to complete the continued development of its products and product manufacturing, and to fund expected additional losses, until revenues are sufficient to cover the Company’s operating expenses. If the Company is unsuccessful in obtaining the necessary additional funding, it will be forced to substantially reduce or cease operations.
The Company believes that it will need approximately $1,500,000 over the next 12 months for continued production manufacturing and related activities, research, development, and marketing activities, as well as for general corporate purposes.
The ability of the Company to continue as a going concern is dependent on its ability to successfully accomplish the plan described in the preceding paragraphs and eventually attain profitable operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty.
The Company is subject to certain claims and lawsuits arising in the normal course of business. In the opinion of management, uninsured losses, if any, resulting from the ultimate resolution of these matters, will not have a material effect on the Company’s consolidated financial position, results of operations, or cash flows.
Operating Leases
The Company operates a certified laboratory located at Innovation Park, Queen’s University in Kingston, Ontario, Canada, which provides a primary research and development platform. The lease term is on a month-to-month basis with a monthly lease payment of $1,375 Canadian dollars (“CD”) plus the applicable goods and services tax (“GST”). Leases for a second laboratory space for full scale room testing and a storage unit are on a month-to-month basis with a monthly lease paymentspayment of CD$1,375 and CD$475, respectively, plus the applicable GST.
The Company has a corporatenon-cancelable lease for office leasespace located in California, with monthly payments of approximately $2,300$500 through December 31, 2015.2016.
MEDIZONE INTERNATIONAL, INC. AND AFFILIATE
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 6 COMMON STOCK OPTIONS
In May 2012, the Company granted options for the purchase of 1,000,000 shares of common stock to a consultant for distribution channel related services to be performed. Options totaling 550,000 shares have vested as of September 30, 2015 and the remaining options will vest on the date certified by the Company as the date that certain other milestones are achieved. The options have an exercise price of $0.17 per share, and are exercisable for up to five years. The Company recognized no expense in connection with these options during the nine months ended September 30, 2015 and 2014. The Company will measure and begin recognizing the remaining expense, when the achievement of the required milestones becomes probable.
In August 2013, the Company granted options for the purchase of 250,000 shares of common stock to a consultant.consultant, of which 50,000 were immediately vested. These options are exercisable at $0.10 per share for five years from the date of grant with 50,000 options vesting immediately and are fully vested asthe other 200,000 options vesting upon the achievement of September 30,certain milestones, which were met in 2015. The Company recognized expense of $17,660$17,659 during the ninethree months ended September 30,March 31, 2015, as the required milestones were achieved.achieved for the remaining 200,000 options.
On February 26, 2014, the Company granted to a new director options for the purchase of 2,000,000 shares of common stock, with an exercise price of $0.1095 per share. Of these options, 1,000,000 vested on February 26, 2015 and the remaining 1,000,000 options will vest upon the successful achievement of certain milestones. Unvested options vest immediately in the event of a change in control of the Company. The options are exercisable for five years. The grant date fair value of the options was $192,184. The Company recognized $16,017 and $56,053 of expense in connection with these options during the ninethree months ended September 30, 2015 and 2014, respectively, and are fully vested as of September 30,March 31, 2015. Also, theThe Company will recognize anmeasure and begin recognizing the remaining expense totaling $96,092 when the achievement of the required milestones becomes probable.
On February 26, 2014, the Company granted options to six consultants and service providers for the purchase of a total of 250,000 shares of common stock at an exercise price of $0.1095 per share. Options for 200,000 shares vested immediately upon grant and options for the remaining 50,000 shares vested on January 9, 2015. The options are exercisable for five years. The grant date fair value of these options was $24,023. The Company recognized expense of $800 and $22,822in connection with these options during the ninethree months ended September 30, 2015 and 2014, respectively. The options were fully vested on January 9,March 31, 2015.
On April 30, 2014, the Company granted options for the purchase of a total of 1,350,000 shares of common stock for services rendered, as follows: 250,000 shares to each of four directors of the Company, 100,000 shares to each of two consultants, and 75,000 shares each to a consultant and an employee of the Company. All options vested upon grant, have an exercise price of $0.163 per share, and are exercisable for up to five years. The total value of these options at the date of grant was $193,234, which the Company recognized as an expense during the nine months ended September 30, 2014.
On May 6, 2014, the Company granted options to a consultant for the purchase of 100,000 shares of common stock at an exercise price of $0.19 per share. Options for 50,000 shares vested immediately upon grant and options for the remaining 50,000 shares vested during the ninethree months ended September 30, 2015.March 31, 2015, when certain milestones were achieved. The options are exercisable for five years. The grant date fair value of these options was $16,684. The Company recognized expense of $8,342 eachin connection with these options during the ninethree months ended September 30, 2015 and 2014.March 31, 2015.
On August 15, 2014, the Company granted options to a consultant for the purchase of 75,000 shares of common stock at an exercise price of $0.13 per share. The shares will vest when certain required milestones are achieved. The options are exercisable for five years. The grant date fair value of these options was $8,555. The Company will recognizemeasure and begin recognizing an expense when the achievement of the required milestones becomes probable.
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
NOTE 6 COMMON STOCK OPTIONS (continued)
On August 15, 2014, the Company granted options for services rendered to a director of the Company for the purchase of 1,000,000 shares of common stock at an exercise price of $0.13 per share. These options vested immediately upon grant. The Company recognized expense of $114,069 during the nine months ended September 30, 2014, which was the grant date fair value of these options.
On October 7, 2014, the Company granted to a new board member options for the purchase of 1,000,000 shares of common stock, with an exercise price of $0.16 per share. These options were fully vested on October 7, 2015. Unvested options vest immediately in the event of a change in control of the Company. The options are exercisable for five years from the date of grant.years. The grant date fair value of the options was $140,178. The Company recognized $105,133$35,044 of expense in connection with these options during the ninethree months ended September 30,March 31, 2015.
On December 4, 2014, the Company granted options to four consultants for the purchase of a total of 140,000 shares of common stock at an exercise price of $0.11 per share. These options have vested as of September 30, 2015.The shares will vest when certain required milestones are achieved. The options have an exercise price of $0.11 per share, and are exercisable for up to five years fromyears. Of the date of grant.140,000 options, 35,000 options vested during the three months ended March 31, 2015 and $3,367 was recognized as expense. The Company recognized $13,462will measure and recognize additional expense on the remaining options when the achievement of expense in connection with these options during the nine months ended September 30, 2015.required milestones becomes probable.
In August 2015, the Company granted options for the purchase of a total of 7,150,000 shares of common stock for services rendered, as follows: 6,000,000 shares total to five directors of the Company, 650,000 shares total to four consultants, and 500,000 shares to an employee of the Company. All options vested upon grant, have an exercise price of $0.088 per share, and are exercisable for up to five years. The total value of these options at the date of grant was $541,686,$541,687, which the Company recognized as an expense during the nine monthsyear ended September 30,December 31, 2015.
In August 2015, the Company granted options to a consultant for the purchase of a total of 250,000 shares of common stock at an exercise price of $0.085 per share. These options vested upon grant and are exercisable for up to five years. The total value of these options at the date of grant was $18,943,$18,991, which the Company recognized as an expense during the nine monthsyear ended September 30,December 31, 2015.
The Company estimated the fair value of the stock options described in the above paragraphs at the date of the grant, based on the following weighted average assumptions:
7
A summary of the status of the Company’s outstanding options as of September 30, 2015 and for the nine months then ended, is presented below:
| | | Shares | | | Weighted Average Exercise Price | |
Outstanding, beginning of the period | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Outstanding, end of the period | | | | | | | | |
| | | | | | | | |
MEDIZONE INTERNATIONAL, INC. AND AFFILIATE
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 6 COMMON STOCK OPTIONS (continued)
The Company estimates the fair value of each stock option award by using the Black-Scholes option-pricing model, which model requires the use of exercise behavior data and the use of a number of assumptions including volatility of the Company’s stock price, the weighted average risk-free interest rate, and the weighted average expected life of the options. Because the Company does not pay dividends, the dividend rate variable in the Black-Scholes option-pricing model is zero. Expense of $722,090$0 and $394,520$81,229 related to stock options was recorded for the ninethree months ended September 30,March 31, 2016 and 2015, and 2014, respectively. Excluding options whose performance condition is not yet deemed probable, as of March 31, 2016, the Company had unvested outstanding options with related unrecognized expense of $104,647. The Company will recognize this expense as thesewhen the achievement of the required milestones becomes probable.
The Company estimated the fair value of the stock options vest over their remaining useful lives, which range from 2 to 47 months.described in the above paragraphs at the date of the grant or date of re-measurement, based on the following weighted average assumptions:
| Risk-free interest rate | | 1.52% to 1.60 | % |
| Expected life | 5 years | |
| Expected volatility | | 131.33% to 136.34 | % |
| Dividend yield | | | 0.00 | % |
10A summary of the status of the Company’s outstanding options as of March 31, 2016 and changes during the three months then ended, is presented below:
| | | Shares | | | Weighted Average Exercise Price | |
| Outstanding, beginning of the period | | | 20,965,000 | | | $ | 0.145 | |
| Granted | | | - | | | | - | |
| Expired/Canceled | | | (250,000 | ) | | | 0.002 | |
| Exercised | | | - | | | | - | |
| Outstanding, end of the period | | | 20,715,000 | | | | 0.143 | |
| Exercisable | | | 19,640,000 | | | | 0.145 | |
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
NOTE 7 STOCK TRANSACTIONS AND SIGNIFICANT CONTRACTS
During August 2015,January 2016, the Company sold an aggregate of 2,600,000issued 500,000 restricted shares of common stock to five accredited investors for cash proceeds totaling $130,000,a consultant. The fair value of the shares on the date of grant was $48,000, or $0.05$0.096 per share. The Company recorded compensation expense of $48,000 in connection with the issuance of the shares.
During April, May and June 2015, the Company sold an aggregate of 7,500,000 restricted shares of common stock to eight accredited investors for cash proceeds totaling $375,000, or $0.05 per share.
During February and March 2015, the Company sold an aggregate of 3,000,000 restricted shares of common stock to seven accredited investors for cash proceeds totaling $150,000, or $0.05 per share.
During February 2015, the Company sold 300,000 restricted shares of common stock to an accredited investor for cash proceeds totaling $21,000, or $0.07 per share.
During January, February and March 2014, the Company sold an aggregate of 9,000,000 restricted shares of common stock to five accredited investors for cash proceeds totaling $450,000, or $0.05 per share.
During March 2014, the Company sold an aggregate of 7,050,000 restricted shares of common stock to 16 accredited investors for cash proceeds totaling $599,250, or $0.085 per share.
During September 2014, the Company sold an aggregate of 2,471,429 restricted shares of common stock to five accredited investors for cash proceeds totaling $173,000, or $0.07 per share.
NOTE 8 ACCOUNTS PAYABLE – RELATED PARTIES
As of September 30, 2015March 31, 2016 and December 31, 2014,2015, the Company had accounts payable ofowed $228,109 and $233,109, owedrespectively, to certain consultants for services rendered in prior years.services. These consultants are stockholders of the Company.Company and are related parties.
MEDIZONE INTERNATIONAL, INC. AND AFFILIATE
Notes to Condensed Consolidated Financial Statements (Unaudited)
NOTE 9 RECENT ACCOUNTING PRONOUNCEMENTPRONOUNCEMENTS
In April 2015,May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-03, “Interest – Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs.” To simplify presentation of debt issuance costs, the amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. For public companies, the ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of the ASU is permitted for financial statements that have not been previously issued. The Company is assessing the impact, if any, of implementing this guidance on its financial reporting, as well as the impact of early adoption of the ASU.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under US GAAP. The core principle of ASU No. 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU No. 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing US GAAP. The standard is effective for annual reporting periods beginning after December 15, 2017,2016, and interim periods therein. Early adoption is not permitted. The Company is currently assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This standard sets forth management’s responsibility to evaluate, each reporting period, whether there is substantial doubt about the entity’s ability to continue as a going concern, and if so, to provide related disclosures in the notes to the financial statements. The standardASU No. 2014-15 is effective for annual reporting periods beginning after December 15, 2016, and interim periods within annual periods ending after December 15, 2016. The Company does not expectis currently assessing the implementationimpact, if any, of implementing this guidance on the Company’s financial statement presentation.
In April 2015, the FASB issued ASU No. 2015-03, “Interest – Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs.” To simplify presentation of debt issuance costs, the amendments in ASU No. 2015-03 require that debt issuance costs related to have a materialrecognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in ASU No. 2015-03. ASU 2015-03 was effective for the Company in the quarter ended March 31, 2016 and there was no impact on its financial reporting.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740)
, simplifying the presentation of deferred income taxes on the balance sheet by requiring companies to classify everything as either a non-current asset or non-current liability. ASU No. 2015-17 is effective for annual reporting periods beginning after December 15, 2016, and interim periods within annual periods ending after December 15, 2016. The Company is currently assessing the impact, if any, of implementing this guidance on the Company’s financial statement presentation.
In February 2016, the FASB released ASU No. 2016-02, Leases (Topic 842), to bring transparency to lessee balance sheets. ASU No. 2016-02 will require organizations that lease assets (lessees) to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. ASU No. 2016-02 will apply to both types of leases; capital (or finance) leases and operating leases. Previously, US GAAP has required only capital leases to be recognized on lessee balance sheets. ASU No. 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early application is permitted. The Company is currently assessing the impact of ASU No. 2016-02 on its consolidated financial statements. accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU No. 2016-09 is effective for years ending after December 31, 2016, and the Company is currently assessing the impact of ASU No. 2016-09 on its consolidated financial statements.
MEDIZONE INTERNATIONAL, INC. AND SUBSIDIARIES
Notes to the Condensed Consolidated Financial Statements (Unaudited)
During September 2015, the Company entered into two notes payable with an unrelated third party which total $75,000. The notes are unsecured, have maturity dates in September 2018, bear interest of 12.0% per annum, with interest only payments due July 5 and January 5 each year through maturity. The holder may convert up to 20 percent of the then outstanding principal of the notes into conversion shares at $0.10 per share, at any time prior to the payment in full of the outstanding principle balance of the notes. The Company has the right to prepay these notes without premium or penalty at any time.
NOTE 1110 SUBSEQUENT EVENTS
The Company has evaluated subsequent events through the filing date of this Quarterly Report on Form 10-Q and no such eventsnoted none that require accounting or disclosure in the accompanying financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction
Medizone International, Inc. (a Nevada corporation) and subsidiariesaffiliate (collectively, “Medizone,” the “Company,” “we,” “us,” or “our”) is a Nevada corporationare engaged in conducting research into the use of ozone in the disinfection of surgical and other medical treatment facilities and in other applications. In SeptemberDuring 2012, we began to sell our patented ozone disinfection system, AsepticSure®. Our current work is in the field of hospital disinfection, rather than human therapies. We cannot predict when or if we will generate sufficient cash flows from operating activities to fund continuingexisting or planned operations. If we fail to obtain additional funding, we will be forced to suspend or permanently cease operations, and may need to seek protection under U.S. bankruptcy laws.
Recent Developments
On July 18, 2015,In January 2016, we received notification fromfinalized an agreement with a consultant to obtain the United States Environmental Protection Agency (“EPA”) regarding “Reportknow-how necessary to source the ultra violet (UV) ozone-generating bulbs and the manufacturing expertise used in the construction of Analysis for Compliancenew generators that are a key component to the efficiency of our Generation III AsepticSure® system. As consideration, we issued 500,000 common shares at $0.096 per share to this consultant and obtained access to the engineer of the generator design and supplier of the bulbs. In February 2016, we terminated the portion of the agreement with PR Notice 11-03” acknowledging that our submissionrespect to future payments to the consultant. During the first quarter of June 24, 2015 was found to be in full compliance2016, Medizone entered into an agreement with the standardsbulb supplier for manufacturing of submissionthe new generator design. The technology of data containedthe design is unique to our AsepticSure® Generation III system and Medizone is the only customer for this product. We believe that this agreement positions Medizone to have significantly increased production capabilities to address increases in demand during the second half of 2016, should it arise.
While our intention is to expand distribution in North America first, following final regulatory approval in the referenced PR Notice 11-03. The EPA has upU.S., we are also in the early stages of preparation to five months to complete its review ofwork with potential corporate distribution partners in Europe and Asia. In Chile, Peru, Columbia and Brazil, our application to register our AsepticSure® Oxidative Catalyst for use with our disinfection system in hospitals, clinics, the food industry, recreation/exercise/sporting facilities venues, and hotels. Theredistribution partner GYD S.A. is no assurance that our application will be accepted or that additional changes or modifications will not be requiredactively seeking regulatory approvals on a country by country basis in order to obtain registration. However,begin distribution activities in South America. In the U.S., we viewhave experienced increasing levels of interest from hospital administrators and infectious disease experts in both the private and government hospital sectors. We expect to sell devices directly to hospitals as a result of this developmentinterest, which will help us penetrate the U.S. market more quickly than if we are required to be significantestablish other distribution channels. As of the filing date of this quarterly report, the Company is more optimistic as to pending commercial success than at any other time in its recent history.
Results of Operations
Three Months Ended March 31, 2016 and will continue to work with the EPA and our professional advisors to obtain the requested registration.2015
During the quarter ended September 30, 2015, we sold two AsepticSure systems to a purchaser in Jeddah, Saudi Arabia. The purchaser, Al-Hidaya International Medical Services Company (Al-Hidaya), has also signed a non-binding letter of intent to become the Company’s exclusive distributor of the system in the Kingdom of Saudi Arabia, subject to the completion and execution of a binding distribution agreement. Pursuant to the letter of intent, Al-Hidaya sponsored the travel of a Medizone team to Saudi Arabia led by Dr. Michael E. Shannon, our President and Director of Medical Affairs, to introduce the system to interested medical and government representatives in Saudi Arabia and to provide initial training to Al-Hidaya personnel. Once an agreement has been executed, we expect Al-Hidaya to introduce a service model to the medical community throughout Saudi Arabia. In addition, the distribution agreement will provide that if Al-Hidaya is successful in establishing sales of the system and related services in Saudi Arabia, we will consider granting future distribution rights to Al-Hidaya for other countries in the Middle East on a country-by-country basis. A subsequent Al-Hidaya-sponsored trip by a senior Medizone technician to continue the training of Al-Hidaya technicians took place in October 2015. Al-Hidaya worked with Saudi regulatory authorities through system demonstrations both in-hospital and in Al-Hidaya offices in these two training sessions. Al-Hidaya has represented that it is in regular and frequent contact with the Saudi regulatory authorities and that it believes it will soon obtain full regulatory approval to import additional AsepticSure systems and operate them providing disinfection services. Following Saudi regulatory approval, it is anticipated the formal contract for future distribution and service rights will be finalized and executed. The distribution agreement will include additional system orders for production. Al-Hidaya has established office, supply and training space to support AsepticSure activities and has hired service technicians in preparation for a broader launch following receipt of regulatory approval. As of the date of this report, final Saudi regulatory approval is pending and the final distribution agreement with the proposed distributor had not been signed.
Subsequent to the quarter ended September 30, 2015, during the week of October 26-30, 2015, Dr. Shannon and other Medizone staff, with additional support from our Canadian distributor Wood-Wyant Canada, and at the request of Alberta Health Services (“AHS”), which represents 304 hospitals in the Province of Alberta, provided demonstrations of AsepticSure at two hospitals in the Province. AHS had requested this be a thorough demonstration providing the opportunity for a complete evaluation of our system. Until the completion of this evaluation period, it is our understanding that AHS has no immediate plans or intentions to make a procurement decision.
Results of Operations
Three Months Ended September 30, 2015 and 2014
During the quarter ended September 30, 2015,March 31, 2016, we continued our primary focus on the expansion of ouron: (1) expanding distribution channels, the continuedchannels; (2) seeking approval from the EPAU.S. Environmental Protection Agency (“EPA”); and (3) improving hardware and software features of the continued development of awireless computer control feature forinterface that operates the AsepticSure® system.
For the quarters ended March 31, 2016 and 2015, we had no revenues or associated cost of revenues.
For the quarter ended September 30, 2015,March 31, 2016, we had revenue of $167,000 and associated cost of goods sold of $88,411 from the sale of two AsepticSure systems in Saudi Arabia, compared to no revenues or costs of goods sold for the quarter ended September 30, 2014.
For the quarter ended September 30, 2015, we hadincurred a net loss of $798,136,$487,389, compared with a net loss of $545,143$409,491 for the quarter ended September 30, 2014. Our primary expenses are payroll and consulting fees, research and development costs, office expenses, interest expense and stock-based compensation expense recorded as a result of options granted to directors, an employee and consultants.March 31, 2015. The increase in net loss for the quarter ended September 30,March 31, 2016 compared to the comparable quarter of the prior year was due primarily to greater research and development expenses.
For the quarters ended March 31, 2016 and 2015, we incurred $279,064 and $312,832, respectively, in general and administrative expenses. General and administrative expenses consist primarily of payroll expense, consulting fees and professional fees. The decrease in expense for the quarter ended March 31, 2016 compared to the same period of the prior year was due to higher stock-based compensation expense forresulting from options granted to directors and consultants during the quarter.quarter ended March 31, 2015.
For the quarters ended September 30,March 31, 2016 and 2015, and 2014, we incurred $800,185$185,961 and $429,900, respectively, in general and administrative expenses. The majority of these expenses comprise payroll and consulting fees and professional fees. The increase in general and administrative expenses for the quarter ended September 30, 2015 over the comparable period in the prior year was due to higher stock-based compensation expense for options granted to directors, consultants and an employee.
For the quarters ended September 30, 2015 and 2014, we incurred $56,263 and $96,660,$77,233, respectively, in research and development expenses. Research and development expenses include consultantconsist primarily of consulting fees, interface development costs, prototypes, and research stage ozone generator and instrument development.development expenses. The decreaseincrease in expense for the quarter ended September 30, 2015March 31, 2016 over the comparable period inquarter of the prior year was due to loweran increase in development software, supplies, and consulting expenses including $48,000 of stock-based compensation expense for options grantedrelated to a consultant and an employee.the 500,000 restricted commons shares issued in January 2016.
Principal amounts owedbalances on notes payable totaled $382,689$381,007 and $298,241$372,396 as of September 30, 2015March 31, 2016 and December 31, 2014,2015, respectively. Interest expense on these obligations for the quarters ended September 30,March 31, 2016 and 2015, was $8,591 and 2014, was $6,820 and $6,192,$6,396, respectively. The annual interest rates on this debt range from 4.63% to 12.00% per annum..
Nine Months Ended September 30, 2015 and 2014
For the nine months ended September 30, 2015, we had revenue of $167,000 and associated cost of goods sold of $88,411 from the sale of two units in Saudi Arabia, compared to no revenues or cost of goods sold for the same period in the prior year.
For the nine months ended September 30, 2015, we had a net loss of $1,592,144, compared with a net loss of $1,532,712 for the nine months ended September 30, 2014. Our primary expenses are payroll, consulting fees, research and development costs, and office expenses, together with interest expense and additional expense recorded as a result of options granted to directors, employees and consultants. The slight increase in net loss for the nine months ended September 30, 2015, compared to the same period in 2014, was due to higher stock-based compensation expense for options granted to directors, employees and consultants. This was partially offset by reduced research and the proceeds from the sale of the two AsepticSure systems.
For the nine months ended September 30, 2015 and 2014, we incurred $1,401,199 and $1,164,435, respectively, in general and administrative expenses. The majority of these expenses comprise payroll, consulting fees and professional fees. The increase for the nine months ended September 30, 2015, compared to the same period in 2014, was due primarily to higher stock-based compensation for options granted to directors, employees and consultants. The remaining general and administrative expenses include rent, office expenses and travel expenses.
For the nine months ended September 30, 2015 and 2014, we incurred $210,336 and $313,153, respectively, in research and development expenses as a result of prototype development costs, consulting, and other research activities. The decrease for the nine months ended September 30, 2015, compared to the same period in 2014, was primarily due to lower stock-based compensation for the grant of options to consultants and an employee as well as the result of less research and development and prototype development costs. Research and development expenses include consultant fees, interface development costs, prototypes, and research stage ozone generator and instrument development.
Interest expense on notes payable during the nine months ended September 30, 2015 and 2014, was $19,438 and $18,651, respectively. The interest rates on this debt range from 4.63% to 12.00% per annum.
Liquidity and Capital Resources
As of September 30, 2015,March 31, 2016, our working capital deficiencydeficit was $3,388,643,$3,105,943, compared to a working capital deficiencydeficit of $3,235,007$2,675,007 as of December 31, 2014.2015. We have incurred significant losses from inception through September 30, 2015,March 31, 2016, which have resulted in an accumulated deficit of $34,954,568.$35,885,735. The stockholders’ deficit as of September 30, 2015March 31, 2016 was $3,197,275,$3,007,728, compared to $3,021,832$2,569,234 as of December 31, 2014. This change is due to the net loss for the nine months ended September 30, 2015 offset by the sale of restricted shares of common stock.2015.
We will continue to require additional financing to fund operations and to undertake our new business plans to further the on-going testing,test and to market our hospital and medical disinfection system. We believe we will need approximately $1,500,000 over the next 12 months for continued production manufacturing and related activities, research, development, and marketing activities, as well as for general corporate purposes.
During the nine monthsquarter ended September 30,March 31, 2015, we generated cash of $676,000$171,000 through the sale of 13,400,0003,300,000 shares of common stock to 20eight accredited investors at prices ranging from $0.05 per share to $0.07 per share. No cash was generated through the sale of shares of common stock for the quarter ended March 31, 2016. We anticipate that we will be able to raise additional funds, as needed, from certain of the accredited investors who have purchased shares during previous years, although we have no agreements at this time with any of these investors to purchase our securities, and there can be no assurance that these investors will purchase additional shares.
Going Concern
Our unaudited condensed interim consolidated financial statements included in this report have been prepared onwith the assumption that we will continue as a going concern. There is substantial doubt that we will be able to continue as a going concern. Through the date of this report on Form 10-Q, it has been necessary to relywe have relied upon financing from the sale of our equity securities to sustain operations as indicated above.operations. Additional financing will be required if we are to continue as a going concern. If additional financing is not obtained in the near future,term, we will be required to curtail or discontinue operations, or seek protection under the U.S. bankruptcy laws. Even if additional financing becomes available, there can be no assurance that it will be on terms favorable to us. In any event, this additional financing will likely result in immediate and possibly substantial dilution to existing stockholders.
Forward-Looking Statements and Risks
The statements contained in this report on Form 10-Q that are not historical are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements discuss our expectations, hopes, beliefs, anticipations, commitments, intentions and strategies regarding the future. They may be identified by the use of the words or phrases that include “believes,” “expects,” “anticipates,” “should,” “plans,” “estimates,” and “potential,” among others. Forward-looking statements include, but are not limited to, statements contained in Management's Discussion and Analysis of Financial Condition and Results of Operations regarding our financial performance, revenue and expense levels in the future, and the sufficiency of existing assetsliquidity to fund future operations and capital spending needs. Actual results could differ materially from the anticipated results or other expectations expressed in such forward-looking statements for the reasons detailed in our Annual Report on Form 10-K for the year ended December 31, 2014.2015.
We believe that many of the risks previously discussed in our SEC filings are part of doing business in the industry in which we operate and will likely be present in all periods reported. The fact that certain risks are endemic to the industry does not lessen their significance. The forward-looking statements contained in this report are made as of the date of this report and we assume no obligation to update them or to update the reasons why actual results could differ from those projected in such forward-looking statements. Among others, risks and uncertainties that may affect our business, financial condition, performance, development, and results of operations include:
| · | Rigorous government scrutiny and regulation of our products and planned products; |
| · | Potential effects of adverse publicity regarding ozone and related technologies or industries; |
| · | Failure to sustain or manage growth including the failure to continue to develop new products; and |
| · | The potential inability to obtain needed financing or to obtain funding on terms favorable to us. |
Critical Accounting Policies and Estimates
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”). The preparation of such statements requires our management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. By their nature, these judgments are subject to an inherent degree of uncertainty. On an on-going basis, we evaluate these estimates, including those related to intangible assets, expenses, and income taxes. We base our estimates on historical experience and other facts and circumstances that are believed to be reasonable, and the results form the basis for making judgments about the carrying values of assets and liabilities. The actual results may differ from these estimates under different assumptions or conditions.
We recognize revenue when a contractual arrangement exists, product is shipped, payment from the customer is reasonably assured, and the price is fixed or determinable. We record customer deposits that have not yet been earned as unearned revenue. Revenue is recognized only when title and risk of loss passes to the customer.
Our inventory consists of our AsepticSure® product and is valued on arecorded using the specific identification cost basis. We purchase our inventory as a finished product from unrelated manufacturing companies. We write off 100% of the cost of inventory that we specifically identify and consider obsolete or excessive to fulfill future sales estimates. NoManagement has determined that no inventory was obsolete or excessive as of September 30, 2015.March 31, 2016.
We record compensation expense in connection with the granting of stock options and their vesting periods based on their fair values. We estimate the fair values of stock option awards issued to employees, consultants and other non-employees at the grant date by using the Black-Scholes option-pricing model. For stock options issued to consultants and other non-employees, we estimate the related expense using the Black-Scholes option-pricing model. For stock options with a service condition, the expense is measured at the grant date and expensed over the vesting period. For stock options with a performance condition, the expense is measured when it is probable that the performance condition will be met, subsequently re-measured at each reporting date, and trued up upon the final completion of the performance condition.
Recent Accounting Pronouncements
In April 2015,May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-03, “Interest – Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs.” To simplify presentation of debt issuance costs, the amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. For public companies, the ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of the ASU is permitted for financial statements that have not been previously issued. We are assessing the impact, if any, of implementing this guidance on our financial reporting, as well as the impact of early adoption of the ASU.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under US GAAP. The core principle of ASU No. 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU No. 2014-09 defines a five-step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing US GAAP. The standard is effective for annual reporting periods beginning after December 15, 2017,2016, and interim periods therein. Early adoption is not permitted. We are currently assessing the impact, if any, of implementing this guidance on the Company’sour consolidated financial position, results of operations and liquidity.
In August 2014, the FASB issued ASU No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This standard sets forth management’s responsibility to evaluate, each reporting period, whether there is substantial doubt about the entity’s ability to continue as a going concern, and if so, to provide related disclosuresnote disclosures. The standard is for annual reporting periods beginning after December 15, 2016, and interim periods within annual periods ending after December 15, 2016. We are currently assessing the impact, if any, of implementing this guidance will have on the Company.
In April 2015, the FASB issued ASU No. 2015-03, “Interest – Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs.” To simplify presentation of debt issuance costs, the amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the notesbalance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The ASU is effective for the Company’s financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. This includes the quarter ended March 31, 2016. We have determined that the adoption of this ASU had no material impact on the Company’s financial reporting.
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740), simplifying the presentation of deferred taxes on the balance sheet by requiring companies to the financial statements. The standardclassify everything as either a non-current asset or non-current liability. ASU No. 2015-17 is effective for annual reporting periods beginning after December 15, 2016, and interim periods within annual periods ending after December 15, 2016. We do not expectare currently assessing the implementationimpact, if any, of implementing this guidance to have a material impact on the Company’s financial reporting.statement presentation.
In February 2016, the FASB released ASU No. 2016-02, Leases (Topic 842), to bring transparency to lessee balance sheets. ASU No. 2016-02 will require organizations that lease assets (lessees) to recognize assets and liabilities on the balance sheet for the rights and obligations created by all leases with terms of more than 12 months. ASU No. 2016-02 will apply to both types of leases; capital (or finance) leases and operating leases. Previously, US GAAP has required only capital leases to be recognized on lessee balance sheets. ASU No. 2016-02 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early application is permitted. We are currently assessing the impact of ASU No. 2016-02 on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting. ASU No. 2016-09 is intended to simplify several areas of accounting for share-based compensation arrangements, including the income tax impact, classification on the statement of cash flows and forfeitures. ASU No. 2016-09 is effective for years ending after December 31, 2016. We are currently assessing the impact of ASU No. 2016-09 on its consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
None.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information that is required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods that are specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our ChiefPrincipal Executive Officer and ChiefPrincipal Financial Officer, as appropriate, to allow timely decisions regarding any required disclosure. In designing and evaluating these disclosure controls and procedures, management recognizesrecognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
As of September 30, 2015,the end of the period covered by this report, our ChiefPrincipal Executive Officer and ChiefPrincipal Financial Officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a- 15(e)13a-15(e) under the Exchange Act). Based on this evaluation, the ChiefPrincipal Executive Officer and ChiefPrincipal Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2015.March 31, 2016.
Changes in Internal Control over Financial Reporting
There were no changes in our internal controlcontrols over financial reporting that occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controlcontrols over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
There were no material developments during the ninethree months ended September 30, 2015March 31, 2016 relative to the legal matters previously disclosed by the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
DuringWe did not sell any securities during the quarter ended September 30, 2015, we sold an aggregate of 2,600,000 restricted shares of common stock to five accredited investors for cash proceeds totaling $130,000 at a price of $0.05 per share, as follows:
| · | On August 31, 2015, we sold 900,000 shares of common stock to two accredited investors for cash proceeds of $45,000. |
March 31, 2016.
| · | On August 17, 2015, we sold 1,000,000 shares of common stock to an accredited investor for cash proceeds of $50,000. |
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures
Not applicable.
| · | On August 5, 2015, we sold 500,000 shares of common stock to an accredited investor for cash proceeds of $25,000. |
Item 5. Other Information
| · | On August 3, 2015, we sold 200,000 shares of common stock to an accredited investor for cash proceeds of $10,000. |
Effective April 30, 2016, our Chief Financial Officer, Thomas Auger, resigned to pursue other interests. Effective April 30, 2016, we entered into an employment agreement with our new Chief Financial Officer, Boyd G. Evans. We filed a Current Report on Form 8-K on May 6, 2016 to report this change. The Current Report includes biographical and business background information regarding Mr. Evans.
The purchasers of the shares in these private placements included a director of the Company as well as existing stockholders not otherwise affiliated with the Company. There were no underwriters or public solicitation involved in the offer or sale of these securities. The proceeds are being used for general operating expenses and the continuing development of the AsepticSure® hospital disinfection system. The offer and sale of these securities was made without registration under the Securities Act of 1933, in reliance upon exemptions from registration, including, without limitation, the exemption provided under Section 4(a)(2) of the Securities Act for private and limited offers and sales of securities made solely to accredited investors.
| Exhibit 31.1 | |
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| Exhibit 31.2 | |
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| Exhibit 32.1 | |
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| Exhibit 32.2 | |
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| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Taxonomy Extension Schema |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
MEDIZONE INTERNATIONAL, INC.
(Registrant)
/s/ Edwin G. Marshall
Edwin G. Marshall, Chairman and Chief Executive
Officer (Principal Executive Officer)
/s/ Thomas (Tommy) E. Auger Boyd G. Evans
Thomas (Tommy) E. Auger,Boyd G. Evans, Chief Financial Officer
(Principal Financial and Accounting Officer)
NovemberMay 13, 20152016