þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31,June 30, 2016

or

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

For the transition period from __________ to ____________

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑   No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☑   No ☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐   No ☑

As of May 13,July 31, 2016, the registrant had 369,934,068 shares of common stock issued and outstanding.

 

 

 

The financial information of Medizone International, Inc., 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, 2015. In the opinion of management, these financial statements contain all adjustments (consisting solely of normal recurring adjustments) which are necessary 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 six months ended March 31,June 30, 2016 are not necessarily indicative of the results to be expected for the full 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’sVIE’s expected residual returns as a result of holding variable interests, which are the ownership, contractual, or other financial interests in the entity.VIE. 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 on 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:

Common stock equivalents, consisting of options to purchase 20,715,00020,865,000 shares, have not been included in the calculation as their effect is antidilutive for the periods presented.

The Company’s consolidated financial statements are prepared in accordance withusing US GAAP which assumes an entity isapplicable to a going concern andwhich contemplates the realization of assets and liquidation of liabilities in the normal course of business.  The Company has incurred significant losses from its inception through March 31,June 30, 2016, which have resulted in an accumulated deficit of $35,885,735$36,206,508 as of March 31,June 30, 2016.  The Company does not have funds sufficient to cover its operating costs for the next 12 months, has negative equity, and has a working capital deficit of $3,105,943$3,419,407 as of March 31,June 30, 2016. The Company has relied exclusively on debt and equity financing to sustain its operations.  Accordingly, there is substantial doubt about the Company’s ability to continue as a going concern.

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.  No cash was generated through the sale of shares of common stock for the quarter ended March 31,June 30, 2016.   

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.

Rakas vs. Medizone International, Inc. - A former consultant brought this action against the Company claiming the Company had failed to pay consulting fees under a consulting agreement.  In September 2001, the parties agreed to settle the matter for $25,000.  The Company, however, did not have the funds to pay the settlement and the plaintiff moved the court to enter a default judgment in the amount of $143,000 in January 2002.  On May 8, 2002, the court vacated the default judgment and requested that the Company post a bond of $25,000 to cover the settlement previously entered into by the parties.  The Company has been unable to post the required bond amount as of the date of this report.  Therefore, the Company has recorded, as part of accounts payable, the original default judgment in the amount of $143,000, plus fees totaling $21,308, as of March 31,June 30, 2016 and December 31, 2015.  The Company intends to contest the judgment if and when it is able to in the future.

As of March 31,June 30, 2016 and December 31, 2015, the Company has $224,852 of past due payables for which the Company has not received invoicesstatements or demands for payment for over 10 years.  Although management of the Company does not believe that the amounts will be required to be paid, the amounts are recorded as other payables until such time as the Company is certain that no liability exists and until the applicable statute of limitations has expired.

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$1,537 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 paymentpayments of CD$1,3751,537 and CD$475, respectively, plus the applicable GST.  

The Company has a non-cancelable lease for office space located in California, with monthly payments of approximately $500$2,400 through December 31, 2016.

In August 2013, the Company granted options for the purchase of 250,000 shares of common stock to a 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 the other 200,000 options vesting upon the achievement of certain milestones, which were met in 2015.  The Company recognized expense of $17,659 during the threesix months ended March 31,June 30, 2015, as milestones were 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.years from the date of grant. The Company recognized $16,017 of expense in connection with these options during the threesix months ended March 31,June 30, 2015. The Company will measure and begin recognizing the remaining expense 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 January 9, 2015.  The options are exercisable for five years.years from the date of grant. The grant date fair value of these options was $24,023. The Company recognized expense of $800 in connection with these options during the threesix months ended March 31,June 30, 2015.

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 threesix months ended March 31,June 30, 2015, when certain milestones were achieved.  The options are exercisable for five years.years from the date of grant. The Company recognized expense of $8,342 in connection with these options during the threesix months ended March 31,June 30, 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.years from the date of grant.  The Company will measure and begin recognizing an expense when the achievement of the required milestones becomes probable.

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.  The options are exercisable for five years.  The grant date fair value of the options was $140,178.  The Company recognized $35,044$70,088 of expense in connection with these options during the threesix months ended March 31, 2015. June 30, 2015 respectively.

On December 4, 2014, the Company granted options to four consultants for the purchase of 140,000 shares of common stock at an exercise price of $0.11 per share.  The shares will vest when certain required milestonesoptions are achieved.  The optionsfully vested and are exercisable for five years. Ofyears from the 140,000 options, 35,000 options vesteddate of grant.  The Company recognized expense of $13,461 during the threesix months ended March 31, 2015 and $3,367 was recognized as expense. The Company will measure and recognize additional expense on the remaining options when the achievement of required milestones becomes probable.June 30, 2015.

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.years from the date of grant.  The totalaggregate fair value of these options at the date of grant was $541,687, which the Company recognized as an expense during the year ended 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 totalaggregate fair value of these options at the date of grant was $18,991, which the Company recognized as an expense during the year ended December 31, 2015.

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 $0 and $81,229$126,369 related to stock options was recorded for the threesix months ended March 31,June 30, 2016 and 2015, respectively.  Excluding options whose performance condition is not yet deemed probable, as of March 31,June 30, 2016, the Company had unvested outstanding options with related unrecognized expense of $104,647.$112,147.  The Company will recognize this expense over the service period or when the achievement of the required milestones becomes probable.

The Company estimated the fair value of the stock options described in the above paragraphs atas of the date of the grant or date of re-measurement, based on the following weighted averageweighted-average assumptions:

A summary of the status of the Company’s outstanding options as of March 31,June 30, 2016 and changes during the threesix months then ended, is presented below:

During January 2016, the Company issued 500,000 restricted shares of common stock to a consultant. The fair value of the shares on the date of grant was $48,000, or $0.096 per share.  The Company recorded compensation expense of $48,000 in connection with the issuance of the shares.

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.

 

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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, 2016,2017, and interim periods therein.  EarlyEarlier adoption is not permitted.permitted only as of annual reporting periods beginning after December 15, 2016.  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 ConcernConcern..  This standard  ASU No. 2014-15 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 financial statements.  ASU 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 is currently assessing the impact, 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 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 ASU No. 2015-03.  ASU 2015-03 was effective for the Company infor the quarter ended March 31, 2016 and there was no impact on its financial reporting.

 

 

 

 

 

 

 

May 13,August 15, 2016