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MZEI > SEC Filings for MZEI > Form 10-K on 18-Mar-2013All Recent SEC Filings

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Form 10-K for MEDIZONE INTERNATIONAL INC


18-Mar-2013

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 21E of the Exchange Act and Section 27A of the Securities Act. All statements contained in this report other than statements of historical fact are forward-looking statements. When used in this report or elsewhere by management from time to time, the words "believe," "anticipate," "intend," "plan," "estimate," "expect," "may," "will," "should," "seeks" and similar expressions are forward-looking statements. Such forward-looking statements are based on current expectations, but the absence of these words does not necessarily mean that a statement is not forward-looking. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors. For a more detailed discussion of such forward-looking statements and the potential risks and uncertainties that may impact upon their accuracy, see "Risk Factors." These forward-looking statements reflect our view only as of the date of this report. Except as required by law, we undertake no obligations to update any forward-looking statements. Accordingly, you should also carefully consider the factors set forth in other reports or documents that we file from time to time with the SEC.

Results of Operations

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

We were incorporated in January 1986. Until 2012, we operated as a development stage company primarily engaged in research into the medical uses of ozone. Our current work is in the field of hospital disinfection, not human therapies. During the year ended December 31, 2012, we generated our first significant revenues from the sale of our AsepticSure hospital disinfection system. We cannot predict when or if we will generate sufficient revenues or cash flows from sales to fund continuing or planned operations. As a consequence, 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.

For the year ended December 31, 2012, we had a net loss of $3,343,694, compared to a net loss for the year ended December 31, 2011 of $1,940,217. The primary reason for the significant increase in the net loss from the prior year is the issuance of restricted common stock and options to directors, officers, employees and consultants during 2012, as discussed below. Our primary expense is payroll and consulting fees, research and development expenses, office expenses, together with interest expense and additional expense recorded as a result of restricted common stock issuances and options granted by the Company. Net loss per common share was $0.01 per share in 2012 which was the same in 2011.

During 2012, we exited the development stage as we commenced planned principal operations. During the year ended December 31, 2012, we delivered units and finalized sales totaling $225,000 with related cost of goods sold totaling $144,404. As of December 31, 2012, we hold deposits for units to be delivered in the first quarter of 2013 totaling $34,554.

General and administrative expenses in 2012 were $2,726,989, compared to $946,833 in 2011. The majority of these expenses include payroll and consulting fees, professional fees, director fees, and performance bonuses. The significant increase from the prior year was primarily the result of the Company recognizing expense from the issuance of restricted shares of common stock for services performed by its directors, officers and employees valued at approximately $1,733,000 during 2012. The remaining general and administrative expenses include rent, office, and travel expenses.

Research and development expenses in 2012 were $635,685, compared to $945,848 in 2011. We continue to incur less research and development costs, as a result of less need for prototype development, consulting, and other research activities. Research and development expenses include prototypes, consultant fees, interface development costs, and research stage ozone generator and instrument development.

Principal amounts owed on notes payable totaled $298,536 as of December 31, 2012, and $283,249 as of December 31, 2011. Interest expense on these obligations totaled $24,425 in 2012 and $23,848 in 2011. The applicable interest rates on this debt ranged from 7.75 percent to 10 percent per annum.

At this time, based on the number of inquiries we are receiving, and the fact that the HAI problem continues to grow worse globally based on frequent media reports, we expect to see significant product demand as we increase production. We currently anticipate we will have delivered or have on order approximately 40 machines by the end of the second quarter of 2013.


Table of Contents

Liquidity and Capital Resources

As of December 31, 2012, our working capital deficiency was $3,307,973 compared to $3,264,298 at December 31, 2011. The total stockholders' deficit as of December 31, 2012, was $3,314,099 compared to $3,334,561 at December 31, 2011.

In 2012 we emerged from the development stage and began to generate revenues with the sale of our AsepticSure disinfection system in the latter half of the year. We will continue to require additional financing to fund operations and to undertake our new business plans, to further the ongoing testing, and to market our hospital and medical disinfection system. We believe that we will need approximately $1.5 million during the next 12 months for continued research, development, marketing, product manufacturing and related activities, as well as for general corporate purposes.

During 2012, we raised a total of $1,420,793 through the sale of 16,729,278 shares of common stock at prices ranging from $0.050 to $0.165 per share, which funds have been used to keep us current in our reporting obligations under the Securities Exchange Act of 1934, as amended (the "Exchange Act") and to pay certain other corporate obligations including the costs related to sales of our hospital disinfection system. Subsequent to December 31, 2012, through the date of this report, we have raised a total of $69,000 through the sale of 3,200,000 shares of common stock at a price of $0.03 per share.

Our consolidated financial statements included in this report have been prepared on the assumption that the Company will continue as a going concern. Since inception, it has been necessary for us to rely upon financing from the sale of our equity securities to sustain operations as indicated above. Additional financing will be required if we are to continue as a going concern. If we do not obtain additional financing in the near future, we may be required to curtail or discontinue operations or possibly to seek protection under the bankruptcy laws.

Critical Accounting Policies and Estimates

We have identified the policies below as critical to our business operations and the understanding of our results of operations.

The preparation of consolidated financial 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, revenues, 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 value of assets and liabilities. The actual results may differ from these estimates under different assumptions or conditions.

We account for equity securities issued for services rendered at the fair value of the securities on the date of issuance.

Recent Accounting Pronouncements

In 2011, the Financial Accounting Standards Board ("FASB") issued two Accounting Standard Updates ("ASU"); namely, ASU No. 2011-05 and ASU No. 2011-12, which amend guidance for the presentation of comprehensive income. The amended guidance requires an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The option to report other comprehensive income and its components in the statement of stockholders' equity has been eliminated. Although the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under existing guidance. We adopted these ASUs using one continuous statement for the years presented.

Off-Balance Sheet Arrangements

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholders' equity (deficit) or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interests in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.


Table of Contents

Outlook

The following discussion is intended to provide a brief overview of management's plan moving forward with our AsepticSure product line as we transition our operations from research and development to production and sales. The achievement of these plans is subject to risks. Those risks include, but are not limited to the results of ongoing clinical studies, economic conditions, product and technology development, production efficiencies, product demand, the existence of competitive products, an increasingly competitive environment for our technologies, successful testing and government regulatory issues as well as the outcome of various relationships with other companies that are still in the development stage at the time of filing of this report.

The AsepticSure production design targets a lead-free, high level green content and system design intended to be globally acceptable to the most stringent regulatory and import licensing bodies. Our original market penetration plan, initially targeted North America exclusively. However, that could be subject to change if market demand from other sectors, such as Asia, justifies an earlier expansion into those regions than originally planned. In any case, should we decide to pursue sales outside of North America this year, we expect that this would not occur until the latter half of the year.

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