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MZEI > SEC Filings for MZEI > Form 10-Q on 26-Apr-2013All Recent SEC Filings

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Form 10-Q for MEDIZONE INTERNATIONAL INC


26-Apr-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Introduction

Medizone International, Inc. and subsidiaries (collectively, "Medizone," the "Company," "we," "us," or "our") has been a development stage company conducting research into the use of ozone in the disinfection of surgical and other medical treatment facilities and in other applications. During 2012, we emerged from the development stage as we began to sell our patented ozone disinfection system, AsepticSure.

Recent Developments

We took delivery at the end of January 2013 of the first AsepticSure system constructed by our new contract manufacturer, Transformix Engineering, located in Ontario, Canada ("Transformix"). Transformix delivered an additional three units from the initial build order during February 2013. The units passed performance confirmation testing at our Innovation Park laboratories. The build quality of the system appears to be very good. We believe we now have a manufacturing source that is capable of meeting our anticipated production requirements.

Subsequent to December 31, 2012, Singapore issued us our Health Care Patent (P-no.: 176977 ? Healthcare Facility Disinfecting Process and System with Oxygen/Ozone Mixture). We consider this significant for our business growth in Asia. According to published reports, the treatment of non-resident and foreign patients (the "medical tourism market") in Singapore has been growing rapidly and as reported by the Singapore press holdings on-line portal AsiaOne, there were approximately 850,000 foreign patients treated in Singapore medical facilities during 2012, producing revenues of about $3.5 billion. We believe Singapore could become a lucrative market for AsepticSure sales as the medical system there seeks to distinguish itself with the safest hospitals possible in order to promote continued growth in the expanding medical tourism market.

In January 2013, we completed successful safety and preliminary operational trials of the AsepticSure system at the Belleville General Hospital site of Quinte Health Care in Canada. Belleville General is a medium-sized community hospital affiliated with Queen's University in Ontario, Canada. In collaboration with Contamination Control Company (C3), an Ontario-based provider of AsepticSure services in Canada, these trials are believed to unequivocally demonstrate the safety and ease of operation of the AsepticSure disinfection system in a functioning health care setting. During the tests, the turnaround time for disinfection and reoccupation of the hospital rooms was less than 90 minutes.

Results of Operations

Three Months Ended March 31, 2013 and 2012

During the third quarter of 2012, we exited the development stage as we commenced planned principal operations. During the quarter ended March 31, 2013, we had revenues of $4,554 with cost of goods sold of $4,000.

For the three months ended March 31, 2013, we had a net loss of $387,298, compared with a net loss for the three months ended March 31, 2012 of $1,412,061. The reduction in net loss for the quarter ended March 31, 2013 compared to the same quarter of 2012, was due to options granted to members of the Board of Directors for services rendered as well as consultants for performance bonuses during 2012, which options vested immediately and resulted in $1,057,600 of expense. Our primary expenses are payroll and consulting fees, research and development costs, office expenses and interest expense.

For the three months ended March 31, 2013 and 2012, we incurred $285,211 and $1,329,766, respectively, in general and administrative expenses. The majority of these expenses include payroll and consulting fees and professional fees. The decrease during the three months ended March 31, 2013 over the prior year comparable period was primarily the result of the expense associated with options granted to members of the Board of Directors as well as consultants for performance bonuses as described above. The remaining general and administrative expenses include rent, office and travel expenses.

For the three months ended March 31, 2013 and 2012, we incurred $85,771 and $68,249, respectively, in research and development expenses. Research and development expenses include consultant fees, interface development costs, prototypes, and research stage ozone generator and instrument development and remained consistent from the prior year period.

Principal amounts owed on notes payable totaled $307,064 and $298,536 as of March 31, 2013 and December 31, 2012, respectively. Interest expense on these obligations during the three months ended March 31, 2013 and 2012 was $6,366 and $6,185, respectively. The applicable interest rates on this debt ranged from 7.75% to 10% per annum.


Table of Contents

Liquidity and Capital Resources

As of March 31, 2013, our working capital deficiency was $3,283,615, compared to a working capital deficiency of $3,307,973 as of December 31, 2012. We have incurred significant losses from inception through March 31, 2013, which have resulted in an accumulated deficit of $30,472,290. The stockholders' deficit as of March 31, 2013 was $3,293,760, compared to $3,314,099 as of December 31, 2012 due to sale of restricted shares of common stock being greater than the net loss for the three month period ended March 31, 2013.

In 2012, we emerged from the development stage. 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 $2,000,000 over the next 12 months for continuing research expenses, marketing, product manufacturing and related activities, as well as for general corporate purposes.

During the three months ended March 31, 2013, we generated cash of $367,000 through the sale of 12,233,332 shares of common stock to 12 accredited investors at a price of $0.03 per share. 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, and there is no assurance that these investors will purchase additional shares.

Going Concern

Our unaudited financial statements included in this report have been prepared on the assumption that the Company will continue as a going concern. There is substantial doubt that the Company will be able to continue as a going concern. Through the date of this report, it has been necessary 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 additional financing is not obtained in the near future, we will be required to curtail or discontinue operations, or seek protection under the bankruptcy laws. Even if additional financing becomes available, there can be no assurance that it will be on terms favorable to the Company. In any event, this additional financing will likely result in immediate and possibly substantial dilution to existing shareholders.

Forward-Looking Statements and Risks Affecting the Company

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 "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 assets 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, 2012.

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 ability to obtain needed financing.


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Critical Accounting Policies and Estimates

This Management's Discussion and Analysis of Financial Condition and Results of Operations is based upon our unaudited consolidated financial statements, which have been prepared in accordance with US 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 value of assets and liabilities. The actual results may differ from these estimates under different assumptions or conditions.

We commenced sales and emerged from the development stage in 2012. 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 customers.

Our inventory consists of our AsepticSure product and is valued on a "specific identification 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. We did not deem any inventory obsolete or excessive as of March 31, 2013.

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

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