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MZEI > SEC Filings for MZEI > Form 10-Q on 31-Oct-2013All Recent SEC Filings

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Form 10-Q for MEDIZONE INTERNATIONAL INC


31-Oct-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") had been in the development stage conducting research into the use of ozone in the disinfection of surgical and other medical treatment facilities and in other applications through the second quarter of 2012. During the third quarter of 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 Kingston, Ontario, Canada ("Transformix"). Transformix delivered an additional four 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. Six additional systems are in the late stage of production and are scheduled for delivery in the fourth quarter of 2013.

In January 2013, 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.

In April 2013, we entered into an agreement with Wood Wyant Canada ("Wood Wyant"), a subsidiary of Sanimarc Group, to become a National Hospital Distributor of AsepticSure® in Canada. Wood Wyant is national in scope and regional in focus, serving Canada from 16 diverse locations across all 10 provinces, providing both sales and service to the hospital market. We delivered an initial order of five systems to Wood Wyant for proceeds totaling $375,000.

In July 2013, Belleville General Hospital suffered an outbreak of MRSA (Methicillin-Resistant Staphylococcus Aureus) infections. The hospital requested the help of Medizone in quelling the outbreak. All of the rooms that had been quarantined due to the outbreak have now been disinfected with AsepticSure® and returned to service. This disinfection process demonstrated the high level of safety of our AsepticSure® process in an operational hospital setting. Comparing sampling results before and after the contaminated ward-rooms were treated, it appears to confirm 100% bactericidal kill was achieved (>6-log) for the pathogens involved. To date, we have not been made aware of any new re-infection issues in any of the rooms disinfected with AsepticSure in July.

On October 8, 2013, the United States Patent and Trademark Office issued the Company US Patent Number 8,551,399 titled "Healthcare Facility Disinfecting System." Our Health Care patent application has now been granted in the United States, Canada and Singapore. The application is also pending in the 38 member countries that are parties to the European Union ("EU") Patent Treaty, as well as Korea, Japan, China, India, Brazil and Mexico. We expect that this ruling by the US Examiner will prove favorable for us in connection with other pending applications. As an example, the application for our government variant of AsepticSure (designed for building remediation following biological attack), was originally challenged by the US Examiner, stating many of the same objections as originally stated for our Health Care application. Now that we've received a grant of the health care patent, we anticipate that the successful approach to overcoming those same objections for the government variant is likely to be accepted.

Results of Operations

Three Months Ended September 30, 2013 and 2012

During the third quarter of 2012, we exited the development stage as we commenced planned principal operations and had revenues of $150,000 with cost of revenues of $86,725. During the quarter ended September 30, 2013, we had no revenues or cost of revenues. All of our revenues have been from the sale of AsepticSure® devices.


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For the three months ended September 30, 2013, we had a net loss of $345,691, compared with a net loss for the three months ended September 30, 2012 of $1,072,381. The reduction in net loss for the quarter ended September 30, 2013 compared to the same quarter of 2012, was due to lower research and development, general and administration expenses as well as significantly lower additional expense recorded as a result of options granted to directors, employees and consultants in 2012. Our primary expenses are cost of manufacturing, payroll and consulting fees, research and development costs, office expenses and interest expense.

For the three months ended September 30, 2013 and 2012, we incurred $263,385 and $932,872, respectively, in general and administrative expenses. The majority of these expenses include payroll, consulting fees and professional fees. The decrease during the three months ended September 30, 2013 over the prior year comparable period was primarily the result of the expense associated with options granted to directors, employees and consultants in 2012. The remaining general and administrative expenses include rent, office and travel expenses.

For the three months ended September 30, 2013 and 2012, we incurred $64,761 and $187,126, 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 significantly decreased from the prior year period as we have now commenced planned operations.

Principal amounts owed on notes payable totaled $310,334 and $298,536 as of September 30, 2013 and December 31, 2012, respectively. Interest expense on these obligations during the three months ended September 30, 2013 and 2012 was $6,125 and $6,097, respectively. The applicable interest rates on this debt ranged from 7.75% to 10.00% per annum.

Nine Months Ended September 30, 2013 and 2012

For the nine months ended September 30, 2013, we had a net loss of $957,896, compared with a net loss for the nine months ended September 30, 2012 of $3,041,730. Our primary expenses are payroll, consulting fees, research and development costs, office expenses, interest expense and any additional expense recorded as a result of options granted to directors, employees and consultants. The reduction in net loss for the nine months ended September 30, 2013 compared to the same period in 2012, was due to an increase in revenues, lower operating expenses and significantly less expense from options granted to directors, employees and consultants in 2012.

For the nine months ended September 30, 2013 and 2012, we incurred $856,664 and $2,514,018, respectively, in general and administrative expenses. The primary decrease for the nine months ended September 30, 2013 compared to the same period in 2012, was the grant in 2012 of options to directors, officers and employees resulting in compensation expense of approximately $1,700,000. Our primary expenses are payroll, consulting fees, and professional fees. The remaining general and administrative expenses include rent, office expenses and travel expenses.

For the nine months ended September 30, 2013 and 2012, we incurred $184,643 and $546,054, respectively, in research and development costs as a result of prototype development costs, consulting, and other research activities. The primary decrease for the nine months ended September 30, 2013 compared to the same period in 2012, was less research and development and prototype development costs as the Company commenced planned operations. Research and development expenses include consultant fees, interface development costs, prototypes, and research stage ozone generator and instrument development.

Interest expense on the notes payable during the nine months ended September 30, 2013 and 2012 was $18,880 and $18,445, respectively. The applicable interest rates on this debt ranged from 7.75% to 10.00% per annum.

Liquidity and Capital Resources

As of September 30, 2013, our working capital deficit was $2,980,355, compared to a working capital deficit of $3,307,973 as of December 31, 2012. We have incurred significant losses from inception through September 30, 2013, which have resulted in an accumulated deficit of $31,042,888. The stockholders' deficit as of September 30, 2013 was $2,979,965, compared to $3,314,099 as of December 31, 2012.

In the third quarter of 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 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.


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During the nine months ended September 30, 2013, we generated cash of $1,160,250 through the sale of 26,891,412 shares of common stock to 26 accredited investors at prices ranging from $0.03 to $0.06 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 condensed consolidated 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 stockholders.

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.

Critical Accounting Policies and Estimates

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 United States 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.

We commenced commercial 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.


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Any 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 have any inventory as of September 30, 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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