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MZEI > SEC Filings for MZEI > Form 10-Q on 25-Oct-2012All Recent SEC Filings




Quarterly Report

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


Medizone International, Inc. and its subsidiaries (collectively, "Medizone," the "Company," "we," "us," "our") is 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.

Ozone is a gas composed of three oxygen atoms (O3) in an unstable and highly reactive form. Ozone naturally tends to seek its normal state, exhibiting a short half-life as it reverts back to oxygen (O2) fairly rapidly. There are many uses of ozone as a disinfecting agent. Although Ozone does react with organic matter it leaves no residue in water or on the treated product. Ozone also does not form any toxic byproducts and when used in water which means that no change in color or flavor results from ozone treatment, unlike chlorine treatment. Ozone can be generated onsite from ambient air or from oxygen. Each method has its advantages and unique challenges. It has been demonstrated that ozone can be economically produced and is effectively used as an agent in food processing, equipment sanitizing, and in water treatment facilities globally. Ozone technology is replacing conventional sanitation techniques such as chlorine, steam, or hot water.

Development of Our Business

Prior to 2008, our research and development activity had been dedicated to (i) seeking regulatory approval of a precise mixture of ozone and oxygen, and the process of inactivating lipid-enveloped viruses for the intended purpose of decontaminating blood and blood products and assisting in the treatment of certain diseases; (ii) developing or acquiring the related technology and equipment for the medical application of our products, including a drug production and delivery system; and, (iii) applying our novel technology to the problem of nosocomial infections world-wide.

Early in 2008, we began to consider other applications of our core technologies and new technologies with lower development costs with the objective of moving us to revenue production in the shortest period of time. This new direction included re-positioning the Company to pursue an initiative in the field of hospital disinfection. Following laboratory results with Bacillus subtilis, an internationally recognized surrogate for anthrax, that produced 7 log reductions (sterilization), we have expanded our research and business plan to include bio-terrorism countermeasures as well as hospital disinfection and critical infrastructure decontamination.

By way of explanation, "log reduction" is a mathematical term (as is "log increase") used to show the relative number of live microbes eliminated from a surface by disinfecting or cleaning. For example, a "5-log reduction" means lowering the number of microorganisms by 100,000-fold, that is, if a surface has 100,000 pathogenic microbes on it, a 5-log reduction would reduce the number of microorganisms to one, as indicated in the following table:

· 1 log reduction means the number of germs is 10 times smaller
· 2 log reduction means the number of germs is 100 times smaller
· 3 log reduction means the number of germs is 1000 times smaller
· 4 log reduction means the number of germs is 10,000 times smaller
· 5 log reduction means the number of germs is 100,000 times smaller
· 6 log reduction means the number of germs is 1,000,000 times smaller
· 7 log reduction means the number of germs is 10,000,000 times smaller

Corporate Operations

This change in our research and development focus was based, in part, on a review of published data on hospital-derived infections, an area of rapidly growing concern in the medical community. We identified an opportunity to build on our experience with ozone technologies and ozone's bio-oxidative qualities in pursuing this initiative and shifted our near term efforts towards one of our founding tenets, namely that under the right conditions, ozone can be extremely effective at sterilizing biological fluids (blood, serum, and plasma and plasma fractionates) as well as biologically contaminated equipment and spaces.

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We expect our unique ozone generating technologies will play a vital role in addressing what public health officials and surgeons world-wide are beginning to recognize as "the silent epidemic" (American Academy of Orthopedic Surgeons, May 2008, copy on file with the Company ("AAOS Study")), a reference to MRSA (Methicillin-resistant Staphylococcus aureus) infection. This is a strain of Staphylococcus aureus bacteria ("staph") that is resistant to the broad-spectrum antibiotics commonly used to treat it. MRSA can be fatal. According to the AAOS Study, "the number of hospital admissions for MRSA has exploded in the past decade. By 2005, admissions were triple the number in 2000 and 10-fold higher than in 1995.

In 2005, in the United States, 368,600 hospital admissions for MRSA - including 94,000 invasive infections - resulted in 18,650 deaths. The number of MRSA fatalities in 2005 surpassed the number of fatalities from hurricane Katrina and AIDS combined and is substantially higher than fatalities at the peak of the U.S. polio epidemic." Indeed, biological contamination of medical treatment areas such as hospitals and chronic care facilities has recently been identified by several world renowned public health institutions, including the Centers for Disease Control or "CDC" (CDC Report, 17 Oct, 2007, copy on file with the Company), as one of the greatest threats to public health and safety in the industrial world. This concern was reflected in an article published in the journal Science (18 July 2008, Vol. 321, pp 356-361, copy on file with the Company) which estimated that hospital-based infections in 2006 accounted for almost 100,000 deaths in the United States. We expect that current data, if available, would indicate that deaths in the United States from hospital-acquired MRSA infections exceed 100,000 per year.

In response to this situation, we have developed a prototype of a highly portable, low-cost, ozone-based technology ("AsepticSure™") specifically for the purpose of decontaminating and sterilizing hospital surgical suites, emergency rooms, and intensive care units. Since this technology is not considered a medical treatment or a diagnostic device, its development pathway is not subject to a stringent and expensive regulatory review process. We anticipate that the development pathway will be based on independent peer-reviewed science and engineering excellence. Our team is also developing a variant of AsepticSure™ for governmental use with bio-terrorism countermeasures.

During May 2009, we commenced the first of a series of trials designed to confirm that our AsepticSure™ Hospital Disinfection System can rapidly eliminate hospital-based bacterial pathogens known to be responsible for the growing number of deaths and serious infections currently plaguing the healthcare system worldwide. We engaged an internationally recognized expert in medical microbiology and hospital infections to lead these trials.

We commenced a second series of laboratory trials in early June 2009, after the first series produced results that our researchers deemed to have demonstrated significant bactericidal effects against C. difficile, E. coli, Pseudomonas aeruginosa, MRSA and Vanocomycin-resistant Enterococci ("VRE"), the main causative agents of hospital derived nosocomial infections. This second series of laboratory trials resulted in what are estimated to be levels of bactericidal action necessary to achieve our commercial objectives.

In October 2009, we began a third series of laboratory trials to establish the precise protocols necessary to obtain maximum bactericidal action in combination with minimum turn-around times in keeping with normal hospital flow patterns. This third series of laboratory trials was completed during January 2010 and demonstrated predictably greater than 6 logs (99.9999%) of bacterial "kill" across the full spectrum of hospital contaminants including MRSA, C difficile, E coli, Pseudomonas aeruginosa and VRE in addition to the internationally accepted surrogate for anthrax, Bacillus subtilis. Our research has shown that the technology can now achieve a level of bacterial decontamination heretofore unseen in open space settings using conventional means. We expect that this development will significantly expand the utility and acceptance or our AsepticSure™ technology.

In connection with our trials described above, we also designed and produced a development prototype which has demonstrated that it can reach both the charge time and saturation requirements of its design criteria. In January 2010, we started mock-up trials for both public (hospital) and government (bio-terrorism countermeasures) applications of our system. Results obtained during early February 2010 demonstrated that every full-scale test run completed in our hospital room mock-up facility had resulted in the total elimination of all bacteria present in the room. Additional testing was designed to confirm in a more realistic hospital setting these laboratory findings indicating extremely high antibacterial efficacy for our novel technology (6-7.2 log reductions) against the primary causative agents of hospital acquired infections (HAIs), sometimes referred to as "Super Bugs." We completed multiple runs with very high concentrations of MRSA, VRE and E. coli samples that were distributed throughout the test room. In every instance, the AsepticSure™ system produced greater than 6 log (99.9999%) reductions, which by definition, is sterilization. We have now systematically collected empirically verifiable scientific data on all of the remaining causative agents of HAIs. We have also disinfected Bacillus subtilis, the recognized surrogate for anthrax in full-sized room settings to a sterilization standard of >6 log, which we interpret as a positive indicator that AsepticSure™ could play a vital role in the government arena of bio-terrorism countermeasures.

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We started hospital beta-testing of a prototype system utilizing the original technology during the summer of 2010, with the initial phases successfully completed during early October 2010. The first round of in-hospital beta-testing for this AsepticSure™ hospital disinfection system was completed on October 9, 2010, at a Hotel Dieu hospital in Kingston, Ontario, Canada. The targeted hospital space was artificially contaminated with high concentrations of MRSA and C. difficile, using both regulatory compliant stainless steel discs and carpet samples typically found in many health care facilities. One hundred percent of the MRSA and C. difficile was eliminated from the discs (7.1 logs for MRSA and 6.2 logs for C difficile). The pathogens were also completely eliminated from all contaminated carpet samples, something we believe to be unachievable with any other technology. Testing further indicated that beyond the test samples artificially introduced, all pre-occurring pathogens present before testing were also eliminated on all surfaces by the AsepticSure™ hospital disinfection system.

In addition to the hospital disinfection system, we employ an ozone-destruct unit which is used following disinfection of the treated infrastructure to reverse the O3 gas in the space, and turn it back into O2 in a short period of time. We have initially targeted the treatment of a typically sized surgical suite including disinfection followed by ozone destruct to habitable standards in ninety minutes or less. This short turn-around period is considered of great importance relative to commercialization of the technology.

In addition, work completed by the Company at Queen's University demonstrated that the AsepticSure™ system can reliably eliminate in excess of 7 logs (99.99999%) reductions of Listeria monocytogenes and Salmonella typhium with 30-minute exposure to our unique and patented gas mixture, which provides an additional application of the AsepticSure™ technology, beyond that of hospital acquired infections for the food processing industry.

Importantly, the AsepticSure™ system is proving equally effective in disinfecting carpets and drapes as well as hard surfaces to greater than 6 log kill (6-log is generally recognized within the scientific community as the standard for sterilization). We are not aware of any other system in the world capable of making this claim that utilizes green technology and allows content to remain in the room during disinfection.

In November of 2011 Medizone awarded the production manufacturing contract for AsepticSure™ to SMTC Corporation (SMTC), headquartered in Toronto, Canada. SMTC maintains manufacturing facilities in Canada, the United States, Mexico and China. We believe SMTC or a similar manufacturer has the capacity to address all AsepticSure™ manufacturing requirements for the foreseeable future.

During January 2012, technology transfer of the production design was completed from ADA Innovations ("ADA"), our production development partner, to SMTC. An initial order was placed for five production validation units to be built. The production validation units are intended to be used for regulatory compliance and licensing validation, additional testing and early delivery positions.

In February 2012, SMTC reported that certain supply-side and tooling delays set back the anticipated delivery date for the initial units by a number of weeks, although the first unit has been delivered. Electrical testing requirements for the unit have been met. The remaining four validation units were delivered in September 2012 and we will use them to fill early delivery positions.

During 2012, we are leaving the development stage as we have commenced planned principal operations. During the three months ended September 30, 2012, we (a) delivered units and finalized sales totaling $150,000; (b) received deposits for units ordered for delivery in the next few months totaling $50,000; and (c) expect an additional $55,000 (as $20,000 has already been collected as a deposit by us as described above in (b)); for purchase of a unit to be delivered to a New Zealand company during the fourth quarter of 2012.

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 first quarter of 2013.

While the Company's intention is to expand distribution in the North American market first, significant seed work has already taken place with potential corporate distribution partners in Europe, parts of Asia and Brazil. Distribution into those markets should not be anticipated until after distribution into the North American market is more fully developed.

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International Recognition of AsepticSure™

In May 2011, a prestigious peer review medical journal, The American Journal of Infection Control ("AJIC"), e-published a peer-reviewed article on the science of AsepticSure™ and its unprecedented micro microbial disinfection ability. (> 6 log kill for all pathogens tested), titled: "Effectiveness of a novel ozone-based system for the rapid high-level disinfection of health care spaces and surfaces," authored by Dick Zoutman, MD, FRCPC, Michael Shannon, M.A., M.Sc., M.D., and Arkady Mandel, M.D., Ph.D., D.Sc., Kingston, and Ottawa, Ontario, Canada. The review was based on the work completed at our laboratories located at Innovation Park, Queen's University, in Kingston, Ontario, Canada. The print edition of the article appeared in the December 2011 issue of the AJIC.

In July 2011, canadaNOW, a bi-annual national magazine of the Canadian university research parks, featured AsepticSure™ in an article titled, "Taking on the 'silent epidemic." Also in July 2011, AsepticSure™ was awarded one of three Awards for Innovation at the First International Conference on Prevention and Infection Control (ICPICP) sponsored by the World Health Organization in Geneva, Switzerland.

Recent Developments

In June 2012, we announced that we had achieved 100% kill rates with tuberculosis in three successive trials. This represents another important milestone in our understanding of the antimicrobial limits of our recently launched disinfection technology, AsepticSure™.

According to Dr. Michael E. Shannon, our President, approximately one-third of the world's population is currently infected with tuberculosis and a new Extreme Drug Resistant Strain of tuberculosis is now sweeping across Asia, central Europe and parts of Africa. These factors drove the Company to evaluate the efficacy of AsepticSure against this daunting bacteria. With a small increase in treatment time (beyond our standard 90 minute protocol, start to finish) we demonstrated that AsepticSure consistently produces greater than 6 log reductions of Mycobacterium terrae, a well-established surrogate organism for Mycobacterium tuberculosis. These findings expand upon our ground-breaking research already published in the field of HAI control, with implications not just of academic or scientific interest but of significant public health importance as well. There are over 200,000 clinical laboratories in the United States and until now, there has been no cost effective way to address their contamination problems. We believe, based on our testing, that AsepticSure offers an extremely effective and surprisingly inexpensive disinfection and decontamination solution, not only for laboratory contamination problems, but environmental contamination problems worldwide.

During the second quarter 2012, we also announced the appointment of Queen's University Professor Dr. Dick Zoutman as our new Chief Medical Officer. In this new role, as well as continuing to provide direct microbiology support to Dr. Shannon, Dr. Zoutman will also report to both the President and the Chief Executive Officer regarding his responsibilities, which include providing:

· input into the design, planning, initiation and analysis of all beta test and post market surveillance programs worldwide; and

· direct liaison with clinical investigators, and maintaining professional awareness of our many scientific accomplishments through the preparation of peer-reviewed articles and the preparation of presentations at medical conferences.

We have also obtained the services of Mr. Glen Balzer to lead our management team in the building of both a distributor network and supply side management and manufacturing oversight team. Mr. Balzer is a recognized expert in both supply side and distribution side team building.

In September 2012, we entered into a Terms and Conditions of Sales, Goods and Manufacturing Contract with Transformix Engineering. Transformix is a specialty engineering and manufacturing company located in Kingston, Ontario, Canada. A change in manufacturers was sought by us to address delays in product delivery and quality control issues with a prior manufacturer. The Company believes that Transformix has an appropriately deep level of engineering depth in its workforce to meet the needs of the Company. Delivery of the first AsepticSure systems to be built by Transformix is anticipated in December. Assuming a successful delivery of the first order, Transformix expects to ramp up production in order to meet estimated sales orders of the AsepticSure system for the first quarter of 2103.

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Regulatory Affairs

The regulatory arm of Health Canada has given us an opinion letter stating that our AsepticSure disinfection system will not be regulated in Canada as a disinfectant, as there is no surface residual following room treatment. In addition, AsepticSure will not be regulated in Canada as a medical device. As a result of this very favorable ruling, we are now free to market AsepticSure in the Canadian market.

New Zealand regulatory authorities have taken a similar position to the Canadian authorities, making New Zealand the second country in which we are authorized to sell the AsepticSure disinfection system.

We anticipate that the United States will become the third country approving sale of AsepticSure. The United States Food and Drug Administration (FDA) has ruled that AsepticSure is a Class 1 medical device. This was expected by our development and regulatory team. Interaction with both the FDA and Environmental Protection Agency (EPA) in the United States has progressed nicely and we currently anticipate obtaining approval for sale into the United States market in the fourth quarter of 2012 or the first quarter of 2013.

Canadian Foundation for Global Health - Consolidated Variable Interest Entity

In 2008, we assisted in the formation of CFGH, a not-for-profit foundation based in Ottawa, Canada. We helped establish CFGH for two primary purposes: (1) to establish an independent not-for-profit foundation intended to have a continuing working relationship with us 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 us to use a tiered pricing structure for services and products in emerging economies and extend the reach of our technology to as many in need as possible.

The CFGH may not contract for research or other services on our behalf without our prior approval. In addition, our understanding with the CFGH provides that all intellectual property, including but not limited to, scientific results, patents and trademarks that are derived from work done on our behalf or at our request by CFGH or parties contracted by CFGH with our prior approval will be our sole and exclusive property.

The CFGH is registered as a not-for-profit corporation under Canadian Federal Charter. Dr. Shannon M.A., M.Sc., M.D. is President of CFGH and maintains offices at CFGH. Mr. Brad Goble, President of TDVGlobal, Inc., is also a board member of CFGH and serves as the Secretary-Treasurer for that organization. According to its website, TDVGlobal, Inc. "is a strategic management consulting company" focusing on the public sector. It is based in Ottawa, Ontario, Canada. Other members of the CFGH board are Edwin G. Marshall (our Chief Executive Officer and Chairman), Daniel D. Hoyt (one of our directors), Dr. Jill C. Marshall, NMD, (Mr. Marshall's wife and a former corporate officer of the Company), and Dr. Ron St. John.

We follow the accounting standard which requires 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 is 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 it. We have determined that CFGH meets the requirements of a VIE, effective upon the first advance to CFGH on February 12, 2009. Accordingly, the financial position and operations of CFGH are being consolidated with our financial results and in our consolidated financial statements included within this quarterly report.

Medizone Canada Limited

We own all of the issued and outstanding stock of Medizone Canada, Ltd., a Canadian corporation ("MedCan"). MedCan was a participant in the Canadian Blood Forces Program's SIV Study, but is not currently engaged in any business activity.


As of October 2012, Medizone had a total of 15 full-time employees and consultants.

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Results of Operations

Three Months Ended September 30, 2012 and 2011

We were incorporated in January 1986. We are a company engaged in research and production of ozone based fogging mixture as a disinfectant. Our current work is in the field of hospital disinfection, and other industrial applications requiring disinfectant, rather than human therapies. During the three months ended September 2012, we began to sell our AsepticSure product. We are continuing to develop production equipment with the intention of increasing sales this year. However, we cannot predict if we will generate sufficient revenues or cash flow to fund continuing 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 United States bankruptcy laws.

For the three months ended September 30, 2012, we had a net loss of $1,072,381, compared with a net loss for the three months ended September 30, 2011 of $485,040. Our primary expense is payroll and consulting fees, research and development costs, office expenses, AsepticSure production expenses, together with interest expense and additional expense recorded as a result of options granted to directors, employees and consultants.

For the three months ended September 30, 2012 and 2011, we incurred $932,872 and $283,730, respectively, in general and administrative expenses. Our primary expenses are payroll, consulting fees, and professional fees and additional expense recorded as a result of options granted to directors, employees and consultants. The remaining general and administrative expenses include rent, office expenses and travel expenses.

For the three months ended September 30, 2012 and 2011, we incurred $187,126 and $189,688, respectively, in research and development costs as a result of prototype development costs, consulting, and other research activities. Research and development expenses include consultant fees, interface development costs, prototypes, and research stage ozone generator and instrument development.

Principal amounts owed on notes payable totaled $311,477 and $283,249 at September 30, 2012 and December 31, 2011, respectively. Interest expense on these obligations during the three months ended September 30, 2012 and 2011 was $6,097 and $6,232, respectively. The applicable interest rates on this debt ranged from 7.75 percent to 10 percent per annum.

Nine Months Ended September 30, 2012 and 2011

For the nine months ended September 30, 2012, we had a net loss of $3,041,730, compared with a net loss for the nine months ended September 30, 2011 of $1,526,519. Our primary expense is payroll and consulting fees, research and development costs, office expenses, together with interest expense and additional expense recorded as a result of options granted to directors, employees and consultants.

For the nine months ended September 30, 2012 and 2011, we incurred $2,514,018 and $712,831, respectively, in general and administrative expenses. The primary increase for the nine months ended September 30, 2012 compared to the same period in 2011, was a result of approximately $1,613,000 of options granted and vested to directors, officers and employees in 2012. 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, 2012 and 2011, we incurred $546,054 and $778,982, respectively, in research and development costs as a result of prototype development costs, consulting, and other research activities. The . . .

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